[2024] KETAT 462 (KLR)

Transglobal Holdings Limited v Commissioner of Domestic Taxes (Appeal 1351 of 2022) [2024] KETAT 462 (KLR) (5 April 2024) (Judgment)

Neutral citation: [2024] KETAT 462 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1351 of 2022

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

April 5, 2024

Between

Transglobal Holdings Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a company incorporated under the Companies Act in Kenya and having registered offices in Nairobi with the principal activity in logistics.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. 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 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 for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant was issued with additional Corporation tax assessments on 11th October 2018 amounting to Ksh 12,609,632. 00 inclusive of penalties and interest.

4. The Appellant objected late to the additional Corporate tax assessments in a letter dated 13th April 2022.

5. On 15th September 2022, the Appellant wrote to the Respondent requesting for assistance in investigating the illegal import activity undertaken using the Appellant’s PIN.

6. On 13th October 2022, the Respondent issued an objection decision fully confirming the Corporation tax amount of Ksh 12,609,632. 00 inclusive of penalties and interest.

7. On 14th October 2022 in a letter, the Respondent informed the Appellant that its Investigations and Enforcement Department had taken up the Appellant’s request for investigation and would advice as applicable.

8. Aggrieved by the Respondent’s objection decision confirming Corporation tax assessments, the Appellant filed its Notice of Appeal at the Tribunal on 9th November 2022.

The Appeal 9. The Appeal was predicated on the Memorandum of Appeal dated and filed on 10th November 2022;i.That the Respondent erred in facts and in law to consider illegal importation of goods on the Appellant’s PIN as part of the Appellant’s sales.ii.That the Respondent erred in fact and in law in assuming that the Appellant imported and sold the products and proceeded to charge additional tax on the Appellant for the period in question without due consideration to any advisory responses from related departments within the confines and control of the Respondent.iii.That the tax in question was subject of investigations by Respondent’s other department a fact that the Respondent failed to consider while arriving at their decision.

Appellant’s Case 10. The Appellant’s case was grounded upon its Statement of Facts dated and filed on 10th November 2022.

11. The Appellant averred that it was issued with additional Corporation tax assessment of Ksh 12,609,632. 00 on 11th October 2018 on the basis that it imported and made sales of products as held in the Respondent’s customs database.

12. The Appellant stated that it objected late to the assessment in a letter dated 13th April 2022 which was then uploaded on iTax on 22nd August 2022.

13. The Appellant was categorical that since incorporation in the year 2016, it had never engaged in any form of trade or business that would have resulted in taxable income.

14. The Appellant contested the purported import products as alleged held in the Respondent’s database as being fraudulent activity undertaken on the Appellant’s PIN yet the Respondent proceeded to issue additional assessment against the Appellant based on this fraudulent activity even though the Appellant brought this to the Respondent’s attention in its notice of objection letter dated 13th April 2022.

15. The Appellant averred that it was yet to receive investigation feedback or guidance from the Respondent regarding the illegal use of its PIN for the illegal importation activity despite committing to have the same undertaken and proceeded to issue an objection decision even before communicating any findings from the investigations.

16. The Appellant asserted that the Respondent held data regarding the purported clearing agents for the illegal import activity yet the Respondent failed to avail the same to the Appellant regarding any investigation findings undertaken.

Appellant’s Prayers 17. The Appellant prayed that the Tribunal would:a.Allow the instant Appeal with costs; andb.Set aside the Respondent’s objection decision dated 13th October 2022.

The Respondent’s Case 18. The Respondent replied to the Appeal through its Statement of Facts dated 9th October 2022 and filed on 9th December 2022.

19. The Respondent averred that it conducted an assessment against the Appellant on the basis of import data held by its Customs and Border Control Department whereupon import data utilized as purchases were marked up as sales and tax was charged on the resultant taxable income which yielded additional corporation tax assessment of Ksh 12,609,632. 00.

20. The Respondent stated that after the Appellant disowned the transactions in its objection alleging that someone else used its PIN to import the said goods, the Respondent invited the Appellant for a meeting within the first 14 days to determine the objection’s validity. It was at the meeting that the Appellant was informed that its objection would be invalidated for failure to provide supporting documentation within the 14 days window period as couched under Section 51(4) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’).

21. The Respondent contested the Appellant’s averments that it never engaged in any trade by stating that it held data which indicated that the Appellant engaged in importation of several containers of assorted goods in the year under review.

22. Further, the Respondent averred that the Appellant failed to support its objection pursuant to Section 51(3) of the TPA as the only document provided was the initial objection letter disowning the said transactions. Therefore, the Appellant failed to provide any evidence that would have altered the assessment since the onus of proof was on the Appellant to support a contrary assessment.

23. The Respondent declared that Section 59 of the TPA empowers it to require production of documents deemed necessary in determination of tax liability; that however, the Appellant only furnished requested documents at the Appeal stage. The Respondent asserted that it made the decision on the basis of information available and to its best judgement at the time since the Appellant failed to successfully demonstrate that it did not engage in the transactions held by the Respondent’s database.

24. The Respondent avowed that it acted within the law and available information and that it was the duty of the Appellant to notify the Respondent of errors in determining the validity of the assessment in question; it was the Respondent’s assertion that the Appellant failed to support its objection despite being given time to do so and that even the two additional letters by the Appellant were procured after objection decision had already been issued. The Respondent relied on Section56(1) of the TPA which provides as follows;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

Respondent’s Prayers 25. The Respondent prayed for the following:i.That the Tribunal upholds the Respondent’s objection decision;ii.That the Tribunal finds the outstanding tax arrears due and payable; andiii.That the Tribunal dismisses the Appeal with costs.

Parties’ Written Submissions 26. The Appellant’s written submissions dated 27th September 2023 were filed on 29th September 2023. The Appellant submitted on a single issue which it analysed hereunder:Whether the Respondent’s objection decision dated 13th October 2022 should be allowed to stand in the light of procedural impropriety occasioned during its issuance.

27. The Appellant challenged the lawfulness of the Respondent’s assessments and contradicted the Respondent’s assertion that it had no knowledge, information or documentation prior to the objection decision yet the Appellant had lodged a complaint vide a letter dated 15th September 2022 regarding the alleged fraud which the Respondent had confirmed as having referred it to its Investigations and Enforcement department later on 14th October 2022.

28. It was the Appellant’s assertion that the Fair Administrative Action Act as read with Article 47 of the Kenya Constitution 2010 (hereinafter ‘the Constitution’) extends the right to fair administrative action and the Respondent ought to have waited for the outcome of investigations before issuing its objection decision against the Appellant. The Appellant stated that the Respondent acted in bad faith by raising the tax demands and sought to rely on court holding in the following cases;a.Council of Civil Service Unions v Minister for the Civil Service [1984] UKHL 9b.R v Commissioner for Co-operatives ex parte Kirinyaga Tea Growers Co-operatives Savings and Credit Society Limited

29. Further, the Appellant stated that the Respondent failed to avail information regarding its investigation and extending opportunity for the Appellant to interact with the fact’s contrary to the Appellant’s legitimate expectation pursuant to Section 29 of the TPA amounting to violation of its constitutionally guaranteed right to fair administrative action. The Appellant relied on the case of Anne Wanjiku Kahwai & Another v Kenya Revenue Authority & Another [2019] eKLR where it was held that;“…the Respondents were and are, entitled to inform the Petitioners of the outcome of their investigations in so far as such outcome will affect the Petitioners. This would include identifying unpaid or apparently unpaid taxes, and requiring the Petitioners, by notice to appear before the 2nd Respondent’ to produce records and information in respect of the tax liability or for any other purposes relating to a tax law, pursuant to sections 61 and 59 of the TPA.”

30. It was the Appellant’s assertion that the Respondent undermined the legality principle when it failed to share the findings of its investigations since the Appellant was entitled to receive the appropriate and relevant critical information which formed the subject matter that would affect the Appellant. In buffering this position, the Appellant cited the case of Republic v Betting Control and Licensing Board & Another ex parte outdoor Advertising Association of Kenya [2019]eKLR where Mativo J quoted with authority the principle espoused in AAA Investments (PTY) LTD v Microfinance Regulatory Council & Another where it was held as follows:“the doctrine of legality, which requires that power should have a source in law, is applicable whenever public power is exercised …Public power… can be validly exercised only if it is clearly sourced in law”

31. The Appellant averred that the Respondent’s decision was manifestly inappropriate, irrational, shrouded in unreasonableness and was casual and manual retrospective uplift of taxes. The Appellant relied on the case of Republic v Parliamentary Service Commission & 2 others; Morris Kimuli & Another (Interested Parties) [2021] eKLR where it was held that;“What the not very apposite term “irrationality” generally means in this branch of the law is a decision which does not add up which, in other words, there is an error of reasoning which robs the decision of logic.”

32. In buttressing this position further, the Appellant cited the court’s holding in Mombasa High Court Miscellaneous Civil Application No. 82 of 2010 Republic v Kenya Revenue Authority Ex-parte L.A.B International Kenya Limited [2011] eKLR that;“The common law, in its evolution, has defined the rules of conduct for a public authority taking a public decision, entrusting the overall control jurisdiction in the hands of the Courts of law; but for Kenya, a general competence of the courts is now no longer confined to the terms of the Statute law and subsidiary ;legislation but has a fresh underwriting in the constitution of Kenya 2010, Article 47 which imposes a duty of fair administrative action and Article 10(2)(c) demands, @good governance, integrity, transparency and accountability.”

33. The Appellant averred that the Respondent failed the test on due process as it based its entire claim on a wholly inaccurate and misconstrued application of the law rather than generally acceptable standards thus the assessments were void ab initio.

34. The Respondent’s written submissions dated 8th September 2023 were filed on 11th September 2023 wherein the Respondent submitted on two issues as hereunder;

i. Whether the Appellant discharged its burden of proof. 35. The Respondent submitted that the rules of evidential burden in tax matters are principally laid down under Section 56(1) as read with Section 50(4) of the TPA which are further affirmed under Sections 30 and 38(b) of the Tax Appeals Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’). That this fact has been lent credence by the courts as held in the case of Kenya Revenue Authority v Man Diesel & Turbo SE, Kenya[2021] eKLR where the court pronounced itself as follows;“…generally, the taxpayer has the burden of proof in any tax controversy. The taxpayer must demonstrate that the commissioner’s assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect.”

36. The Respondent averred that the Appellant was required to adduce competent and relevant evidence that establishes the existence of an alleged fact. That upon discovery by the Respondent of import data, the subsequent mark up of sales and tax charge on resultant taxable income, the Appellant was then required by law to adduce competent and pertinent evidence to show why entries were missing and why assessment should not have been raised.

37. The Respondent averred that it requested and was not served with the following documents:i.Complaint letter to Commissioner Customs & Border Control.ii.Sworn affidavit declaring the transactions as unknown.iii.Bank statements to confirm no transactions took place in the period under review.iv.Any other documentation indicating that the said company did not trade.

38. The Respondent stated that the Appellant did not avail any certified bank statements, sworn affidavit declaring the transactions were unknown or any supporting documents and that the evidence presented by the Appellant could not be treated as conclusive proof since what amounted to proof of a fact was provided for under Section 2 of the Evidence Act CAP 80 of Kenya’s Laws (hereinafter ‘Evidence Act’) as follows:“A fact is proved when, after considering the matters before it, the court either believes it to exist, or considers its existence so probable that a prudent man ought, in the circumstances of the particular case, to act upon the supposition that it exists.”

39. The Respondent questioned why the Appellant failed to present evidence for entries yet it had an opportunity to do so. Further, the Appellant failed to give logical explanation why lodging the Appeal was a sufficient reason to withdraw its interest in the investigations and its findings. Moreover, the Respondent submitted that PIN was personal and required anyone intending to use it to login details and the allegation that it was used without authorization by duly licensed clearing agents was highly improbable. The Respondent cited Section 2 of the Evidence Act as defining evidence as;““evidence” denotes the means by which an alleged matter of fact, the truth of which is submitted to investigation, is proved or disproved; and, without prejudice to the foregoing generality, includes statements by accused persons, admissions, and observation by the court in its judicial capacity…”

40. To buttress this position, the Respondent cited Section 119 of the Evidence Act which provides as follows:“The court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case.”

(ii) Whether the Respondent failed to consider the Appellant’s views. 41. The Respondent submitted that the Appellant was granted more than one opportunity to present its case but the Respondent found no satisfactory substance in the Appellant’s assertions. The Respondent stated that the Appellant failed to provide documents and cooperate after the Respondent embarked on the investigations. The Respondent was adamant that the Appellant was granted fair opportunity to be heard and relied on the case of John Florence Maritime Services Limited & Another v Cabinet Secretary Transport & Infrastructure & 3 Others (Petition 17 of 2015) [2021]KESC 39 (KLR)(Civ)(6August 2021);“In considering whether the High Court procedurally considered the plea of res judicata, we are asked to determine whether the court accorded the appellant an opportunity off hearing; and whether that opportunity was reasonable.”

42. In emphasizing further that it adhered to the requirements of procedural fairness as laid down, the Respondent relied on the case of Republic v Public Procurement Administrative Review Board & 2 Others [2019]eKLR where the court held that;“There are five mandatory procedures that must be followed when performing and administrative action that has a particular impact on a person or persons. These are that the affected person must be given, before the decision is taken, Adequate notice of the nature and purpose of the proposed administrative action, A reasonable opportunity to make representations; After the decision is taken, A clear statement of the administrative action, Adequate notice of any right of review or internal appeal; and Adequate notice of the right to request reasons.”

43. The Respondent submitted that it acted reasonably and that the decision to initiate investigations or not was a delicate matter with several factors to consider such as credibility of the allegations by the Appellant. The Respondent averred that its discretion to initiate the investigations should not be dictated. In buffering this position, the Respondent relied on the court holding in the case of Republic v Kenya Revenue Authority & Another; Directorate of Criminal Investigations & Another (Interested Party) Ex-Parte CMC DI Ravenna-Itinera JR[2020]eKLR that;“The court will merely require the decision-maker to take the relevant considerations into account; it will not prescribe the weight that must be accorded to each consideration, for to do so could constitute a usurpation of the decision-maker’s discretion. The law remains, as I see it, that when a functionary is entrusted with a discretion, the weight to be attached to particular factors, or how far a particular factor affects the eventual determination of the issue, is a matter for the functionary to decide, and so long as it acts in good faith (and reasonably and rationally) a court of law cannot interfere.”

Issues for Determination 44. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that two issues call for the Tribunal’s determination;a.Whether the Respondent’s objection decision dated 13th October, 2022 was validly issued.b.Whether the Appellant discharged its burden of proof

Analysis and Determination (a) Whether the Respondent’s objection decision dated 13th October, 2022 was valid 45. The Tribunal has sighted assessments dated 11th October 2018 which were objected to late on 13th April 2022, approximately Forty-Two (42) months later having sought leave from the Tribunal to file late. The cause of the delay in objection as stated by the Appellant being that it has never engaged in trade or business thus never used its PIN during the period when it was dormant. The parties did not avail any correspondences between them leading to the objection decision dated 13th October 2022 which was issued approximately Five (5) months after notice of objection. The Tribunal relies on Section 51(2) of the TPA which reads as follows;“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

46. Further, Section 51(3) and Section 51(11) of the TPA provides that;“51 (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;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); andc.All the relevant documents relating to the objection have been submitted”“51(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.”

47. From the foregoing, it is apparent that the Respondent had until 13th June 2022 to render its decision whether or not the Appellant had provided all relevant documentation as provided for under Section 51(11) of the TPA (supra). The Tribunal relies on the case of Consolbase Limited -vs- Commissioner of Investigations and Enforcement (TAT NO. 138 OF 2020) where the Tribunal held as follows:“Further, it is puzzling how the Respondent waited a record two years upon requesting for “books of three related companies” which were not provided. The Respondent ought to have issued its objection decision citing the failure to provide the requested documents as the basis of its objection decision. The Tribunal finds it untenable for the Respondent to zealously posit that it delivered its objection decision on 13th April 2017 whereas on 24th September 2019 it was calling upon the Appellant to provide documents (namely sales ledgers and VAT 3B samples), in respect of the same assessment issued on 28th January 2017 and indication that the investigations were still ongoing and no decision had been made. The Respondent is expected to act timeously and in a fair manner to give a taxpayer such as the Appellant some certainty with regard to its obligation.”

48. The Tribunal restates that statutory timelines which give rise to substantive rights cannot be extended by the Tribunal suo moto as was held in the case of Andrew Mukite Musangi V Commissioner of Domestic Taxes E163 (2021).

49. The import of the foregoing is that the validity of Respondent’s objection decision has been put to question and ought to have been issued in clear observance of set statutory timelines, the import of which implies that the Appellant’s objection was deemed allowed by operation of the law pursuant to Section 51(11) of the TPA. It is the Tribunal’s considered view that the Respondent’s objection decision dated 13th October, 2022 was not validly issued.

(b) Whether the Appellant discharged its burden of proof 50. Having established that the Respondent’s objection decision was not validly issued, the Tribunal will not proceed with the second issue as the same has been rendered moot.

Final Decision 51. The upshot of the foregoing is that the Appeal is meritorious and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 13th October 2022 be and is hereby set aside.c.Each party to bear its own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 5TH DAY OF APRIL, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K NGALA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE - MEMBER