[2024] KETAT 40 (KLR)

Transafrica Motors Limited v Commissioner Domestic Taxes (Tax Appeal 1258 of 2022) [2024] KETAT 40 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 40 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1258 of 2022

RM Mutuma, Chair, EN Njeru, BK Terer, M Makau & W Ongeti, Members

January 26, 2024

Between

Transafrica Motors Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company duly incorporated and registered under the Companies Act within the Republic of Kenya. Its main form of business is in assembling FAW trucks locally.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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 & 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 Appellant noticed that it had inadvertently omitted in its VAT returns for the months of January 2021 and February 2021, input tax on supplies purchased/imported in the same month totaling Kshs. 29,183,396. 40 and sought to amend the error in the VAT returns of May 2021 vide an application dated 4th August 2021 to incorporate omitted input VAT incurred in January and February 2021.

4. Vide its letter dated 18th July 2022, the Respondent rejected the amendment on the basis that the inputs sought to be claimed were imported/purchased more than 6 months from the date of the amendment contrary to Section 17(2) of the VAT Act 2013.

5. On 12th August 2022, the Appellant lodged an objection to the Respondent’s rejection after which the Respondent issued an objection decision vide a letter dated 23rd September 2022.

6. On receiving the objection decision and feeling aggrieved, the Appellant filed the instant Appeal vide a Notice of Appeal on 14th October 2022.

The Appeal 7. The Appellant set down its case in the Memorandum of Appeal dated 25th October 2022 and filed on 26th October 2022 and premised on the following surmised grounds:-a.The Respondent erred in fact and law in rejecting input VAT lawfully claimed by the Appellant.b.The Respondent misinterpreted Section 17 (2) of the VAT Act by holding that when a taxpayer files a VAT return late, then input VAT should only be allowed for deductibility to the extent it is within 6 months at the time of filing the return.c.The Respondent misinterpreted Sections 31(2) and 31(4) of the Tax Procedures Act by holding that when a taxpayer files a VAT return late then input VAT should only be allowed for deductibility to the extent it is within 6 months at the time of filing the return.d.The Respondent erred in law and fact by rejecting input VAT lawfully claimed by the Appellant by introducing extraneous requirements not provided for under the VAT Act.e.The Respondent erred in law and fact by failing to appreciate that what the Appellant sought was an amendment of VAT returns and not late filing of VAT returns.f.The Respondent fell in error in that Section 17 (2) (a) of the VAT Act requires a purposive approach to statutory interpretation and there is a mandatory requirement to construe every piece of legislation in a manner that promotes the spirit, purpose and objects of the Kenya tax laws and uphold the principles of taxation.

The Appellant’s Case 8. The Appellant’s case was set out in:-i.The Statement of Facts dated 25th October 2022 filed on 26th October 2022 together with the documents attached thereto.ii.The Written submissions dated and filed on the 20th June, 2023 together with the authorities filed therewith.

9. It stated that it made importation and purchases of certain taxable supplies in the months of January and February 2021 but inadvertently omitted its VAT and input tax on the supplies returns for the same period totaling Kshs. 29,183,396. 40.

10. It averred that the supplies qualify for input deductions as the purchases made in January and February 2021 or any subsequent tax period ended on 31st July 2021 and 31st August 2021, respectively.

11. It stated that the 6 months period allowable by law for claiming input VAT began to run when the supply or importation occurred and not necessarily when the return was filed.

12. It averred that it made an application to the Respondent to make an amendment to its VAT return for May 2021 to incorporate omitted input VAT incurred in January and February 2021 pursuant to Section 31 (2) of the Tax Procedures Act.

13. It contended that it did the importations to make taxable supplies used in the production of the income and allowable under Section 17 of the VAT Act and the verification of import data confirmed that the import occurred and that VAT was charged and accounted for as per the VAT Act.

14. It stated that a review of filed returns for the subject period confirmed that the inputs had not been claimed in its original self-assessment returns. It added that the Respondent rejected its amendment of the VAT return for May 2021.

15. It averred that by holding that when a taxpayer filed a VAT return late then input VAT should only be allowed for deductibility to the extent it is within 6 months at the time of filing the returns.

16. It further averred that the right of deduction of input tax is an integral part of the VAT scheme as a taxable person who makes a transaction in respect of which VAT is deductible may deduct the VAT in respect of goods and services acquired provided such goods and services have a direct and immediate link with the output transaction in respect of which VAT is deductible.

The Appellant’s Prayers 17. The Appellant prayed for the following from the Tribunal.a.The Appellant’s request for amendment of VAT returns for the month of May 2021 be allowed.b.The Respondent’s objection decision dated 23rd September 2022 be quashed and/or be set asidec.The Honourable Tribunal be pleased to issue any other order favorable to the Appellant as it may find just and expedient to issue.d.Costs of this Appeal be borne by the Respondent.

The Respondent’s Case 18. The Respondent’s case is premised on:i.The Statement of Facts filed on 25th November 2022 together with the documents annexed thereto; andii.The written submissions dated and filed on 23rd June 2023.

19. The Respondent stated that the input tax sought to be claimed is valid and had not been previously claimed in any returns relating to the month in which supplies/importation occurred or any of the subsequent six months and the returns sought to be amended fall within the period of six months from the time of importation/supplies occurred.

20. It relied on the cases of Northern Auto Dealers Ltd vs. Commissioner of Investigation & Enforcement, Highlands Mineral Water Ltd vs. Commissioner of Domestic Taxes, and Section 17 (2) of the VAT Act in averring that a return may be filed late but in itself does not deny the taxpayer the right to claim input tax deduction as long as the claim is within six months from the date the supply or importation occurred.

21. The Respondent further averred that the inputs should have been claimed on or before regardless of the month the taxpayer wanted to amend its return and the burden of proof lies on the Appellant per the provisions of Section 56 (1) of the Tax Procedures Act.

22. The Respondent further presented its case in its submissions where it reiterated verbatim its assertions in the Statement of Facts.

The Respondent’s prayers** 23. The Respondent, therefore, prayed for orders that the Tribunal:a.Upholds the Respondent’s assessment as proper and in conformity with the provisions of the law.b.Upholds the objection decision carried out by the Respondent.c.Dismisses this Appeal with costs to the Respondent.

Issues for Determination 24. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal puts forth the following as the main issue for determination:a.Whether the Respondent was justified in its refusal to allow the Appellant amend the VAT returns.

Analysis and Findings 25. The Tribunal wishes to analyse the issue as herein-under.a.Whether the Respondent was justified in its refusal to allow the Appellant amend the VAT returns.

26. The Appellant averred that on 4th August 2021 it made an application to the Respondent to make an amendment to its VAT return for May 2021 to incorporate omitted input VAT incurred in January and February 2021 pursuant to Section 31 (2) of the Tax Procedures Act.

27. It further averred that a taxable person who makes a transaction in respect of which VAT is deductible may deduct the VAT in respect of goods and services acquired provided such goods and services have a direct and immediate link with the output transaction in respect of which VAT is deductible.

28. The Respondent stated that the Appellant’s amendment, sought to claim input tax that had not been previously claimed in any returns relating to the month in which supplies/importation occurred or any of the subsequent six months, and that the returns sought to be amended fell within the period of six months from the time of importation/supplies had occurred.

29. It further averred that the input taxes should have been claimed on or before regardless of the month the taxpayer wanted to amend its return and the burden of proof lies on the Appellant per the provisions of Section 56(1) of the Tax Procedures Act.

30. That Section 17 of the VAT Act provides as follows:-“(1)Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period ……Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

31. The Appellant argued that the Respondent did not appreciate that what it sought was an amendment of VAT returns in accordance with Section 31 (2) and not late filing of VAT returns.

32. Section 31 (2) of TPA provides as follows with regard to timelines for the amendment of tax returns; -“A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4) (b) (i), to make an amendment to the taxpayer's self-assessment.”

33. The aforementioned subsection (4) (b) (i) provides as thus;-“(4)The Commissioner may amend an assessment—(a)in the case of gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment.”

34. The Tribunal observes that the Appellant made its application for amendment on 4th August 2021 for the VAT return made in May of the same year which was within the 5 years provided for under Section 31 (2) of TPA.

35. Having determined that the Appellant was well within time to amend the May return, it remains to determine whether the amendment in May would result in the input VAT claim being time barred. The Tribunal is guided by the decision of the High Court in Highlands Mineral Water Limited vs. Commissioner of Domestic Taxes [2020] eKLR where it was held: -“…section 17 (1) and (2) of the VAT Act, permits the taxpayer to claim input tax at any time provided the claim falls within 6 months from period which the supply or importation occurred notwithstanding that the VAT return is filed late. In other words, the fact of late filing does not preclude a taxpayer from claiming input VAT and that this claim ought to be allowed as long as the Return is filed and claimed within 6 months from the date of supply or importation…”

36. The Tribunal notes that the Appellant’s amendment sought to include entries relating to January and February in the May return of the same year, which was within the six months as allowed under Section 17 (2) of the VAT Act.

37. Having thus observed, the Tribunal holds that the Respondent was not justified in its refusal to allow the Appellant’s application for amendment of the May return.

Final Decision 38. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby allowed.b.The Objection Decision dated 23rd September 2022 be and is hereby set aside.c.The Respondent to allow the Appellant to amend the VAT returns for the month of May 2021 and to claim the input VAT arising therefrom.d.No order as to costs.

39. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERBONIFACE K. TERER - MEMBERMUTISO MAKAU - MEMBERDR. WALTER ONGETI - MEMBER