[2024] KETAT 838 (KLR)

St Theresa Industries Limited v Commissioner of Domestic Taxes (Tax Appeal E246 of 2023) [2024] KETAT 838 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 838 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E246 of 2023

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

June 28, 2024

Between

St Theresa Industries Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya and involved in the business activity of manufacture of industrial steel products.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act mandated with the responsibility for the assessment, collection, and accounting for all the tax revenue as an agent of the Government of Kenya, and is also mandated with the responsibility for the administration and enforcement of all the statutes set out in the schedule to the said Act.

3. The Appellant was audited by the Respondent for the period January 2017 to December 2020 and was issued with the audit findings vide a letter dated 26th January 2022, whereon the Respondent demanded the sum of Kshs. 202,443,232. 00 as taxes due comprising Income Tax and VAT.

4. The Appellant objected to the said audit findings vide a letter dated 25th May 2022 whereon it responded to the queries raised in the audit findings and reconciled and provided explanations to the variances outlined in the Respondent’s demand.

5. The Respondent in a letter dated 12th April 2023 issued its Objection Decision and reviewed the amount stated as due and payable to Kshs. 72,300,358. 70 for the period 2017 to 2018.

6. The Appellant being aggrieved by the Respondent’s decision filed its Notice of Appeal on 11th May 2023 with the Tribunal.

The Appeal 7. The Appellant lodged its Memorandum of Appeal dated on 24th May 2023 and filed on 25th May 2023 and set out the following grounds of appeal;i.That the Respondent erred in law and fact by failing to issue a proper objection decision as set out by Section 51 (10) of the Tax Procedures Act.ii.That the Respondent erred in law and fact in invalidating the objection issued by the taxpayer.iii.That the Respondent erred in law and in fact by demanding Kshs. 72,300,358. 20 as taxes due and payable.iv.That the Respondent erred in law and fact in its original demand by using the wrong year and consequently invalidated all its workings that support its claim.

The Appellant’s Case 8. The Appellant ‘s case is set out on its;a.Statement of Facts dated 24th May 2023 and filed on 25th May 2023 together with the documents attached thereto; and,b.Written submissions dated 2nd February 2024 and filed on 15th February 2024.

9. The Appellant stated that the Respondent’s Objection decision was not properly issued as stipulated by the Tax Procedures Act.

10. It stated that Section 51 (10) of the TPA stipulates that an Objection Decision should consist of a statement of findings and reasons for the decision, as follows;“(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

11. The Appellant posited that the Respondent’s Objection Decision dated 12th April 2023 was a one paragraph document that did not properly explain the reason as to why the Objection Decision was in contrast to the detailed objection in response to the audit findings, and therefore did not meet the requirements stipulated by the TPA in Section 51 (10).

12. The Appellant further posited that the reason given by the Respondent in its Objection Decision that no information or documentation was availed in support of its objection is false, as there was email as far back as 25th August 2022, and other correspondences with the former tax agent from when the objection was lodged.

13. The Appellant also stated that the foregoing contrasted with the audit findings that the Respondent issued, and averred that it was quite peculiar that an audit finding would be more detailed than the Objection Decision yet there were more correspondence after the objection. It averred that even the period subject of the dispute changed from what was in the audit findings and the Objection Decision, where in the audit findings the period in question run from January 2017 to December 2020 while in the Objection Decision, the period ran from 2017 to 2018.

14. The Appellant contended that such drastic changes in position should be sufficiently and properly explained to it as prescribed by section 4 of the Fair Administrative Actions Act;“4(1)Every person has the right to administrative action which is expeditious, efficient, lawful, reasonable and procedurally fair.(2)Every person has the right to be given written reasons for any administrative action that is to be taken against him ….”.

15. The Appellant averred that the Respondent is bound by the provisions of Section 51 (10) of the TPA that requires an objection decision to include a statement of findings on the material facts and the reasons for the decision.

16. The Appellant cited the case of Republic vs. Commissioner of Domestic Taxes Large Taxpayers Office Exparte Barclays Bank of Kenya Ltd (2012) eKLR, where the court stated;“The approach to this case is that stated in the often-cited case of Cape Brandy Syndicate -vs- Inland Revenue Commission (1920) 1KB where Roland J. state “in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

17. The Appellant therefore contended that the Objection Decision was not properly drafted in compliance with the relevant provision of the law cited hereinabove, and therefore ought to be thrown out.

18. On the issue of sales as per banking receipts, VAT returns and Financial Statements, the Appellant contended that since the Respondent did not issue a properly formatted and drafted Objection Decision, it was forced to use the audit findings as the basis of its Appeal.

19. It stated that the Respondent in its findings stated that the sales as per adjusted banking and sales as per income tax returns show that for the period 2017 /2018, the adjusted sales figures were higher than the sales figures declared in its income tax returns, indicating an understatement of turnover in the income tax returns. The Appellant contended that the Respondent in its reconciliation used the wrong year end in its working, as the Appellant’s financial year runs from April to March in line with the Group’s year end.

20. The Appellant further contended that the use of the wrong year end automatically disqualified the method used in calculating tax due by the Respondent.

21. The Appellant further contended that the Respondent while carrying out its audit used the wrong figures due to the use of the wrong year end when taking into account the Appellant’s loans/contra entries/returned cheques and interbank transfers that reflected in the Appellant’s bank accounts.

22. It further stated that the Respondent in establishing the Appellant’s receivables took into account all receivables which is wrong as they should have only considered trade receivables when considering its receivables.

23. The Appellant also stated that it reconciled its workings using proper year ends and compared them to the Respondent’s workings and has incorporated a loan and interbank transfers appearing in its bank account resulting in declared income. It stated that its reconciliation proved that all income had been declared correctly and that it had also declared for the periods in review.

24. On revenue as per the VAT returns and as per Financial statements, the Appellant stated that the Respondent in its findings of sales as per VAT3 concluded that VAT was chargeable based on the fact that there were undeclared sales and consequently added back the VAT due.

25. The Appellant contended that the Respondent used the wrong year end in its workings and consequently the amount deemed as VAT on undeclared sales is erroneous.

26. The Appellant asserted that the use of the wrong year end automatically disqualifies the amounts deemed as tax due.

27. The Appellant also averred that the variance noted in 2019 was as a result of a credit note that had not been reversed in its VAT returns, and consequently if the credit note were to be reversed there would be no variance to warrant the payment of tax.

28. The Appellant further averred that the variance in 2020 was as a result of other income that was separately shown in its financials statement that there was declared as income liable for VAT. This income once considered significantly reduces the variance that was noted, regardless tax was already paid on this income.

29. On estimated purchases as per banking payment analysis, the Respondent in its findings used the debits from banking for the period 2017 /2018 to adjust the Appellant’s purchase figures. It stated that the Respondent used the wrong year end in its workings and consequently its workings cannot be deemed to be accurate.

30. The Appellant contended that upon review of the Respondent’s workings and its own reconciliation, it noted that the Respondent had ignored a cardinal rule in its working that not all payments made in a year relate to purchases made in that year. The Respondent’s methodology failed to consider interbank transfers, all loan repayments, and contras also considered in sales to banking analysis.

31. The Appellant contended that in 2020 there were aspects of IFRS 16 adjustments in the books which were not considered by the Respondent as the entries related to book entries and had nothing to do with bank payments.

32. The Appellant also contended that it had no choice but to follow the Respondent’s methodology in its reconciliation and that following the methodology used by the Respondent it was clear that all purchases and expenses were well accounted for and there was no variance that would warrant the payment of additional taxes.

33. The Appellant submits that the one paragraph Objection Decision issued by the Respondent did not sufficiently address the issues raised in the objection letter, neither did it adequately provide statement of findings on material facts.

34. The Appellant further submitted that an Objection Decision should not be scant but it should be well detailed offering well explained reasons for its decision. It cited the case of Joseph Muriithi Ndirangu T/A Ndirangu Hardware vs. Commissioner of Domestic Taxes ITA E070 of 2021, where the court held that the duty to offer reasons for its decision is a mandatory constitutional requirement and not a discretionary requirement that can be ignored.

35. The Appellant further submitted that even where an Objection Decision is valid for having been issued within sixty days statutory timeline, the said Objection Decision can still be deemed void for lack of reasons.

36. The Appellant cited the case of PZ Cusssons East Africa Ltd vs. Kenya Revenue Authority HCC 309 of 2012 eKLR, where the court held;“I agree with the KRA that the burden would be upon the company to show that the amount taxed was excessive. But to that extent only. It was necessary and indeed in regard to reasonable administrative action to detail how it came to its decision contained in the letter of 29th June 2012, so as to enable the company, if it so wished, to mount a challenge if it wished. The duty to give reasons in now embedded in Article 47 (2). I therefore find and hold that the failure by KRA to give information as to how it arrived at the amount was unreasonable.”

37. The Appellant also submitted that the wording of Section 51 (10) of the TPA is in peremptory terms, the word “shall’’ indicating that it is not obligatory but mandatory for the Respondent to give reasons as to the basis of its Objection Decision by including a statement of findings and workings that informed the Objection Decision.

38. The Appellant cited the case of Equity Group Holdings Ltd vs. Commissioner of Domestic Taxes (ITA CA E069 & E025 of 2020) 2021 KEHC 25 (KLR), where the court held;“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.”

39. From the foregoing the Appellant submitted that the Objection Decision issued by the Respondent failed to give reasons and or statement of findings, and subsequently the Objection Decision did not address an y of the issues in the Notice of Objection and it cannot therefore be said to be an Objection Decision and should be duly disregarded by the Tribunal.

40. The Appellant further submitted that the failure by the Respondent to give reasons on its Objection Decision contravened the right of the Appellant to fair administrative action and contravened Article 47 of the Constitution of Kenya 2010.

41. The Appellant cited the case of Judicial Service Commission vs. Mbalu Mutava & Anor (2014) eKLR, where it was held;“Article 47(1) marks an important and transformative development of administrative justice for, it not only lays a constitutional foundation for control of powers of state organs and other administrative bodies, but also entrenches the right to fair administrative action in the Bill of Rights. The right to fair administrative action is a reflection of some of the national values in Article 10 such as the rule of law, human dignity, social justice, good governance, transparency and accountability. The administrative action of public officers, state organs and other administrative bodies are now subjected by Article 47(1) to the principle of constitutionality rather than to the doctrine of ultra vires from which administrative law under common law was developed.”

42. It was a further submission of the Appellant that the Respondent having failed to give reasons for the basis of its impugned Objection Decision, the Tribunal ought to hold and find that under Section 6 (4) of the Fair Administrative Actions Act, the impugned decision was made arbitrarily, in bad faith, improperly, and without good reason. Section 6 (4) of the FAA Act provides;“(4)Subject to section 5, if an administrator fails to furnish the applicant with the reasons for the administrative decision or action, the administrative decision or action shall in any proceedings for review of such action or decision and in the absence of proof to the contrary, be presumed to have been taken without good reason.”

43. The Appellant therefore submitted that the fact that the Respondent’s Objection Decision was lacking reasons and or statement of findings was a blatant contravention of the Appellant’s right to fair administrative action.

44. On the application of the wrong year end by the Respondent, the Appellant submitted that the financial year end is important because it provides a framework for business to track their income and expenditure over a set period of time. This information is used to prepare financial statements which provide insights into the financial health of the business. The start and end dates of the financial year also determine when tax returns must be filed, and is critical in assessments of tax due.

45. The Appellant submitted that in determination of tax due, the Respondent in its reconciliation used the wrong year end in its workings. The Appellant further submitted that its financial year end runs from April to March, while the Respondent took the position that the financial year run from May to April.

46. It submitted that a tax year is the calendar year, but for a company (except for financial institutions) can choose any date as the end of its financial year. The Appellant has therefore chosen its financial year to run from the month of April to the month of March the following year.

47. It further submitted that the Respondent while carrying out its audit used the wrong figures due to the use of the wrong year end when taking into account the Appellant’s loans/contra entries/returned cheques and interbank transfers reflected in the Appellant’s bank accounts. Therefore, the tax assessed by the Respondent on the basis of the wrong workings on the financial year ultimately led to incorrect tax assessments by the Respondent.

48. The Appellant also submitted that the financial year is critical for purposes of determination of taxes due and payable by a taxpayer and thus the financial year that the company elects to use should be the same that the Respondent adopts to use in the assessment of taxes to avoid over declarations and under declarations.

49. It was also submitted for the Appellant that the use of wrong financial year in the workings by the Respondent has the net effect of overestimation of purchases as per banking payment analysis used by the Respondent, and will lead to erroneous amount deemed as VAT on undeclared sales leading to erroneous tax due.

50. It was also submitted for the Appellant that the use of wrong working financial year by the Respondent in its assessments will ultimately lead to erroneous comparison of sales as per VAT 3 returns and sales as per income tax returns, leading to an over/under declaration of taxable sales in the VAT returns. As was demonstrated, the audit findings of the Respondent that indicated an under declaration of taxable sales in the VAT returns on the basis of the wrong working financial year used by the Respondent.

51. The Appellant submitted that it has used the proper financial year end in its own returns, and that these financial statements is what it had used to file its annual returns on iTax, and that the returns are a mirror of the financial statements. Therefore, any comparisons the Respondent makes ought to be guided by the financial statements. However, the Respondent got its final figures by assessing the Appellant’s banking, purchases, stocks and debtors, on a wrong year end thus creating the huge variances.

52. The Appellant also submitted that upon realization that the wrong financial year end had been used, it not only informed the Respondent but also did its own reconciliation and came to a different position which it duly shared with the Respondent but the it was never acted upon. This was per the initial objection notice dated 25th May 2022.

53. The Appellant therefore asserted that the use of the wrong year end automatically disqualified the amounts deemed as tax due.

Appellant’s Prayers 54. By reason of the foregoing the Appellant prayed for relief as follows;a.The Respondent’s Objection Decision dated 12th April 2023 be set aside;b.The Appeal be allowed with costs to the Appellant; and,.c.Any other relief the Honourable Tribunal may deem fit.

The Respondent’s Case 55. The Respondent’s case is set out on its;a.Statement of facts dated 20th June 2023 and filed on 14th August 2023; and,b.Written submissions dated and filed on 23rd January 2024.

56. The Respondent stated that it carried out investigations into the business of the Appellant for the period 2018 to 2021 with a view of confirming its tax compliance under Income Tax obligations, noting that information from the data base on non-filers showed that the Appellant failed to declare the business income for the year 2017 and 2018 respectively and an audit report was accordingly issued.

57. The Respondent stated that during the aforesaid investigations, it was discovered that the Appellant had overstated expenses while others were unsupported and their income was under declared respectively.

58. It also stated that further to the review, a compliance check was conducted by examining the records and audited accounts of the taxpayer to establish the correctness of their declarations, and the Respondent established;a.The taxpayer had underdeclared business income as per the adjusted bankings and sales per income tax returns compared.b.Sales figures were higher than sales figures declared in the income tax returns which indicated turnover in the income tax returns.c.Comparison of sales as per VAT3 returns and sales as per income tax returns indicated an under declaration of taxable sales in the VAT returns.

59. The Respondent stated that it carried out a return review and during the process, it performed an analysis of purchases claimed by purchasers and sales declared by suppliers, and were ran on iTax system for the period of 2017 and 2020 resulting to a grand total liability of Kshs. 202,443,732. 00 in income tax and VAT.

60. It stated that during the review it was discovered that there were inconsistencies between the returns filed by the Appellant’s suppliers and invoices claimed by the company for the years 2017 and 2028. Further the Appellant was informed of the inconsistency of the VAT3 returns invoices for the Appellant to resolve the same, however the Appellant failed to resolve the said inconsistencies within the stipulated timeframe.

61. The Respondent averred that in view of the foregoing, the adjustments were brought to charge for Income Tax by together with unsupported expenses and underdeclared income by issuing additional assessments for the years 2017 and 2018 on 25th May 2022 for Kshs. 112,155,576. 78 including penalties and interest.

62. It further stated that the Appellant filed an objection on 2nd June 2022 which was duly acknowledged by the Respondent, but the Appellant failed to provide supporting documentation for the objection as requested within stipulated timelines.

63. Consequently, the Respondent issued a demand for documents vide email for delivery notes, purchase invoices, delivery notes, supplier statements and bank statements.

64. It further stated that the Appellant failed to provide all relevant supporting documents, records and invoices for the years 2017 and 2018 for income tax in support of their objection. The Appellant’s income was therefore estimated, as this was the only reasonable basis of assessing Income Tax, and the Objection Decision issued for Kshs. 72,300,358. 20.

65. The Respondent averred that the assessments were correctly issued and conform to the Income Tax Act, stating that the Appellant did not provide any evidence that would have altered the assessment. The TPA places the onus of proof in tax objections on the tax in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection, in terms of the provisions of Section 56 (1) of TPA.

66. The Respondent further asserted that the Appellant lodged the Objection Notice on iTax, the same was received and acknowledged however the same was treated as invalidly lodged as it did not have grounds of objection. The Respondent stated that the TPA empowers the Respondent to notify a party where an objection notices as lodged is invalid and the Appellant was notified, and requested to provide documents, but failed to provide the documents as requested.

67. The Respondent further asserted that the Appellant filed all the necessary returns and paid what they assessed themselves to be payable. It averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to the Respondent’s request for documents hence no relevant records or documents were provided to support the objection. Consequently, the assessment was made on the only available information based on best judgement by the Respondent. The TPA Section 59 empowers the Respondent to require production of such documents vide issuance of notice as deemed necessary in determination of tax liability.

68. The Respondent also averred that the examination of the Appellant’s records, audited accounts and income tax returns established that the Appellant failed to declare business income and all their incomes for years of income 2017 and 2018 respectively. The Respondent averred that it is empowered by the Income Tax Act to bring to charge income where the same is established as due, as per Section 73 (1) ITA.

69. The Respondent further averred that the tax assessment was reached at based on the information available and provided by the Appellant and the Respondent is empowered by the TPA to make such decisions. The assessment was therefore based on the information provided in line with Section 29 (1) of the ITA.

70. The Respondent asserted that the Appellant despite declaring some income knowingly continued to under declare income for the period under review contrary to the provisions of the Income Tax Act. The Respondent averred that according to the ITA it is the responsibility of any person carrying on business to maintain records of all transactions as per Sections 54 A (1) and Section 55(2) of ITA. It maintained that it is mandated by the law specifically Section 31 of the TPA to carry out amendments on assessments where adjustments are due to bring to charge the correct amounts.

71. The Respondent also averred that the Appellant did not file income tax returns for the accounting period 2017 and 2018 in contravention of the requirements of the TPA and therefore the estimated assessment was correct.

72. The Respondent also reiterated that that the Appellant failed to provide signed financial statements and books of accounts to support their allegations, and therefore the assessment was issued based on the information available, and the information provided.

73. The Respondent further averred that the Appellant failed to provide the documents requested in support of their objection hence the input VAT was disallowed. The Respondent insists that the VAT Act empowers the Respondent to disallow such input VAT where necessary documents are not provided.

74. The Respondent also contended that examination of the Appellant’s records established that the Appellant earned income from business in the period under audit, however, these incomes were not declared for tax purposes for the year earned. The Respondent asserted that the Appellant carried on business in contravention of the TPA which requires such documents be maintained and for purposes of taxation i.e. as per Sections 42, 43, and 93 of TPA.

75. The Respondent denied that the Appellant had paid all its tax dues and reiterated that because of its under declaration, the Appellant is in debt of Kshs. 112,115,576. 78.

76. In its submissions, the Respondent reiterated the averments made in its statement of facts and submitted that the Tribunal should be guided by the following considerations;a.Were any documents provided to justify the Appellant’s objection;b.Were the annual tax returns of income as done and filed by the Appellant from time to time correct and complete;c.Were any transactions been omitted from or incorrectly recorded in the Appellant’s books of accounts/bankings.

77. The Respondent submitted that Section 23 (1) (b) of the TPA makes it an obligation of a taxpayer to maintain any document required under a tax law to enable the person’s tax liability to be readily ascertained.

78. It further submitted that the Appellant’s Objection dated 13th June 2022 was devoid of substance and failed to include any supporting documents to validate the Appellant’s claims as required under Section 51 of the TPA, leaving the Respondent no other option but to issue an objection decision confirming the assessment pursuant to Section 51 (9) of the TPA in order to comply with the timelines.

79. The Respondent cited the case of Commissioner of Domestic Taxes vs. Metoxide Limited (2021) where the court held that Section 56 (1) of the TPA provided that the taxpayer has the burden of proving that a tax decision is incorrect. It stated that it did not err in invalidating the Appellant’s objection and issuing a decision as the Appellant has failed to discharge its burden of proof and challenge the Respondent’s assessment with unchallenged and uncontroverted evidence to prove the incorrectness of the tax assessments.

80. The Respondent also cited the cases of Ken Iron and Steel Limited vs. Commissioner of Investigations and Enforcement (2021) eKLR, and Commissioner of Domestic Services vs. Galaxy Tools Limited (2021) eKLR, where it was stated that, the tax laws reverse the well-known principle of evidence of “He who alleges must prove.”

81. The Respondent also cited the case of Kamargut Hardware vs. Commissioner of Domestic Taxes TAT No.727 of 2022, where the court noted that Section 30 of the TAT Act places the burden of proof on the taxpayer to submit all necessary documents to support its case.

82. The Respondent also cited the case of Monaco Engineering Limited vs. Commissioner of Domestic Taxes TAT No.67 of 2017, where the Tribunal stated that;“it has been made clear on the burden of taxpayers to have documents in disputing tax assessments. This responsibility is precisely provided for in section 54 A (1) of the Income Tax Act.”

83. The other cases cited by the Respondent were;i.John Githua Njogu vs. Commissioner of Investigations and Enforcement TAT 101 of 2018;ii.Osho Drapers Ltd vs. Commissioner of Domestic Taxes TAT 159 of 2018;iii.Miao Yi vs.Commissioner of Investigations and Enforcement TAT No. 441 of 2019;iv.Ritz Enterprises Limited vs. Commissioner of Investigations and Enforcement TAT 227 of 2018.

84. The Respondent submitted that the Appellant failed to produce documentation to discharge its burden of proof,

Respondent’s Prayers 85. The Respondent prayed that;a.The Respondent’s Objection Decision be held;b.The outstanding tax arrears of Kshs. 112,155,576. 78 are due and payable by the Appellant;c.The confirmed assessments dated 25th May 2022 were proper in law; and,d.The Appeal herein be dismissed with costs to the Respondent.

Issues For Determination 86. The Tribunal having carefully reviewed the pleadings, supporting documentation and submissions filed on behalf of the parties is of the considered view that the appeal herein distils into two issues for determination namely:i.Whether the Respondent erred in failing to issue a proper Objection Decision in line with Section 51 (10) of the TPA; and,ii.Whether the Respondent was justified in raising the impugned income tax/VAT assessment for the period 2017 – 2020.

Analysis And Determination 87. The Tribunal having identified the issues for determination, shall analyze the same as herein under;

i. Whether the Respondent erred in failing to issue a proper Objection Decision in line with Section 51 (10) of the TPA. 88. The background giving rise to this Appeal is that the Respondent carried out investigations into the business of the Appellant for the period 2017 to 2020 to confirm tax obligations compliance on income tax and VAT. In its findings the Respondent stated that the Appellant had overstated expenses while others were unsupported and their income was under-declared respectively.

89. The Respondent further averred that a review of the Appellant’s records and examination of its audited accounts to establish the correctness of their declarations established that the business had underdeclared business income as per adjusted banking and sales per income tax returns compared, sales figures were higher than sales figures declared in the income tax returns which indicated turnover in the income tax returns, and that the comparison of sales as per VAT3 returns and sales as per income tax returns indicated an under-declaration of taxable sales in the income tax returns.

90. The Respondent carried out adjustments which were brought to charge and an additional assessment for the years 2017 and 2018 was issued on 25th May 2022 for Kshs. 112,155,576. 78 including penalties and interest.

91. The Appellant duly objected to the additional assessment and the Respondent issued its Objection Decision and demand thereto on 12th April 2023 for Kshs. 72,300,358. 20.

92. On the hand the Appellant has contended that the Respondent erred in its assessment by using the wrong financial year ends and consequently invalidating the workings that it supported the assessment with.

93. The Appellant also averred that the Respondent while carrying out its audit used the wrong figures due to the use of the wrong year end when taking into account the Appellant’s loans/contra entries/returned cheques and interbank transfers that reflected in the Appellant’s bank accounts and therefore the tax assessed by the Respondent on the basis of the wrong working financial year ultimately led to incorrect tax assessments by the Respondent.

94. In the second limb of its contestation, the Appellant contended that the Respondent issued a terse one paragraph decision that did not adequately explain, or include the statement of findings or give reasons for its decision in line with the provisions of Section 51 (10) of the TPA, and the decision was in contrast to the detailed objection to the audit finding.

95. The Appellant contended that for an Objection Decision to be determined as being valid, the same ought to be structured as set out in Section 51 (10) of the TPA, i.e. it should consist of a statement of findings and reasons for the decision, while addressing the issues raised in the objection notice particularly. The Appellant further contended that an Objection Decision should not be scant and should be well detailed offering well explained reasons for its decision, and the duty to offer reasons for its decision is a mandatory constitutional requirement, and not a discretionary requirement that can be ignored.

96. The relevant provision of the TPA is set out as follows;“51(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

97. In its Objection Decision dated 12th April 2023, the Respondent in response to a detailed 7-page objection application analyzing eight grounds of objection with supporting documents and tables, the Respondent stated:“Your objection application dated 02/06/2022 for the years of income 2017 -2018 amounting to Kshs. 72,300,358. 20 refers.Please note that the documents/analysis and explanations as requested in our emails have not been availed. This is to inform you that the objections have been rejected.”

98. The abovesaid Objection Decision letter was framed as such inspite of the Respondent’ averments and submissions as to the detailed extent into which it reviewed, analyzed, examined a myriad of the Appellant’s supporting documents, records, audited accounts, Bank statements and so on before adjusting the assessment which was initially assessed at Kshs. 202,443,232. 00 to Kshs. 72,300,358. 20 as per the Objection Decision.

99. It is noteworthy that the Appellant has addressed each of the issues raised in the Respondent ‘s assessment/audit finding under the various heads under income tax and VAT tax heads, with a detailed analysis supported by its analytical tables, explanations and supporting documents annexed thereto.

100. From the foregoing the Respondent rejected the objection application but did not issue any statement of findings or give reasons for the rejection of any of the grounds or issues raised or why it was not prepared to amend on any of the grounds or issues objected to.

101. The requirement under Section 51 (10) for an Objection Decision to make a statement of findings and give reasons the decision is couched in mandatory terms.

102. In the case of Joseph Muriithi Ndirangu T/a Ndirangu Hardware vs. Commissioner of Domestic Taxes ITA E070 OF 2021, Majanja J. held;“the requirements under Section 51 (10) for an objection decision to give reasons is couched in mandatory terms and thus I agree with the Appellant that the said objection decision was inadequate and did not amount to an objection decision as contemplated by the law. For that reason I have set out I hold that in much as the objection decision was valid as it was made in time, it was inadequate for not providing written reasons hence it is null and void. This duty to give written reasons is a mandatory requirement that is rooted in the Constitution and cannot be sidestepped hence the objection decision is set aside for that reason.”.

103. In the case of PZ Cussons East Africa Ltd vs. Kenya Revenue Authority (2012) eKLR, the court noted and considered the effect of failure to give written reasons as follows;“I agree with the KRA that the burden would be upon the company to show that the amounts taxed was excessive. But to that extent only. It was necessary and indeed in regard to reasonable administrative action to detail how it came to its decision contained in the letter of 29th June 2012 so as to enable the company, if it so wished, to mount a challenge if it so wished. The duty to give reasons is now embedded in Article 47 (2) of the constitution. I therefore find and hold that the failure by KRA to give information as to how it arrived on the amount unreasonable.”

104. In the case of Joseph Muriithi Ndirangu case (supra), the court stressed that the duty to give reasons is not a trifling requirement. It is a constitutional mandate embedded in the right to fair administrative action guaranteed by Article 47 of the Constitution and elevated to a right under the Bill of Rights.

105. Suffice it to say that the duty to give written reasons is a mandatory requirement that is firmly anchored in the constitution of Kenya 2010 and cannot be circumvented or disobeyed.

106. The wording of Section 51 (10) of the TPA is couched in peremptory terms, where the use of the word “shall” indicate that it is not a discretionary obligation but a mandatory duty for the Respondent to give reasons as to the basis of its Objection Decision by including a statement of findings on the material facts, and the reasons that informed the Objection Decision.

107. The Tribunal has perused the impugned the Respondent’s Objection Decision and noted that the same did not contain a statement of findings, noting that the amount objected to was Kshs. 202,443,732. 00, for the years of review January 2017 to December 2020 on account of Income Tax and VAT and the Objection Decision contained a demand for Kshs. 72,300,358. 20 for the period of income of 2017 to 2018 and the tax heads were neither disclosed nor explained.

108. It is the Tribunal’s view that had the Respondent complied with the provisions of Section 51 (10) of the TPA, the Objection Decision would have addressed some of the variations raised herein above and by the Appellant, thus would have been statutorily adequate.

109. The Tribunal having carefully considered the facts and the binding decisions above is satisfied that the Respondent’s Objection Decision was inadequate and did not amount to an Objection Decision as contemplated by the law.

110. In light of the foregoing, the Tribunal finds and holds that in as much as the Objection Decision was made in time, it was inadequate for not providing the statement of findings and written reasons for the decision as contemplated under Section 51 (10) of the TPA, hence it is null and void and consequently invalid.

ii. Whether the Respondent was justified in raising the impugned income tax/VAT assessment for the period 2017 -2018. 111. The Tribunal having made a finding that the Objection Decision issued by the Respondent against the Appellant was invalid, the Tribunal shall not delve into the other issue commending for determination as the same as been rendered moot.

112. The upshot of the foregoing is that the Appellant’s Appeal is merited and therefore succeeds.

Final Determination 113. The Appellant’s Appeal having succeeded the Tribunal proceeds to make the following orders;a.The Appellant’s Appeal be and is hereby allowed;b.The Respondent’s Objection Decision dated 12th April 2022 be and is hereby set aside; and,c.The parties to bear their own costs.

114. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28THDAY OF JUNE 2024. ROBERT M. MUTUMA - CHAIRPERSONELISHA N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI DIRIYE - MEMBER