[2025] KETAT 227 (KLR)

Trovados Investment Limited v Commissioner of Domestic Taxes (Tribunal Appeal E1036 of 2024) [2025] KETAT 227 (KLR) (9 May 2025) (Judgment)

Neutral citation: [2025] KETAT 227 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E1036 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

May 9, 2025

Between

Trovados Investment Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer whose core business is dealing with importation of timber.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 and 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. In a letter dated 12th January 2023, the Respondent expressed its intention to audit the Appellant’s books. The Respondent’s initial interview and examination of documents was conducted on 8th February 2023.

4. The audit preliminary findings were shared with the Appellant on 6th April 2023 followed by an email request from the Appellant for additional time to file documents on 25th April 2023. The parties held a meeting in relation to the audit findings on 9th May 2023.

5. The parties had several correspondence and in an electronic mail of 15th May 2023, the Respondent requested the Appellant to avail documents.

6. Through a demand notice dated 23rd May 2023, the Respondent demanded principal taxes amounting to Kshs. 41,707,503. 00 for the 2021/2022 review period.

7. The Respondent vide i-Tax issued assessment order dated 20th June 2023 in relation to corporation tax for the 15th April 2021 to 31st March 2022 review period. Similarly, on 26th June 2023 vide i-Tax, the Appellant was issued with an assessment order for VAT in relation to 2021 year of income.

8. The Appellant’s late objection lodged via i-Tax portal on 12th September 2023 was allowed by the Respondent on 15th September 2023. The Appellant validated its objection properly on 25th September 2023.

9. The Respondent’s objection decision dated 8th November 2023 confirmed principal taxes amounting to Kshs. 41,089,407. 00 comprising VAT of Kshs. 37,453,548. 00 and corporation tax of Kshs. 3,635,859. 00 in relation to the 2021/2022 review period.

10. Aggrieved by the Respondent’s objection decision dated 8th November 2023, the Appellant filed its notice of appeal dated 3rd September 2024 on 18th September 2024 at the Tribunal.

The Appeal 11. The Appellant’s case was predicated upon a Memorandum of Appeal dated 3rd September 2024 and filed on 18th September 2024 wherein the Appellant held that;i.The additional tax assessments and demand for taxes amounting to Kshs. 45,854,833. 00 by the Respondent were erroneous, inaccurate, unreasonable and improper in their entirety.ii.The Appellant made online objections dated 12th September 2023 for assessment number KRA2023XXXX1811, KRA2023XXXX4849 and KRA202XXXX09957, against the Respondent.iii.The Respondent erred in law in failing to consider, that the additional assessments issued to the Appellant were erroneous and thus the Respondent arrived at an excessive additional demand for taxes.iv.The Respondent erred in law by issuing a demand notice to the Appellant’s bankers without necessarily affording them the right of audience before such a drastic action was adopted.v.The Respondent in law by: -i.Purporting to issue and enforce the impugned demand notice before any assessments were issued as by law required.ii.Purporting to issue and enforce the impugned demand notice before giving any opportunity to the Appellant to object to any such assessments or to pursue the subsequent appellate channels provided in law.iii.Purporting to enforce the impugned demand notice despite full knowledge that the tax was disputed, contrary to Section 52(2) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”)iv.That the Respondent violated the Appellant’s right for fair administrative action and natural justice by summarily and arbitrarily issuing and enforcing the demand notice without affording them any reasonable opportunity to be heard on the demanded taxes as by law required.v.The Respondent violated the Appellant’s right to fair administrative action and natural justice by acting as investigator, judge and executioner, in so far as it summarily and arbitrarily issued and enforced the demand notice against the Appellant without affording them any reasonable opportunity to be heard.vi.The Respondent violated the fundamental constitutional provisions prohibiting unilateral decisions and the right to be heard in a fair administrative process before a decision impacting economically on the Appellant was determined by arbitrarily raising the impugned demand notice.vii.The Respondent reasoning in arriving at an invalid decision was irrational and therefore reached a conclusion that was null and void ab initio in the circumstances.viii.The Respondent actions were done illegally, irrationally and unreasonably by demanding from the Appellant huge sums of money equivalent to Kshs. 45,854,833. 00 to be paid immediately with the sole intention to compel payment under duress.ix.The Appellant has neither fraudulently engaged in tax evasion nor obtained any tax advantage/benefit or involved with any fraudulent scheme by failing to remit VAT.

Appellant’s Case 12. The Appellant’s Statement of Facts dated 3rd September 2024 were filed on 18th September 2024.

13. The Appellant stated that as required by law, all businesses are expected pay Corporation tax and VAT. That however, between the March 2021 and May 2022, upon import of timber worth Kshs. 53,113,445. 00 as per their bank statements, the Respondent instead assessed the Appellant Kshs. 271,708,650. 42.

14. It was the Appellant’s case that it neither engaged in any fraudulent scheme nor sough to obtain any tax advantage/benefit by failing to remit VAT. That however, having appointed a Clearing agent to clear goods at the Namanga border, the agent without the knowledge of the Appellant, used its Personal Identification Number (PIN) to clear goods that did not belong to the Appellant.

15. According to the Appellant, the Respondent used all declared imports to assess taxes instead of what had been rightfully imported by the Appellant as such the Appellant recommended that the Respondent ought to pursue the Clearing agent in order to assess the correct owners and their import entries removed from Appellant’s returns.

16. The Appellant conceded that VAT of Kshs. 10,298,065. 00 on imports valued at Kshs.64,345,624. 93 had not been captured in VAT returns but challenged the Respondent’s use of a 10% markup as being too high as the most realistic representation markup ought to be 7%.

17. The Appellant averred that VAT refunds should have been allowed since import tax had already been paid when importing because disallowing the refunds would amount to double taxation. Additionally, that the Appellant engaged someone to assist in filing tax returns who made erroneous filing leading to misrepresentation of facts to the Respondent.

18. The Appellant held that the Respondent violated its fundamental rights and freedom pursuant to Article 27, 28,40, 47 of the Constitution of Kenya 2010 (hereinafter “the Constitution”) as the Respondent made demands before carrying out assessments and notifying the Appellant of the same as couched under Section 29(2) of the TPA ignoring the fact that the Appellant had 60 days to object against the assessment. Further that the Respondent failed to notify the Appellant prior to issuance of demand letter to bankers denying the Appellant the opportunity to be heard and went ahead to demand illegal taxes while relying on a wrong provision which has rendered the Appellant apprehensive in engaging in any business.

19. The Appellant held that the Respondent’s reasoning and the demand notice therewith was preposterous, irrational and outrageous. The Appellant invoked the doctrine of estoppel as precluding the Respondent from alleging or proving in legal proceedings that a fact is otherwise than what it has been made to appear by the matter giving rise to that disability. That in the instant matter, the Respondent is estopped from making current demands because it had audited the accounts of the Appellant and gave clearances.

20. It was the Appellant’s case that a procedural legitimate expectation rests on the presumption that a public authority will follow a certain procedure in advancing a decision being made whereas substantive legitimate expectation arises where the authority makes a lawful representation that an individual will receive or continue receiving some kind of substantive benefit.

21. The Appellant held that two issues fall for determination as follows;i.Whether the impugned objection decision is meritorious or should be quashed?ii.What were the tax obligations of the Appellant?

Appellant’s Prayer 22. The Appellant’s prayers were that;a.The Tribunal allows the Appeal with costs.b.The Tribunal annuls Respondent’s tax demand notice dated 14th March 2024 as well as the objection decision dated 8th November 2024. c.The Tribunal grants any other relief as may be fair and just in the circumstances.

The Respondent’s Case 23. The Respondent replied to the Appeal through its Statement of Facts were dated and filed on 11th November 2024

24. According to the Respondent, the audit exercise revealed a variance between sales declared in VAT returns due to omitted purchases whose corresponding sales had not been declared.

25. The Respondent averred that the Appellant fully explained the variance on PAYE but failed to properly explain the variance relating to corporation tax and VAT resulting in assessments dated 20th June 2023 and 26th June 2023. The Appellant’s late objection on iTax portal on 12th September 2023 was allowed on condition the Appellant prepared a substantive objection within 3 days which was instead properly done on 25th September 2023

26. The Respondent reiterated its position as stated in the objection decision and went on to stated that the assessments raised were proper, accurate and reasonable based on audit findings and information available. In addition, that the Appellant was afforded the right audience both during and after the audit period as well as at the objection stage as shown by various correspondences.

27. The Respondent maintained that it gave the Appellant adequate time to object to the assessments, even allowing a late objection, and at no time were any demand notices issued or any enforcement of the impugned demand notices sought and dared the Appellant to prove the same.

28. It was the Respondent’s case that no fair administrative right of the Appellant was violated as the Respondent adequately provided the Appellant an opportunity to challenge the assessments as provided by law. Thus, the objection decision was validly arrived at it was the Appellant who failed to discharge its burden of proof that the assessments were irregular or excessive.

29. The Respondent cited the following tax laws: Section 3 of the Income Tax Act

Section 17 of the Value Added Tax

Section 51 of the Tax Procedures Act

Section 56 of the Tax Procedures Act

Section 30 of the Tax Appeals Tribunal Act

30. The Respondent fashioned the following as issues falling for determination;i.Whether the assessments were proper?ii.Whether the Appellant was given an opportunity to challenge the assessments?iii.Whether the Appellant discharged its burden of proof?

31. The Respondent held that the Appeal was improperly before the Tribunal as the Appellant failed to seek leave of the Tribunal before filing the Appeal.

32. It was the Respondent’s case that the Appellant was time barred from claiming all input VAT on imported timber as provided for under Section 17 of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act “). Further, that the invoices availed to support timber importation expenses failed to provide proof of having paid for the incurred expenses thus, failed to discharge its burden of proof leading to Respondent’s confirmation of the assessments.

33. The Respondent sought the following reliefs:i.That the Tribunal finds that the assessments dated 20th June 2024 and 26th June 2023 were proper in law and the same be affirmed;ii.That the Tribunal finds the Respondent’s objection decision dated 8th November 2023 as proper and the same be affirmed; andiii.The Tribunal dismiss the Appeal with costs.

Parties’ Written Submissions 34. The Appellant’s written submissions dated 11th April 2025 were filed on 23rd April 2025 wherein the Appellant submitted on four issues as hereinunder;i.Whether the tax assessments issued by the Respondent were valid in law, factually sound, and procedurally fair.ii.Whether the Respondent’s actions amount to a breach of the Appellant's right to fair administrative action.iii.Whether the Respondent’s enforcement actions were legal, reasonable, and justifiable under the law.iv.Whether the Appellant was entitled to the prayers sought including the quashing of the impugned decisions and an award of costs.

35. The Appellant proceeded to analyze the combined issues as follows;

36. The Appellant submitted that the Respondent grossly overstated, by nearly five times, the Appellant’s actual import volumes while the Appellant furnished credible evidence showing its actual import value was Ksh 53,113,445. 00.

37. The Appellant held that while the principle of accurate and fair tax assessment requires the taxing authority to investigate and correctly attribute tax liabilities, the Respondent failed to distinguish the Appellant’s actual imports from those of unrelated third parties who unlawfully used its PIN. That this was a gross dereliction of investigative obligations of the Respondent and relied on the case of Silver Chain Limited v Commissioner of Income Tax & 3 Others [2016] eKLR where the court held that arbitrary and unilateral assessments lacking taxpayer input are procedurally unfair and must be struck down.

38. It was the Appellant’s submission that the assessment was not only inflated but was based on unreliable, unverified and misattributed data as the Appellant had no control or knowledge regarding the use of its PIN by third parties yet it was only just and equitable that the Respondent investigated the actions of the Clearing agent and excluded unrelated entries from the Appellant’s assessments.

39. The Appellant stated that the decision to simultaneously issue demand notice and notify bankers without prior engagement or notification violated the Appellant’s rights as enshrined in Article 47 of the Constitution and as couched under the Fair Administrative Action Act thus violated the cardinal principle of natural justice. That the right to be heard was not a formality but a constitutional imperative and any decision made in contravention of this principle is nullity ab initio and cited the case of Republic v Kenya Revenue Authority ex parte M-Kopa Limited[2020] eKLR.

40. That in contravention to Section 52(2) of the TPA, the Respondent acted as judge, jury and executioner when it issued assessment rejecting the objection and enforcing payment unilaterally.

41. That in line with the doctrine of estoppel, the Respondent was prohibited from demanding taxes that were based on flawed process and misinformation as the Appellant had a legitimate expectation that previously submitted and acknowledged tax filings would be accepted and that no adverse assessments would be made without prior notice or fair hearing.

42. The Appellant further held that the Tribunal having the ultimate discretion to award costs of the suit should award the same to the Appellant based on the circumstances of this case.

43. The Respondent’s Statement of Facts were dated and filed on 15th April 2025 wherein the Respondent fashioned four issues for determination as follows;

i. Whether the Appeal as presented by the Appellant is properly before the Tribunal? 44. The Respondent submitted that having issued a decision on 8th November 2023 and the same having been received on even date, the Appellant ought to have lodged an appeal on or before the 8th December 2023 but instead filed the pleadings at the Tribunal on 3rd September 2024 without seeking the leave of the Tribunal as provided for under Section 13(3) of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”). Thus, the Appeal herein is fatally defective and as such improperly before the Tribunal.

45. The Respondent stated that the Appeal was in contravention of Section 51(12) of the TPA, Section 13(1)(2) and Section 13(3) of the TATA as read with Rule 3 and 10 of the Tax Appeals Tribunal (Procedure) Rules as it was filed outside the statutorily provided timelines yet the Appellant failed to legalize the process. The Appellant placed reliance of the following case law Jitihada Furniture Centre Limited v Commissioner of Domestic Taxes [Appeal 274 of 2022]

Nicholas Kiptoo Arap Korir Salat vs Independent Electoral and Boundaries Commission and 6 Others [2013] eKLR

ii. Whether the assessments issued by the Respondent were proper? 46. The Respondent asserted that Appellant’s assessments were properly raised after the Appellant conclusively explained variances on PAYE but failed to explain the variances on corporation tax and VAT. That the Appellant had omitted purchases whose corresponding sales had not been declared in the period August 2021 to March 2022

47. The Respondent held the Appellant’s underdeclared sales when compared with imported timber worth Ksh 270,624,300. 00, a variance with sales declared was established that was then mark-up with a settled rate of 10% and subjected to corporation tax as provided for by Section 29 of the TPA.

48. Further, the Respondent stated that the Appellant failed to claim all purchases in self-assessment returns which were then time barred and thus not allowable for input claim as such, all input tax incurred on importation of timber were time barred as provided for by Section 17(2) of the VAT Act which caps the input claim window at six months. The Respondent relied on the case of Highlands Mineral Water Limited vs Commissioner of Domestic Taxes 2021KEHC12894(KLR) where the court held that;“…the Commissioner was entitled to disallow input VAT claims relating to purchases made outside the six month window period from date of supplying provided in section 17(2) of the VAT Act.”

iii. Whether the Appellant was given an opportunity to challenge the assessments? 49. The Respondent averred that the Appellant was afforded a right of audience during the audit, after the audit and during the objection stage as evidenced by various correspondence. The Appellant was appropriately informed of audit findings, assessments and was allowed to file a late objection. Thus, the claim by the Appellant that it was denied an opportunity to challenge the assessments was irregular and does not hold water.

50. That the mere fact that a late application was allowed by the Respondent was proof enough the Appellant was granted adequate opportunity to defend its position.

iv. Whether the Appellant discharged its burden of proof? 51. The Respondent held that the Appellant provided invoices to support some of the expenses incurred on importation of timber but failed to provide proof of payment relating to expenses incurred as the Appellant only produced bank statements before the Tribunal which were not availed to the Respondent at the objection stage and must not be allowed as the Respondent did not have the opportunity to look the same. The Respondent sought reliance on the high court income tax appeal case of Commissioner of Investigations and Enforcement vs Doshi Enterprises Limited warns that;“The tribunal should resist attempts of seeking documents which were not provided to the Commissioner during objection proceedings as in doing so, it will not be acting as an appellate tribunal but a trial one.”

52. The Respondent stated that the Appellant failed to discharge its burden of proof as provided under Section 56(1) of the TPA that was contradictory to the assessments by availing documents proving payments and confirming actual supply of goods took place even at the Tribunal. The Respondent placed reliance on the cases of Osho Drappers limited vs Commissioner of Domestic Taxes and Commissioner of Domestoc Taxes v Trical and Hard [Tax Appeal No. E146 of 2020[2022]KEHC 9927(KLR).

53. It was the Respondent’s case that the Tribunal in the instant case ought to proceed on the assumption that the assessments are correct until the Appellant produces competent and relevant evidence as what has been placed before it by the Appellant is proof of payment which was not adduced at the objection stage. Additionally, that no evidence was provided showing that all requested documents had been provided and that there was lack of clarity.

54. In regards to VAT input, the Respondent held that the claim was time-barred as it was made outside the statutorily provided timelines as provided for by Section 17 of the VAT Act. The Respondent held that transaction documents availed failed to meet the requirements of Section 17 of the VAT Act wholly, as a result the Respondent was constrained to partially allow the Appellant’s objection.

55. The Respondent asserted that it contravened no law as the assessments were done in conformity with the provisions of law instead it was the Appellant who failed to discharge its burden of proof in regards to the validity of the notice of objection.

Issues for Determination 56. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions adduced before it notes that three distill for its determination as follows;i.Whether the Appeal is properly before the Tribunalii.Whether the Appellant was discharged the burden of proof pursuant to Section 56(1) of the TPAiii.Whether the Respondent’s objection decision dated 8th November 2023 was justified.

Analysis and Findings 57. The Tribunal having established three issues for determination will proceed to analyze them as follows;

i. Whether the Appeal is properly before the Tribunal. 58. The Tribunal notes that the dispute at hand emanated from an audit carried out by the Respondent who held that the Appellant had omitted imported timber purchases whose corresponding sales had not been declared as a result the Respondent marked-up the cost of sales by 10% and brought the same to income tax-company and VAT. In defense, the Appellant held that having appointed a Clearing agent to clear its cargo at the Namanga border post, the said agent went rogue and allowed third party importers to declare imports under the Appellant’s PIN. That this fact was evident as the impugned sales by the Respondent of more than Kshs 271,000,000. 00 was nearly five times higher than the actual documented imports in Appellant’s financial and banking records.

59. Further, the Appellant held that the 10% mark-up used by the Respondent on the cost of sales was higher than the industry market rate of 7% and that the Respondent failed to allow the Appellant to claim all its allowable input VAT which the Respondent termed as time barred.

60. The Tribunal notes the Appellant’s contention that the Respondent issued unilateral demand notices before any assessments were issued as required by the law which was a violation of the Appellant’s right to fair administrative action and natural justice an action that was irrational and unreasonable with the aim of compelling payments under duress. The Appellant went on to assert that it was neither engaged in fraud, tax evasion nor obtained any tax advantage/ benefit by failing to remit VAT. On its part, the Respondent held that the assessments raised were proper, accurate and reasonable based on audit findings and information available having engaged the Appellant all along from the onset of the audit, during the audit and after the audit period as well as at the objection stage and that was why even it allowed a late objection from the Appellant in the spirit of affording the Appellant and opportunity to defend its position.

61. The Tribunal has carefully considered the chronology of events leading to the objection decision of 8th November 2023 and notes that the Appellant is required under Section 51(11) of the TPA to lodge an Appeal within 30 days upon being issued with an objection decision which in this case was to have been by 8th December 2023. The cited section provides as follows;“A person who is dissatisfied with the decision of the Commissioner under subsection (11) may appeal to the Tribunal within thirty days of being notified of the decision.”

62. The instant Appeal was filed vide a notice of appeal dated 3rd September 2024 on 18th September 2024 at the Tribunal which was over nine 9) months late.

63. The Tribunal notes that the law under Section 13(3) and (4) of the TATA extends to the Tribunal discretion to allow an Appeal out of time where exigencies impede a taxpayer from lodging an appeal in time. The said legislation provides as follows;“(3)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).(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.”

64. The Tribunal notes that the Appellant in its attachments appended a notice of motion under certificate of urgency and a sworn affidavit by Erastus Mutuma all dated 3rd September 2024 and filed together with Appeal documents on the same date. The same does not appear to have been heard. However, the Tribunal asserts that its discretion to grant leave to file an Appeal out of time is not a mere technicality but must be exercised upon proper invocation by a taxpayer who in this case merely annexed the prayers to the pleadings of the main suit. The Tribunal reiterates the following Court position on a similar matter in the case of Commissioner of Domestic Taxes vs Lifecare International Brokers Limited [2020] eKLR :“Failure to file an appeal within time and without complying with statutory conditions is not a mere technicality that can be overlooked, it goes to the competence of the appeal. Counsel for the Appellant valiantly addressed the court on why the court should validate the appeal. The issues raised are factual issues that call for the court to exercise its discretion and can only be addressed in an appropriate application which is not before the court.”

65. The view of the Tribunal is that the Appellant failed to move the Tribunal in a proper legal manner when it sought to be heard and as such the Tribunal finds that the Appeal as brought was not properly before it and is ripe for striking out.

66. Having established that the Appeal is improperly before it, the Tribunal finds the other issues falling for its determination as rendered moot.

Final Decision 67. The upshot of the foregoing is that the Appeal herein is unmerited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck outb.Each party to bear its own costs.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 9TH DAY OF MAY, 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER