[2024] KETAT 940 (KLR)

Velmac Furniture Enterprises & 2 others v Commissioner of Domestic Taxes (Tax Appeal E299 of 2023) [2024] KETAT 940 (KLR) (19 July 2024) (Judgment)

Neutral citation: [2024] KETAT 940 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E299 of 2023

RM Mutuma, Chair, AM Diriye, M Makau, B Gitari & EN Njeru, Members

July 19, 2024

Between

Velmac Furniture Enterprises

1st Appellant

Joseph Ikaru

2nd Appellant

Rahab Wangu Buku

3rd Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The 2nd and 3rd Appellants operate partnership in the name and style of Velmac Furniture Enterprises (1st Appellant) (collectively herein referred to as ‘Appellants’). The partnership is a registered Company and a tax payer in Kenya based in Mombasa. The partnership has operations both in Mombasa and in Nairobi and deals in the manufacture and sale of furniture.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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 commenced investigations against the Appellants on allegations that they were claiming fraudulent purchases in their VAT returns. The investigation covered the period between 2015 to 2020 covering corporation tax and VAT.

4. The Respondent vide a letter dated 31st December 2021 issued the Appellants with tax investigations findings for Kshs. 51,432,577. 00. Consequently, The Appellants were served with VAT and income tax assessments orders dated 26th January 2022, 20th July 2022, 29th June 2022, and 30th June 2022.

5. The Appellants lodged an objection dated 27th July 2022, objecting to the assessment in its entirety. The Respondent invalidated the objection and issued a letter dated 12th October 2022 confirming the assessments.

6. Aggrieved by the Respondent’s decision, the Appellants filed this Appeal vide a Notice of Appeal dated 29th March 2023 and filed with the Tribunal on 14th June 2023.

THE APPEAL 7. The Appeal as contained in the Memorandum of Appeal dated 29th March 2023 and filed on 14th June 2023 raised the following grounds:a.That the Respondent erred in law and fact by failing to consider the material evidence, to review the documents provided and objections tendered therein.b.That the Respondent erred in law and fact proceeding with additional assessment without notice to the Appellants.c.That the Respondent erred in failing to consider properly the submissions made by the Appellants.d.That the Respondent erred both in law and fact failing to make any or any proper findings on the evidence before him.e.That the Commissioner erred in law, and fact in considering issues that were extraneous to the matter.

THE APPELLANTS CASE 8. The Appellants based their case on its Statement of Facts filed on 14th June 2023 together with the documents attached thereto.

9. The Appellants stated that on 30th December 2021, the Respondent issued findings from the just concluded compliance verification that resulted to a tax liability for the partnership amounting to Kshs. 16,790,277. 00 arising from alleged significant under-declaration of income in VAT. A tax liability for 3rd Appellant amounted to Kshs. 7,324,085. 00 arising from alleged significant under declaration of income tax. A further tax liability on 2nd Appellant amounted to Kshs. 17,318,215. 00 arising from alleged significant under-declaration of income tax. The total tax liability for both the partnership and the partners amounted to Kshs. 51,432,577. 00.

10. The Appellants stated that they started engaging the Respondent on 10th and 12th January 2022 regarding the findings and scheduled a meeting with relevant documents it had requested.

11. The Appellants further stated that on 29th June 2022 and 20th July 2022 the Respondent served them additional assessments demanding tax liability of Kshs. 17,255,260. 90; Kshs. 17,525,763. 00 and Kshs. 17,533,930. 00 for the partnership, 2nd and 3rd Appellant respectively totaling up to tax demand of Kshs. 52,314,953. 90.

12. The Appellants averred that they were dissatisfied with the assessment and lodged an objection on 27th July 2022 leading to the Respondent confirming the assessment.

13. According to the Appellants, the additional assessment was lodged in error as the Respondent failed to review the documents preceded despite the Appellants providing all the requested documents and information, including valid objections to assessment. The Appellants argued that they availed themselves for a meeting and agreed to present documents to the Respondent who was already in communication with the Appellants’ auditor during the period doing reconciliations. The Appellants further stated that they were therefore surprised when additional assessment was issued without the parties again sitting to discuss the findings.

14. The Appellants averred that the Respondent’s major decision that raised the assessment was on purchases claimed during VAT. They stated that they presented the supportive documents for the same and further asked the Respondent to verify the supplies through statements and proof of payments. They argued that the Respondent did not consider the documents but ignored the same leading to the high tax demanded on the partnership PIN.

15. The Appellants maintained that the Respondent’s decision on income tax liability demanded was derived from the Appellants’ bank reconciliation with detailed explanations to support the variance found. The Appellants further argued that the Respondent failed to consider this fact and proceeded to assess and demand tax from original tax finding.

16. The Appellants stated that the Respondent failed to consider the documents and information given even after the Notice of Objection and a further request by the Appellants to have the assessment reviewed.

17. The Appellants stated that the Respondent erred in law and fact by deeming the compliance verification findings as an additional assessment. The Appellants further stated that nothing in additional assessment significantly changed in terms of amounts, and inconsistent claims of income and inputs yet the Appellants availed all documents and explanations.

The Appellant’s Prayers 18. The Appellants prayed for the following orders that this Appeal be allowed and the decision of 20th July 2022 be set aside with costs to Appellants.

THE RESPONDENT’S CASE 19. The Respondent’s case is premised on its;a.Statement of facts dated and filed on 14th July 2023 and the documents attached thereto;b.Written submissions dated 20th April 2024 and filed on 23rd April 2024; and,c.Preliminary Objection dated and filed on 14th July 2023.

20. The Responded in its preliminary objection raised the following grounds:a.That the Appellants failed to file Memorandum of Appeal within the statutory timelines in contradiction to Section 52 (1) and Section 52 (2) of the Tax Procedures Act as read together with Part lIl of the Tax Appeals Tribunal Act thus in contravention of the law.b.That the Appellants have failed to file an application seeking for leave to file its Memorandum of Appeal out of time as set out in Section 13 (3) & (4) of the Tax Appeals Tribunal Act.c.That the Application is therefore an abuse of the process and a waste of resources.d.That the suit is fatally defective and must fail.

21. The Respondent stated that it commenced investigations on Corporation Tax and VAT against Velmac Furniture Enterprises, 2nd Appellant and 3rd Appellant on allegations that the Appellants were claiming fraudulent purchases in its VAT returns. It is alleged that one of the companies that the Appellants claimed from was Malvi Enterprises which wrote to the Respondent stating that the Appellants were making false claims from their company.

22. With regards purchases claimed from Malvi Enterprises, the Respondent averred that it used the Banking Method whereby the Respondent requested for bank statements from the partnership’s bankers, which included Cooperative bank, Absa Bank, KCB Bank and Equity Bank. Analysis of the bank statements received revealed that the Partners’ bank accounts were also used for business transactions and that the Appellants were dealing in significant cash transactions; and that they made payments mainly through cheques and Mpesa withdrawals.

23. The Respondent also stated that based on the findings above, it proceeded to analyze the partners’ accounts held at Equity bank. Cooperative Bank and KCB. From the analysis. The Respondent noted that the Appellants were claiming significantly higher purchases than the supplier’s sales declared.

24. With regards to Crater Automobiles, the Respondent established that there was no significant variances with respect to what the Appellants had declared as purchases and the company’s sales.

25. With regards to Bobmil Industries Ltd- from the analysis, the Respondent found that the Appellants had overstated the amounts of the actual invoices during filing of its VAT returns in order to reduce their VAT liability.

26. With regard to Megha Marketing Ltd, the supplier stated that the Appellants were cash purchasers and therefore they had no account for them.

27. The analysis found that the Appellants were claiming significantly more than the actual purchases amounts. The Respondent asserted that the variances between the purchases claimed and sales declared by the subsequent suppliers for the period under review were disallowed and subjected to VAT.

28. Having verified the correct vatable purchases of the Appellants through third party verification and Insight tool, the Respondent stated that it proceeded to compare the same to the purchases claimed by the Appellants in its Income Tax returns. According to the Respondent, the outcome showed that the Appellants had overstated purchases in its Income Tax returns. The same was disallowed and subjected to Income Tax.

29. In response to allegations that the Respondent did not use the documents availed, the Respondent maintained that that it carried out over four tests to determine the Appellants tax position, that it relied on information from third parties, and that it used banking analysis. It stated that this Tribunal as well as courts of law have found no fault in the Respondent’s use of the banking analysis method. According to the Respondent, due to lack of additional supporting documents from the Appellant, it proceeded to use its best judgment to arrive at the correct tax position. The Respondent therefore, averred that the tax decision is sensible, reasonable and procedurally fair.

30. In response to a claim that the Respondent erred by failing to include the reasons for the decision as required under Section 51 (10) the Tax procedures Act 2015, the Respondent stated that there are no minimum prescriptions on what the statement of findings entails and the reasons. In that regard, the content to be communicated to the Appellants is discretionary provided that the same constitutes ‘statements of findings’ and ‘reasons for the decision’ in communicating to the taxpayer.

31. In its written submissions, the Respondent identified four issues for determination as follows:i.Whether there is a valid Appeal for consideration by the Tribunal;ii.Whether there is a valid objection;iii.Whether the Respondent validly disallowed the late objection; and,iv.Whether the Respondent considered all the documents presented.

32. On whether there is a valid Appeal for consideration by the Tribunal, the Respondent relied on Section 13 (1) of the Tax Tribunal Act 2015 to submit that the instant Appeal is not properly on record as the same is based on an invalid Notice of Appeal. It argued that the Appeal was filed with non-adherence to Section 51 and Section 52 (1) of the Tax Procedures Act No. 29 of 2015 and Sections 12 and Section 13 (1), (2), (3) and (4) of the Tax Appeals Tribunal Act. It submitted that the Appellants filed the Appeal herein beyond statutory timeframe without leave.

33. In support of this issue, the Respondent cited the case of Omnispace Limited vs. Commissioner for Customs and Border Control TAT No. 780 of 2022 wherein the Tribunal in affirmed the position that;“The Tribunal finds that the Appeal herein was lodged beyond the statutorily prescribed period and is therefore incompetent and untenable in law.”

34. The Respondent also relied on Tangazo Letu Limited vs. the Commissioner of Investigations and Enforcement Appeals Tribunal No. 21 of 2018 where the Tribunal while dismissing the Appeal held as follows;“We find that the procedural guidelines enshrined in the Tax Appeals Tribunal Act and the Tax Procedures Act, among other tax legislations, are not merely instructive but a guide in achieving substantive justice. These rules cannot be cast aside in the quest for achieving substantive justice, as they have deeper roots in the Constitution of Kenya, 2010 to safeguard due process. Accordingly, we are of the considered view that the Appeal herein is improperly before the Tribunal.”

35. On whether there is a valid objection, the Respondent submitted that there was no valid objection to the assessment because the objection did not comply with Section 51 (3) of the Tax Procedures Act. The Respondent argued that in compliance with Section 51 (4) of the Tax Procedure Act, it informed the Appellants that its objection was invalid and sought for documentation to validate the objection but Appellants failed to do so.

36. The Respondent relied on the case of Boleyn International Limited vs. Commissioner of Domestic Taxes TAT No. 55 of 2019 it was held;“on 8th March 2O18, the Appellant lodged an objection with the Respondent. However, the said objection did not reiterate the grounds of objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide the relevant documents in support of its alleged objection. Therefore, there was no conceivable way the Respondent would have considered the Appellant's objection as the same did not place itself within the parameters of Section 51 (3) of the Tax Procedures Act.”

37. On burden of proof, the Respondent submitted that the Appellants failed to discharge burden of proof. It submitted that the Appellants failed to comply with Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act which places the burden of proof on the taxpayer.

38. The Respondent relied on Ngurumani Traders Limited vs. Commissioner of Investigations and Enforcement TAT No. 125 of 2017 where this Tribunal held at Paragraph 40 of its judgement that;“From the foregoing the Appellant’s failure to lodge a proper objection meant that the Respondent was at liberty to confirm the assessment. Measured against the provisions of Section 51 (3) of the Act, the Appellant’s conduct ad manner of lodging the objection fell considerably short of the permissible statutory requirements under Section 51 (3) of the Tax Procedures Act, 2015. It would be fundamentally non-justifiable for this Tribunal to entertain this preliminary objection, taking into account the Appellant’s flagrant non-compliance with the law on raising objections.’’

39. Further the Respondent insisted that the Respondent has to discharge the burden of proof. It relied on Section 107 of the Evidence Act which states that:‘‘(1) Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

40. On whether the Respondent validly disallowed the late objection, the Respondent submitted that the Appellants failed to provide documents in support of its objection therefore, the objection did not comply with Section 51 (3) of the Tax Procedures Act, 2015. Therefore, the Respondent maintained that was right in disallowing the late objection Application for lack of any supporting document.

41. On whether the Respondent considered all the documents presented, the Respondent submitted that it considered all documents that the Appellants provided.

Respondent’s prayers 42. The Respondent prayed for the following orders:a.The Tribunal upholds the Respondent’s decision dated 12th October 2022; and,b.The Honourable Tribunal dismisses the Appeal with costs borne by the Appellant.

ISSUES FOR DETERMINATION 43. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, witness statements, and written submissions, puts forth the following issue for determination:i.Whether the Preliminary Objection on points of law raised by the Respondent are justified;ii.Whether the Respondent was justified in invalidating Appellant’s Notice of Objection; and,iii.Whether part of the assessments are statutorily time barred.

ANALYSIS AND FINDINGS 44. The Tribunal having issues for determination, it shall analyse the same as herein under;i.Whether the Preliminary Objection on points of law raised by the Respondent are justified;

45. The Respondent raised a preliminary objection on point of law outlining the following grounds;a.That the Appellants failed to file Memorandum of Appeal within the statutory timelines in contradiction to Section 52 (1) and Section 52 (2) of the Tax Procedures Act as read together with Part lIl of the Tax Appeals Tribunal Act thus in contravention of the law.b.That the Appellants have failed to file an application seeking for leave to file its Memorandum of Appeal out of time as set out in Section 13 (3) & (4) of the Tax Appeals Tribunal Act.c.That the Application is therefore an abuse of the process and a waste of resources.d.That the suit is fatally defective and must fail.

46. As regards the first ground of the preliminary objection, Section 52 of the Tax Procedure Act provides;“(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013. (2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

47. The Tribunal has canvassed the Respondent’s pleadings and submissions and has observed that whereas the issues relating to the deficiencies attributable to Section 52 (1) and (2) of the TPA have been raised in the preliminary objection, the same have not been addressed by the Respondent. More particularly, the Respondent has been unable to demonstrate the undisputed taxes that the Appellant has failed to pay prior to institution of the Appeal.

48. On the second limb of the preliminary objection, Section 13 (3) and (4) of the Tax Appeals Tribunal Act 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.’’

49. The Tribunal has perused the record and observed that the Appellants Notice of Appeal was lodged on 29th March 2023, while the Memorandum of Appeal and appeal documents were filed on 14th June 2023, the same being lodged 63 days late as contemplated under Section 13 (2) of the Tax Appeals Tribunal Act.

50. Section 13 (2) of the Tax Appeals Tribunal provides as follows:‘‘(2) The Appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)A memorandum of appeal;(b)Statements of facts;(c)The appealable decision.’’

51. From the record, the Tribunal noted that there is no evidence indicating that that the Appellants sought leave to file their Memorandum of Appeal and appeal documents out of time.

52. The Tribunal reiterates its holding on the question of timelines in W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT Case No.247 of 2020] where it was held at paragraph 70 while reiterating the holding in Krystalline Salt Ltd vs. KRA [2019] eKLR that: -“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

53. In absence of evidence indicating that the Appellants sought and were granted leave to file Memorandum of Appeal and appeal documents out of time, the Memorandum of Appeal and appeal documents are improperly on record, ripe for being expunged and therefore the Appeal is fatally defective as it is not supported by a Memorandum of Appeal, Statement of Facts, tax decision and documents.

54. Having thus determined that the Appeal is defective, the Tribunal shall uphold the Respondent preliminary objection dated 14th July 2023 and finds that the instant Appeal is incompetent.

55. In view of the foregoing, the Tribunal shall not delve into the other two issues for determination as the same have been rendered moot.

DETERMINATION 56. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is incompetent and consequently makes the following orders; -a.The Appeal be and is hereby struck out; and,b.Each party to bear its own costs.

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF JULY 2024ROBERT M. MUTUMACHAIRMANABDULLAHI DIRIYE MUTISO MAKAUMEMBERBERNADETTE M. GITARI ELISHAH N. NJERUMEMBER