[2024] KETAT 557 (KLR)

Stealth Africa Consulting LLP v Commissioner of Domestic Taxes (Tax Appeal E114 of 2023) [2024] KETAT 557 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 557 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E114 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

April 26, 2024

Between

Stealth Africa Consulting LLP

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is incorporated in Kenya. Its principal business activity is the provision of forensic accounting and related services to clients both locally and outside Kenya mainly in the business of general supplies and construction activities.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 of Kenya’s Laws. Under Section 5(1) of the Act, the Respondent is an agency of the Government for the collection and receipt of all the tax revenue. Further under Section 5(2) of the Act with respect to performance of its functions under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act for purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Appellant lodged an income tax refund application for the period 2018 to 2020 on 26th January 2023 for the amount of Kshs 3,528,585. 00 which was rejected by the Respondent vide an order dated 1st February 2023.

4. The Appellant issued a notice of objection vide its letter dated 1st March, 2023 stating its ground of objection.

5. The Respondent reviewed the Appellant’s objection and vide its letter dated 14th March, 2023 upheld its refund rejection decision.

6. Being dissatisfied with the Respondent’s decision, the Appellant filed its Notice of Appeal dated 29th March 2023 on even date.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 31st March, 2023 and filed on even date:a.That the Respondent erred in law and fact by rejecting the income tax refunds amounting to Kshs 3,528,585. 00 for years of income 2018 to 2021. b.That the Respondent erred in law and fact in failing to consider that the Commissioner’s refund decision dated 1st February, 2023 required the Appellant, if dissatisfied with it, to lodge an objection as opposed to lodge an appeal to the Tax Appeals Tribunal (TAT) based on the prevailing provisions of the law.c.That the Respondent erred in law and fact by failing to consider that the repeal and replacement of Section 47 of the Tax Procedures Act, No. 29 of 2015 (hereinafter ‘TPA’) brought ambiguity in interpretation of what is a tax decision and as such should have interpreted it in favour of the Appellant.d.That the Respondent erred in law and fact by failing to undertake the review or confirmation of income tax refunds applied by the Appellant as per the law instead of rejecting the full refunds amounts.e.That the Respondent erred in law and fact by failing to take into consideration that the key challenge with income tax refunds application is due to the fact that, the i-Tax system as currently configured doesn’t allow an applicant to indicate the correct refunds amounts as compared with overpayments in the approved filed returns in case of identifiable variances.f.That the Respondent erred in law and fact by violating the Appellant’s legitimate expectations and the right to fair administrative action.g.That the Respondent erred in law and fact by failing to appreciate the ambiguity created by partial amendment of the law and that the Appellant is inviting this Honourable Tribunal to settle this matter once and for all.

The Appellant’s Case 8. The Appellant argued its case through its Statement of Facts dated and filed on 31st March 2023.

9. It stated that the Respondent failed to accept the revised income tax refunds of Kshs. 3,201,062. 00 as per the filed returns which was the main reason for rejecting the Income tax refunds application of Kshs. 3,528,585. 00. It stated further that the objection application as a tax decision and indicated that the Appellant should have directly appealed to this Tribunal following the rejection of the income tax refund application.

10. It argued that Section 3 of TPA provides for definition of terms that guided it on whether to lodge an objection or an appeal following the initial rejection of the income tax refund application. The said Section defined what an appealable decision and tax decisions are and that based on this Section, a refund decision is a tax decision.

11. It averred that while the Finance Act, 2022 repealed and replaced Section 47 of the TPA with the new Section, it failed to amend the definition of an “appealable decision” and/or tax decision by either indicating that an appealable decision includes a refund decision under the new Section 47 or deletion of the phrase “a refund decision” from the definition of a tax decision.

12. It contended therefore that in the absence of the above changes or the failure of the drafters of law to clearly define what is an appealable decision and/or a tax decision, the Appellant was right and correct in treating the rejection of the income tax refund application by the Respondent as a tax decision as opposed to an “appealable decision” and accordingly lodging an objection as per the provisions of the law.

13. To buttress its argument, the Appellant relied on the Court of Appeal Ruling between Mount Kenya Bottlers Ltd & 3 others vs Attorney General & 3 others (2019) eKLR where the Court noted that a purposive interpretation of the statute that looks to the intention of the legislation in enacting a statute cannot be applied to tax statutes. It argued that a strict constructionist approach should be applied to the interpretation of tax statutes. As such the Respondent cannot read in or assume that because the amendment did not clean up the definition of a tax decision, then a tax refund decision does not fall within the ambit of a tax decision for objection.

14. The Appellant asserted that the Respondent failed to appreciate the ambiguity created by the repeal and replacement of the new Section 47 of the TPA on what was expected of the Appellant upon issuance of a tax decision by the Respondent.

15. The Appellant averred that it is common procedure that where there is an ambiguity in interpretation of tax laws, it should be interpreted in favour of the taxpayer hence the Respondent ought to have reviewed the objection decision as lodged by the Appellant with respect to rejection of income tax refunds application.

16. The Appellant asserted that the Respondent failed to ascertain the refunds amounts as provided for in the law arguing that both the old Section 47 and the new Section 47 gave the Respondent an option of ascertaining the validity of an application by subjecting the application to an audit. It asserted further that the fact that the Respondent identified variances of income tax refunds between filed income tax returns and the refunds applied, it ought to have communicated the findings and requested the Appellant for confirmation on whether he was in concurrence or not agreeable to his findings.

17. The Appellant averred that it applied for the income tax refund where the i-Tax system populated the refunds amounts to be applied for, however the system did not provide any room or offer an option of amending the refund amounts to indicate any amounts either reflected in the filed income tax returns. This system configuration challenge should not be used to deny the Appellant what rightfully belongs to it unless it was the intention of the Respondent to configure it that way to allow for under review of the refund claim.

18. The Appellant averred that by virtue of Section 47(4), of the TPA the Respondent has an option of undertaking a review to ascertain the validity of the income tax refund. This created a legitimate expectation where the Respondent was to undertake a review of an application made as opposed to just reviewing the filed returns, a position that was held in the case of Commissioner of Domestic Taxes vs Lewa Conservancy Ltd (2019) eKLR where the court held: -“a legitimate expectation may arise either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue.”

19. The Appellant contended that the Respondent has an obligation under Section 4 (3) of the Fair Administrative Action Act No. 4 of 2015 (hereinafter ‘FAA’) that where an administrative action is likely to adversely affect the rights and fundamental freedoms of any person, the administer shall give the person affected by the decision prior an adequate notice of the nature and reasons for the proposed administrative action; an opportunity to be heard and to make representations in that regard; notice of a right to a review or internal appeal against an administrative decision; where applicable, a statement of reasons pursuant to Section 6 of FAA.

20. It contended that the Respondent’s decision created ambiguity thus adversely affecting the Appellant and other taxpayers in their pursuit to seek clarity.

Appellant’s Prayers 21. The Appellant prays that the Appeal be allowed and that part of the decision of the Respondent contained in the letter dated 14th March 2023 be set aside.

The Respondent’s Case 22. The Respondent addressed the Appellant’s grounds of appeal through its Statement of Facts dated 26th April, 2023 and filed on 2nd May, 2023.

23. In response to the grounds of Appeal, the Respondent averred that Section 23 of the TPA mandates a taxpayer to maintain any records required under a tax law in either of the official languages and submit tax returns in the approved form and manner prescribed by the Respondent.

24. The Respondent averred that where Section 47(1) of the TPA entitles a taxpayer with overpaid taxes the right to seek a refund, Section 47(4) empowers it to undertake an audit ascertaining the validity of an application for refund. It stated that the Appellant applied for a refund of Kshs 3,528,585. 00 while the amount available for refunds as per return amounted to Kshs 3,201,062. 00. It therefore rejected the refund application as there was no reconciliation of the variance between the available amounts and the amount claimed.

25. The Respondent stated that Section 47(13) of the TPA that came into force on 1st July 2022 bestows the Tribunal the jurisdiction to ascertain disputes on refunds. The Section provides as follows:“A person aggrieved by a decision of the Commissioner under this Section may appeal to the Tribunal within thirty days after being notified of the decision.”

26. The Respondent argued that its decision to reject the refund claim was informed by the Appellant’s self-assessed records and that as per Section 56(1) of the TPA, the burden lies with the taxpayer to prove that a tax decision is incorrect. As such it averred that the rejection decision was valid and issued according to the letter of the law.

Respondent’s Prayers 27. The Respondent prayed that the Tribunal would:a.Uphold the objection decision dated 14th March, 2023. b.Dismiss the Appeal with costs.

Submissions Of The Parties 28. The Appellant’s submissions were filed on 20thJuly 2023 wherein it raised one issue for determination which it analysed in as follows:Whether the Respondent was justified in law to reject the income tax refunds based on an ambiguous or conflicting provision of the law.

29. The Appellant submitted that the Respondent failed to treat the objection application of the income tax refunds as a tax decision indicating that the Appellant should have directly appealed to the Tribunal following the rejection of the income tax refund. It submitted further that it was guided by Section 3 of the TPA which provides for definitions of terms that guided the Appellant.

30. It submitted that it was guided to lodge an objection or an appeal following the initial rejection of the income tax refund application pursuant to Section 3 of the TPA which provides for definition of term.

31. The Appellant submitted that while the Finance Act, 2022 repealed and replaced Section 47 of TPA with the new Section, it failed to amend the definition of an appealable decision and/or tax decision by either indicating that an appealable decision includes a refund decision under the newly introduced Section 47 or through a deletion of the phrase “a refund decision” from the definition of a tax decision.

32. It was the Appellant’s assertion that the ambiguity has now been addressed through the Finance Act, in particular Section 49 of the Finance Act 2023 which provides that Section 3 of the TPA is amended in the definition of tax decision. However, the matter stays suspended through court orders following a Petition Number E18 of 2023.

33. The Appellant therefore submitted that in the absence or the failure of the drafter of the law to clearly define what an appealable decision and/or a tax decision, it was justified and correct in treating the rejection of the income tax refund decision by the Respondent as a tax decision as opposed to an appealable decision and accordingly lodging an objection as per the provisions of the law. It argued therefore that the Respondent cannot read in or assume that because the amendment did not clean up the definition of a tax decision, then a tax refund decision does not fall within the ambit of a tax decision for objection.

34. The Appellant reiterated that it is common practice that where there is an ambiguity in interpretation of tax laws, it should be interpreted in favour of the taxpayer, hence the Respondent ought to have reviewed the objection decision as lodged by the Appellant with respect to rejection of income tax refunds.

35. It was the Appellant’s averment that the Respondent has an obligation under Section 4(3) of the FAA that where an administrative action is likely to adversely affect the right and fundamental freedoms of any person, the administrator shall give the person affected by the decision prior and adequate notice of the nature and reasons for the proposed administrative action; an opportunity to be heard and to make representations in that regard; notice of right to a review or internal appeal against an administrative decision, where applicable, a statement of reasons pursuant to Section 6 of the FAA.

36. The Appellant submitted that it stands to lose Kshs.3,201,062. 00, being the legitimate income tax refund due to it even as it appreciates the differences identified by the Respondent owing to the i-Tax system challenges which does not allow a taxpayer to apply for a different figure other than the figures indicated on i-Tax system.

37. To buttress its argument, the Appellant relied on the case of Stellenbosch Farmers Winey Group Ltd & Another vs Martell & Others where the South African Supreme Court of Appeal explained how a court should resolve factual disputes and ascertain as far as possible, where the truth lies between conflicting factual assertions. It stated that the court should be concerned with the side that appears more convincing and credible than the other and must rule in favour of the contrary side.

38. The Appellant submitted that it has demonstrated how it relied on the law as it was and the fact that the subsequent legislation has made an attempt to clean up the confusion created by the law. It submitted further that the need to consider relevant considerations and ignore irrelevant facts in the decision making has close nexus with the need to act reasonably. As such those ignoring the errors or ambiguity caused by the changes in law the Respondent arrived at a decision that was not only illegal, unreasonable but also one based on bad faith.

39. The Appellant relied on the following other cases to buttress its argument.i.Republic vs Commissioner of Co-operations, Kirinyaga Tea Growers Cooperative & Savings & Credit Society Ltd. Civil Appeal No.39 of 1997 (1999) I EA 245. ii.Associated Provincial Picture houses Ltd vs Wednesbury Corporation.

40. The Respondent’s Written Submissions dated 13th July 2023 and filed an 14th July, 2023 also raised one issue for determination which it proceeded to analyse as follows:

Whether the Application dated 15th June 2023 is merited. 41. The Respondent submitted that Section 47(1) of the TPA entitles a taxpayer with overpaid taxes the right to seek a refund while Section 47(4) of the TPA empowers the Respondent to undertake an audit ascertaining the validity of an application for refund. However, its role of encompassing disposal of public funds is not a mere conveyor belt or a winnowing device for sorting out the wheat from chaff, rather it is mandated by statute to apply its mind to the validity of tax refund claims.

42. The Respondent submitted that the Appellant applied for a refund of Kshs 3,528,585. 00 while the computed refunds as per the Appellant’s filed returns for the subject periods amounted to Kshs 3,201,062. 00. It therefore rejected the refund claim in light of the variance between refund claimed and the refund on i-Tax. It argued that the Appellant failed to tender evidence of its tax and business records reconciling the variance identified.

43. It argued that it is settled law that creatures of statute exercise their mandate within the strict confines of the authority on functions conferred upon it by statute. Hence the Respondent rejected the subject refund claim for lack of authority pursuant to Section 47(4) of the TPA. It however stated that Section 47(13) of TPA which came into force on 1st July 2022 bestows the Tribunal with the jurisdiction to ascertain disputes on refunds.

44. The Respondent submitted that the Appellant filed its objection on 1st March 2023, eight months after the amendment of Section 47(13) of the TPA. It argued therefore that its decision conforms to the provisions of Section 47 of TPA in its entirety on the tax refunds for accuracy.

45. The Respondent submitted in conclusion that the Appellant failed to meet the evidential standard prescribed under Section 56(1) of the TPA as well as failed to present evidence ousting the Respondents grounds for rejecting the tax refund and failing to discredit the Respondent’s computation of any of the tax refund according to the Appellant’s own returns.

Issues For Determination 46. The Tribunal has considered the parties pleadings, documenting evidence and the submissions of the parties and is of the view that this Appeal raises one issue for determination.Whether the Respondent was justified in rejecting the Appellant’s refund application

Analysis And Findings 47. Having identified the single issue for determination, the Tribunal will now proceed to analyse it as herein under:

48. The Appellant had applied for an income tax refund of Kshs 3,528,585. 00. However, the Respondent rejected this claim stating that the correct claim as per the filed returns was Kshs 3,201,062. 00 and that due to the fact that the Appellant was not able to provide the reconciliation for the variance between the available amounts and the amount claimed.

49. The Respondent had stated that its decision to reject the refund application was that it was not a tax decision and that it is empowered under Section 47(4) of the TPA to undertake an audit ascertaining the validity of an application for refund.

50. Section 47(1) of the TPA entitles a taxpayer with overpaid tax the right to seek a refund. It provides as follows: -“Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner in the prescribed form--(a)To offset, the overpaid tax against the taxpayers outstanding tax debts and future tax liability; or(b)For refund of overpaid tax within the years, or six months in the case of value added tax, after the date on which the tax was overpaid.”

51. Pursuant to the said Section 47(1) of the TPA, the Appellant is entitled to a refund where it’s due. The Tribunal notes that the Respondent has admitted at paragraph 12 of its Statement of Facts that although the Appellant applied for a refund of Kshs 3,528,585. 00 the amount available as per the return was Kshs 3,201,062. 00 which amount the Appellant was agreeable to settle for.

52. As stated above, one of the reasons for rejecting the Appellant’s a refund application given by the Respondent was that there was no reconciliation of the variance between the available amount and the amount claimed yet the key challenge was due to the current configuration of the Respondent’s i-Tax system which did not provide for amendment of amounts. On the one hand, the Respondent admits to the correct refund due, on the other hand its i-Tax system which it has configured and controls does not provide for adjustments, then why would one be denied what rightfully belongs to them. The Respondent’s assertion therefore that it is empowered under Section 47(4) of the TPA to undertake an audit to ascertain the validity of an application for refund does not hold as it had already admitted that the refund due to the Appellant as per its i-Tax system was Kshs. 3,201,062. 00.

53. The Respondent had relied on Section 47(13) of the TPA that came into force on 1st July 2022 and contended that the Appellant filed its objection eight months after the amendment of this Section. It argued that its decision for rejection of the Appellant’s refund application conformed with the provisions of Section 47 of TPA in its entirety as pertaining to tax refunds.

54. The Tribunal notes that the repeal and replacement of Section 47 created ambiguity in the interpretation of what a tax decision is. The Appellant contended that the Respondent’s rejection of its refund application was a tax decision whereas the Respondent asserted that Section 47(13) of the TPA bestows the Tribunal the jurisdiction to ascertain disputes on refunds. The Tribunal is of the view that it has the jurisdiction to ascertain disputes on refunds based on the provisions of Section 41(13) of the TPA. Section 47 (13) of the TPA stipulates as follows:“(13)A person aggrieved by a decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the decision.”

55. In any case, it is trite law that any ambiguity in interpretation of what a tax statute is should be interpreted in favour of a taxpayer. In the holding in the case of Mount Kenya Bottlers Ltd and 3 other vs The Attorney General and 3 others, Civil Appeal No.164 of 2013(2019) eKLR, the Court of Appeal stated:“This common law position is what pertains and has been adopted by our courts as good law. In our view there cannot be equitable construction of income tax legislation…. If however there is any ambiguity in a taxing statute Act, such ambiguity must be resolved in favour of the taxpayer or as it is sometimes stated; contra fiscum…”

56. The reasons the Respondent gave for rejection of the refund were flimsy and any reconciliation of variances ought to have been carried out by it. In line with the provisions of Section 47 of the TPA, the Appellant was entitled to a refund.

57. In view of the foregoing, the Tribunal finds that the Respondent was not justified in rejecting the Appellant’s tax refund application.

Final Decision 58. The upshot of the above is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following final orders.a.The Appeal be and is hereby allowedb.The Respondent’s refund rejection decision dated 14th March 2023 be and is hereby set aside.c.The Respondent to process a refund of the admitted refund amount of Kshs 3,201,062. 00 within Ninety(90) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

59. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE - MEMBER