[2024] KETAT 36 (KLR)

Waciama Company Limited v Commissioner of Domestic Taxes (Tax Appeal 792 of 2022) [2024] KETAT 36 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 36 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 792 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, BK Terer & W Ongeti, Members

January 26, 2024

Between

Waciama Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act, with its registered offices within the Republic of Kenya. Its main form of business is construction.

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 conducted a review on the Appellant’s VAT returns and raised VAT assessments for May 2021 on 23rd June 2021 on the iTax profile.

4. The Appellant objected to the additional assessments on 28th June 2021 and on 16th December 2021 and 13th January 2022, the Respondent issued Objection decisions invalidating the Appellant’s notice of objection.

5. On receiving the Objection decisions and being aggrieved, the Appellant filed the ensuing Appeal and Memorandum of Appeal dated and filed on 29th July 2022.

The Appeal 6. In its Memorandum of Appeal dated and filed on 29th July 2022, the Appellant premised its Appeal on the following grounds;-a.The Commissioner erred in both law and fact by arbitrarily and retroactively imposing VAT on the variance found between the Income Tax and VAT declared resulting in higher taxation, and applied it retrospectively to the Appellant’s detriment.b.The Respondent breached the Appellant’s right of certainty and regularity of law. The Appellant correctly relied on legitimate expectation, and correctly conducted its affairs by correctly declaring his actual VAT for May 2021. c.The Commissioner opted to punish the Appellant for declaring his actual income the impugned demand by the Respondent contrary to the settled law and facts, therefore, suffering from serious legal infirmity hence unsustainable.d.The Respondent violated the Appellant’s right to fair administrative action and natural justice by acting as investigator, judge and executioner; by assessing correctly and timely filed VAT return, then goes ahead and issues demand notice for the same.e.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.f.The Respondent violated the Appellant’s right to be guaranteed their legitimate expectation that the laid down procedures by issuing an objection decision after 169 days.g.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.

The Appellant’s Case 7. The Appellant set down its case in;a.The Appellant’s Statement of Facts dated and filed on 29th July 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 24th November 2020 and filed on 21st March 2023.

8. It stated that on 24th April 2022, the Appellant’s director, Mr. Lyford fell ill while he was supervising a project in Isiolo and was rushed to Isiolo County Referral Hospital as a diabetic and admitted on 27th April 2022.

9. It averred that the Respondent’s action is actuated by malice aimed at frustrating the Appellant and its business operations and stands to suffer irreparable loss and damage if the orders sought are not granted.

10. It further averred that the Respondent’s action is unreasonable, illegal, ultra vires to its powers and authority as the amount demanded is disputed and has not been ascertained to be due and payable as envisaged in Section 42 of the Tax Procedures Act 2015.

11. It maintained that the Respondent is prohibited from arbitrarily trying to retroactively impose higher taxation and apply it retroactively to the Appellant’s detriment as the Appellant is entitled to rely on the certainty and regularity of law and it relied on legitimate expectation by correctly conducting its affairs as per the Tax Procedures Act 2015.

12. The Appellant identified the following issues for determination:a.Whether the Respondent was right to issue the Objection decision of 16th December 2021, fully rejecting the Appellant’s Objection;b.Whether the Objection decision was made as per the stipulated timelines;c.Whether sufficient documents were provided during the objection stage;d.Whether the Respondent made a correct computation in raising the confirmed assessments;e.Whether the Respondent filed a valid VAT returns inputs (cost of sales); andf.Whether communication was done before assessments were raised and the amended assessments done as per the Tax Procedures Act.

13. The Appellant stipulated that it raised its objection within the stipulated timelines as the Respondent issued the assessment on 23rd June 2021 which the Appellant subsequently objected to on 26th June 2021 then the Respondent rejected the objection on 16th December 2021.

14. The Appellant submitted that the Respondent made an objection decision on 16th December 2021, 170 days after the date of the objection contrary to Section 51 (4) of the Tax Procedures Act which it cited.

15. The Appellant submitted that its tax agent made frantic efforts to remind the Commissioner on the status of the case and requested for meetings to resolve the matter at the objection stage which the Respondent was not interested in and after several attempts at communication, the Respondent still proceeded to make the decision out of time.

16. It argued that the assessments were based on already filed returns which the Appellant accepted was an error it explained to the Respondent.

17. The Appellant submitted that the Respondent rejected its objection while raising assessments on income tax but did not consider any cost of sales of the business despite the Appellant having filed the same on Input VAT for the year in dispute.

18. It cited IAS 11 and 18 submitting that the Respondent ought to have used industries profit margin to arrive at the Appellant’s taxes or at least use Input VAT filed to determine the cost of sales.

19. The Appellant asserted that the Respondent ought to have realized that the Appellant had been filing VAT returns for the years 2015, 2016, and 2017 therefore having valid purchases and expenses and used the same to ascertain the true tax position of the Appellant.

20. The Appellant submitted that the Respondent never gave the Appellant any notice of intention to raise assessments or come for an audit and when the Respondent was raising 2017 assessments, it opted to file self-assessments followed by additional assessments for the Appellant without considering the fact that VAT taxes were filed on claiming inputs contrary to Section 31 (2), (4) (b) (i) and (5) of the Tax Procedures Act.

The Appellant’s Prayers 21. The Appellant prayed for orders that the Honourable Tribunal:a.Varies the assessments and objection decision raised by the Respondent.b.Be pleased to substitute the assessment under review herein.c.Be pleased to order the Respondent to pay costs of this Appeal to the Appellant.d.Be pleased to issue any other order favorable to the Appellant as it may find just.

The Respondent’s Case 22. The Respondent’s case is premised on;a.Respondent’s Statement of Facts dated and filed on 27th August 2022 together with documents attached thereto.b.Respondent’s written submissions dated and filed 7th March 2023.

23. The Respondent stated that it requested the Appellant to validate its Objection and provide documents vide emails sent on 26th November 2021 and 2nd December 2021. It added that the Appellant failed to avail supporting documents to validate its objection to the assessment and merely objected to the same on iTax without providing any supporting documents in contravention of Section 51 (3) of the Tax Procedures Act.

24. It averred that in the absence of supporting documents, grounds of the objection, reasons for any delay, the Appellant’s notice of objection was therefore invalid and the Respondent had no option but to confirm the assessment as issued.

25. The Respondent set down its case in its submissions dated 7th March 2023 where it reiterated that upon conducting a review on the Appellant’s VAT returns it noted that the Appellant had under-declared sales.

26. The Respondent relied on the following cases:a.Ivita vs. Kyumba (1984) KLR 441 where the court held:“The test applied by the Courts in an application for dismissal of a suit for want of prosecution is whether the delay is prolonged and inexcusable and if it is, whether justice can be done despite the delay. Thus, even if the delay is prolonged, if the court is satisfied with the plaintiff’s excuse for the delay and that justice can still be done, it will be ordered that it be set down for hearing at the earliest time...”b.St. Patrick’s Hill School vs. Bank of Africa Kenya Ltd [2018] eKLR where it was stated:“In order to ensure equality before the law under Article 27 (1) of the constitution when the rights and duties of any person are being determined by the court or any independent tribunal, that person shall be entitled to a fair hearing.”c.Philip Chemwolo & Another vs. Augustine Kubende [1986] where Apaloo J.A reiterated:“Blunders will continue to be made from time to time and it does not follow that because a mistake has been made that a party should suffer the penalty of not having his case determined on its merits. I think the broad equity approach to this matter is that unless there is fraud or intention to overreach, there is no error or default that cannot be put right by payment of costs. The court, as is often said, exists for the purpose of deciding the rights of the parties and not for the purpose of imposing discipline. ”d.Republic vs. District Land Registrar, Uasin Gishu & Another (2014) eKLR where the court stated as follows:“To my mind, Justice is not dependent on Rules or technical procedures. Justice is about the right thing. Pursuant to Article 159 (2) (d) of the Constitution; “ In exercising Judicial authority, the courts and tribunals shall be guided by the following principles- ….............. (d) Justice shall be administered without undue regard to procedural technicalities …”

27. It argued that in its delay, no prejudice has been suffered by the Appellant vis a vis the prejudice that shall be suffered by the Respondent should it be found that the taxes due were payable.

The Respondent’s prayers 28. The Respondent, therefore, prayed for the Tribunal to find that:a.The notice of objection is invalid for want of compliance with Section 51 (3).b.The Appellant be compelled to issue a valid notice of objection and the Commissioner does issue an objection decision.c.This Appeal be dismissed.d.The Appellant be compelled to pay costs to the Respondent.

Issues For Determination 29. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal puts forth the following issue for determination:Whether the Respondent erred in issuing the Objection Decision of 14th March 2020.

Analysis And Findings 30. The Tribunal wishes to analyze the issue as herein under.

31. The Respondent stated that it requested the Appellant to validate its Objection and provide documents vide emails sent on 26th November 2021 and 2nd December 2021. It added that the Appellant failed to avail supporting documents to validate its objection to the assessment and merely objected to the same on iTax without providing any supporting documents in contravention of Section 51 (3) of the Tax Procedures Act.

32. The Appellant submitted that its tax agent made frantic efforts to remind the Commissioner on the status of the case and requested meetings to resolve the matter at the objection stage to which the Respondent was not interested in and after several attempts at communication, the Respondent still proceeded to make the decision out of time.

33. Section 51 of the Tax Procedures Act of 2015 provides as follows with regard to objection proceedings:-“(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if —(a)The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)In relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1).(c)All the relevant documents relating to the objection have been submitted.(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

34. The Tribunal notes that the Respondent issued a confirmation assessment notice via iTax on 16th December 2021 followed by an objection decision vide a letter dated 13th January 2022 fully rejecting the Appellant’s objection for being invalidly lodged, which was 113 days beyond the date when the same ought to have been issued.

35. It was the Respondent’s argument, admittedly so that whereas there was delay in issuing its objection decision, that there was no prejudice that the Appellant would suffer from such delay compared to the prejudice the Respondent was bound to suffer in the event the objection decision is not upheld by the Tribunal.

36. The Appellant submitted that the Respondent never communicated to it that its objection was invalid in order to allow it to correct the defect which fact the Respondent did not dispute.

37. In regard to issuance of objection decisions Section 51 (11) of the TPA requires the Respondent to issue an objection decision within sixty days of receipt of the notice of objection or of the last request for documents or information, in default by operation of the law the Appellant’s objection is deemed allowed.

38. The Tribunal finds that the Respondent acted in contravention of Section 51 (11) of the Tax Procedures Act (supra), and in so doing, the late objection decision was time-barred.

Final Decision 39. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following Orders;-a.The Appeal is hereby allowed.b.The objection decision dated 13th January 2022 be and is hereby set aside.c.Each party to bear its own costs.

40. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONIFACE K. TERER - MEMBERDR. WALTER ONGETI - MEMBER