[2024] KETAT 31 (KLR)

Sino v Commissioner of Domestic Taxes (Tax Appeal 1243 of 2022) [2024] KETAT 31 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 31 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1243 of 2022

RM Mutuma, Chair, M Makau, EN Njeru, W Ongeti & BK Terer, Members

January 26, 2024

Between

George Arunga Sino

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a citizen of the Republic of Kenya and a registered taxpayer. His core activity is mixed farming, including diary and crop farming.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5 (2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent carried out a verification of business operations of the Appellant in order to verify the source of financing of purchased property of Kshs. 13,000,000. 00 and raised additional assessments relating to income tax on 4th May 2022 for the years 2016, 2018, 2019 and 2020 cumulatively in the amount of Kshs. 16,289,924. 26.

4. The Appellant disputed the Respondent’s additional assessments and lodged its notices of objection on 3rd June 2022.

5. The Respondent issued the objection decision on 27th September 2022 disallowing the Appellant’s objection and confirmed the additional assessments.

6. The Appellant being aggrieved by the decision issued by the Respondent, lodged this Appeal on the 24th October 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal dated the 17th October 2022 and filed on the 24th October 2022 is premised on the following grounds, that;a.The Respondent erred in both law and fact in arbitrarily estimating enormous incomes not known to the Appellant on which additional excessive assessments were based.b.That the Respondent erred in both law and fact in computing tax on gross incomes ignoring deducting all expenses wholly and exclusively incurred in the production of those incomes as provided by Section 15 of the Income Tax Act.c.That the Respondent erred in both law and in fact in failing to comply with Section 15 of the Kenyan Income Tax Act with a consequence of making assessments that are excessive.d.That the Respondent violated the Appellant’s right to fair administrative action and laws of natural justice by summarily and arbitrarily issuing additional assessments without affording him any reasonable opportunity to be heard on the assessments.e.That the Respondent erred in fact and law by openly manifesting biasness, unfairness and unfair administrative action of imagining income amounts not known to the Appellant and has never been earned by him.f.That the Respondent erred in law by denying the Appellant his right to be subjected to administrative action from a public body, Kenya Revenue Authority, which is expeditious. efficient, lawful, reasonable and procedurally fair as under Article 47 of the Constitution of Kenya.

The Appellant’s Case 8. The Appellant’s case is premised on the herein under filed documents before the Tribunal;a.The Appellant’s Statement of Facts filed on the 24th October 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 19th June 2023 and filed on 21st June 2023.

9. That the Appellant stated that he was issued with Assessment Orders for income tax dated 4th May 2022 for the years 2016 to 2020, respectively.

10. The Appellant stated that being aggrieved by the additional assessments it filed distinct notices of objection on the 3rd June 2022 against the assessments and the Respondent rendered its objection decision on 27th September 2022.

11. The Appellant averred that the Respondent computed additional taxes on estimated non-existent gross incomes while at the same time ignoring deduction of all expenditure incurred in those years of income which were wholly and exclusively incurred in those years of income as provided by Section 15 of the Income Tax Act.

12. That the Appellant provided financial statements for the years under review to the Respondent.

13. The Appellant averred that the Respondent rendered its objection decision on 27th September 2022 varying the taxes demanded to Kshs. 12,271,064. 73 upon allowing 40% of the expenses claimed.

14. The Appellant averred that the Tribunal by an order issued on 14th April 2023 allowed the Appellant’s application which sought to have the amended audited financial statements of accounts for the years 2016 to 2020 to be deemed as filed.

15. That the Appellant subsequently filed a Notice of Preliminary Objection on the basis that the Respondent’s objection decision was issued out of the Sixty (60) day period.

16. That the Appellant identified three (3) issues for determination, namely;a.Whether the notice of objection stood allowed as matter of law the moment the Respondent failed to render its decision within the statutory period of 60 days.b.Whether there is in fact an Appeal before the Honourable Tribunal for determination.c.Whether the Honourable Tribunal has jurisdiction to adjudicate on this matter.

17. The Appellant stated that the grounding of the statutory timelines for the Respondent to issue an objection decision subsists within Section 51 (11) of the Tax Procedures Act, being sixty (60) days of lodging of a valid objection.

18. That the Respondent issued its objection decision on 27th September 2022 against the Appellant’s notice of objection of 3rd June 2022, issuance whereof occurred 114 days after the Respondent’s receipt of the notice of objection and therefore the objection decision was not valid.

19. The Appellant submitted that the Honourable Tribunal ought not to entertain the Appeal as the same is engrossed with technical and evidential elements of taxation, the Preliminary Objection raises well established principle in law with respect to the Respondent’s decision making process.

20. That the Respondent’s intent on proceeding with the Appeal not only defies the very clear dictates of the rule of law, but also defies logic as there is in fact no Appeal before this Honourable Tribunal and before the confines of the law.

21. The Appellant submitted that there was valid objection decision.

22. The Appellant submitted that the Tribunal does not have the jurisdiction to hear, try and/or determine the Appeal presented rendering the entire process illegal, irregular, and unlawful ab initio in all facets and thus a nullity in law.

23. The Appellant submitted that the Respondent is at the eleventh hour latching onto the issue of validity of the Appellant’s notice of objection as an afterthought, as the issue has never before been raised in the Respondent’s pleadings and is only raised in its submissions after the Appellant has very well raised the issue of the validity of the Respondent’s decision vide his Preliminary Objection.

24. The Appellant submitted that it is trite law, that parties are bound by their pleadings and he placed reliance on the case of Republic vs. Chairman Procurement Administrative Review Board & Another Ex-Parte Zapkass Consulting and Trading Limited & Another [2014] eKLR.

25. The Appellant submitted that Section 51 (4) of the TPA sets the grounds and ultimately the procedure to be followed by a taxpayer (Appellant) where the Respondent declares its notice of objection to be invalid, and also sets the procedure for the Respondent to the extend that if he is not of the opinion that such notice of objection is invalid, the law then guides the Respondent to make its objection decision as Section 51 (8) of the TPA.

26. The Appellant submitted that the reading of Section 51 (3), (4) and (8) of the TPA together, is that the burden shifts to the Respondent to declare and determine such invalidity of the notice of objection within the period of 14 days so as to set the stage for the next course of action and further afford a taxpayer (Appellant) a fair process.

27. That the Respondent never issued such communication in whatever form as to the validity of the Appellant’s notice of objection within 14 days period after the Appellant lodged his notice of objection. Instead, the Respondent made an out of time objection decision while speaking to and/or so being directed to Section 51 (8) of the TPA.

28. That the Appellant lodged a valid Objection pursuant to Section 51 (3) of the TPA as he gave comprehensive supporting evidence and/or statements in the meeting held between him and the Respondent, further, the Appellant has disputed the amount of tax due under the assessment in the entirety through its notice of Objection. Suffice it to say that despite providing amended audited accounts to the Respondent, which the Respondent very well allowed, and which were further uncontroverted by the Respondent, the Respondent has neglected, declined and/or refused to make the necessary amendments and are punitively inflicting unfair process of collecting unsubstantiated amounts from the Appellant.

29. The Appellant relied on the following case law;a.Equity Group Holdings Limited vs. Commissioner of Domestic Taxes [2021] KEHC 25 (KLR).b.Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-parte Barclays Bank of Kenya Ltd [2012] eKLR.c.Republic vs. Kenya Revenue Authority Ex-parte M-Kopa Kenya Lts [2018] eKLR.d.Republic vs. Commissioner of Domestic Taxes Ex-parte Fleur In.e.vestments Limited [2020] eKLR.f.Owners of the Motor Vessel “Lilian S” vs. Caltex Oil (Kenya) Ltd [1989] KLR 1. g.Samuel Kamau Macharia vs. Kenya Commercial Bank & 2 Others, Civil Appl. No. 2 of 2011. h.Mukisa Biscuit Manufacturing Co. Ltd vs. West End Distributors Ltd [1969] EA 696 (unreported).i.Republic vs. Chairman Procurement Administrative Review Board & Another Ex-Parte Zapkass Consulting and Trading Limited & Another [2014] eKLR.

Appellant’s Prayers 30. The Appellant made the prayer to the Tribunal to set aside and annul the assessments by the Respondent.

Respondent’s Case 31. The Respondent’s case is premised on the herein under filed documents before the Tribunal;a.Statement of Facts dated 22nd November 2022 and filed on 24th November 2022 together with the documents attached thereto; andb.The Respondent’s written submissions dated and filed on 5th June 2023.

32. The Respondent stated that the Appellant was identified for income tax review (Compliance Level 1) under Section 59 of the Tax Procedures Act and was issued with a notice on 10th September 2021.

33. That the Respondent stated that the notice of intention to carry out a verification of business operation for the periods January 2016 to December 2020 was to verify the source of financing for the property purchased and valued at Kshs. 13,000,000. 00.

34. That the Appellant was requested to provide various documents and a reminder thereto via email dated 23rd September 2023 to furnish the documents by 30th September 2021, in the failure whereof the additional assessments would issue.

35. The Respondent averred that the Appellant availed some of the documents requested and upon examination it emerged that there were some unexplained variances between the bank deposits and self-declared returns.

36. That vide the letter dated 9th March 2022 the Appellant was informed of the preliminary findings of the review and was instructed to forward his submissions or clarifications with supporting documents by 16th March 2022, failure to which the income tax self-assessments would be revised upwards.

37. That the Appellant having failed to provide the documents required, the Respondent issued additional assessment on 4th May 2022 relating to income tax.

38. That the Appellant objected to the additional assessments on the 3rd June 2022 without providing any supporting documents.

39. The Respondent averred that the objection was acknowledged on 8th September 2022 requesting the Appellant to avail supporting documents to the objection which he failed to provide. The Respondent reviewed the basis of the additional assessment allowing 40% expenses to be claimed and decided to partially amend the additional assessment by allowing the 40% of the unsupported expenses as per Section 37A (2) of the Tax Procedures Act.

40. That the Respondent considered the grounds of the objection and pursuant to Section 51 (8) of the Tax Procedures Act a decision was issued on 27th September 2022.

41. The Respondent submitted that it is not bound by the information provided by the Appellant whilst submitting the self-assessment returns, but can assess for additional taxes based on any other available information in accordance with Section 24 of the TPA.

42. The Respondent stated that it is empowered under Section 31 (1) (c) of the TPA to amend a taxpayer’s assessment to the best of its judgement.

43. The Respondent contented that Section 73 (2) of the Income Tax Act, grants powers to the Respondent, if it has reasonable cause to believe that the return is not true and correct, to determine, according to the best of its judgement, the amount of income of that person and to assess him accordingly.

44. It was the Respondent’s averment that the Appellant had a window of proving his correct tax liability provided under Section 31 of the Tax Procedures Act and provide the records required. The Appellant, cannot therefore, fault the Respondent for relying on the available records to assess and confirm the assessment after several failed attempts to acquire all the necessary documents.

45. The Respondent relied on Sections 15 and 16 of the Income Tax Act and submitted that Section 15 allows the deductions of all expenditure incurred wholly and exclusively in the production of income, it also averred that the Appellant must prove the same to the satisfaction of the Respondent.

46. That the Appellant is duty bound to keep and maintain proper records for the purposes of computation of tax in accordance with Section 23 of the Tax Procedures Act and Section 43 of the VAT Act.

47. That the Appellant has not provided proof for its purchases, but has merely made averments that the Respondent computed tax on gross incomes and failed to acknowledge the deductible expenses.

48. That the Respondent stated that there was no violation of the Appellant’s right to fair administrative action as he was given various chances to provide sufficient documents which he failed to do.

49. The Respondent further contended that the objection decision was rendered after due consideration of all the documents and explanations availed by the Appellant vide the various correspondences. Findings of the same which are duly stated in the objection decision.

50. The Respondent submitted that the Appellant was duty bound under Section 23 of the Tax Procedures Act to keep and maintain proper records for the purposes of taxation, further the duty is reiterated under Section 43 of the VAT Act.

51. The Respondent submitted that the Appellant’s objection did comply with the provisions of Section 51 (3) of the Tax Procedures Act, particularly that despite the Appellant providing the requisite documents when objecting, he did not provide the requested documents.

52. That the Appellant failed to substantiate his notice of objection and thus the grounds therein can, at the very least, be described as an academic exercise which has no probative value.

53. The Respondent submitted that the Appellant raised an invalid objection that was unsupported, despite numerous engagements, thereby failing to demonstrate how the Respondent erred in raising the assessment that was confirmed.

54. The Respondent submitted that the Appellant has failed in discharging its burden of proof that the assessment was wrong or could have been made differently in accordance with Section 56 (1) of the TPA, the Appeal should therefore fail.

55. The Respondent relied on the following case law;i.Commissioner of Domestic Taxes vs. Structural International Kenya Ltd (Income Tax Appeal No. E089 of 2020) [2021] KEHC 152 (KLR).ii.Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR, Nairobi High Court Income Tax Appeal No. E125 of 2020. iii.Nairobi TAT Appeal No. 25 of 2016 Family Signature Limited vs. The Commissioner of Investigations and Enforcement.iv.TAT Appeal No. 28 of 2018 Joycott General Contractors Limited vs. Kenya Revenue Authority.

Respondent’s Prayers 56. The Respondent prayed that this Honourable Tribunal;i.The Respondent’s objection decision issued on 27th September 2022 being income tax returns for the period January 2016 to December 2020 amounting to Kshs. 12,271,064. 73 was properly issued and to uphold the same.ii.That this Appeal be dismissed with costs.

Issues For Determination 57. The Tribunal upon the careful consideration of the pleadings and Statements of Facts made by the parties, respectively, was of the view that the issues that recommend themselves for its determination are;a.Whether the Objection Decision of 27th September 2022 herein was validly issued.b.Whether the Respondent’s Objection Decision was justified.

Analysis And Findings 58. The Appellant filed a Notice of Preliminary Objection dated 9th March 2023 seeking to have the Appeal struck out, which notice is misguided, misplaced and a procedural misfit, for lack of better terms. The Appellant’s Notice of Preliminary Objection as it may be, brings out an important matter of law that the Tribunal must interrogate and address in this Appeal.

59. The Tribunal having identified the issues for its determination proceeds to analyse the same as herein under;a.Whether the Objection Decision of 27th September 2022 herein was validly issued.

60. The Appeal before the Tribunal stems from the Respondent’s objection decision which confirmed the additional assessment.

61. The Respondent submitted that it issued the Appellant with an additional assessment relating to income tax on the 4th May 2022, the Appellant being dissatisfied lodged its notice of objection on the 3rd June 2022, subsequently the Respondent issued an objection decision on 27th September 2022.

62. It was the Respondent’s submission that the Appellant’s objection was acknowledged on the 8th September 2022 on one hand and that it was invalid for failure to adhere with the provision of Section 51 (3) (c) of the Tax Procedures Act.

63. The Respondent further submitted that the Appellant was requested to furnish the Respondent with documents to support the objection, however, the Appellant provided the requisite documents, but did not furnish the requested documents.

64. It was submitted by the Appellant that there was no valid Appeal before the Tribunal to exercise its jurisdiction over premised on the fact the objection decision was issued beyond the statutory timelines in accordance with Section 51 (11) of the Tax Procedures Act.

65. It is important to note that there are amendments to the Tax Procedures Act that came into effect on the 1st July 2022, particularly relating to Section 51 of the TPA.

66. Whereas the decision as to whether a notice of objection is validly lodged or not rests with the Respondent, such power must be exercised in accordance with the law. The Respondent ought to be guided by the provisions of Section 51 (4) of the Tax Procedures Act which provides as thus; -,“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within fourteen (14) days notify the taxpayer in writing that the objection has not been validly lodged.”

67. Accordingly, the Respondent having alleged that the Appellant’s objection was invalid, was obligated in law to demonstrate that it notified the Appellant that its objection had not been validly lodged within the period of fourteen days and in default thereof the Appellant’s objection was validated by the operation of law.

68. The Respondent has not demonstrated via documentary evidence that the aforesaid notice was issued to the Appellant, the Tribunal is therefore, persuaded that the Appellant was not notified that its Objection was not validly lodged and by the Respondent’s action of failure to notify, the objection was deemed as valid.

69. The Appellant submitted that the Respondent’s objection decision was issued beyond the statutory timelines as provided for under Section 51 (11) of the Tax Procedures Act. Section 51 (11) of the TPA, provides that ;-“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

70. The Tribunal has observed and found that the Respondent did not present evidence to demonstrate that it notified the Appellant that his notice of objection was not validly lodged, it therefore follows that the Respondent was obligated to issue its objection decision within sixty days of a validly lodged objection.

71. The notice of objection was lodged on 3rd June 2022 and the objection decision ought to have been issued on or before the 2nd August 2022, which the Respondent failed to do.

72. The Tribunal is guided by the case of Equity Group Holdings Limited vs. Commissioner of Domestic Taxes [2021] eKLR, relating to strict dictates of compliance with any statute, the Court observed that:“A statutory edict is not procedural technicality. It’s a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided…”

73. It is the Tribunal’s position that, the Respondent’s objection decision was issued beyond the statutory timelines, therefore the Appellant’s objection was deemed as allowed by operation of the law.

74. The Tribunal having established that the Appellant’s objection was allowed by operation of the law, it shall not delve into the other issue for determination as the same have been rendered moot.

75. Consequently, the Tribunal finds that the Appeal herein is merited and tenable in law.

Final Decision 76. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision issued on 27th September 2022 be and is hereby set aside.c.Each party to bear its own costs.

77. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26THDAY OF JANUARY, 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERDR. WALTER ONGETI - MEMBERBONIFACE K. TERER - MEMBER