[2024] KETAT 835 (KLR)

Skyman Freighters Limited v Commissioner of Investigations and Enforcement (Tax Appeal 122 of 2023) [2024] KETAT 835 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 835 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 122 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

June 28, 2024

Between

Skyman Freighters Limited

Appellant

and

Commissioner of Investigations and Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act in the Republic of Kenya and a registered taxpayer.

2. The Respondent is a principal agent of the Government of Kenya appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The dispute in this Appeal arose when the Respondent issued the Appellant with a notice to a preliminary finding for tax investigations on 9th June 2022, subsequently issuing the Appellant with additional assessments relating to Income Tax and VAT amounting to a cumulative tax obligation of Kshs. 491,267,752. 00 for the period spanning January 2016 to December 2020.

4. The Appellant objected to the assessment vide a letter dated 22nd July 2022 and the Respondent confirmed the assessment vide an Objection Decision dated 24th October 2022.

5. The Appellant being aggrieved by the Objection Decision issued by the Respondent, lodged this Appeal, filing its Notice of Appeal dated and filed on 15th November 2022.

The Appeal 6. The Appellant’s Memorandum of Appeal dated 30th January 2023 and filed on 6th February 2023 is premised on the following grounds, that;a.The Respondent erred in law and fact when it failed to consider the Appellant’s objection as a whole.b.The Respondent erred in law and fact by failing to adopt the schedule of the consolidated trade receivables, cash re-banked, disbursements and subcontractor schedules for the years 2017 and 2020, that was to be subjected to proper tax evaluation.c.The Respondent in determining the taxable income failed to take into account non-income items including contra-entries, interbanking, loan items, insurance refunds, disbursements and customer deposits.d.The Respondent failed to exercise due diligence as required by the law in arriving at the impugned decision in view of the fact that;i.Section 23 of the Tax Procedures Act imposes an obligation on tax payers to maintain proper records, to wit: records of Company Directors so as to enable the persons’ tax liability to be readily ascertained. Additionally, the records are to retained for a period of five (5) years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.ii.Therefore, had the Respondent exercised due diligence it would have come across the following;a.That the Appellant is an agency that financially receives and/or transmits finances on behalf of its principals.b.That the earnings and expenditures reflected in the Appellant’s accounts in question were not the Appellant’s earnings and expenditures per se.c.That the Appellant herein submitted a breakdown of all expenses and later shared them to the Respondent. However, the Respondent refused to take heed and respond to the same.e.It is unconstitutional, illegal, irrational, capricious, in bad faith and abuse of office for the Respondent to issue the impugned decision against the Appellant in a bid to compel it to paying Kshs. 491,267,752. 00 as the principal liability, which the Respondent knew or ought to have known that the assessment orders were disputed since it was served with preliminary findings for tax investigations for the period January 2016 to December 2020. f.The Respondent’s decision to issue the impugned notice was actuated by malice, bad faith and improper motive.g.By issuing the impugned decision, the Respondent acted unreasonably and took into account improper considerations while at the same time failed to take into account proper considerations.

The Appellant’s Case 7. The Appellant’s case is premised on its;a.Statement of Facts filed on 6th February 2023 together with the documents attached thereto; and,b.The Witness statement of Michael Simiyu Wangamati dated and executed on 12th March 2024, filed on 13th March 2024 and adopted as evidence in chief on 15th May 2024. c.The Witness statement of Juma Swaleh dated and executed on 12th March 2024, filed on 13th March 2024 and adopted as evidence in chief on 15th May 2024.

8. The Appellant stated that it received a notice with regard to preliminary findings for tax investigations for the period January 2016 to December 2020 on 9th June 2022 in the sum Kshs. 491,267,752. 00.

9. The Appellant averred that it objected to the Respondent’s assessment on the 7th July 2022 and raised several grounds thereto to which the Respondent issued an Objection Decision on 24th October 2022.

10. The Appellant avowed that the findings of the investigations carried out by the Respondent revealed as follows, inter alia;i.That the bank loans and insurance claims are received from Banks and compensation from insurance company respectively and therefore are not trade items.ii.Proceeds on disposal relates to disposal of a motor vehicle are not trade item.iii.Opening balance is opening amount included in the reconciled cash book but not for the for financial period.iv.Difference in exchange results to gain or loss on monthly dollar conversion from reconciled cash book.v.Cash re-banked is amount from cash receipts from receivables banked in other bank accounts.vi.Disbursements relates to expenses incurred on behalf of consignee at cost but not income for example; port charges, shipping charges, demurrages, retention charges etc.vii.Subcontractor transport related to provision amount to the transporter as specified by the consignee amount not related to the Appellant’s trucks.viii.Output VAT as stated in the iTax and summary (turnover comparison) issued by KRA.ix.Trade receivables relate to trade debtors only.

11. The Appellant stated that on 15th November 2022 it instructed it Advocates to represent the Appellant, the Notice of Appeal was filed on the 16th November 2022, however, premised on illness the Appellant’s Advocate it was not able to file the Memorandum of Appeal and appeal documents within the statutory timelines.

12. The Appellant avowed that the Respondent was irrational when it failed to consider the Appellant’s objection as a whole. That the Respondent by failing to adopt the schedule of the consolidated trade receivables, cash re-banked, disbursements and subcontractor schedules for the years 2017 to 2020 acted unfairly.

13. The Appellant asserted that it was a mere agent who receives money on behalf of principals and later makes payments on their behalf.

14. The Appellant stated that the Respondent in determining the taxable income failed to take into account non-income items including contra-entries, inter-banking, loan items, insurance refunds, disbursements and customer deposits. Further, the Respondent failed to exercise due diligence as required by the law in arriving at the impugned decision.

15. The Appellant stated that the Respondent’s decision to issue the notice was actuated by malice, bad faith and improper motive and it acted unreasonably by taking into account improper considerations.

16. The Appellant contented that it had a legitimate expectation that as a dutiful taxpayer, the Respondent would not exercise its statutory mandate whimsically by erroneously issuing the decision and subjecting the Appellant to additional assessment.

17. The Appellant vide its witnesses who testified on 15th May 2024, testified as follows.

18. The witnesses reiterated their respective witness statements dated and signed on 12th March 2024 and further stated the Respondent’s assessment was erroneous and it had been issued with agency notices dated 20th April 2023, 19th June 2023 and 24th July 2023 when the Appeal was pending before the Tribunal.

19. The witnesses testified that the Appellant has been unable to obtain a tax compliance certificate and thereby prejudicing the Appellant’s position as regards proceeding with its business is concerned.

Appellant’s Prayers 20. The Appellant prayed that the Tribunal;i.Allows this Appeal;ii.Annuls their decision and a proper review of the same be done based on the schedule of the consolidated trade receivables, cash re-banked, disbursements and subcontractor schedules for the years 2017 and 2020;iii.That this Tribunal orders the Decision of the Commissioner of Domestic Taxes delivered on 24th October 2022 be set aside and the Appellant be allowed to be heard based on schedule of the consolidated trade receivables, cash re-banked, disbursements and subcontractor schedules for the years 2017 and 2020; and,iv.Awards costs of this Appeal to the Appellants.

The Respondent’s Case 21. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 10th March 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 29th May 2024.

22. The Respondent contended that it issued the Appellant with a letter of findings dated 9th June 2020 and further issued the Appellant with additional assessments on Income Tax and VAT amount to Kshs. 491,267,752. 00 to which the Appellant objected to on 22nd July 2022.

23. The Respondent stated that on 19th August 2022 it informed the Appellant that its objection was invalid as it had not met the requirements of Section 51 (3) of the Tax Procedures Act.

24. The Respondent averred that the Appellant provided the Respondent with additional information for review on 25th August 2022 and the Respondent delivered its Objection Decision on 24th October 2022.

25. The Respondent raised two issues for determination, namely;i.Whether the additional assessments were justified in law; and,ii.Whether the Appellant discharged the burden of proof by providing documentary evidence in support of its objection.

26. The Respondent asserted that its decision as arrived in law was justified and had basis in law.

27. The Respondent contented that it was not bound by the Appellant’s returns or self-assessment and it is empowered to vary the assessments using any available information in the Respondent possession, which power is hallowed under Section 31 of the Tax Procedures Act.

28. The Respondent stated that the additional VAT and Income Tax assessments in question were raised after the Respondent noted that there were variances between the income declared in the Appellant’s tax returns and the Appellant’s actual income as per its bank statements.

29. The Respondent averred that while issuing the assessments, it took into considerations the non-income credits in as far as they could be traced in the Appellant’s bank statements.

30. The Respondent asserted that the Appellant had assessed back output tax claiming that nearly all services offered were zero-rated therefore not vatable, to which the Appellant did not provide supporting documentation to show that the services offered were zero rated.

31. The Respondent whilst citing Section 56 (1) of the Tax Procedures Act averred that the Appellant held the burden to proof that the Respondent’s decision was in correct and in the instance case, the Appellant had failed to discharge its burden of proof.

32. The Respondent averred that the Appellant did not provide sufficient documentation in support of its objection and the Respondent was right in confirming the VAT and Income Tax assessments.

33. The Respondent submitted that the Appellant was expected to maintain documents necessary and relevant to determine its tax liability, that the Appellant can only discharge its burden of proof by producing documents that are relevant to the tax head and tax period in question.

34. The Respondent submitted that the Appellant’s director on cross-examination confirmed that it carries out the business of clearing and forwarding and under the second schedule the clearing of goods is not a zero rated service and thus taxable at the standard rate.

35. The Respondent submitted that the Appellant’s director further confirmed that the Appellant offered zero rated services but failed to provide evidence confirming the same. Further the Appellant’s second witness (AW 2) confirmed that most of the documents were availed at ADR which implies that they were never availed to the Respondent during the objection stage.

36. The Respondent relied on the following cases;i.Oliver Merrick Fowler & Another vs. Kenya Revenue Authority [2022] eKLR.ii.Ushindi Limited vs. Commissioner of Investigation and Enforcement Kenya Revenue Authority [2020] eKLR.

Respondent’s Prayers 37. The Respondent called upon the Honourable Tribunal to find that;i.The Appeal be dismissed with costs.ii.The additional VAT and Income Tax Assessments raised by the Respondent amounting to Kshs. 491,267,752. 00 be confirmed and the principal taxes and interest be found due and payable as per the Objection Decision rendered by the Respondent.

Issues for Determination 38. The Tribunal upon the careful consideration of the Pleadings, Statements of Facts and submissions made by the parties respectively, was of the view that the issues that recommend themselves for its determination are;i.Whether the Respondent’s Objection Decision issued on 24th October 2022 was proper in law; and,ii.Whether the Appellant fulfilled its obligation in discharging the burden of proof?

Analysis and Determination 39. The Tribunal shall proceed to analyze and determine the issues as follows;i.Whether the Respondent’s Objection Decision issued on 24th October 2022 was proper in law.

40. The Tribunal is enjoined to determine whether the Respondent’s Objection Decision issued on 24th October 2022 was issued in accordance with the laid down procedures and provisions of the law.

41. Upon perusal of the documents provided by the parties herein, the Tribunal noted that the Respondent issued the Appellant with a notice of findings of investigations vide the correspondence dated 9th June 2022, subsequently the Respondent issued the Appellant with assessment order, though it has not been clearly indicated to the Tribunal when the assessments were issued.

42. Whereas, the parties seem to have different dates as to when the objection was lodged, the Appellant stating to have lodged the same on 7th July 2022 while the Respondent insisted that the same was lodged on 22nd July 2022, there is no dispute that the objection was lodged out of the statutory timelines.

43. It was the Respondent assertion that the objection as lodged was invalid, in that regard, the Respondent wrote to the Appellant vide the correspondence dated 19th August 2022, that the objection having been treated as being in contravention of the provisions of Section 51 (3) of the Tax Procedures Act as the Appellant had not supplied the Respondent with its documentation in support of the objection.

44. The Respondent submitted that the Appellant provided the documents in support of the objection on the 25th August 2022, following which it issued its Objection Decision on 24th October 2022.

45. The Tribunal has perused the Appellant’s correspondences dated 22nd July 2022 and 25th August 2022 and noted that the Appellant referenced to having provided documents within its correspondence dated 22nd July 2022. Further, a reading of the correspondence of 25th August 2022 offers highlights and table in the body of the correspondence therein explaining its position.

46. As relates to invalid objections, the Respondent’s power and procedure in dealing with the same is anchored under Section 51 (4) of the Tax Procedures Act, the section provides;“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall notify the taxpayer within 14 days in writing that the objection has not been validly lodged”

47. and proceeded to reduce the same in writing as prescribed in law.

48. The Tribunal noted that the Respondent, as is contemplated in the law, treated the Appellant’s objection as invalid and acknowledged receipt of the Appellant’s objection on 22nd July 2022 wherein it notified the Appellant of the invalidity of its objection vide the correspondence dated 19th August 2022.

49. Deriving from the provisions of Section 51 (4) of the Tax Procedures Act, the Respondent is required to notify the Appellant that its objection was invalid with fourteen (14) days of the date of receipt of the objection.

50. The Tribunal noted that the wording of Section 51 (4) of the Tax Procedures Act as used is “shall” which connotes the strict and mandatory application of the legal provision, that it is not to be adhered to at the discretion of the Respondent, rather is one the must be observed at all time and without variation.

51. In the prevailing circumstances, the Respondent issued the notice to the Appellant on 19th August 2022, which was fifteen (15) days beyond the timelines prescribed in law and therefore was in contravention of the provisions of Section 51 (4) of the Tax Procedures Act.

52. The Tribunal’s position on the failure of the Respondent to comply with the mandatory terms of Section 51 (4) of the Tax Procedures Act is that, the Appellant’s objection was therefore deemed and/or treated as valid by operation of the law. That the Respondent was therefore required to issue its Objection Decision in accordance to Section 51 (11) of the Tax Procedures Act.

53. Section 51 (11) of the Tax Procedures Act relating to delivery of Objection Decisions, as was at that period, provided as follow;“(11)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.”

54. The Tribunal noted that prior to 1st July 2022 Section 51 (11) (b) of the Tax Procedures Act, empowered the Respondent to request for the supply of supporting documentation and relevant information from the Appellant, and the statutory timelines could be maintained on a reset premised on the request or supply of information and documents by the Respondent.

55. It is the Tribunal’s view that the Appellant’s objection in the instant case cannot be deemed to have been validated on 25th August 2022 by the supply of information and documentation as firstly, the provision in law had been repealed and secondly, the objection had been deemed as validated by operation of the law occasioned by the failure by the Respondent to notify the Appellant that it had treated its objection as invalid with fourteen (14) days.

56. The Appellant’s objection having been received and acknowledged on 22nd July 2022 and deemed as valid by operation of the law, the Objection Decision ought to have been issued on or before the 20th September 2022 as to be deemed as proper in law, failure whereof the Appellant’s objection was deemed to have been allowed by operation of the law.

57. Consequently, the Respondent’s Objection Decision issued on 24th October 2022 was issued beyond the statutory timelines.

58. Having determined that the Objection Decision was not proper in law for being issued beyond the statutory timelines, the Tribunal shall not delve into the other issue for determination as the same have been rendered moot.

Final Determination 59. The Appellant’s Appeal being merited, the Tribunal makes the following orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection Decision dated 24th October 2022 be and is hereby set aside.c.Each party to bear their own costs.

60. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE 2024ROBERT M. MUTUMA CHAIRPERSONMUTISO MAKAU - MEMBERELISHA N. NJERU - MEMBERBERNADETTE M. GITARI -MEMBERABDULLAHI DIRIYE - MEMBER