[2023] KETAT 962 (KLR)

Solomon Marias Kureko t/a Vicjofya Enterprise v Commissioner Domestic Taxes (Tax Appeal 1175 of 2022) [2023] KETAT 962 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 962 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1175 of 2022

E.N Wafula, Chair, E Ng'ang'a, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & B Gitari, Members

November 10, 2023

Between

Solomon Marias Kureko t/a Vicjofya Enterprise

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a sole proprietor who trades as Vicjofya Enterprises and operates a petrol station in Narok known as “Total Narok”. His principal business activity is the sale of petroleum and petroleum related products within his petrol station.

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 (the Authority) is an agency of the Government for the collection and receipt of all tax revenue.

3. On 20th May 2019, the Appellant filed his original VAT return for the month of April 2019. In his return, the Appellant declared a VAT credit position of Kshs. 2,475.

4. Upon further review of his records, the Appellant amended his VAT return for the month of April 2019 on 28th May 2019, eight (8) days later after he had filed his original return. In this amended return, the Appellant declared a VAT credit position of Kshs. 194,072. 26.

5. On 20th August 2019, the Respondent rejected the Appellant’s amended return and communicated the same to the Appellant.

6. On 6th June 2022, the Appellant received an additional VAT assessment for the same tax period, April 2019 for Kshs. 4,240,431. 60. which constituted principal tax of Kshs. 3,051,364. 91 and interest of Kshs. 1,189,066. 70.

7. The Appellant objected to the entire VAT assessment via a notice of objection dated 1st July 2022.

8. On 29th August 2022, the Respondent issued it’s Objection decision and which confirmed the entire VAT assessment for the tax period of April 2019.

9. The Appellant being aggrieved by the Respondent’s decision lodged this Appeal.

The Appeal 10. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated on 11th October 2022 and filed on 12th October 2022:a.That the Respondent’s decision to reject the Appellant’s amended assessment for the month of April 2019 is illegal.b.That the Respondent’s assessment for the month of April 2019 is alien to the Appellant and does not tally with the Appellant’s sales and purchases records;c.That the Respondent erred in fact and in law by finding that the Appellant ought to have sought amendment of his return before the Respondent raised his additional assessment.

Appellant’s Case 11. The Appellant’s case is supported with the following documents:a.The Appellant’s Statement of Facts dated 11th October 2022 together with the documents attached thereto.b.The Appellant’s written submission dated on 4th April 2023 and filed on 5th April 2023 together with authorities attached hereto.c.The Appellant’s Supplementary Submissions dated 19th May, 2023 and filed on 23rd May, 2023.

12. That on 20th May 2019, the Appellant filed his original VAT return for the month of April 2019. In this return, the Appellant declared a VAT credit position of Kshs 2,475. 00.

13. The Appellant stated that upon further review of his records, the Appellant amended his VAT return for the month of April 2019 on 28th May 2019, eight (8) days later after he had filed his original return. In this amended return, the Appellant declared a VAT credit position of Kshs 194,072. 26.

14. That it was only until 20th August 2019 when the Respondent purported to reject the Appellant's amended return and communicated to the Appellant its feedback on the Appellant's application to amend his assessment. In his rejection notice, the Respondent stated as follows:“Kindly provide your invoices for verification and amendment at Nakuru KRA any KRA office nearest to you"

15. That the Appellant engaged the Respondent on this matter in a bid to clarify any outstanding issues with the Respondent.

16. That in a surprising turn of events, the Appellant was shocked when on 6th June 2022, it received an additional VAT assessment for the same tax period, April 2019 for Kshs 4,240,431. 60. This assessment constituted principal tax of Kshs 3,051,364. 91 and interest of Kshs 1,189,066. 70.

17. The Appellant averred that it objected to the entire VAT assessment via a notice of objection dated 1st July 2022, in which the Appellant highlighted why he had to amend his VAT assessment for the April 2019 tax period. This objection was filed both on iTax and via a letter to the Respondent.

18. The Appellant stated that it engaged the Respondent's independent review of objections team and provided additional documents to the Respondent in an attempt to resolve the matter.

19. That the Respondent then issued his objection decision on 29th August 2022 in which he fully rejected the Appellant's notice of objection and confirmed the entire VAT assessment for the tax period of April 2019.

20. The Appellant stated that as a public body, the Respondent is required to operate within the confines of the law. This is envisaged in Article 10 of the Constitution which mandates all state organs to uphold the rule of law as a national value and principle of governance.

21. That it is public knowledge that Kenya operates a self-assessment regime, which means that the taxpayer first assesses himself and declares his taxes based on his self-assessment. The Commissioner then has five years within which to review the taxpayer's self-assessment and make an additional assessment, should he feel that the taxpayers return is not accurate.

22. That Section 31 of the Tax Procedures Act ("the TPA”) is the governing law on amendment of tax assessments by both the taxpayer and the Commissioner. The relevant provisions are as set out below:-“2)A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer's self-asessment.3)Where an amended self-assessment return has been submitted under subsection (2), the Commissioner may accept or reject the amended self-assessment return and where he rejects, he shall furnish the taxpayer with the reasons for such rejection within thirty days of receiving the application.4)The Commissioner may amend an assessment-(a)in the case of gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of-(i)for self -assessment, the date the that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment:Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

23. That Section 31(2) of the TPA prescribes that a taxpayer who has made a self-assessment could apply to the Commissioner to amend his assessment within five years from the date which he filed the self-assessment.

24. That inline with Section 31(2), the Appellant amended his self-assessment return for the month of April 2019, on 28th May 2019, which was 8 days after the original return was filed.

25. That Section 31(3) of the TPA then provides that the Commissioner may accept or reject the amended self-assessment return and where he rejects, he shall furnish the taxpayer with the reasons for such rejection within thirty days of receiving the application.

26. That it is clear from Section 31(3) that the Commissioner can only reject an amended assessment within thirty days from the date that the amended return was filed. In this case, the Respondent has purported to reject the amended return on 20th August 2019, which is close to three months after the amended return was filed.

27. That the Appellant contends that Section 31(3) of the TPA means that if the Commissioner fails to communicate within the thirty-day period, the Appellant's amended return is deemed to be allowed.

28. That accordingly, the Appellant submitted that the Respondent's attempted to reject the Appellant's amended return after the thirty-day period stipulated in Section 31(3)is illegal.

29. That the Respondent's entire decision is based on his rejection of the its amended assessment for the period of April 2019. Based on the Appellant's contentions above, it follows that the Respondent's objection decision is null and void and that no tax can be demanded from the Appellant with respect to the April 2019 tax period.

30. That the Appellant further submitted that upon the lapse of the thirty-day period stipulated in Section 31(3), the Respondent is functus officio. Accordingly, the purported request for documents and confirmed assessment for the April 2019 tax period by the Respondent is ultra vires the powers donated to him by the TPA.

31. That the Respondent's VAT assessment for the April 2019 is for the reasons set out above, null and void and it is the Appellant’s prayer that this Honorable Tribunal quashes the same in its entirety.

32. That without prejudice to the fact that the Respondent's assessment is illegal, the Appellant also contended that the Respondent's assessment is alien and does not tally with the Appellant's sales and purchase records.

33. That first and foremost, the Respondent has not provided the Appellant with the basis of its computations. The incremental tax payable of Kshs 3,051,365. 00 as set out in the objection is alien to the Appellant. The Respondent did not provide the Appellant with the basis for its computations and accordingly the Appellant cannot respond effectively to the decision.

34. That due to this action, the Appellant cannot correctly explain its position and defend the assessment. The importance of affording a taxpayer an opportunity to explain its position was confirmed in Silver Chain Limited v Commissioner Income Tax &3 Others [2016] eKLR where the Court stated as follows:“From the pleadings, herein, I am satisfied that the applicant was not given an opportunity to explain his position on the sales reports or the entire operations of the company. What is being demanded as tax is what was unilaterally computed by the respondents. Although the respondents are empowered by the law to assess what a taxpayer ought to pay, it is prudent that while undertaking such an exercise, the taxpayer be given an opportunity to explain its position”

35. That the second error that was made by the Respondent in his computation is by subjecting all of the Appellant's petroleum products to VAT at the rate of 16%. It is well known that pursuant to Section 5(2)(a) of the VAT Act, 2013, petroleum is subject to VAT at 8% and not at 16%, as purported by the Respondent.

36. That the third error that the Respondent made in its assessment is failing to consider the input tax claimable by the Appellant in his purchases. The Respondent had just applied VAT of 16% on the sales and in arriving at the VAT payable, had not offset the Appellant's input V.AT. This clearly showed that the Respondent had a pre-disposed mindset to arrive at a contrived and overstated assessment.

37. That the Appellant contended that due to the foregoing, the Respondent's assessment is erroneous and cannot be used to charge tax on the Appellant. The Appellant's amended assessment should be allowed and the Commissioner's additional assessment and objection decision should be quashed.

38. That there is no prejudice that the Respondent will suffer if its additional assessment is quashed. This is because the period of April 2019 is still well within the five year period and the Respondent can audit the Appellant’s records and issue another assessment should it still not be satisfied with the Appellant's financial records.

Appellant’s Prayers 39. That the Appellant prayed for orders, that:a.The Appeal be allowedb.This Honorable Tribunal be pleased to:i.Set aside and annul the Objection Decision issued by the Respondent;ii.Order that the Respondent pays the costs of this Appeal; andiii.Make such orders that it may deem appropriate

Respondent’s Case

40. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-a.The Respondent’s Statement of Facts dated on 8th November 2022 and filed on the same day together with the documents attached thereto.b.The Respondent’s written submissions dated 26th April 2023 and filed on the same date.c.The Respondent’s supplementary submissions dated on 19th May 2023 and filed on the 23rd May 2023.

41. That the Appellant is a sole proprietor registered in Kenya under the business name Vicjoyfya Enterprise.

42. That the Appellant operates a Total Service Station appointed as a young dealer by Total Kenya PLC and is currently based at Narok Total Service Station, Narok.

43. That the case was among intelligent summaries forwarded PTO-AUDIT under the reference BIO/REF/020/1309 on 25/11/2021.

44. That the assessment was based on variances noted between the sales as per VAT returns and the sales per Income tax returns with that of Income tax returns being higher.

45. That based on the above, an additional VAT assessment was raised on 6th June,2022.

46. That the Appellant fully objected to the assessments on 1st July 2022.

47. That at the point of receipt of the objection application, the objection was not valid as the Appellant had not provided supporting documents to support his grounds of objection.

48. That the Respondent informed the Appellant of the invalidity of the objection on 15th July 2022.

49. That upon notification, the Appellant provided a summary of sales for the month under review but did not demonstrate how the summary reconciled with the variances in question nor any further documents to support the same.

50. That the Respondent issued its objection decision on 29th August 2022 confirming the said assessments since the Appellant failed to provide the requisite relevant documents for review.

51. That the Appellant based its appeal on grounds that:-a.The assessment for the month of April 2019 was illegalb.The Respondent's assessment does not tally with the Appellant's sale and purchase recordsc.The Respondent erred in finding the Appellant ought to have sought amendment of returns before raising additional assessments.

52. That Section 31 (1) of the Tax Procedures Act states that:-“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that-a.in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;b.in the case of an exeess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

53. The Respondent affirmed that it is within its mandate to amend assessments as it deems fit and such action is not only legal but also expected.

54. That the Appellant's claim that the assessment is illegal is therefore unfounded.

55. That the Appellant goes on to claim that the assessment does not tally with its records.

56. The Respondent stated that Section 31 of the TPA allows the Respondent to amend an assessment based on the available information and to its best judgment.

57. That the Appellant was therefore expected to ensure the correct documents are provided for the Respondent's consideration.

58. That Section 56 (1) of the Tax Procedures Act states that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

53. That the Appellant failed to discharge its burden of proof by not ensuring that the documents were relevant and could be reconciled.

54. That the documents provided would need to be reconciled and the Appellant was expected to shed light on the provided documents to allow the Respondent use them to reduce the tax liability.

55. That the Appellant was unable to explain the variances between the sales as per IT2C returns and the sales as per VAT returns. This is in itself means that the Appellant was concealing taxes and was further unable to discharge on its burden of proof.

56. That due to a filed NIL return for April 2019, an assessment was raised for that particular month with sales of Kshs 19,071,025. 00 and VAT on the same of Kshs.3,051,364. 00 as per sales summaries provided by the Appellant.

57. That this action was in line with Section 31 of the Tax Procedures Act that allowed the Respondent to amend assessments based on available information and its best judgment.

58. That the Appellant was flagged on grounds that there was an under declaration based on its VAT sales returns as compared to its income tax returns.

59. That the Appellant ought to have noted the discrepancy and made an effort to correct the same and ensure that the two returns reflected the correct position.

60. That the Appellant need not be prompted by the Respondent to act accordingly.

61. That the Appellant had filed nil returns despite the fact that it had income as evidenced by its VAT returns.Respondent’s Prayers68. The Respondent’s prayed to this Tribunal for orders that:(a)Upholds the Respondent’s Objection decision(b)The Appeal is dismissed.

Issues For Determination 69. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there are two issues that call for its determination;a.Whether the Respondent erred in law and in fact in rejecting the Appellant’s amended return.b.Whether the Respondent erred in the computation and confirming the VAT tax assessment.

Analysis And Findings 70. The Tribunal having determined the issues falling for its determination proceeded to analyse them as hereunder.a)Whether the Respondent erred in law and in fact in rejecting the Appellant’s amended return.

71. The Appellant averred that the Respondent being a public body, it is required to operate within the confines of the law. That this is envisaged in Article 10 of the Constitution which mandates all state organs to uphold the rule of law as a national value and principle of governance.

72. The Appellant averred that Section 31 (2) of the TPA prescribes that a taxpayer who has made a self-assessment could apply to the Commissioner to amend his assessment within five years from the date which he filed the self-assessment.

73. That in line with Section 31 (2), the Appellant amended his self-assessment return for the month of April 2019, on 28th May 2019, which was 8 days after the original return was filed.

74. The Appellant averred that Section 31(3) of the TPA then provides that the Commissioner may accept or reject the taxpayer’s amended assessment with the reasons for such rejection within thirty days of receiving the application.

75. The Appellant averred that it is clear from Section 31(3) of the Act that the Commissioner can only reject an amended assessment within thirty days from the date that the amended return was filed. In this case, the Respondent had purported to reject the amended return on 20th August 2019, which is close to three months after the amended return was filed.

76. The Appellant submitted that the use of the word “shall" in Section 31(3) meant that if the Commissioner failed to communicate his rejection of an amended return within the thirty-day period, the Appellant's amended return is deemed to be allowed.

77. The Appellant relied on the decision by Justice Mativo in Civil Appeal ITA No. E069 of 2020 Equity Group Holdings Limited vs Commissioner of Domestic Taxes where he expounded on the meaning of the term “shall” as follows:“the word "shall" when used in a statutory provision imports a form of command or mandate. It is not permissive, it is mandatory. The word shall in its ordinary meaning is a word of command which is normally given a compulsory meaning as it is intended to denote obligation. The Longman Dictionary of the English Language states that "shall" is used to express a command or exhortation or what is legally mandatory.”

78. The Appellant further submitted that upon the lapse of the thirty-day period stipulated in Section 31(3) of the TPA, the Respondent is functus officio. Accordingly, the purported request for documents and confirmed assessment for the April 2019 tax period by the Respondent was ultra vires the powers donated to it by the TPA.

79. The Respondent submitted that in exercising its mandate under the Tax Procedure Act the Respondent issued additional tax assessments. Sec 31 (1) of the TPA states as follows with regard to amendment of assessment:-“(1)Subject to this Section, the Commissioner may amend an assessment (refereed to in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner’s judgment, to the original assessment of a taxpayer for a reporting period to ensure that-(c)In any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

80. The Respondent argued that upon receiving the assessment, it was the Appellant's duty to prove his position and prove that the Respondent had erred in his assessment.

81. The Respondent averred that it took issue with the unexplained variances and that the Appellant sought to amend its returns but this was never done.

82. The Respondent averred that in the end the Appellant was not able to provide documents and reconcile the variances noted.

83. The Respondent posited that it relied on Section 56 (1) of the Tax Procedures Act in carrying out its mandate which provides that;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

84. The Tribunal is guided by Section 31 of the Tax Procedures Act ("the TPA") as it is the governing law on amendment of tax assessments by both the taxpayer and the Commissioner. The relevant provisions states that:“2)A taxpayer who has made a self-assessment may apply to the Commissioner,within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer's self-assessment.3)Where an amended self-assessment return has been submitted under subsection (2), the Commissioner may accept or reject the amended self-assessment return and where he rejects, he shall furnish the taxpayer with the reasons for such rejection within thirty days of receiving the application.4)The Commissioner may amend an assessment-(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of-(i)for self- assessment, the date that the self assessment taxpayer submitted the self- assessment return to which the self-assessment relate; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment:Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

86. The Tribunal finds that that Section 31 (3) of the TPA is couched in mandatory terms by using the word “shall”. The Respondent was thus required to supply the Appellant with the reasons for its rejection within 30 days of receiving the application for amendment.

87. The rejection of the amendment in this Appeal was issued after 30 days. This failure to issue the rejection within the 30 days period was fatal as it directly contravened Section 31(3) of the TPA.b)Whether the Respondent erred in the computation and confirming the VAT tax assessment.

88. Having found that the assessment from where the Respondent’s computation was made was unlawful for breach of Section 31(3) of the TPA, the issue as to how the VAT tax assessment was computed is thus moot and shall not fall for determination at this point.

Final Decision 89. In the end, the Tribunal finds that the Appeal is partially merited and accordingly proceeds to makes the following Orders;

a. The Appeal be and is hereby partially allowed.b. The Respondent’s objection decision dated 29th August, 2022 be and is hereby set aside.c. The matter is hereby referred back to the Commissioner to re-assess the Appellant based on the amended return filed on 28th May 2019. Each Party to bear its own cost. 90. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023ERIC NYONGESA WAFULA - CHAIRMANEUNICE NG’ANG’A - MEMBERDR RODNEY OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNEDDETTE GITARI - MEMBER