[2023] KETAT 1009 (KLR)

Super Steel Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal 774 of 2022) [2023] KETAT 1009 (KLR) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1009 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 774 of 2022

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

September 15, 2023

Between

Super Steel Enterprises Limited

Appellant

and

The Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya under the Companies Act. Its principal business is the sale of steel and hardware materials.

2. The Respondent is a principal officer appointed under Section 13 of theKenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning the performance of its functions under subsection (1), the Authority 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 to assess, collect and account for all revenues under those laws.

3. The issue in dispute herein arose when the Appellant was issued with an assessment arising from an audit of its self-assessment returns and bank account deposits of the company and its directors.

3. The Respondent subsequently issued the Appellant with a notice of assessment dated 30th November 2021 with additional income tax of Kshs 6,706,459. 00 and VAT of Kshs 48,375,083. 00- inclusive of penalties and interest.

4. The Appellant objected to the Respondent’s assessment through a letter dated 20th December 2021.

5. The Respondent confirmed the assessment for income tax of Kshs 22,578,184. 00 through a letter dated 28th April 2022.

6. The Appellant being dissatisfied with the objection decision, lodged a Notice of Appeal on 24th January 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal which was filed on the 27th July 2022 was premised on the following grounds:a.The objection decision does not refer to the assessment notice and therefore is not for the taxpayer in relation to the tax in dispute.b.The assessments do not consider all the information availed to the Respondent.c.The assessment amounts do not consider the purchase and expenditure documents already picked by the Respondent but instead use a gross profit margin of 7% which is not tenable in the current economic circumstances.d.Income tax has been assessed based on the gross profit margin estimate yet it is supposed to be based on net income or loss.e.The assessment is excessive and punitive and does not reflect the reality on the ground.f.The Respondent opted to use the banking method for the determination of taxable income yet there was some non-income banking that has not been taken care of in the reconciliation.g.The Respondent has mixed up personal bankings for the directors and for the Appellant thereby violating the principle of separate entities as far as tax is concerned.h.As a gesture of good faith and willingness to be fully tax compliant, the Appellant has already paid a total amount of Kenya Shillings four hundred Thousand (Kshs 400,000. 00) on account for the years 2018-2020.

Appellant’s Case 8. The Appellant supported its appeal with its Statement of Facts filed on 27th July 2022, written Submissions filed on 16th February 2023 and Supplementary Submissions filed on 11th April 2023.

9. The Appellant stated that the additional assessment against it on income was for Kshs 6,706,459. 00 and VATof Kshs 48,375,083. 00 inclusive of penalties and interest. It contended that the objection decision however made reference to an income tax additional assessment of Kshs 22,578,184. 00

10. It was its position that this mix-up in figures was sufficient evidence that the objection decision did not relate to its objection. That this is because its assessment was for additional income tax assessments of Kshs 6,706,459. 00 and not Kshs 22,578,184. 00 as indicated in the objection decision.

11. It submitted that the objection decision went against the tax canon of certainty and cannot be a proper objection decision because of the different figures in the assessed amount in the assessment notice and the amount demanded in the objection decision. That based on this it asserted that the Respondent should not make any demands for the said period because of the ambiguity in the demands.

12. The Appellant argued that:a.The company and its directors are different persons and it was thus a grave error for the Appellant to assess the tax liability of the company based on the bank account details of its directors.b.The Respondent did not make consideration of the complex nature of the banking in the two sets of bank statements, the fact that not all banking is revenue, and the fact that those accounts had friendly loans and inter-banking transfers.c.The Respondent ignored additional VAT input on purchases that were presented to them by the Appellant.

13. The Appellant requested the Tribunal to focus on ground 10 of its Memorandum of Appeal upon which all the other grounds are predicated. It submitted that the crux of this ground is premised on Section 51 (11) of the Tax Procedures Act, which provides that:The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.

14. It supported this argument with the cases of Vivo Energy Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority & another (2020)eKLR and Republic v Kenya Revenue Authority Ex-Parte M-kopa Kenya Limited (2018) eKLR from where it submitted that the objection decision was dead on arrival, could not be resuscitated, has no effect, is null and void for having been made outside the statutory timelines of sixty days.

15. The Appellant posited that it supplied the documents required including audited accounts and the supporting documents like payroll, other administrative costs and closing stock balances which were sufficient to inform the Respondent of the correct income and VATpayable. It was its view that the Respondent’s objection decision was erroneous and unlawful because it did not disclose the supporting documents required.

16. Based on this logic, it argued that the impugned objection decision was wrongly arrived at for the reasons:a.The Appellant furnished all requisite supporting documentation.b.The Respondent presumed that all deposits were incomec.The Respondent refused to factor in the input tax that it had provided

17. The Appellant pointed out in its supplementary submissions that whereas its objection application was dated 20th December 2021 the impugned objection decision referred to an application dated 22nd January August 2021.

Appellant's Prayer 18. Based on above grounds, the Appellant prayed:-a.Against the assessment report dated 30th November 2021 and objection decision dated 28th April 2022 and further prays that the correct basis for assessing taxable income be usedb.That the audited accounts supplied should be used as the basis for the determination of taxable income.c.That Tribunal declares the objection decision null and voidd.That no further action be taken to send agency notice to the appellant bankers and customers based on the objection decision.

Respondent’s Case 19. The Respondent has grounded its case on the Statement of Facts filed on the 15h August 2022 and the Written Submissions dated 7th March 2023.

20. The Respondent stated that the Appellant was issued with an income tax additional assessment of Kshs. 6,706,459. 00 and VAT additional assessment of Kshs. 48,375,083. 00 inclusive of penalties and interest but it only objected to income tax assessment of Kshs. 22,578,184. 00 on the 22nd January 2022.

21. The Respondent further stated that the Appellant did not provide the documents to support its objection as requested by emails dated 22nd February 2022 and 6th of April 2022 even though it was allowed sufficient time to provide the documents.

22. That the objection was thus invalidated due to a lack of supporting documentation vide an objection decision dated the 28th of April 2022.

23. The Respondent invoked:a.Section 56(1) of the TPAto assert that the burden of proof, in this case, lies with the Appellant. In which case the Appellant was obliged to prove that the tax decision was incorrect.b.Section 29(1) of the TPA to assert that failure by the Appellant to provide the requisite documents meant that it was entitled to issue a default assessment based on information available to it. Therefore, the default assessment was correct, due and payable.

24. The Respondent supported its case with the following authorities:i.Saima Khalid vs The Commissioner for Her Majesty Revenue and Customs- Appeal No TC/2017/02292,ii.Digital Box Limited vs Commissioner of Investigation and Enforcement, TATNo. 115 of 2017,iii.Van Boeckel vs C & EQBDec 1980, [1981] STC 290iv.Raghubar Mandal Harihar Mandal vs the State of Bihar Air 1952 PAT 253

25. The Respondent supported its use of banking analysis in this matter based on the following grounds that:a.The Appellant did not provide it with supporting documents.b.It was the most appropriate method that it could adopt in the present circumstances to compute income.c.The onus was on the Appellant to prove that it was an inappropriate method and this burden was not dislodged.

25. It relied on the Tribunal’s previous decision in the case of Digital Box Limited v Commissioner of Investigation and Enforcement,TAT No. 115 of 2017, to support its decision to use the banking method to determine the Appellant's tax liability.

Respondent’s Prayer 26. Given the foregoing, the Respondent urged the Honourable Tribunal to confirm the default assessment and find that the assessed taxes are due and payable by the Appellant.

Issues For Determination 27. The Tribunal having carefully considered the pleadings filed and the evidence tendered is of the view that the Appeal herein crystallizes into the following issues for determination:a.Whether the Respondent's Objection decision dated 28th April 2022 was justified .b.Whether the Respondent erred in confirming the Appellant’s Additional Assessment vide its Objection Decision dated 28th April 2022

Analysis And Determination a. Whether the Respondent’s Objection decision dated 28th April 2022 was justified. 28. The Appellant argued under this head as follows:a.That whereas the additional assessment against it on income was for Kshs 6,706,459. 00 and VATof Kshs 48,375,083. 00 inclusive of penalties and interest, the Respondent issued it with an objection decision confirming income tax additional assessment of Kshs 22,578,184. 00b.That whereas its objection application was dated 20th December 2021, the impugned objection decision referred to an application dated 22nd January August 2021

29. The Respondent did not specifically respond to this issue. It instead affirmed that the assessment was fair and it was confirmed because the Appellant refused to provide the documents that it had requested.

30. The Tribunal has noted the following from the pleadings of both parties:a.The Assessment Notice dated 30th November 2021 was for additional income tax assessment of Kshs 6,706,459. 00= and VAT 48,375,083. 00 all totaling to Kshs 55,081,541. 00 These figures were inclusive of penalties and interest.b.The Appellant's Objection application was dated 20th December 2021c.The objection decision which was titled ‘Objection to additional assessment for income tax of Kshs 22,578,184" stated as follows in relevant parts:“Reference is made to your objection application dated 22nd January August 2021 in response to the additional assessment raised on in iTAX on 9th June 2021. ”d.The objection decision continued as follows:“.. we have not received all the documents required under the above statute. The Principal tax of Kshs 22,578,184 together with the resultant penalty and interest remain due and payable as per the assessment.”

31. The following glaring issues are discernible from the foregoing 3 documents:-a.The Appellant's additional assessment for income tax was for Kshs 6,706,459. 00 and not Kshs 22,578,184. 00 which was stated by the Respondent in the objection decision.b.The Assessment Notice was dated 30th November 2021 and not 9th June 2021 as indicated in the objection decision. Indeed the dates of January and August both predate the date of the assessment Notice.c.The Appellant's notice of objection was dated 20th December 2021 and not 22nd January 2021 or 22nd August 2021 as indicated in the objection decision. The dates of January and August 2021 both predate the date of the Objection.

32. It is clear from the above analysis that the objection decision issued by the Respondent was referring to:a.An objection application that was not authored or owned by the Appellant.b.An Assessment Notice that had not been presented to the Appellant for its consideration. Indeed, the Respondent did not even provide proof that it had served this assessment of 9th June 2021 on the Appellant.c.An additional income tax assessment of Kshs 22,578,184. 00 which was unknown to the Appellant, and which was contrary to the additional income tax assessment of Kshs 6,706,459. 00 as contained in the Assessment Notice of 30th November 2021.

33. The Appellant and the Respondent were therefore not on the same page regarding the tax assessment. The Appellant was defending and objecting to an assessment that was different from the one to which the Respondent issued an assessment.

34. Based on the foregoing analysis, it would be safe to state that the Respondent has not issued an objection decision regarding the Appellant’s notice of objection lodged on 20th December 2021. It has instead issued an objection decision arising from an assessment and objection that is either non-existent and or unknown to the Appellant.

35. The law as it is, under Section 51(1) and (2) of the TPA, requires that an objection decision by the Respondent would emanate from a tax decision to which a taxpayer has been given the chance to file an objection. An objection decision cannot be premised on a tax decision or an assessment that is unknown and or has never been sighted by the Appellant. Unfortunately, this appears to have been the case in this Appeal.

36. Moreover, the impugned objection decision affirmed an additional tax liability of Kshs 22,578,184. 00 while the Appellant objected to an additional assessment of Kshs 6,706,459. 00 Therefore, the action of the Respondent amounted to the issuance of an objection decision under Section 51(4) and (8) of the TPA without bringing this assessment to the attention of the Appellant as is dictated under Section 51(1) and (2) of the TPA.

37. The outcome of the foregoing analysis is that the Respondent's objection decision was based on nothing. It also failed to comply with Sections 31(8), 51(1) and (2) of the TPA which required it to give the Appellant a chance to file an objection to its additional assessment raised on 9th June 2021 before issuing the said objection decision.

38. The Courts have held in Rongai Tiles & Sanitary Wares Limited v Commissioner of Domestic Taxes (Tax Appeal E011 of 2020) [2023] KEHC18546 (KLR) (Commercial and Tax) (16 June 2023) (Judgment) that express breach of a substantive law that defines relationships between parties is not a procedural technicality, it is a fatal error. That the consequences of such failure by the Commissioner mean that the Appellant's objection stand allowed.

39. In the end, and having held that the Respondent’s objection decision was not in compliance with Sections 31(8), 51(1) and (2) of the TPA, it follows that the Respondent’s omissions and commissions in this dispute were fatal and hence the reason why its objection decision dated 28th April 2022 was not justified.

b. Whether the Respondent erred in confirming the Appellant’s Additional Assessment vide its Objection Decision dated 28th April 2022 40. The determination of this issue has been overtaken by events following the Tribunal’s foregoing holding that the Respondent’s objection decision dated 28th April 2022 was not justified.

Final Decision 41. Based on the foregoing analysis, the Tribunal finds that the Appeal has merit and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby allowedb.The Respondent‘s objection decision dated 28th April 2022 be and is hereby set aside.c.Each party is to bear its own costs.

42. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023. ERIC NYONGESA WAFULA.............CHAIRMANDR. RODNEY O. OLUOCH.............MEMBERABRAHAM K. KIPROTICH............MEMBERCYNTHIA B. MAYAKA...................MEMBEREUNICE NG’ANG’A........................MEMBERBERNADETTE GITARI..................MEMBER