[2024] KETAT 45 (KLR)

The Hotel Eagles Limited v Commissioner of Domestic Taxes (Appeal 844 of 2021) [2024] KETAT 45 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 45 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 844 of 2021

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, E Komolo & T Vikiru, Members

January 26, 2024

Between

Hotel Eagles Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act. It operates a hotel business in Kenya.

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. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated 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 for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent audited the Appellant’s tax declarations of income tax for the years 2017 and 2018, and on 30th June 2020, it issued income tax additional assessments Reference KRA202013768557 dated 30th June 2020 for the year of income of 2017, and Reference KRA202013784515 dated 30th June 2020 for the year of income of 2018.

4. On 8th May 2021, the Appellant filed its objection to the assessments under assessment order references KRA 202013768557 and KRA 202013784515.

5. The Respondent rejected the Appellant’s objection lodged out of time, in its Late Objection Rejection notice dated 10th November 2021, citing therein that the Appellant failed to submit documents.

6. The Appellant consequently filed its Notice of Appeal on 10th December 2021.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal filed on 23rd December 2021 which raised the following grounds:-a.That the Respondent failed to ascertain the basic definition of corporate deductions as defined under Section 16 of the Income Tax Act (ITA).b.That the Respondent made an error in law and action by disallowing the expenses declared by the Appellant in its income tax returns for the periods January 2017 to December 2017 and January 2018 to December 2018 that resulted in incremental tax of Kshs. 1,336,709. 06. c.That the Appellant did a background check on the service providers to confirm their registration as per Part IX of the Value Added Tax Act, 2013 (VAT Act), and that it was satisfied that the service providers had met the requirements under Section 34 of the VAT Act to be registered.d.That the Appellant made payments to the suppliers through cash and bank for all the supplies made.e.That the Respondent erred in law and in fact when it refused to recognise wholly incurred expenses deducted by the Appellant to generate income of the period of time under review.f.That the Respondent erred in law by refusing to acknowledge and effect the Appellant’s deductible expenses despite being furnished with the evidence of service provider invoices and receipts.g.That the Respondent erred in law and in fact by partially rejecting the Appellant’s objection to the VAT assessment despite the Appellant providing all the documentary evidence as required by law.h.That the Tribunal has jurisdiction to hear this Appeal.

Appellant’s Case 8. The Appellant’s case is premised on the Statement of Facts filed on 23rd December 2021.

9. The Appellant stated that the Respondent issued it with additional income tax assessments on 30th June 2020 for the year of income 2017 KRA reference KRA 202013768557 and year of income 2018 KRA reference KRA 202013784515, which the Appellant stated arose from expenses which the Respondent disallowed.

10. The Appellant stated that it objected to the assessments on 8th May 2021.

11. The Appellant averred that on 24th June 2021, 21st July 2021 and 13th September 2021, it presented to the Respondent copies of invoices, proofs of payment, employee contracts, remission slips for employee statutory deductions, and some supplier statements and confirmations for the expenses that the Respondent disallowed for the years of income 2017 and 2018.

12. That the Respondent issued its decision on 10th November 2021 rejecting the Appellant’s late objection on the basis of its non-submission of documents.

Appellant’s prayer 13. The Appellant prays that the Tribunal upholds the Appeal.

Respondent’s Case 14. The Respondent’s case is premised on the following documents.a.Preliminary Objection dated 21st January 2022 and filed on the same date.b.Statement of Facts both dated 21st January 2022 and filed on even date and the documents attached thereto.c.Written Submissions dated 6th February 2022 and filed on 27th February 2023.

15. The Respondent made a preliminary objection opposing the Appellant’s Appeal against the Respondent’s decision issued on 10th November 2021 on the following grounds:a.That the Appeal is incompetent, legally unsuitable and amounts to forum shopping, and as such, an abuse of the court process as there is no appealable decision before the Tribunal.b.That the Tribunal lacks jurisdiction to hear the Appeal as the Appeal as filed is premature and ought to be dismissed at first instance.c.That the Appeal is fatally defective for want of compliance with the law as it offends the mandatory provisions of Section 52 (1) of the Tax Procedures Act, 2015 (TPA).d.That under the circumstances, the Appeal is a misconception and ought to be dismissed with costs to the Respondent.e.That the Appeal lacks merit as there is no appealable decision to warrant this Appeal, thus the Appeal is premature.

16. The Respondent stated that it initiated an audit on the Appellant’s tax declarations of income tax for the years 2017 and 2018, and on 30th June 2020, it issued income tax additional assessments as follows:-a.KRA 202013768557 dated 30th June 2020 for Kshs. 1,220,789. 29 for the tax period 2017. b.KRA 202013784515 dated 30th June 2020 for Kshs. 115,919. 77 for the tax period 2018.

17. The Respondent affirmed that the Appellant filed a late objection to the entire assessment without providing any reasons for the late objection, and without documentation as required by law.

18. The Respondent reiterated that the Appellant failed to discharge its burden of proof in averring that the Respondent’s decision was incorrect as required under Section 56 (1) of the TPA.

19. The Respondent stated that it proceeded to issue a Late Objection Rejection, following the Appellant’s failure to provide reasons for its late objection and failure to provide any documentation.

20. The Respondent stated that it relied on the available information in making the assessment orders and confirming the assessments, and cited Section 31 (1) (c) of the TPA below, which grants the Respondent the power to amend a taxpayer’s assessment: -“(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

21. The Respondent further stated that the Appellant’s objection was invalid as the Appellant failed to precisely state the grounds of objection, the amendments required to correct or change the decision, contrary to Section 51 (3) of the TPA which provides: -“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute, or has applied for an extension of time to pay the tax not in dispute under section 33(1).(c)all the relevant documents relating to the objection have been submitted.”

22. The Respondent submitted that the right of appeal under the TPA is not absolute, but that it is conditional on an Appellant first lodging a valid objection pursuant to Section 51 (1) of the TPA. The Respondent referred to the components of a valid objection as provided under Section 51 (3) of the TPA, including that it states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and all the relevant documents relating to the objection have been submitted.

23. The Respondent submitted that the Appellant failed to provide relevant documents in support of its objection and failed to adduce evidence in support of its claim that it provided the Respondent with further documents in the course of review of the objection. For these reasons, the Respondent submitted that its grounds for invalidating the Appellant’s objection were reasonable and legally sound.

24. The Respondent referred to the Transfix Limited vs Commissioner of Domestic Taxes Miscellaneous Application No. 178 of 2022, in submitting that in the absence of a valid objection by a taxpayer: -“…there was no decision issued by the Commissioner that could possibly form a basis for an appeal before the Tribunal… In the circumstances, the Tribunal finds that there is no conceivable appeal with merit that could be possibly filed by the Applicant for appropriate determination by the Tribunal.”

25. The Respondent averred that the Appeal before the Tribunal was irreparably incompetent in light of the Appellant failing to validate its objection.

Respondent’s prayers 26. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s late objection rejection dated 10th November 2021. b.Dismisses the Appeal with costs.

Issues for Determination 27. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Tribunal has the jurisdiction to determine the Appeal.b.Whether the Respondent was justified in issuing the late objection rejection dated 10th November 2021.

Analysis and Findings a. Whether the Tribunal has the jurisdiction to determine the Appeal. 28. In its Preliminary Objection, the Respondent stated that this Appeal is incompetent, legally unsuitable and amounts to forum shopping, and as such, an abuse of the court process as there is no appealable decision before the Tribunal.

29. The Respondent further pleaded that the Tribunal lacks jurisdiction to hear the Appeal as the Appeal as filed is premature and ought to be dismissed at first instance for it is fatally defective for want of compliance with the law as it offends the mandatory provisions of Section 52 (1) of the TPA.

30. The Tribunal, therefore, seeks to determine whether the Appeal is based on an appealable decision, which would confirm whether the Tribunal has jurisdiction to hear and determine the Appeal.

31. The Tribunal observes that its jurisdiction is provided in Section 3 of the Tax Appeals Tribunal Act (TAT Act) which states that: -“There is established a Tribunal to be known as the Tax Appeals Tribunal to hear appeals filed against any tax decision made by the Commissioner.”

32. The TAT Act does not define the term tax decision. However, the term is defined in the TPA, under Section 3 where it means: -““tax decision” means—(a)an assessment;(b)a determination under section 17(2) of the amount of tax payable or that will become payable by a taxpayer;(c)a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under sections 15, 17, and 18;(d)a decision on an application by a self-assessment taxpayer under section 31(2);(e)a refund decision;(f)a decision under section 48 requiring repayment of a refund; or(g)a demand for a penalty.

33. Section 3 of the TPA defines appealable decision as: -““appealable decision” means an objection decision and any other decision made under a tax law other than—(a)a tax decision; or(b)a decision made in the course of making a tax decision;”

34. The Tribunal is of the view that a taxpayer who wishes to dispute a decision by the Commissioner must first exhaust remedies available under a tax law before seeking remedies under another law. Section 51 (1) of the TPA limits the type of decisions whose remedies can be sought by way of objection; these are tax decisions, as listed above. Should the Commissioner partially or wholly reject the objection, the taxpayer can appeal the objection decision to the Tribunal. These dispute resolution steps embody the doctrine of exhaustion.

35. In addition, a decision made in the course of making a tax decision means a decision which the Commissioner makes during the making of a tax decision. These types of decisions are in the purview of the administrative role of the Commissioner. Section 3 of the TPA expressly excludes decisions made during the making of a tax decision from the meaning of appealable decisions.

36. Section 51 (1) of the TPA provides that: -“A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.”

37. The Tribunal notes that Section 51 (1) of the TPA as read together with the meaning of appealable decision under Section 3 of the TPA elaborates the jurisdiction of the Tribunal. These provisions of the TPA uphold the doctrine of exhaustion and demonstrate that all other decisions of the Commissioner, that are not tax decisions or decisions made in the course of making a tax decision, are appealable decisions.

38. While the definition of appealable decision is not in the TAT Act, the Tribunal finds that a late objection rejection decision is not a tax decision by the meaning provided in the TPA. A late objection rejection is also not a decision made in the course of making a tax decision. The term ‘in the course of making a tax decision’ defines the period during the making of a tax decision, on the other hand, a late objection rejection decision is a decision that is made after the making of a tax decision.

39. Based on the foregoing, the Tribunal finds that a late objection rejection decision is an appealable decision. Therefore, the Appellant was justified in appealing the decision under Section 52 of the TPA in accordance with the TAT Act.

40. Being that the decision appealed by the Appellant was an appealable decision, the Tribunal finds that it has the jurisdiction to hear and determine the Appeal.

(b) Whether the Respondent was justified in issuing the Late objection rejection dated 10th November 2021. 41. On 8th May 2021, the Appellant objected to the income tax additional assessments for the years of income of 2017 and 2018. The Respondent rejected the late Objection on 10th November 2021 citing that the Appellant failed to give a valid reason for objecting out of time and failed to provide documentary evidence in support of its late objection ground contrary to Section 51 (3) (c) of the TPA.

42. The Tribunal considers that the Respondent is expected to resolve tax disputes expeditiously to enable taxpayers to make informed decisions. Any delay in the dispensation of tax disputes has the effect of delaying the issuance of an objection decision. The timelines for objecting to tax assessments are clearly set in the law, and all taxpayers are liable to comply with the timelines, save for when unavoidable circumstances as envisioned in Section 51 (7) of the TPA, as cited below, prevent a taxpayer from fulfilling its obligations: -“(7)The Commissioner may allow an application for the extension of time to file a notice of objection if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.”

43. The Tribunal perused the evidence presented before it and found that the Appellant did not provide a reason for filing its objection late. In addition, the Appellant did not discharge its burden of proof as required under Section 30 (b) of the TAT Act when it failed to adduce evidence to support its Appeal against the impugned late objection rejection and to demonstrate that it did not unreasonably delay in lodging its objection. Section 30 (b) of the TAT Act provides that: -“30. In a proceeding before the Tribunal, the appellant has the burden of proving—(b)in any other case, that the tax decision should not have been made or should have been made differently.”

44. Further, the Tribunal buttresses its observation of the importance of adherence to timelines by referring to Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR) where the court stated that: -“... Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the tax payer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

45. The Tribunal is further guided by the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT Case No.247 of 2020] where it was held at paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR 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. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

46. Based on the foregoing, the Tribunal finds that the Respondent correctly rejected the Appellant’s application for extension of time to lodge notices of objection in its rejection decision dated 10th November, 2021.

Final Decision 47. The upshot of the foregoing is that the Appeal fails and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Late Objection Rejection Notice dated 10th November 2021 be and is hereby upheld.c.Each party to bear its own costs.

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. GRACE MUKUHACHAIRPERSONGLORIA A. OGAGAMEMBERJEPHTHAH NJAGIMEMBERDR. ERICK KOMOLOMEMBERTIMOTHY VIKIRUMEMBER