[2024] KETAT 568 (KLR)

Tyndy International Limited v Commissioner Of Domestic Taxes (Tax Appeal 1500 of 2022) [2024] KETAT 568 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 568 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1500 of 2022

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

March 22, 2024

Between

Tyndy International Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose principal activity is that of architectural and engineering consultancy.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent through a letter dated 23rd June, 2020 raised a Value Added Tax assessment.

4. The Appellant raised an objection to the assessment vide a letter dated 23rd July, 2020.

5. The Respondent on 11th June, 2021 invalidated the objection.

6. Following its dissatisfaction with the Respondent’s decision to invalidate its objection, the Appellant filing a Notice of Appeal to the Tribunal on 22nd December, 2022. The Appellant was on the 23rd day of December, 2022 granted leave to file the Appeal out of time.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 9th December, 2022:-a.That the Respondent erred in fact and law, by issuing late invalidation contrary to Section 51(4) of the Tax Procedures Act, 2015. b.That the Respondent notified the Appellant of the invalidation of the objection after 170 days.c.That the Commissioner erred in law by refusing to acknowledge that the taxpayer filed his 2014, 2018 returns on time and that he also declared all his income as at that period. However, without prior letter to audit the operations and business of the Appellant the Respondent without notice went ahead and raised assessments on the Appellant.d.That the Commissioner erred in law and in fact by electing to raise an assessment despite the taxpayer filling his return on time.e.That the alleged supplier whom the Respondent is accusing the Appellant of not declaring his actual income, indeed withheld and never remitted the withheld amounts on time.f.That payment received by the Appellant from his supplier were all less the 5% withholdings.g.That in discharging the KRA mandate, the Respondent is bound by provisions of the Tax Procedures Act which harmonizes and consolidates the procedural rules for administration of tax laws in Kenya. The Respondent has no power to administer tax laws through any other procedure that contravenes the mandatory provisions of the Tax Procedures Act.h.That the Respondent violated the Appellant's right to be guaranteed its legitimate expectation of the laid down procedures by issuing an objection decision after 170 days.i.That further, it is against the principles of natural justice for the Respondent to make a tax demand on mere allegations without tangible evidence or proof to show that the Appellant unlawfully applied Tax Procedures Act 2015.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts filed on 9th December, 2022. b.The Appellant’s submissions filed on 10th August, 2023 and the authorities attached thereto.

9. That the Appellant deems the acts of the Respondent as not only unfair but also illegal, amounting to violations of its fundamental rights and freedoms as illustrated herein below:-a.Breach of Article 27 of the Constitution – That every person is equal before the law and has the right to equal protection of the law. Equality includes the enjoyment of all rights and fundamental freedoms. The Respondent has issued the said demand notices against the Appellant without any regard to its rights to procedural fairness and in breach of natural justice.b.Breach of Article 35 of the Constitution – That KRA has elected to harass the Appellant on the basis of information held by them alone. That no information whatsoever was given on the sum of Kshs. 141,599,338 before demand notice action was taken. Thus, the Respondents' actions are in breach of the Appellant's rights to access information that is required for the protection of their fundamental rights and freedoms.c.Article 41 of the Constitution - As a result of the Respondents' agency notices, the Appellant’s businesses is presently crippled with very possible threat of insolvency should the sum of Kshs. 141,599,338 be paid out by the Respondents, without justification. The subsequent extreme financial loss will inevitably necessitate the retrenchment of all employees who depend on the Appellant for their livelihoods.

10. That the Respondent also breached the following legal principle relevant to exercise of administrative power generally, and to administration of tax law specifically:Doctrine of Legitimate Expectation - The Courts over the years have recognized both procedural and substantive legitimate expectation. A procedural legitimate expectation rests on the presumption that a public authority will follow a certain procedure in advancing a decision being made. Procedural legitimate expectation applies in this case.

11. That had the Respondent carried out an audit he would have found that some of the declared income in the VAT are from purchase of assets. That this recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. That these costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

12. That IAS 16 does not prescribe the unit of measure for recognition - what constitutes an item of property, plant, and equipment. [IAS 16. 9] That, however, if the cost model is used each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately.

13. That IAS 16 recognizes that parts of some items of property, plant, and equipment may require replacement at regular intervals. That the carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. That the carrying amount of those parts that are replaced is derecognized in accordance with the derecognition provisions of IAS 16. 67-72.

14. That continued operation of an item of property, plant, and equipment (for example,an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. That when each major inspection is performed, its cost is recognized in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed.

15. That IFRS 5 achieves substantial convergence with the requirements of US SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets with respect to the timing of the classification of operations as discontinued operations and the presentation of such operations. That with respect to long-lived assets that are not being disposed of, the impairment recognition and measurement standards in SFAS 144 are significantly different from those in IAS 36 Impairment of Assets. That however those differences were not addressed in the short-term IASB-FASB convergence project.

16. That it is clear that purchase of assets cannot amount to revenue by the mere fact that it was declared in the VAT return and not in the income tax does not in any way make it revenue and thus must be treated as such (Assets) sample invoice of assets purchase from UDV fridges and Kenya breweries limited (Bottles, Crates & Keg cylinders).

17. That had the Respondent conducted an audit, it would have realized that the Appellant had been filing its VAT returns for the years 2015, 2016 & 2017, and therefore had valid purchases and expenses and with this it would have used the validly filed Inputs (as cost of sales) to ascertain the Appellant’s true tax position,

18. That the Respondent never gave the Appellant any notice of intention to raise assessments or even come for an audit.

Appellant’s Prayers 19. The Appellant prayed that:a.This Honorable Tribunal be pleased to set aside the assessments under review herein;b.Thereafter, this Honorable Tribunal be pleased to substitute the assessment under review herein in line with the Appellant’s filed return set out under the Appellant’s Statement of Facts; and recognize all the Withholdings deducted;c.In the alternative to (b) above and further to (a) above herein above, this Honorable Tribunal be pleased to vary the assessments herein as per it's wisdom;d.This Honorable Tribunal be pleased to order the Respondent to pay costs of this Appeal to the Appellant; ande.This Honorable Tribunal be pleased to issue any other Order favourable to the Appellant as it may find just and expedient to issue.

Respondent’s Case 20. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 18th January, 2023 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 24th July, 2023.

21. That it is not true that the Respondent did not inform the Appellant that its objection was invalid before issuing the letter dated 11th June, 2021.

22. The Respondent stated that it informed the Appellant on various occasions that its objection was invalid. That by an email dated 16th September, 2020, the Respondent informed the Appellant that its objection was invalid for failure to provide accompanying documents. That the communication asked the Appellant to provide the Respondent with some documents, namely: proof of payment not in dispute, signed audited financial accounts for the years 2014 - 2018, ledgers for direct costs and administration expenses, loan agreements and any other documents to support the Appellant's objection.

23. That the Appellant was reminded to validate its objection by providing the aforementioned documents within 14 days. That the Appellant responded to this letter via its tax agent on 28th September, 2020 and requested for a further 30 days so as to comply with the directions provided. That the Appellant was thus aware of the invalidation by 16th September, 2020 which was 56 days after it had lodged its objection. That as such its assertions that the invalidation came after 170 days are not factual.

24. That the Respondent in its forbearance wrote further emails to the Appellant to remind it to provide the documents requested. That via an email dated 23rd December, 2020 the Respondent asked the Appellant to provide the documents and granted it a further 14 days to do so.

25. That via an email dated 19th February, 2021 the Respondent lamented the lack of response from the Appellant and the fact that the Appellant was ignoring its calls. That the Respondent afforded the Appellant a further 7 days to provide the requested documents.

26. That the Respondent via an email dated 23rd February, 2021 referred to a meeting held between the parties in which the Appellant promised to deliver documents namely: payments reconciliation received from Zakhem verses bank statement, proforma invoices raised, sales ledger, direct and administration expenses and loan agreement. That this email also reminded the Appellant to provide the remaining documents to validate its objection which was still invalid

27. That via an email dated 19th March, 2021, the Respondent reminded the Appellant of a follow up meeting that was supposed to be convened on 9th March, 2021. That the Respondent reminded the Appellant to validate its objection on this occasion as well.

28. That having run out of commendable patience that had been abused by the Appellant, the Respondent, via an email dated 11th May, 2021, informed the Appellant that the communication was the final reminder for the Appellant to validate its objection. That the Appellant was given 7 days to act accordingly or there would be no more opportunity for validating the objection.

29. That the Appellant failed to validate the objection which prompted the Respondent to confirm the assessments it had earlier raised.

30. That from the foregoing, it is clear that the Appellant was notified of the invalidation without an unreasonable delay. That furthermore, when it was notified of the invalidation it was given several chances to validate its objection and as such the contention that the Respondent only communicated the invalidation after 170 days is dishonest.

31. The Respondent stated that it did not ignore the Appellant's returns while issuing the default assessments. That the Appellant claims that the Respondent raised default assessments without notice yet it had duly filed its tax returns. The Respondent stated that the Appellant had not filed any returns for the relevant period of 2014 - 2018 at the time the default assessments were raised.That the Respondent is allowed to raise default assessments in such a scenario by virtue of Section 29 of the Tax Procedures Act which states as follows:“Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment")of-a.the amount of the deficit in the case of a deficit carried forward under the Income Tax Act (Cap.470) for the period;b.the amount of the excess in the case of an excess of input tax carried forward under the Value Added Tax Act, 2013 (No. 35 of 2013), for the period; orc.the tax (including a nil amount) payable by the taxpayer for the period in any other case.”

32. The Respondent further stated that there is no legal requirement that a taxpayer should be notified before default assessments are raised. That this springs from the fact that it is the duty of every taxpayer to file returns as provided under Section 24(1) of the Tax Procedures Act in the following terms:“A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”

33. That upon failure to submit its returns, the Appellant is only entitled to a notice that default assessments have been raised. That this is provided by Section 29(2) of the Tax Procedures Act which states that:“The Commissioner shall notify in writing a taxpayer assessed under subsection (1) of the assessment and the Commissioner shall specify-a.the amount assessed as tax or the amount of a deficit or excess of input tax carried forward, as the case may be;b.the amount assessed as late submission penalty and any late payment penalty payable in respect of the tax, deficit or excess input tax assessed;c.the amount of any late payment interest payable in respect of the tax assessed;d.the reporting period to which the assessment relates;e.the due date for payment of the tax, penalty, and interest being a date that is not less than 30 days from the date of service of the notice; andf.the manner of objecting to the assessment.”

34. That the manual assessment issued by the Respondent on 23rd June, 2020 complied with the above provisions and informed the Appellant of the assessed amounts, the penalty and interests, the period to which the assessment relates and the manner of objecting to the assessments by reference to Section 51 of the Tax Procedures Act. That the Appellant's contention that it should have been given prior notice of the default assessment is therefore not based on any law.

35. The Respondent submitted that the Appellant only filed its returns during the objection review. That as such the Appellant should not question why a default assessment was raised yet it filed returns after the default assessments had already been issued. That even if the Respondent would deem the returns as having been properly filed, it would not be bound by such returns. That this is provided by Section 24(2) of the Tax Procedures Act which provides as follows:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

36. That the Appellant would still need to provide documents showing that the default assessments were excessive or wrong. That this is further supported by Section 56(1)of the Tax Procedures Act as read with Section 50(4) of the same legislation. Section 56(1) reads as follows:-“ In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

37. That Section 50(4) reads as follows:-“In this section, "proceedings under this Part" means-a.an objection made under section 51;b.an appeal made to the Tribunal under section 52 in relation to an appealable decision;c.an appeal made to the High Court under section 53 in relation to a decision of the Tribunal; ord.an appeal made to the Court of Appeal under section 53 in relation to a decision of the High Court.”

38. That the Appellant failed to provide the necessary documents in its objection and thus failed to discharge the burden of proving that the default assessment was incorrect. That the fact that the Appellant sneakily filed its returns during the objection review does not automatically remedy the faults which caused the default assessment. That from the foregoing, the arguments based on the fact that returns were filed have no legal basis.

39. That the Appellant's contentions on withheld amounts are mere allegations. That the Appellant merely alleged that it received its payments net 5% of the total amounts. That the Appellant goes ahead to blame those who were paying it these amounts alleging that they failed to remit the withheld amounts in time.

40. The Respondent stated that the Appellant had ways of proving this, for example, its bank statements, cheques, invoices and contracts which would have actually proved that the Appellant was being paid net 5% of total amounts due for the services provided. That the Appellant failed to submit thedocuments and as such the Respondent cannot verify the truth of the Appellant's assertions. That the burden of proof was and still is on the Appellant to establish these allegations. That this is generally supported by Section 107 of the Evidence Act which states that a person who alleges has the duty of proving such allegations. The Respondent also stated that it reasonably suspects that these allegations are an afterthought.

41. That the raising of grounds which were not presented during the objection without the Tribunal's permission is outlawed by Section 56(3) of the Tax Procedures Act which states as follows:“In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless theTribunal or Court allows the person to add new grounds.”

42. That the Appellant failed to show that the entire of its income was derived from supply of exempted services. That additionally, the Appellant failed to show precisely as regards the confirmed amounts, what extent of the amounts was attributable to the exempt services and what extent was attributable to the vatable supplies. That as such the ineligibility is only alleged but has not been supported.

43. That financial statements are the final accounts which need to be verified by further primary documents and books of entry. That the Appellant should have presented documents supporting the note to the financial statements to show the extent to which the income should have been attributed to the vatable supplies. That mere statement of figures is not sufficient.

44. That in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR the court stated;“The shifting of the burden of proof in tax disputes flows from the presumption of correctness, which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

45. That the court then proceeded to state;“The taxpayer in such cases generally possesses objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue Authority is in a poor position to establish an affirmative case... Placing the burden of proof in tax cases on the taxpayer reflects the unique nature of the tax system.57. ........the Appellant in the present appeal has manifestly failed to discharge such an onerous burden of proof placed squarely on it....”

46. That the Respondent's assessment was premised on the provisions of Sections 94 and 95 of the Tax Procedures Act which term the failure to submit a tax return and pay taxes respectively as an offence. In the circumstances, the Appellant failed to submit tax returns for the income earned in the provision of consultancy services for the period between 2014 and 2018.

47. That in the instant case, the Appellant has failed to prove that the Commissioner's tax decision was in any way inconsistent, based on extraneous factors, excessive or incorrect.

48. That, noteworthy, is that data relied upon by the Respondent was from a bank analysis of the Appellant’s statements and invoices which established that the company received Kshs. 235,556,903. 00 in payments from various persons between January 2014 to December 2018.

49. That the Appellant has time and again been unable to disprove that the monies received were not income derived under Section 3 of the Income Tax Act. That similarly, the Appellant has failed to support its contentions that it received sums net 5% of the total amounts owed. That in the circumstances, the Respondent's population remain uncontroverted.

50. That in conclusion, the Respondent submitted that the Appellant's objection was unsupported and as such the Respondent was proper in disallowing the same as have been submitted herein above.

Respondent’s Prayers 51. The Respondent prayed that the Tribunal finds:a.That the Respondent's decision to partially confirm the Appellant's tax liability as Kshs. 1,726,100. 16 for the relevant period was proper in law and conformed with the Value Added Tax Act and Tax Procedures Act.b.That this Appeal be hereby dismissed with costs to the Respondent as the same is without merit.

Issue for Determination 52. The Tribunal has evaluated the pleadings and documentation filed by both parties and is of the respectful view that the singular issue for its determination is:Whether the Respondent’s decision to confirm the tax assessment was justified.

Analysis And Determination 53. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

54. This dispute arose from the Respondent’s action of invalidating the Appellant’s objection and confirming its assessment on the basis that the Appellant did not provide documentation in support of its objection.

55. The Appellant argued that the Respondent issued its invalidation notice in response to its objection after 170 days and thus this was beyond the statutory timelines.

56. A review of the pleadings by the Tribunal revealed that the Appellant filed a notice of objection on 23rd July 2020 in response to an assessment dated 23rd June 2020. The invalidation notice that is the subject of this appeal was issued on 11th June 2021 after numerous correspondence between the two parties.

57. The Tribunal further confirmed the following communication between the parties before the invalidation notice of 11th June 2021:a.The Respondent through a letter dated 23rd June, 2020 raised a Value Added Tax assessment.b.The Appellant raised an objection to the assessment vide a letter dated 23rd July, 2020. c.An email dated 16th September 2020 where the Respondent informed the Appellant that its objection was not valid for failure to provide accompanying documents. Further, this email requested the Appellant to avail certain documentation within 14 days of the email to enable the Commissioner validate the Appellant’s objection.d.The Appellant’s response to the above email on 28th September 2020 requesting the Respondent for a further 30 days so as to comply with the directions provided.e.An email by the Respondent dated 23rd December, 2020 requesting the Appellant to provide the documents that it had been previously asked for and granting it a further 14 days to provide these documents.f.An email by the Respondent dated 19th February, 2021 that gave the Appellant a further 7 days to provide the requested documents.g.An email dated 23rd February, 2021 referring to a meeting held between the parties in which the Appellant promised to deliver certain documents.h.An email dated 19th March, 2021 where the Respondent reminded the Appellant of a follow up meeting.i.An email dated 11th May, 2021 giving the Appellant 7 final days to validate its objection.

58. Section 51(11) of the Tax Procedures Act, 2015 (2021 version) at the time of the objection stated as follows in regard to issuance of an objection decision by the Commissioner:“The Commissioner shall make the objection decision within sixty days from the date of receipt of-a.the notice of objectionb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed allowed.”

59. The Tribunal notes that, from the chronology of events extracted from the pleadings, the parties were in correspondence regarding documentation that the Appellant committed to submit to the Respondent. It is also clear that the Respondent kept renewing its statutory time limits by incessantly requesting for these documents before the statutory time limit lapsed.

60. A reading of Section 51(11) of the TPA (2021 version) makes it clear that the law (as it was) allowed the Respondent to issue its objection decision within 60 days of receipt of further information that it had requested of the Appellant. In this Appeal, and as shown in the chronology above, the Respondent kept requesting for documents which were never supplied and each request for document reset the time limit for compliance.

61. The last correspondence regarding this matter was issued on 11th May, 2021 wherein the Appellant was directed to supply the required documents within 7days. The Tribunal did not find any evidence on record to prove that the Appellant complied with this request.

62. Considering that there was no further correspondence between parties after the 11th of May 2021, it follows that the 60 days time limit within which the Respondent was required to issue its objection decision under Section 51(11) of the TPA (as the law was at the time of this dispute) began to run on 18th May, 2021. The Respondent was thus required to issue its decision on or before the 17th of July 2021.

63. The Respondent in this Appeal finally issued its decision on 11th June 2021, wherein it confirmed the assessed taxes as due. This decision was issued within the 60 day time line envisaged under Section 51(11) of the Tax Procedures Act.(2021 version)

64. The Tribunal in the circumstances observes that the Respondent’s invalidation decision was issued within the prescribed statutory timelines.

65. It is manifestly clear from the foregoing that the Appellant failed to supply the Respondent with the documents that would have facilitated a proper review of its notice of objection by the Respondent. This is inspite of its having been granted several opportunities and extended time to supply the specific documents that the Respondent required to consider in its review of the notice of objection.

66. The Tribunal notes that the Appellant equally made no attempt to make available the documents requested by the Respondent to the Tribunal for its consideration in the determination of the Appeal.

67. With the Appellant’s failure to produce documents in support of the notice of objection and by extension to challenge the tax assessment, the Appellant has failed to discharge its burden of proof under both Section 51(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

68. In the circumstances the Tribunal finds that the Respondent was justified in the invalidation of the Appellant’s notice of objection for want of production of documents to support the objection.

Final Decision 69. In view of the foregoing, the Tribunal finds that the Appeal is not merited and accordingly makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s invalidation decision dated 11th June, 2021 be and is hereby upheld.c.Each Party to bear its own costs.

70. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTH B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER