[2024] KETAT 1098 (KLR)

Triospan Limited v Commissioner of Domestic Taxes Department (Tax Appeal E131 of 2023) [2024] KETAT 1098 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 1098 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E131 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

June 28, 2024

Between

Triospan Limited

Appellant

and

Commissioner of Domestic Taxes Department

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal business activity is the provision of construction services.

2. The Respondent a Principal Officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The issue in dispute in this Appeal arose when the Respondent allegedly noted variances between the sales declared by the Appellant in its income tax returns and the VAT as compared to sales computed based on withholding certificates issued to the Appellant.

4. The Respondent subsequently issued the Appellant with additional income tax and VAT assessments dated 9th November 2022 and based on the alleged variances.

5. The Appellant objected to this additional assessment vide its letter dated 10th November 2022.

6. The Respondent invalidated the said objections vide a letter dated 1st December 2022.

7. Dissatisfied with the Appellant’s invalidation decision, the Respondent lodged a Notice of Appeal dated and filed on 5th April 2023.

The Appeal 8. The Appellant in its Memorandum of Appeal dated 3rd April 2023 and filed on 6th April 2023 has set out grounds the following grounds of Appeal:a.That the additional estimated assessments are excessive because of some error or mistake of fact in the alleged assessed income.b)That the estimated additional assessment is punitive, erroneous and not as per the Income Tax Act.c.That the Commissioner contravened Section 17 of the VAT Act when it raised output VAT additional assessment.c.That by the Commissioner's dishonouring or neglecting credit for input tax against output tax is a decision contrary to law.c.That the Commissioner contravened the provisions of Article 47 of the Constitution when it failed to grant the Appellant credit for its Input tax against output tax.c.That no fair hearing was granted by the Commissioner contrary to Article 50 of the Constitution. The Commissioner erred in law and fact by not according to the Appellant a fair hearing more specifically to hear the Appellant's grounds and consider the substance of the matter and further giving untrue assessments and dishonest reasons for raising assessments.g.That the Commissioner while raising additional assessment on Income tax made a substantial error or defect in the procedure provided by Section 15 of the Income Tax Act Cap 470. h)That the Respondent when raising Income tax additional assessment ignored expenses wholly and exclusively incurred by Triospan Ltd in the production of that income, hence the decision being contrary to law or some usage having the force of the law.i.That the Respondent by alleging that the Appellant under-declared income in the years of Income 2018-2020.

Appellant’s Case 9. The Appellant relied on its Statement of Facts dated 30th March 2023 and filed on 6th April 2023 and written submissions dated 15th December 2023 and filed on 18th December 2023.

10. The Appellant averred that the Respondent erred when it took the variance between income declared and income derived from Withholding certificates because the supplies in question were exempt supplies that were made to AMREF Health Africa Projects. That this error tainted its entire assessment.

11. It posited that the Respondent’s decision to ignore its credit tax against output tax was contrary to Section 17 of the VAT Act.

12. That the Appellant was not granted a fair hearing as is provided in Section 7 of the Fair Administrative Act and Article 50 of the Constitution when it refused to grant the Appellant a hearing before disregarding its input tax claims and subsequently raising an untrue assessment against it.

13. The Appellant affirmed that it was entitled to deductions wholly and exclusively incurred in the course of its business under Section 15 of the ITA. That it was wrong for the Respondent to ignore these expenses in its tax computations.

14. That the notice of objection was valid because it was served within 30 days from the date of service.

15. The Appellant stated that it had complied with the provision of Section 62 of the VAT Act when it provided exempt goods to AMREF and also provided evidence including a letter from the Treasury dated 16th April 2018, National Treasury letter dated 29th March 2017 and AMREF letter dated 4th August 2017 to confirm that it was dealing in exempt supplies.

16. The Appellant posited that the variance being alleged to have been detected by the Respondent had already been taxed in the years 2017 and prior years. It relied on Section 35(3) of the Income Tax Act to support this postulation.

Appellant’s Prayer 17. The Appellant’s prayer to the Tribunal was for orders that:a.The decision of the Commissioner of 9th November 2022 and assessment orders be quashed.b.The additional assessment be annulled.c.Costs of the Appeal.

Respondent’s Case 18. The Respondent opposed this Appeal with the support of its Statement of Facts dated and filed on 18th May 2023 and submissions dated 4th December 2023 and filed on 7th December 2023.

1 9. The Respondent stated that it invalidated the Appellant's objection because apart from the iTax objection, the Appellant did not provide any other documents despite several reminders requesting it to supply documents. That Appellant neither provided any reconciliation to support its objection nor did it provide supporting documents in support of its objection and hence its invalidation decision on 1st December 2022.

20. The Respondent stated that it did not render an objection decision under Sections 51(8), (9), (10) and (11) of the Tax Procedures Act, that it invalidated the objection for which reasons the Appellant’s Appeal is invalid as was held in Misc. Appl. No. 175 Of 2022 Valley Drillers & General Contractor’s Ltd V The Commissioner of Domestic Tax.

21. The Respondent stated that it took into account the expenses incurred wholly and exclusively in the production of the reported income as provided for under Section 15 of the Income Tax Act hence the decision to raise the additional assessments was not contrary to the law.

22. The Respondent stated that the Appellant failed to discharge its burden of proof under Section 56(1) of the TPA to the extent that it did not provide detailed supporting documentation and records to counter the additional assessment. It relied on the case of Mbuthia Macharia V Annah Mutua Ndwiga & Another [2017] eKLR to support this argument.

23. That in the absence of supporting documents, the Respondent issued an assessment by applying its best judgment as provided in Section 24 of the Tax Procedures Act.

24. The Respondent asserted that the Appellant did not lodge notices of objection with respect to the assessments amounting to Kshs 11,849,385. 59 and that contrary to Section 52(2) of the TPA it neither paid the undisputed amount nor entered into any arrangement with the Respondent to pay the taxes not in dispute.

25. That under the circumstances the Appeal should be dismissed for being invalid and incompetent as was held in TAT Appeal No. 43 of 2017 Uchumi Supermarkets Ltd v Commissioner of Domestic Taxes.

26. The Respondent submitted that the estimated additional VAT assessments in question were raised based on declarations made by the Appellant in its VAT and Income tax returns. That it is the under-declaration of income as compared with the withholding certificates that led it to conclude that there was a variance and hence an additional tax liability.

27. The Respondent submitted that the Appellant under-declared its income in comparison to the withholding tax deducted paid by its clients against the same income. That the Appellant failed to explain the variances between the sales declared and the withholding.

28. That these additional assessments issued to the Appellant were based on self-assessment taxes which the Appellant declared in its VAT and income tax returns for the tax period years 2018 to 2021.

Respondent’s Prayer 29. The Respondent’s prayer to the Tribunal was for orders that:i.The Commissioner’s invalidation decision dated 1st December 2022 be held as proper in law and in conformity with the Income Tax Act and Tax Procedures Act.ii.This Appeal is devoid of merit and ought to be dismissed with costs to the Respondent.

Issues For Determination 30. The Tribunal having considered the parties’ pleadings, submissions and documents is of the view that the Appeal herein distils into the following two issues for determination:a.Whether the Appeal is validb.Whether the Respondent was justified in demanding additional tax from the Appellant.

Analysis And Determination 31. The Tribunal having identified the issues falling for its detemination proceeds to analyze the same as hereunder.

a. Whether the Appeal is valid 32. The Appellant argued that its objection was valid as it was lodged in time and also contained the precise grounds upon which its objection was premised.

33. The Respondent argued that the Appeal herein was invalid on two grounds, namely:a.The Appellant had only objected to an assessment amounting to Kshs 11,849,385. 59 against a total assessment of Kshs 35,102,405. That failure to pay the undisputed amount or to enter into an agreement relating to the disputed amount rendered the Appeal invalid under Section 52(2) of the TPA.b.The Appellant’s objection was invalidated and therefore no Appeal can lie against an invalid objection.

34. The burden of proof in tax matters rests with the taxpayer under Section 30 of the TAT Act which provides as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have made or should have been made differently.”

35. The Respondent did not attach the Appellant's objection letter to enable the Tribunal to affirm that the Appellant had only objected to a portion of the assessment. It is thus impossible for the Tribunal to make a decision on this limb of the Appeal and it is hence dismissed.

36. On the second ground, the Tribunal has looked at the Respondent’s letter dated 1st December 2022. It is indeed an invalidation notice under Section 51(3) of the TPA. It was not an objection decision under Section 51(10) of the TPA. The Appellant was thus required to validate it before filing its Appeal.

37. The Appellant thus fell into error when it failed to validate its objection before filing this Appeal. Indeed, the only other avenue available to it if it was not satisfied with the decision contained in the invalidation notice would have been for it to file an Appeal against it to the Tribunal and or to lodge an application before the Commissioner for an extension of time to validate the objection as is provided in Section 51(8) of the TPA.

38. The Appellant did not take either action and as such it did not have a valid objection from which it could lodge an Appeal to the Tribunal under Section 51(3) of the TPA.

38. The Appellant's Appeal is therefore invalid and incapable of sustaining an Appeal before the Tribunal as was held in Judgment – Tat No. 1288 Of 2022 Moto Commodities Limited V. Commissioner Of Domestic Taxes where the Tribunal stated as follows:“In the circumstances, the Appellant did not have a valid objection on record and it followed that the Respondent’s assessment stood confirmed, in which case there did not exist an objection from which the Appellant could lodge an Appeal to the Tribunal. The present Appeal is thus invalid as it lacks the legs to stand, crawl or walk on.”

40. Accordingly, it follows that the Respondent’s invalidation decision as contained in its letter dated 1st December 2022 was justified. The Appeal herein is thus invalid.

41. Having held that the Appeal herein was invalid, the Tribunal will not delve into the second issue that fell for determination as it has been rendered moot

Final Decision 42. On the basis of the foregoing analysis, the Tribunal finds that this Appeal is incompetent and accordingly proceeds to make the following Orders: -a)The Appeal be and is hereby struck out.b.Each party is to bear its own costs.

43. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER