[2024] KETAT 431 (KLR)

Unibee Construction Company Limited v Commissioner of Legal Services (Tax Appeal 35 of 2023) [2024] KETAT 431 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 431 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 35 of 2023

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

March 22, 2024

Between

Unibee Construction Company Limited

Appellant

and

Commissioner of Legal Services

Respondent

Judgment

1. The Appellant is a limited company registered under the Companies Act and whose principal business is in construction.

2. The Respondent is the 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 Respondent carried out an audit of the Appellant’s affairs and it issued an assessment dated 31st August 2022.

4. The Appellant objected to the assessment on 29th September 2022 and the Respondent issued its objection decision on 30th December 2022.

5. Aggrieved by the objection decision, the Appellant filed the Appeal vide a Notice of Appeal dated and filed on 27th January 2023.

The Appeal 6. The Appellant set out its Appeal in its Memorandum of Appeal dated and filed on 13th February 2023 and stated the following as its grounds of Appeal:a.The Respondent erred in law and fact by wrongfully deeming the bank credits as sales and charging tax.b.The Respondent is in violation of Section 15(1) of the Income Tax Act.c.The Respondent erred in law by wrongfully ignoring Section 29(1) and(5)of the TPA.d.The Respondent is in violation of Section 109 of the Evidence Act which states that the burden of proof as to any particular act lies on the person who wishes the court to believe in its existence.e.The Respondent erred in law and fact by wrongly ignoring Section 31(3) of the TPA.f.The Respondent erred in fact by failing to acknowledge the reconciliations availed by the Appellant which clearly showed how sales were accounted for by the Appellant.

The Appellant’s Case 7. The Appellant stated its case in its Statement of Facts dated and filed on 13th February 2023 and the written submission filed on 13th October 2023.

8. The Appellant stated that it filed self-assessment returns for both VAT and income tax for the years 2016 to 2021 and also attached the sales ledger z-report and other supporting documents in support of its objection.

9. The Appellant contended that the Respondent erred and contravened Section 3(1) and (2) of the ITA when it charged tax on its bankings at the rate of 30% and yet bankings are not net gains. That it had explained this contention to the Respondent during their meetings and it also provided the supporting documents to prove its point. It supported this argument with the cases of:a.Republic v. Commissioner of Income Tax ex-parte SDV Transami (Kenya) .b.Republic v Commissioner of Domestic Taxes large Tax Payers Office Ex parte Barclays Bank of Kenya Ltd .

10. It argued that the Respondent had misapplied the banking analysis and supported its argument with the cases of:a.Hole v The Queen, 2016 TCC 5. b.Digital Box Limited v Commissioner of Domestic Taxes, TAT 115 OF 2017.

11. The Respondent stated that it amended its assessment and also provided all the documents which were requested via email but the Respondent did not acknowledge the documents.

12. That the Respondent acted in bad faith and denied its right to a fair hearing by disregarding the documents and reconciliations presented which was a clear violation of Article 47 of the Constitution.

13. The Appellant stated that it discharged its burden of proof by producing supporting documents and workings to prove that the assessment was erroneous.

14. The Appellant asserted that the assessment in question demanded tax for 8 years which went beyond the 5-year limit prescribed in Section 29 of the TPA. That the burden to prove that the Appellant was involved in fraud to justify an assessment beyond the 5-year limit lay with the Respondent.

15. The Appellant asserted that the Respondent violated Section 51(4) of the TPA because it did not issue its invalidation immediately. It supported its opinion with the decision in TAT No. 1 of 2017 Associated Battery Manufacturers Limited v Commissioner of Customs Services.

16. The Appellant also argued that the objection decision was invalid as it contravened Section 51(11) of the TPA given the fact that it was issued beyond the 60-day limit period. It supported its argument for the invalidation of the objection decion with the following cases of Republic v Commissioner of Domestic Taxes ex-parte SDV Transami (Kenay) Limited and Republic v Commissioner of Domestic Taxes Large Taxpayers Office Ex-parte Barclays Bank of Kenya.

Appellant’s Prayers 17. The Appellant's prayers to the Tribunal were for orders:a.That the Tribunal allows the Appeal,b.That the Tribunal be pleased to order the Respondent to pay the costs of this Appeal.c.That the Tribunal be pleased to issue any other Order favourable to the Appellant as it may find just.

Respondent’s Case 18. The Respondent opposed this Appeal with the support of its Statement of Facts dated the 5th April, 2023 and filed on 6th April, 2023 and written submissions filed on the 16th October, 2023.

19. The Respondent stated that the Appellant provided schedules showing higher expenses as compared to the expenses claimed in the Appellant’s financial statement. That it supported expenses like some of the materials, fuel, vehicle and allowances using receipts and vouchers but the Respondent could not establish if they were indeed of a business nature or were fully utilized in the generation of the Appellant's taxable income.

20. The Respondent stated that the Appellant did not object to the VAT assessment and thus the same was sustained as raised and fully confirmed.

21. The Respondent averred that the Appellant did not provide any supporting documentation for the PAYE objection and hence the objection was fully rejected.

22. The Respondent stated that the Appellant introduced a new ledger for the tax period 2017, however, failed to avail supporting documents as per the communications and timelines given.

23. That the general ledgers availed by the Appellant were a combination of all expenses incurred for each period separately.

24. The Respondent urged that the purchases claimed by the Appellant in the income tax company returns revealed variances and the overstated amounts were not supported.

25. The Respondent contended that it is empowered to use its best judgment to arrive at a tax decision as provided in Section 30 (1) of the Tax Procedures Act. That in the circumstances it applied its best judgment considering that the Appellant did not amend its assessment.

26. The Respondent averred that it reviewed all the documents provided by the Appellant in its objection before coming up with the objection decision.

27. The Respondent stated that under Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on theAppellant to demonstrate that the Respondent’s decision was incorrect.

28. The Respondent contended that the Appellant failed to demonstrate why VAT should not be charged on the undeclared income from the sale of motor vehicles.

29. The Respondent asserted that it made its assessment beyond the 5-year limit period because the Appellant had knowingly and fraudulently understated its tax liability and also not filed its tax returns as required under the Tax Procedures Act, 2015.

30. The Respondent maintained that the Appellant was misguided in lodging this Appeal since the objection decision was given after review of the supporting documents provided by the Appellant.

31. The Respondent urged the Tribunal to find that there is no valid Appeal before it and thereafter to proceed to dismiss the prayers sought by the Appellant in its Memorandum of Appeal.

Respondent’s Prayers 32. The Respondent prayed that the Tribunal do:a.Uphold its objection decision dated 30th December 2022 as proper and in conformity with the provisions of the law.b.Dismiss the Appeal with costs.

Issues for Determination 33. The issues that have presented themselves for determination from the evidence submitted by the parties before the Tribunal are:a.Whether the Respondent’s objection decision was justifiedb.Whether the Respondent’s assessment was justified.

Analysis and Determination 34. The Tribunal upon identifying the issues falling for its determination proceeds to analyze the same as hereunder.

a. Whether the Respondent’s Objection Decision was valid 35. The Appellant was of the view that the Respondent breached the provisions of Section 51(11) of the TPA because its objection decision was issued outside the 60-day statutory period.

36. The Respondent on its part stated that it had invalidated the Appellant’s objection with the resultant consequence that there was no valid appeal before the Tribunal.

37. The documents on record in this Appeal paint the following picture:i.The letter of assessment was issued on the 31st August 2022. ii.It is agreed by both parties that the objection was lodged on 29th September 2022. ii.The objection decision was issued on 30th December 2022.

38. The Respondent has made reference to an invalidation notice dated 13th October 2022 and its argument revolved around this invalidation notice and yet it never bothered to file it to support its argument.

39. The Appellant displaced this argument when it asserted severally, that the communication it received from the Respondent after lodging its objection was an objection decision and not an invalidation that the Respondent has incessantly referred to.

40. The Tribunal is not able to make a determination on this validation letter because it was not filed by the party relying on it. It would thus be difficult to make a decision on the validity, veracity and or existence of an invalidation notice that it never sighted.

41. As it is, the parties agree that the objection was lodged on the 29th September 2022 and a decision issued thereof on the 30th December 2022.

42. Section 51(11) of the TPA provides as follows regarding timelines for issuing objection decisions:“The Commissioner shall make the objection decision within sixty days from the date of receipt of—a.the notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

43. By dint of Section 51(11) of the TPA, the objection decision herein should have been issued on or before the 28th November 2022. It was instead issued late by about 32 days.

44. The Tribunal stated in Judgment- Appeal No. 207 Of 2022 – Ibangua Investments Co. Ltd –Versus- The Commissioner Of Domestic Taxes as follows with regards to the compliance of timelines that are prescribed under Section 51(11) of the TPA:“The Tribunal finds and holds that the Objection decision dated the 28th January 2022 was issued beyond the prescribed statutory time limit. It is thus invalid for reasons that it has breached the mandatory provisions of Section 51(11) of the TPA which is couched in peremptory terms.”

45. Accordingly, based on the Respondent’s laches, lack of a discernible intervening event that can cause the re-computation of time as is envisaged in Section 51(11)(b) of the TPA and guided by the decision of the Tribunal in Ibangua Investment Co Ltd (supra), the Tribunal hereby finds and holds that the Respondent’s objection decision dated 30th December 2022 is invalid for breaching peremptory provisions of Section 51(11) of the TPA.

46. Having held that the Objection decision is a nullity, the Tribunal did not delve into the second issue that fell for determination as it has been rendered moot.

Final Decision 47. The upshot of the foregoing is that the Appellant’s Appeal succeeds and the Tribunal proceeds to issue the following Orders;a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 30th December 2022 be and is hereby set aside.c.Each party is to bear its own costs.

48. It is so ordered.

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