[2024] KETAT 1462 (KLR)

Techsavanna Company Limited v Commissioner of Domestic Taxes (Appeal E932 of 2023) [2024] KETAT 1462 (KLR) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1462 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E932 of 2023

E.N Wafula, Chair, G Ogaga, RO Oluoch, AK Kiprotich & Cynthia B. Mayaka, Members

October 4, 2024

Between

Techsavanna Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Backround 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act and is engaged in the business of offering IT and development services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent issued the Appellant with income tax and Value Added Tax (VAT) additional assessments for the periods in 2021 to 2022 on 12th May 2023.

4. The Appellant objected to the assessments on 11th June 2023.

5. The Respondent on 19th June 2023 informed the Appellant that it had declined the Appellant’s application and stated that the taxes assessed remained due and payable.

6. The Appellant, being dissatisfied with the Respondent’s decision of 19th June 2023, filed its Notice of Appeal dated 7th September 2023.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 11th December 2023 and filed on 18th December 2023 which raised the following grounds: -a.That the Respondent erred in law and fact by invalidating the Appellant’s notice of objection on the basis that it had been lodged outside the statutory timelines when indeed the Appellant had complied with Section 51(2), of the Tax Procedures Act.b.That the Respondent erred in law and fact by raising additional assessments for VAT by disallowing input VAT claimed by the Appellant, contrary to the provisions of Section 17 of the VAT Act.c.That the Respondent erred in law and fact by raising additional income tax based on variance between VAT returns and Income tax returns that arose as a result of deferred income without consideration of the deferred costs for the months when the Appellant had been placed under Special Table.d.That the Respondent erred in law and fact by charging Corporation tax on gross established income contrary to the provisions of Section 15(1) of the Income Tax Act.e.That the Respondent erred in fact and law by raising additional assessments based on the provisions Section 17 of the VAT Act, 2013 and totally disregarding the provisions of Section 31 of the Tax Procedures Act.f.That the Respondent erred in law and fact by disregarding all the information shared during the audit period contrary to the provisions of Section 4 of the Fair Administrative Action Act.

Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated 12th December 2023 and filed on 18th December 2023 and the documents attached to it.

9. The Appellant stated that the Respondent issued it with a notice of return review dated 2nd February 2023, where the Respondent notified the Appellant that it had carried out a review of the Appellant’s returns for VAT and income tax for the period 2020-2022 to verify the status of VAT and income tax as per the filed returns and established variances in income tax filings and that the Appellant had claimed input VAT from newly established companies.

10. That the Appellant averred that after several meetings between the Appellant’s representative and the Respondent, the Appellant wrote to the Respondent vide a letter dated 13th April 2023 explaining the cause of the variances in the returns as noted.

11. That the Respondent wrote to the Appellant vide an email dated 14th April 2023 and acknowledged receipt of the Appellant’s response and set up a meeting at the Appellant’s office to carry out physical verification of the invoices on the 21st April 2023.

12. The Appellant further stated that vide a Gazette Notice No: Vol. CXXV - No. 90, 21st April 2023 was declared a public holiday to mark Idd-ul-Fitr. That the meeting never happened and the Respondent, who was the convener of the meeting never wrote to the Appellant to propose another date for the meeting.

13. The Appellant averred that on 12th May 2023, the Respondent disregarded all the information given and proceeded to raise additional assessments in the Appellant’s iTax portal, which the Appellant stated that it objected to in their entirety.

14. The Appellant claimed that there was an exchange of information between the Appellant and the Respondent, and the Respondent proceeded to issue an objection decision dated 19th June 2023, confirming all the additional assessments.

15. The Appellant stated that it filed herein a Notice of Appeal dated 7th September 2023, having been aggrieved by the actions of the Respondent.

16. The Appellant argued the case under the following highlighted headings.a.The Respondent erred in law and fact by issuing an invalidation notice to the Appellant’s notice of objection.b.Failure by the Respondent to consider Section 17 of the VAT Act.c.Failure by the Respondent to consider all the material facts in the case.d.Taxation of gross established income contrary to the provisions of Section 15(1) & 16(1) of the Income Tax Act.

a. The Respondent erred in law and fact by issuing an invalidation notice to the appellant’s notice of objection 17. The Appellant averred that the Respondent erred in law and fact by issuing an invalidation notice dated 19th June 2023 on the basis that the Appellant had filed the notice of objection out of time.

18. That as per the assessment orders, assessment date was 12th May 2023, and as per the objection application slips, the objection was lodged on 11th June 2023.

19. That Appellant argued that it is erroneous in fact and law for the Respondent to have failed to consider the substantive matters of the objection and invalidated to objection yet the notice of objection had been indeed filed within the statutory timelines as provided for by the Tax Procedures Act.

b. Failure by the Respondent to Consider Section 17 of the VAT Act 20. It was the Appellant’s contention that the Respondent erred in fact and law by disallowing input VAT on the Appellant’s purchases, contrary to the provisions of Section 17 of the VAT Act.

21. The Appellant submitted that a claim for input VAT is based on the documents listed in Section 17 of the VAT Act, and pursuant to the provisions of the VAT Act, on the following requirements: -i.The taxpayer is registered for VATii.The purchase was for purposes of making a taxable supplyiii.The input tax does not relate to the excluded purchases as set out in Section 17(4) of the VAT Act or exempt supplies.iv.The input tax is claimed within 6 months of receiving the supply.

22. The Appellant affirmed that it complied with all the requirements as set out in Section 17 of the VAT Act for its input claims and that all the documentation required for the Respondent’s confirmation are available.

23. The Appellant added that Section 17(2)(b) of the VAT Act places further reliance on declaration of the sales invoice by the registered supplier in the return. The Appellant claimed that from this proviso, the declaration of the purchase by the supplier is an alternative to possession of the requisite documents and that the same cannot be relied upon by the Respondent in disallowing validly claimed input VAT.

24. It was the Appellant’s submission that the basis for allowing the input VAT claim is clearly set out under Section 17 of the VAT Act and the failure by the Respondent to allow the same is arbitrary, illegal and a violation of the Appellant’s right to fair administrative action protected under Article 47(1) of the Constitution of Kenya, 2010.

25. The Appellant asserted that it was its legitimate expectation that the Respondent would allow its input VAT claims since at the time of claiming the input, the Appellant held such documents as required and/or the registered suppliers had declared the sales invoices in their returns.

c. Failure by the Respondent to Consider all the Material Facts in the Case 26. The Appellant submitted that Article 47 of the Constitution of Kenya 2010 guarantees it a right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair. That the right to a fair administrative action entails taking into consideration explanations and information availed by the party against whom an assessment is made.

27. The Appellant cited the case of Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] eKLR, where the High Court held that failure to consider material facts presented by a party against whom an assessment had been raised amounts to an abuse of legislative provisions and such an assessment cannot be acted upon.

28. That the High Court in Republic v Kenya Revenue Authority ex-parte Amseo Kenya Limited [2014] eKLR held: -“Further an administrative action cannot be said to be procedurally fair where a decision is arrived at based on an opinion formed as a result of the consideration of the version of only one side since by a consideration of one side one cannot be said to have felt certain about the truth of the matter in dispute.”

29. The Appellant further placed reliance on the holding of the High Court in Kenya Medical Association Housing Cooperative Society Limited v Attorney General & another [2016] eKLR where it was held that it was a breach of the rules of natural justice to fail to give consideration to the person against whom a decision is made. That citing Lord Reid in Ridge V Baldwin [1963]2 ALL ER 66 at page 81, the Court emphasised the effect of this as follows: -“Time and again in the cases I have cited it has been stated that a decision given without regard to the principle of natural justice is void.”

30. The Appellant averred that it held meetings with the Respondent and the Respondent set up a site visit vide an email dated 14th April 2023, where the Respondent intended to visit the taxpayer's office and verify the physical documents on 21st April 2023.

31. The Appellant stated that 21st April 2023 was declared as a National Holiday to mark Idd-ul-Fitr, vide a Gazette Notice No: Vol. CXXV - No.90, and the Respondent never communicated a change in date for the meeting but proceeded to issue assessment orders without further reference to the Appellant.

d. Taxation of Gross Established Income Contrary to the Provisions of Section 15(1) & 16(1) of the Income Tax Act 32. The Appellant argued that the Respondent erred in law and fact by charging income tax on the gross established income contrary to the provisions of Section 15(1) and 16(1) of the Income Tax Act.

33. The Appellant referred to Sections 15(1) and 16(1) of the Income Tax Act and submitted that the provisions allow the Appellant an opportunity to claim all the expenses and/or cost incurred wholly and exclusively for purposes of earning an income, in determination of the taxable income.

34. The Appellant relied on the case of Afya-X-Ray-Centre-Ltd -v- Commissioner of Domestic Taxes [2019] eKLR in submitting that the Honourable Tribunal noted that:“The Respondent in this case could have used industrial margins to determine the Appellant's profits and then subject that figure to the z0% for corporate Tax rather than a topline 30% on Bank Deposits..."

35. The Appellant concluded that the Respondent’s additional tax assessments for income tax for the year 2021, based on an established variance between the VAT returns and the income tax returns, are grossly exaggerated as the same did not factor in the provisions of Section 15(1) of the Income Tax Act.

Appellant’s prayers 36. The Appellant prayed that the Tribunal grants the following orders:a.That this Appeal be allowed.b.That the Honourable Tribunal forthwith withdraws and cancels the Objection decision letter dated 19th June 2023. c.In the alternative, the Honourable Tribunal allows the VAT input claim that meets the threshold of the provisions of Section 17 of the VAT Act, 2013. d.This Honourable Tribunal orders the Respondent to stay the enforcement of assessed taxes until the matter is conclusively determined.e.The Honourable Tribunal be pleased to issue any other orders favourable to the Appellant as it may deem fit, just and expedient to issue.

Respondent’s Case 37. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 18th January 2024 and filed on 19th January 2024 and the documents attached to it; andb.The Respondent’s Written Submissions dated and filed on 2nd August 2024.

38. The Respondent stated that on 12th May 2023 issued additional assessments on VAT for the period of 2021 to 2022 amounting to the sum of Kshs. 71,774,738. 13

39. That the Appellant on 11th June 2023 objected to the assessment orders through iTax.

40. The Respondent further stated that on 19th June 2023, the Respondent responded to the Appellant’s application for objection and declined to allow the Appellant to object out of time since no reason was advanced for lodging a late objection.

41. That aggrieved by the Respondent’s decision, the Appellant instituted the Appeal herein vide its Memorandum of Appeal and Statement of Facts.

42. The Respondent responded to the Appeal under the following headings:

a.Whether the Appellant’s Appeal is valid.b.Whether the additional assessment was justified in law.c.Whether the Appellant’s notice of objection was valid

a. Whether the Appellant’s Appeal is Valid 43. The Respondent averred that on 14th September 2023 the matter was slated for inter-parties’ hearing of the Appellant’s application seeking to appeal out of time. That the application was allowed since the Respondent was not opposed to the same and the Tribunal directed that the Appellant to file and serve its Memorandum of Appeal within 15 days and the Respondent was granted 30 days to respond.

44. It was the Respondent’s submission that the Appellant’s Memorandum of Appeal was to be filed on 28th September 2023 in compliance with the directions of the Tribunal issued on 14th September 2023.

45. The Respondent stated that the Appellant’s Appeal was filed on 18th December 2023, being 64 days later after the Tribunal issued its direction.

46. The Respondent asserted that the Appellant has not demonstrated that it sought further leave to appeal after failing to comply with the directions of the Tribunal. That on this ground, the Appellant’s Appeal was lodged out of time, thus the same is not valid.

47. The Respondent argued that allowing the instant Appeal would be an abuse of the rule of law and statutory procedures as the Appellant lodged the same 64 days later after the Tribunal issued its directions.

48. In submitting that the Appellant ought to uphold the rule of law by complying with Court orders, the Respondent refers to the holding of the Court of Appeal in A.B. & Another v R. B., Civil Application No. 4 of 2016 [2016] eKLR cited with approval by the Constitutional Court of South Africa's decision in Burchell v. Burchell, Case No. 364 of 2005 where it was held: -“Compliance with court orders is an issue of fundamental concern for a society that seeks to base itself on the rule of law. The Constitution states that the rule of law and supremacy of the Constitution are foundational values of our society. It vests the judicial authority of the state in the court and requires other organs of the state to assist and protect the court. It gives everyone the right to have legal disputes resolved in the courts or other independent and impartial tribunals. Failure to enforce court orders effectively have the potential to undermine confidence in recourse to law as an instrument to resolve civil disputes and may thus impact negatively on the rule of law.”

49. The Respondent further referred this Tribunal to the decision in TAT Case No. 247 of 2020: W.E.C. Lines Limited vs The Commissioner of Domestic Taxes where the Tribunal in relation to compliance with statutory procedures held that: -“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures.”

50. The Respondent urged this Honourable Tribunal to strike out the Appeal, in light of the above, as the same was filed out of time and contrary to the Tribunal’s orders.

b. Whether the Additional Assessment was Justified in Law 51. The Respondent asserted that its decision to arrive at the assessment was justified and had basis in law as required under the Tax Procedures Act.

52. The Respondent stated that the assessment in dispute was conducted against the backdrop of Section 3 of the Income Tax Act which provides for taxation of incomes derived from or accrued in Kenya, Section 17 of the VAT Act and, Sections 29 and 31 of the Tax Procedures Act on default and additional assessments.

53. It was the Respondent’s statement that the additional VAT assessment in question was confirmed since the Appellant failed to object to the assessments within the required timelines or provide a valid reason for seeking to object out of time.

54. The Respondent contended that it is not bound by the Appellant’s returns or self-assessment and it is empowered to vary the assessments using any available information in the Respondent’s possession, according to Section 24(2) of the Tax Procedures Act.

55. The Respondent referred to Section 31 of the Tax Procedures Act stating that the provision empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner’s best judgment.

c. Whether the Appellant’s Notice of Objection was Valid 56. The Respondent averred that the Appellant’s notice of objection dated 11th June 2023 did not meet the requirements of Section 51(7) of the Tax Procedures Act.

57. The Respondent maintained that the Appellant did not lodge a valid notice of objection to warrant the Respondent’s discretion since no valid reason was adduced for objecting out of time as provided under Section 51(7) of the Tax Procedures Act 2015.

Respondent’s prayers 58. The Respondent prayed that the Tribunal: -a.Upholds the Respondent’s additional VAT assessment as proper and in conformity with the provisions of the law.b.Dismisses this Appeal with costs to the Respondent as the same is devoid of merit.

Issue for Determination 59. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:Whether there is a valid appeal on record.

Analysis and Findings 60. The Tribunal has analysed the issue that calls for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned decision.

61. The Respondent issued the Appellant with income tax and Value Added Tax (VAT) additional assessments for the periods in 2021 to 2022 on 12th May 2023.

62. The Appellant objected to the assessments on 11th June 2023.

63. The Respondent on 19th June 2023 informed the Appellant that it had declined the Appellant’s application and stated that the taxes assessed remained due and payable.

64. The Appellant, being dissatisfied with the Respondent’s decision of 19th June 2023, filed its Notice of Appeal on 18th December 2023.

65. The Appellant filed an application at the Tribunal, TAT MISC/E121/2023, seeking leave of the Tribunal to file its appeal out of time. On 14th September 2023, during the application hearing, the Respondent confirmed that it does not oppose the application. The Tribunal granted the Appellant leave to file its Appeal out of time, and gave the following orders:-“a)Notice of Appeal dated 7th September 2023 and filed on 8th September 2023 is hereby deemed as duly filed.b)The Appellant to file and serve the Appeal documents within 14 days of today.c)The Respondent to file an serve the Statement of Facts within 30 days of being served.d)No order as to costs.”

66. The Respondent stated that the Appellant’s Appeal was filed on 18th December 2023, being 64 days after the date the Tribunal issued its direction, and urged this Honourable Tribunal to strike out the Appeal in light of the above, as the same was filed out of time and contrary to the Tribunal’s orders.

67. The Tribunal notes that the procedure for appeal provided in Section 13(1)(b) of the Tax Appeals Tribunal Act (TAT Act) requires that a Notice of Appeal be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.

68. Further, for an Appeal to be deemed as competently filed, it ought to be filed within the timelines set out under Section 13(2) of the TAT Act which provides that: -“The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)a memorandum of appeal;(b)statements of facts; and(c)the tax decision.”

69. Section 13(3) of the TAT Act provides the remedy to any party which wishes to lodge an appeal out of time, being that any such intended Appellant may seek leave of the Tribunal in writing, seeking an extension of time and leave to file an Appeal out of time. The provision reads as thus: -“The Tribunal may, upon application in writing, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).”

70. The Tribunal observes that the Appellant’s Notice of Appeal dated 7th September 2023 and filed on 8th September 2023 was deemed as duly filed on 14th September 2023 following the Tribunal’s grant of leave to the Appellant.

71. The Tribunal further observes that from the documents on record, the Tribunal gave the Appellant an order to file its Appeal documents within 14 days of 14th September 2023.

72. The Tribunal’s position is that the Appellant ought to have lodged its Appeal documents on or before 28th September 2023 . The Tribunal notes that the Appellant filed its Appeal documents on 18th December 2023, which was beyond fourteen (14) days of 14th September 2023, and consequently out of time.

73. The Tribunal is of the considered view that the timelines for appealing the Commissioner’s decisions are clearly set in the law, and all parties are liable to comply with the timelines, save for when unavoidable circumstances prevent a party from fulfilling its obligations as envisioned in Section 13(4) of the TAT Act which provides:“(4)An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

74. The Tribunal further notes that the Appellant failed to apply for leave to file its Appeal documents out of time as required in Section 13(3) of the TAT Act which provides: -“The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).”

75. The Tribunal reiterates its decision in TAT Appeal No. 1321 of 2022 CKL Africa Limited v Commissioner of Domestic Taxes where it held as follows: -“63. The law makes provisions under Section 13 (3) of the Tax Appeals Tribunal Act for any party who lodges its appeal out of time and with reasonable grounds, to seek leave of the Tribunal to file its appeal out if time, the Appellant did not move the Tribunal seeking such Orders.64. The timelines provided under Section 47 (13) of the Tax Procedures Act and Section 13 (1) of the Tax Appeals Tribunal Act demand strict adherence and are not discretional to any party lodging an appeal before the Tribunal.65. It is the Tribunal’s position that there is no proper and valid Appeal before the Tribunal for the exercise of its jurisdiction.”

76. The Tribunal finds that the Appeal herein was lodged beyond the time extended by the Tribunal and is therefore incompetent and untenable in law. The Appeal is therefore not validly and properly before the Tribunal.

Final Decision 77. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal is incompetent and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

78. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF OCTOBER, 2024. ERIC NYONGESA WAFULA - CHAIRMANGLORIA A. OGAGA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBER