[2023] KETAT 1003 (KLR)

Souk Bazaar Limited v Commissioner of Domestic Taxes (Tax Appeal 665 of 2022) [2023] KETAT 1003 (KLR) (6 October 2023) (Judgment)

Neutral citation: [2023] KETAT 1003 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 665 of 2022

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

October 6, 2023

Between

Souk Bazaar Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The appellant is a limited liability company registered under the Companies Act, Kenya. Its main form of business is in construction.

2. The respondent is a principal officer appointed under and in accordance with section 13 of the Kenya Revenue Authority Act, the Authority 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 Appellant filed VAT returns for January 2018 to May 2018. The Respondent advised the Appellant on inconsistencies noted between the Appellant’s declaration and its supplier’s declarations after which the Respondent’s iTax system generated additional VAT Automated Assessments on November 15, 2019 for a total of Kshs. 21,271,040. 27.

4. The appellant objected to the additional assessments on October 8, 2020 availing some documentation in support of the same. Upon further communication between the parties, on June 2, 2022, the respondent issued an objection decision partially allowing the appellant’s notice of objection reducing the tax amount due to Kshs 16,112,803. 42.

5. Being dissatisfied with the respondent’s assessments and pursuant to the provisions of section 51 of the Tax Procedures Act ,2015, the appellant lodged a notice of appeal on June 13, 2022.

The Appeal 6. In its memorandum of appeal dated June 16, 2022 and filed on June 23, 2022, the appellant premised its appeal on the ground that;i)Being dissatisfied with the objection decision issued, it would like to provide further supporting documents on the disallowed invoices.

The Appellant's Case 7. The Appellant set down its case on;i)The appellant’s statement of facts dated June 16, 2022 and filed on June 23, 2022 together with documents attached thereto.ii)The appellant’s written submissions dated February 6, 2023 and filed on the same date.

8. The appellant stated that it commits to avail all the supporting documents on the disallowed invoices of Kshs. 16,112,802. 42.

9. The appellant averred that the disallowed VAT amount of Kshs. 16,112,802. 42 is punitive and excessive.

10. That vide a letter dated June 2, 2022, 31 days after issuance of assessments, the respondent wrote to the appellant informing it of its decision to invalidate its objection.

11. That the said letter was contrary to the mandatory provision of the section 51 (4) of the Tax Procedures Act, which mandates the respondent to notify the appellant immediately in writing if the notice of objection is not validly lodged.

12. That the respondent failed to notify the appellant that its notice of objection filed on October 8, 2020 was invalid within reasonable time

13. The appellant submitted that the respondent erred in issuing an invalidation decision on the objection lodged by the appellant dated 2nd June 2022 without a fair hearing and a proper validation process.

14. It asserted that by deciding that the appellant’s objection notice did not meet the requirements of section 51 (3) of the Tax Procedures Act, the respondent misdirected itself in law as there is no specific format that a notice of objection must conform to other than comprising of the requirements under section 51 (2) of the Tax Procedures Act and grounds to be relied on are not set on stone but rather a matter of fact dependent on each specific case.

15. It relied on the case of Republic v Kenya Revenue Authority Ex-parte M-Kopa Kenya Limited [2018] where the court held that:-“In my view, since there is no format for making an objection, what is required is the substance rather than the form. What the law frowns at is an objection that is framed in such an ambiguous manner as not to be certain whether the taxpayer is seeking further particulars or indulgence to enable it pay the taxes demanded. In this case, the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. ”

16. The appellant reiterated that having lodged its objection on October 8, 2020, it was incumbent on the respondent to immediately notify the appellant in writing that the objection had not been validly lodged per section 51 (4) of the Tax Procedures Act after determining that a notice of objection had not been validly lodged.

17. It further argued that the respondent’s letter dated June 2, 2022 informing the Appellant of the invalidation of the objection, 31 days after the assessment was issued cannot be termed as immediate within the meaning of section 51 (4) of the Tax Procedures Act as it was made beyond the 30-day statutory period allowable for the appellant to rectify any issues that the respondent had with the objection effectively locking the appellant out of rectifying any issues in its objection thus violating the appellant’s right to fair administrative action.

18. The appellant submitted that the respondent rejected its objection while raising assessments on income tax but did not consider any cost sales of the business despite the appellant having filed the same on input VAT for the year in dispute.

19. It asserted that in its application for late objection, it indicated that it did not have access to its iTax account, having forgotten its iTax password and the password to its email and it was only upon its change of the said iTax password and email address that the Appellant learned of the assessments and Responded to on October 8, 2020.

20. The Appellant further asserted that it has been more than willing to avail any documentation required by the Respondent to ascertain the extent of its true tax liability.

21. The appellant cited section 51 (11) of the Tax Procedures Act and submitted that should it be found that its notice of objection was not validly lodged per section 51 (3) of the Tax Procedures Act, the respondent was still under a duty to render its objection within 60 days as section 51 (11) does not contemplate an objection decision is to be based solely on a validly lodged objection.

22. The appellant argued that per section 51 (11) of the Tax Procedures Act provides as follows;“where the Commissioner has made an objection decision is to be within sixty days from the date the taxpayer lodged a notice of objection, the objection shall be allowed.”

23. That the objection decision is to be made within 60 days from the date the taxpayer lodged a notice of objection, not from the date a taxpayer lodged a valid notice of objection.

24. The Appellant averred that even after the respondent was of the opinion that the objection was invalidly lodged and after exhaustion of communication to either the objection refiled or amended, the Tax Procedures Act contemplates that after the objection is lodged(not necessarily a valid objection) the Commissioner must make a decision within 60 days on the notice of objection and the validity or otherwise of a notice of objection should be in the objection decision which the Appellant can validly appeal or seek review on.

25. In support of its submission the Appellant relied on the case of Commissioner of Income Tax v Westmont Power (K) Ltd [2006] eKLR where the court held:“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity. Following the Inland Revenue v Scottish Central Electricity Company case, any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.”

26. The Appellant reiterated that if there be any ambiguity, it should be resolved in favour of the Appellant since it is the Appellant who will suffer irreparable harm, however, its notice of objection having been validly lodged within the statutory timelines, it was incumbent on the Respondent to issue an objection decision within 60 days which it failed to abide as per the mandatory timelines of section 51 (11) of the Tax Procedures Act.

27. The appellant cited the holding in the case of Republic v. Kenya Revenue Authority Ex-parte M-Kopa Limited (supra) where the court held that:“Accordingly, the respondent was required to make a decision in respect thereof within sixty (60) days under section 51 (11) of the said Act. As the respondent defaulted in making a termination thereon within the prescribed time, the said objection was deemed to have been allowed.107. As the law deems the objection to have been allowed, there is no reason why the applicant should have appealed. In the premises, the question of the existence of an alternative remedy does not arise in the circumstances.”

28. The Appellant cited section 51 (10) of the Tax Procedures Act and submitted that the contents of the objection decision did not meet the threshold of the law. It argued that section 51 (10) of the TPA provides the content necessary for an objection by providing that;“An objection decision shall include a statement of findings on materials facts and the reason for the decision.”

29. The Appellant argued that the alleged objection decision neither had a statement of finding on materials facts nor reasons for the decisions and prayed to the Tribunal to find that the said decision failed to meet the threshold required thus null and void.

The Appellant’s Prayers 30. The Appellant prayed for the honourable tribunal to find that:i)The objection decision was considered allowed after the passing of 60 days; andii)Proceeds to allow the Appeal.

The Respondent's Case 31. The Respondent’s case is premised ona)The respondent’s statement of facts dated and filed on July 22, 2022 together with the documents filed thereto, andb)The Respondent’s submissions dated January 27, 2023 and filed on February 6, 2023.

32. The dispute herein is as a result of the Value Added Tax (VAT) Automated Assessments inconsistency exercise carried out by the Respondent, which resulted in system generated additional assessment for the periods January to May 2018.

33. The Respondent stated that the Appellant filed VAT returns for the month of January to May 2018 and it compared its iTax system with declarations of the Appellant and those by its suppliers and various inconsistences were noted in the Appellant’s purchases.

34. That due to the inconsistencies, the Respondent advised the Appellant through its system notification to amend VAT returns within specified timelines for the months of January – May 2018. The Appellant failed to rectify the mismatch, subsequently, the Respondent’s iTax system generated additional assessments (under VAT Automated Audit Assessments) on November 15, 2019 for Kshs. 21,271,040. 27.

35. The Appellant filed an objection on iTax on October 8, 2022 and availed various copies of invoices and supplier confirmations in support of its purchase declarations in the VAT returns which had been declared as inconsistent.

36. The Respondent stated that upon lodging the Objection to the VAT Assessments, the Appellant provided some supporting documentation which was not sufficient for the Respondent to fully vacate the assessment.

37. The Respondent averred that the Appellant has the responsibility to avail supporting documents for review by the Respondent and in the instant case, contrary to Section 17 (2) and (3) of the VAT Act 2013, the Appellant’s invoice did not match with the invoices provided by the supplier and the taxable value in the Appellant’s invoice did not match with the invoice taxable value in the supplier’s invoice which the supplier provided.

38. That the parties further engaged through various correspondence where the Respondent explained to the Appellant its reasons for disallowing some of the input VAT claimed. It partially accepted the objection to the assessment for the period January to May 2018 by allowing input claim for the months that were within the invoice and disallowed the overclaimed expenses and confirmed a tax assessment of Kshs. 16,112,802. 42.

39. The Respondent asserted that the disallowed input VAT of Kshs. 16,112,802. 42 were rejected because of lumped-up sales in the VAT returns of the Appellant’s suppliers, differences in invoice referencing between the Appellant as compared to those of its suppliers, lumped purchases in the Appellant’s VAT return, and differences in Input Tax claimed by the Appellant and Input Tax declared by their supplier.

40. It reiterated that it explained the reasons to the Appellant in the objection decision and the Appellant was accorded an opportunity to avail the supporting documents such as invoices and supplier confirmation but the Appellant failed to avail the same hence the VAT Input claim was disallowed.

41. The Respondent maintained that it engaged the Appellant severally with a view of ensuring that the Appellant provides proof of and an explanation to all the input VAT prior to the issuance of the Objection Decision.

42. It maintained that the supporting documents were not available and if the same were available, the Appellant would have presented the same before this Tribunal.

43. It averred that the iTax system compared the Appellant’s declarations and its supplier’s declarations which noted various inconsistencies in the Appellant’s purchase declarations leading to the Respondent advising the Appellant through its system notification to amend their VAT returns for the period January 2018 to May 2018 within the specified timelines.

44. It stated that the Appellant failed to rectify the mismatch subsequently, the Respondent’s iTax system generated additional assessments and upon objection to the VAT assessments, the Appellant provided supporting documents which were insufficient.

45. The Respondent further stated that contrary to section 17 (2) and (3) of the VAT Act 2013, the Appellant’s invoice did not match with the invoice provided by the supplier and the Appellant failed to avail the tax invoices when the inconsistency notices were issued.

46. It reiterated that for a claim of input VAT to be successful, the Appellant must produce an original valid invoice and the Respondent reviewed all the documents provided by the Appellant and subsequently amended the assessment from Kshs. 21,271,040. 27 to Kshs. 16,112,802. 42.

47. It asserted that the invoices relied upon by the Appellant did not meet the legal threshold of a proper invoice as they were different from what was issued by its suppliers. It cited section 56 (1) of the Tax Procedures Act, 2015 and added that the burden of proof is on the Appellant to produce the evidence challenging the Respondent’s decision to disallow the input VAT claim by providing a breakdown of the perceived, the correct or accurate assessment.

48. It averred that the Appellant has not provided any additional evidence to show that the Respondent’s confirmed assessment was wrong therefore the Appeal herein is devoid of any merit and its objection decision which adjusted the Input VAT met the requirements under section 17 of the VAT Act.

49. The Respondent reiterated that upon lodging the objection to the VAT assessments, the Appellant provided some supporting documentations. It argued the same were however, not sufficient for the Respondent to fully vacate the assessment.

50. Further the Respondent reiterated verbatim its assertions in its submissions as provided in its Statement of Facts and relied on the following authorities to support its averments:i)Section 17(2) & 3 of VAT Act 2013 the Appellant must possess an original valid invoice and states as follows;(1)Subject to the provisions of this section and regulations , input tax on a taxable supply , or importation made, by registered person may , at the end of tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period , but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If at the time when a deduction for input tax would otherwise be allowable under section (1), the person does not hold the document referred to in subsection 3, the deduction for input tax shall not be allowed until first tax period in which the person holds such documentation.Provided that input tax shall be allowable for deduction within six months after the end of the tax period in which supply or importation occurred.(3)The documentation for purposes of sub section (2) shall be(a)An original tax invoice issued by the supply nor certified copy;(b)A customs entry duly certified by a proper officer and a receipt form a proper officer;(c)A customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a custom auctionii)Section 43 of the VAT Act“Every registered person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.”(2)the records to be kept under subsection (1) shall include;(a)copies of all tax invoices and simplified tax invoices in serial number order;(b)copies of all credit and debit notes issued, in chronological order.iii)Further in the holding under Malindi Judicial Review No. 2 of 2016 Silver Chain Limited v Commissioner of Income Tax and 3others eKLR [2016] where the court held:“The above section elaborates the specific records to be kept under section 43 (2). Such records include tax invoices, credit and debit notes, purchase invoices, custom entries, receipts for customs duty tax among other documents.”iv)Section 23 of the Tax Procedures Act:“A person shall–(a)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and”The Respondent maintains that it was the Appellant’s responsibility to provide Information to help the Respondent in deciding on its tax liability. It stated that Appellant failed in the discharge of this responsibility that has been placed on it by law, thus no sufficient evidence had been provided before the Respondent to reverse the Commissioner’s tax assessment decision.v)Section 56(1) of the Tax Procedures Act:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”vi)Section 30 of the Tax Appeals Tribunal Act, 2013:“In a proceeding before the Tribunal, the Appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”vii)The Respondent relied on the High court decision PZ Cussons East Africa Limited v Kenya Revenue Authority [2013] eKLR where it was stated as follows:“Blunders will continue to be made from time to time and it does not follow that because a mistake has been made that a party should suffer the penalty of not having his case determined on its merits. I think the broad equity approach to this matter is that unless there is fraud or intention to overreach, there is no error or default that cannot be put right by payment of costs. The court, as is often said, exists for the purpose of deciding the rights of the parties and not for the purpose of imposing discipline.”viii)Pierson v Belcher (H.M Inspector of Taxes) (1956-1960) 38 TC 387 where it was held:“But the matter may be disposed of, I think, even more shortly in this way: there is an assessment made by the Additional Commissioners upon the Appellant; it is perfectly clearly settled by cases such as Norman v Golder 26 T.C. 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect; and of course, he has completely failed to do so. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs.”ix)The Respondent further cited the decsison of this Tribunal in Boleyn International Ltd v Commissioner of Investigations and Enforcement Nairobi TAT Appeal No. 55 of 2018 where the Tribunal held:“We find that the Appellant at times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The Tribunal is guided by the provisions of section 56 (1) of the TPA, 2015 which states: In any proceedings under this part the burden shall be on the taxpayer to prove that a tax decision is incorrect.”x)Primarosa Flowers Limited v Commissioner of Domestic Taxes (2019) eKLR where the court referred to the case of Mulherin v Commissioner of Taxation (2013) FCAFC 115 and stated:“The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied”

51. The Respondent submitted that the Appellant has not in any way discharged its burden of proof by providing supporting documents which would have proved that the assessments by the Respondent were incorrect.

The Respondent’s prayers 52. The Respondent, therefore, prayed for the Tribunal to:i)Find the Appeal as devoid of merit.ii)The Respondent’s decision be upheld.iii)Dismiss the Appeal with cost.

Issues for Determination 53. The Tribunal having considered the parties’ Statements of Facts and submissions, puts forth the only issue for determination, as:Whether the Respondent is justified in issuing the Objection Decision of 2nd June 2022.

Analysis and Findings 54. The Tribunal wishes to analyse the issue as herein under.

Whether the Respondent is justified in issuing the Objection Decision of 2nd June 2022. 55. The Appellant submitted that the Respondent erred in issuing an objection decision on the Objection lodged by the Appellant dated October 8, 2020 without a fair hearing and a proper validation process and that the Respondent misdirected itself in law as there is no specific format that a notice of objection must conform to other than comprising of the requirements under section 51 (2) of the Tax Procedures Act and grounds to be relied on are not set on stone but rather a matter of fact dependent on each specific case.

56. The Appellant reiterated that having lodged its objection on 8th October 2020, it was incumbent upon the Respondent to immediately notify the Appellant in writing that the Objection had not been validly lodged as per section 51 (4) of the Tax Procedures Act after determining that a Notice of Objection had not been validly lodged.

57. The Appellant cited section 51 (11) of the Tax Procedures Act and submitted that should it be found that its notice of objection was not validly lodged per section 51 (3) of the Tax Procedures Act, the Respondent was still under a duty to render its Objection within 60 days as section 51 (11) does not contemplate an Objection decision is to be based solely on a validly lodged objection.

58. The Appellant argued that per Section 51 (11) of the Tax Procedures Act, the objection decision is to be made within sixty days from the date the taxpayer lodged a notice of objection and not from the date a taxpayer lodged a valid notice of objection.

59. The Appellant asserted that the Tax Procedures Act contemplates that after the Objection is lodged (not necessarily a valid objection) the Commissioner must make a decision on the notice of objection within 60 days and the validity or otherwise of a notice of objection should be in the Objection decision which the Appellant can validly appeal or seek review on. It added that if it was incumbent on the Respondent to issue an objection decision within 60 days which it failed to abide by as per the mandatory timelines of Section 51 (11) of the Tax Procedures Act.

60. The Respondent stated that upon lodging the objection to the VAT assessments, the Appellant provided some supporting documentation which was not sufficient for the Respondent to fully vacate the assessment and the Appellant has the responsibility to avail supporting documents for review by the Respondent.

61. The Respondent reiterated that it explained the reasons to the Appellant in the objection decision and the Appellant was accorded an opportunity to avail the supporting documents such as invoices and supplier confirmation but the Appellant failed to avail the same hence the VAT Input claim was disallowed.

62. Section 51 (11) of the Tax Procedures Act is unequivocal that the Respondent must provide an objection decision within sixty days from the date of the filing of a validly lodged Objection decision. The Appellant’s Argument on this particular issue is therefore defeated and the Tribunal finds that the objection decision was not time-barred and conformed to Section 51 (11) of the Tax Procedures Act.

63. The Tribunal observed that the Appellant filed its notice of objection on 8th October 2020 to which the Respondent was obligated to issue an objection decision within sixty days, unless the Appellant had provided further documents in which case sixty days upon the receipt of such further documents.

64. The Tribunal noted that it was not in dispute that no further documents were furnished by the Appellant to the Respondent in support of the objection.

65. The Tribunal takes the position that the provisions of Section 51 (11) are framed in mandatory terms, requiring the Commissioner to render its objection decision within 60 days and not a day beyond, in default whereof, the Taxpayer’s objection is deemed to be allowed.

66. The Tribunal deems that the Respondent failed to render an objection decision within the prescribed period of sixty days within the meaning of Section 51 (11) of TPA, the consequence whereof is that the Appellant’s objection by operation of the law stands allowed.

Final Decision 67. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following orders; -a)The Appeal is hereby allowed.b)The Objection Decision dated June 2, 2022 be and is hereby set aside.c)Each party to bear its own cost.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF OCTOBER 2023ROBERT M. MUTUMA.............CHAIRPERSONBONIFACE K. TERER................MEMBERMUTISO MAKAU.......................MEMBERELISHAH N. NJERU...................MEMBERDR. WALTER ONGETI.............MEMBER