[2025] KETAT 221 (KLR)

Tarkoks Investments Limited v Commissioner of Domestic Taxes (Tax Appeal E764 of 2024) [2025] KETAT 221 (KLR) (25 April 2025) (Judgment)

Neutral citation: [2025] KETAT 221 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E764 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

April 25, 2025

Between

Tarkoks Investments Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer in the building and construction industry.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to 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 Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent on 21st April 2021 issued a Notice of Intention to Audit the affairs of the Appellant under Section 59 of Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”). Subsequently, the Respondent issued income tax assessments dated 15th June 2021.

4. The Appellant lodged an objection to the assessments on 14th July 2021 which the Respondent acknowledged receipt through objection application acknowledgment receipts dated 14th July 2021.

5. The Respondent confirmed the assessments vide a letter dated 13th September 2021 demanding the Appellant to pay a total of Kshs 3,726,506. 00 on the basis that the Appellant failed to provide documents to support the objection.

6. Being dissatisfied with the decision of the Respondent, the Appellant obtained leave to file the Appeal out of time on 4th July 2024 and filed this instant Appeal vide Notice of Appeal dated and filed on 24th June 2024.

7. The Appellant applied for review of the Judgement delivered on 21st March 2025 pursuant to provisions of Section 29A of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) and following directions of the Tribunal on 8th April 2025, the Judgement delivered on 21st March 2025 was set aside and the matter referred back for determination on its merits which determination the Tribunal will proceed to render herein.

The Appeal 8. The Appellant filed Memorandum of Appeal dated 5th July 2024 and filed on 12th July 2024 raising the following grounds of appeal:a.That the Respondent erred in law and fact by issuing the objection decision outside statutory timelines contrary to Section 51(11) of the TPA.b.That the Respondent erred in law and fact by disregarding the expenses incurred by the Appellant when raising the impugned Income Tax assessment.c.That the Respondent erred in law and fact by asserting that it had not been given adequate documents by the Appellant, whereas the Appellant had supplied all relevant documentary evidence to support the expenses claimed.d.That the Respondent erred in law and fact by confirming the assessments without due regard to all records/documents, explanations and information provided, thereby failing to appreciate all issues presented and raised by the Appellant before, confirming the assessment.

Appellant’s Case 9. In support of its case the Appellant relied its Statements of Facts dated and filed on 12th July 2024 and its written submissions dated and filed on 27th November 2024.

10. The Appellant contended that the objection decision is a contravention of the provisions of Section 51(11) of the TPA on the basis that it lodged its objections on 14th July 2021 but the Respondent issued its objection decision on 13th September 2021. It asserted that the objection decision ought to have been issued on or before the 12th of September 2021, unless there were intervening actions that fall under Section 51(11) (b) of the TPA but there were no intervening factors.

11. The Appellant relied on the cases of ESL Forwardersvs Commissioner of Domestic taxes Nairobi TAT No. 255 of 2020 and Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 24 (KLR) (Commercial and Tax) (23 August 2021) to state that the Respondent has to issue its decision within 60 days failure to which the objection is deemed as allowed.

12. The Appellant averred that the Respondent erred in alleging that the Appellant failed to provide relevant documentary evidence in support of its objection, whereas the Appellant had supplied all relevant documentary evidence to support the expenses claimed. The Appellant contended that the Respondent failed to consider its objection and the supporting documentary evidence which included the Appellant's bank statements, audited financial statements and relevant invoices and receipts to support the expenses claimed.

13. It alleged that the document provided by the Appellant demonstrated that the deposits in the Appellant's bank accounts included loans, contra entries, bounced cheques and director's capital injections which could not constitute taxable income within the confines of Section 3(2) of the Income Tax Act, cap 470 of the Laws of Kenya (hereinafter “ITA”). It argued that despite the foregoing, the Respondent erred by considering the loans, contra entries, bounced cheques, overdrafts and director's injections as taxable income for the period in question.

14. The Appellant stated that the Respondent is bound by the express text of the ITA and is precluded from speculating as was established by the Superior court in the case of Republic v Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited (2014] eKLR.

15. It contended that failure of the Respondent to take into consideration the documents provided and the expenses incurred by the Appellant during the periods in question was not only prejudicial but also excessive and arbitrary.

16. The Appellant submitted that the Respondent's decision dated 13th September 2021 is not justified on the basis that that the Respondent did not use the available information as provided by the Appellant. It asserted that failure to rely and consider the documents provided in essence denied the Appellant the rights provided by Section 15 of the ITA which provides a list of deductions that qualify for deduction before assessment of the tax payable.

17. According to the Appellant, had the Respondent restricted itself to the provisions of Section 3(2) (a) (i) of the ITA and taking into account the allowable deductions under Section 15 of the ITA, the Respondent would not have made the impugned decision.

18. Further, the Appellant averred that the Respondent in its decision failed to consider the nature of the business the Appellant is involved in by subjecting it to an arbitrary decision premised on assumptions and not the documentary evidence provided. It asserted that in the building and construction industry where the Appellant is based, profit margins are dictated by several factors and most importantly the operating expenses.

19. It argued that in not considering the documents provided to justify the expenses incurred in the periods in question amounts to an illegality under the ITA and the general fair administrative action contrary to Article 47 of the Constitution of Kenya, 2010.

20. In its submissions, the Appellant reiterated that the Respondent’s decision is contrary to section 51(11) of the TPA. To support this position, the Appellant cited the cases of Koibos General Contractors Limitedv Commissioner of Domestic taxes TAT NO. 373 of 2023; Farmers Wells Limited v Commissioner Domestic Taxes TAT No. 179 of 2021; Cyka Manpower Services Limited v Commissioner Domestic Taxes TAT No. 21 of 2022; and Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of2020) [2021] KEHC (KLR) wherein emphasis was placed on the need to issue objection decision within 60 days.

21. It submitted that the Respondent did not properly consider the Appellant’s expenses in issuing its assessment. In support of its position, the Appellant relied on case of Republic v Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited [2014] eKLR.

22. The Appellant prayed that the appeal be allowed; the Respondent's decision dated 13th September 2021 be set aside; and that the costs of this appeal be awarded to the Appellant.

Respondent’s Case 23. The Respondent’s case was premised on its Statement of Facts dated and filed on 23rd August 2024 and its written submissions dated and filed on 22nd January 2025.

24. The Respondent stated that the Appellant was selected based on an intelligence summary from the Intelligence and Strategic Operations (I&SO) department, which indicated significant discrepancies between the VAT turnover and the combined totals of IFMIS turnover and withholding certificates. This suggested that the Appellant was under declaring VAT sales therefore, on or about 21st April 2021, the Respondent issued a Notice of Intention to Audit under Section 59 of TPA. The Respondent alleged that the Appellant failed to respond nor provide the records requested. Thereafter, the Respondent issued the assessments dated 15th June 2021.

25. According to the Respondent, the Appellant filed an objection 14th July 2021 and on 23rd August 2021, the Respondent engaged with the Appellant regarding the objection, notifying it that the objection was invalid due to the lack of relevant documentary evidence.

26. It averred that despite the objection being deemed invalid, the Respondent was willing to review the case provided that the Appellant submitted the following documents on or before 31st August 2021: audited accounts, sales and purchase ledgers, VAT Control accounts, VAT Z-reports, and bank/M-Pesa statements.

27. The Respondent stated that on 31st August 2021, the Appellant responded to the Respondent stating it was unable to provide the requested documents by the agreed date citing that its external Accountant filling returns on its behalf disappeared with the documents and declined to help. Additionally, the Respondent noted that the Appellant requested more time, which the Respondent granted, extending the deadline by an additional 7 days until 6th September 2021. The Appellant having failed to honour the new date or communicate, the Respondent confirmed the assessments 7 days later hence this Appeal.

28. In response to the Appeal, the Respondent contended that it engaged the Appellant on the objection application as stated above thus it maintained that it issued the objection decision within the statutory timelines as per Section 51(11) of the TPA.

29. The Respondent stated that the Appellant failed to provide documentation in support of audit queries raised as per the audit submission. Additionally, the Respondent averred that during the objection review, the requested records were not submitted therefore, the Respondent confirmed the assessments.

30. In its written submissions, the Respondent submitted that it confirmed the assessments according to the law. It also submitted that the Appellant failed to adduce documents to support the objection which according to the Respondent was contrary to section 59 of the TPA.

31. The Respondent also submitted that the Appellant failed to discharge its burden of proof under section 56(1) of TPA and section 30 of the TATA. The Respondent submitted that the taxpayer has a burden of proving and has to prove that the Respondent’s decision is in correct but the Appellant failed to do so. In support of this position, the Respondent cited the case of Boleyn International Limited v Commissioner and Enforcement, Nairobi TAT Appeal No. 55 of 2018.

32. The Respondent sought the following reliefs:a.That the Respondent's objection decision dated 13th September 2021 was proper in law and the same be affirmed.b.This Appeal be dismissed with costs to the Respondent.

Issues for Determination 33. Having considered the parties’ pleadings, the Tribunal puts forth the following issues for determination:a.Whether the Respondent’s decision was time barred under Section 51(11) of the TPA.b.Whether Respondent erred in confirming the assessments.

Analysis and Findings 34. The Tribunal having established the issues for determination will proceed to analyze them as follows:a.Whether the Respondent’s decision was time barred under Section 51(11) of the TPA

35. The Appellant maintained that the Respondent’s decision was time barred under Section 51(11) of the TPA on the basis that it was issued beyond the statutory 60 days. On the other hand, the Respondent submitted that the decision was issued within the statutory time frame.

36. The Tribunal notes that the Appellant lodged its notice of objection which the Respondent acknowledged receipt vide objection Application Acknowledgement receipt dated 14th July 2021. The Appellant expected the Respondent to issue its objection decision on or before 12th September 2021 but the Respondent issued the decision on 13th September 2021.

37. The Tribunal examined the Respondent’s objection decision and noted that it was issued a day late. Therefore, the Respondent has to justify why it issued the objection decision on 61st day instead of the 60th day.

38. At the material time, Section 51(11) of the TPA provided as follows:‘‘(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.’’

39. The Tribunal examined the parties’ pleadings and supporting documents and noted that the Respondent stated that it invalidated the Appellant’s notice of objection on account of insufficient supporting documents. It stated as follows at paragraph 9 of its Statement of Facts:‘‘On 23rd August 2021, the Respondent engaged with the Appellant regarding the objection, notifying them that the objection was invalid due to the lack of relevant documentary evidence.’’

40. The Tribunal noted that whereas the Appellant filed its notice of objection and the Respondent acknowledged receipt on 14th July 2021, the Respondent waited until 23rd August 2021 to notify the Appellant that the notice of objection was invalid. It should be noted that Section 51(4) of the TPA mandated the Respondent to communicate its finding immediately. Therefore, the Respondent could not be said to have complied with the provisions of Section 51(4) of the TPA.

41. The Respondent at paragraph 10 of its Statement of Facts stated that:‘‘Despite the objection being deemed invalid, the Respondent was willing to review the case provided that the Appellant submitted the following documents on or before 31st August 2021:-i.Audited accounts, sales and purchase ledgers,ii.VAT Control accounts,iii.VAT Z-reports, andiv.bank/M-Pesa statements.’’

42. The Tribunal noted that the Respondent did not adduce any document showing that it requested the Appellant to produce additional documents or information in form of Audited accounts, sales and purchase ledgers, VAT Control accounts, VAT Z-reports, and bank/M-Pesa statements therefore, it was an uphill task for the Respondent to successfully rely on Section 51(11) (b) of the TPA.

43. The Respondent stated as follows at paragraph 13 of its Statement of Facts:‘‘On 31st August 2021, the Appellant responded to the Respondent stating they were unable to provide the requested documents by the agreed date citing that their external accountant filling returns on their behalf disappeared with their documents and declined to help. Additionally, the Appellant requested more time, which the Respondent granted, extending the deadline by an additional 7 days until 6th September 2021. ’’

44. The Tribunal therefore finds that the Respondent did not successfully invalidate the Appellant’s notice of objection and was thereby required to issue its objection decision within 60 days as stipulated in law.

45. The Tribunal observes that the Appellant filed its notice of objection on 14th July 2021 meaning that the Respondent’s objection decision ought to have been issued on or before 12th September 2021, however the objection decision was issued on 13th September 2021 a day later than it ought to have been.

46. In the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR) (Commercial and Tax) (23 August 2021) (Judgment) the court held follows:“A statutory edict is not procedural technicality. It’s a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided the consequences of failing to render a decision within 60 days. The Objection is deemed to be allowed. That being the law, the appellant’s Objection stood allowed as a matter of law the moment the Commissioner of Domestic Taxes failed to render his decision within the 60 days. This being the correct legal position, it is my finding that the 1st appeal succeeds”.

47. Under the circumstances, the Tribunal finds and holds that the Respondent issued its objection decision beyond the statutory 60 days and subsequently the Respondent’s decision was time barred thus the Appellant’s notice of objection was deemed to have been allowed by operation of law as provided for under Section 51(11) of the TPA.

48. Pursuant to the foregoing, the Tribunal finds that the determination of the remaining issue is rendered moot.

Final Decision 49. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and consequently makes the following Orders:a.The Appeal be and is hereby allowed;b.The objection decision dated 13th September 2021 be and is hereby set aside;c.Each party to bear its own cost.

50. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 25TH DAY OF APRIL. 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER