[2024] KETAT 1599 (KLR)

Zhao v Commissioner, Investigations and Enforcement Department (Appeal E208 of 2024) [2024] KETAT 1599 (KLR) (Commercial and Tax) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1599 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal E208 of 2024

E.N Wafula, Chair, G Ogaga, AK Kiprotich & RO Oluoch, Members

November 22, 2024

Between

Hanqing Zhao

Appellant

and

The Commissioner, Investigations and Enforcement Department

Respondent

Judgment

1. The Appellant is an individual taxpayer dealing in general supplies.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Respondent 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 dispute in this Appeal arose when the Respondent investigated the affairs of the Appellant for the period 2018 to 2023 and subsequently issued him with a notice of assessment dated 7th September 2023 for taxes totaling Kshs 1,136,144,299. 00.

4. The Appellant objected to the assessment and the Respondent issued a decision on 29th January 2023.

5. Aggrieved by the Respondent’s decision, the Appellant lodged its Notice of Appeal dated 18th February 2024 and filed on 20th February 2024.

The Appeal 6. The Appellant’s Appeal is premised on its Memorandum of Appeal dated 18th February 2024 and filed on 20th February 2024. The said Appeal was premised on the following grounds:a.That the Respondent did not give the basis of the assessments thus contravening Article 47(1) and (2) of the Constitution of Kenya and thus denying the Appellant his rights to fair administrative action.b.That the Respondent’s Objection decision issued on 29th January 2024 was 122 days from the date of the notice of objection. The Objection decision was not issued within 60 days of objecting as provided for under Section 51(11) of the Tax Procedures Act.c.That the Respondent in his Objection decision acknowledges 30th November 2023 as the date of objection. This is not true as no objection application regarding VAT was done on 30th November 2023 but on 29th September 2023. d.That the Appellant is not registered for VAT obligation however the Commissioner assessed him without first applying Section 34(6) of the VAT Act which requires that the Commissioner shall register a person if satisfied that the person is eligible for registration and has not done so within the time limits.e.That the Appellant could not object to VAT assessment through the ITax platform as the same has not been uploaded to this date.f.That the Respondent issued an objection decision disregarding Section 15 of the Income Tax Act as the Appellant was not allowed the cost of doing business.g.That the Respondent disregarded the Appellant’s workings, explanations and documents provided in support of the objection.h.That the tax decision is excessive and punitive and will adversely affect the Appellant’s business if not reversed.

Appellant’s Case 7. The Appellant set out its case on its Statement of Facts dated 18th February 2024 and filed on 20th February 2024 and Written Submissions dated and filed on 10th September 2024.

8. The Appellant stated that the Respondent issued it with an Income tax assessment for the periods 2018, 2019, 2020, 2021, and 2022 totalling to Kshs. 653,371,807. 00 on 7th September 2023 and VAT additional assessment for the periods 2018, 2019, 2020, 2021, 2022, 2023 totalling Kshs. 482,772,492. 00 on 7th September 2023.

9. That he objected to the assessments on 29th September 2023 and he was subsequently issued with a demand notice dated 8th November 2023 wherein the Respondent demanded the entire objected Income tax plus interest and penalties despite there being no Objection decision.

10. The Appellant averred that it filed its application for late objection on 30th November 2023 on the grounds that he had already filed his objection to the assessment on 29th September 2023 through email.

11. The Respondent issued its objection decision fully rejecting the Appellant’s objection and confirming the taxes of Kshs. 1,129,243,870. 00 on 29th January 2024.

12. The Appellant stated that he was not registered for VAT Obligation as of the date of this Appeal. That he could thus not be assessed for VAT.

13. That the Respondent erred in law and in fact by disallowing expenses which were wholly and exclusively incurred in making the income in violation of Section 15 of Income Tax Act, Cap 470.

14. The Appellant identified the following issues for determination in this Appeal:i.Whether the Respondent’s objection decision was issued out of time.ii.Whether the Respondent misapplied section 15 of Income Tax Act, Cap 470 by disallowing expenses which were wholly and exclusively incurred in making the income in violation of section 15 of Income Tax Act, Cap 470. iii.Whether the Respondent erred in assessing the Appellant for VAT before registering him.i.Whether the Respondent’s objection decision was issued out of time.

15. The Appellant averred that the Respondent’s Objection decision was late by about 122 days contrary to Section 51(11) of the Tax Procedures Act which mandatorily requires the Commissioner to make the objection decision within 60 days from the date of receipt of the notice of objection.

16. That Section 51(8) of the TPA obligates the Commissioner, where a notice of objection has been validly lodged within time, to consider the objection and decide either to allow the objection in whole or in part or disallow it.

17. The Appellant posited that he filed his objection in response to the Respondent’s assessment on 30th November 2023. That the said objection was copied to the following email addresses of the officers who were handling his assessment: Kennedy.Wakoli@kra.go.ke, Koech.William@kra.go.ke and Masna.Abdi@kra.go.ke

18. That the failure of these officers to respond to the said objection in time binds the Respondent as was stated in the case of Royal British Bank v Turquand (1856) 6 E&B 327 and buttressed in the cases of Ex-Parte M-kopa Kenya Limited (supra) and Vivio Energy Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority & another [2020] eKLR.ii.Whether the Respondent misapplied Section 15 of Income Tax Act, Cap 470 by disallowing expenses which were wholly and exclusively incurred in making the income in violation of Section 15 of income Tax Act, Cap 470

19. The Appellant averred that the Respondent misapplied Section 15 of the Income Tax Act, Cap 470 by disallowing expenses which were wholly and exclusively incurred in making the income.iii.Whether the Respondent erred in assessing the Appellant for VAT before registering him.

20. That the Respondent abused power by assessing him for VAT without first applying Section 34(6) of the VAT Act which states that the Commissioner shall register a person if satisfied that the person is eligible for registration and has not done so within the time limits.

21. The Appellant further submitted that the Commissioner contravened Article 47(1) of the Constitution which states “Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.”

22. That the Respondent did not explain to him the reasons why he was being assessed for VAT without being registered first as required by the VAT Act.

23. The Appellant submitted that the Respondent registered him for VAT obligation on 25th March 2024 which was 7 months after the assessment was done.

24. The Appellant postulated that the VAT assessment has not been uploaded onto his Itax portal to date. That the Respondent’s objection decision is thus not valid as no application in relation to VAT objection was done on 30th November 2023.

25. That the Respondent erred in its attempt to tax it without following the laid down procedures as he was supposed to register him for VAT first before taxing him as was stated in the case of Republic vs. Kenya Revenue Authority Ex-Parte Cooper K- Brands Limited {2016} eKLR.

26. The Appellant submitted that the Respondent had contravened Article 47 of the Constitution and Sections 4(2), 6(1) and 6(2) of the Fair Administrative Action Act, 2015 (FAAA) which required the Respondent to give him reasons for its decision and that he was also required to be heard before the current administrative action was taken against him.

27. He supported his position on fair administrative action with the cases of Geothermal Development Company Limited vs. Attorney General & 3 Others (2013) eKLR and Richard Bonham Safaris Limited v Commissioner of Income Tax (2006) eKLR.

Appellant's Prayers 28. The Appellant prayed for orders that:a.The Appeal be allowed.b.The Respondent’s Objection decision dated 29th January 2024 be quashed and or be set aside.c.The Tribunal be pleased to grant any such other orders as it deems fit to grant.

Respondent’s Case 29. The Respondent has opposed this Appeal while relying on its Statement of Facts dated 20th March 2024 and filed on 21st March 2024 and Written Submissions dated 24th September 2024 and filed on 25th September 2024.

30. The Respondent stated that it conducted investigations into the tax affairs of the Appellant for the period 2018 to 2023. That from its investigations it noted that there were instances of under declarations of taxes by the Appellant arising from the variances in his income as per the bank deposits from Equity and Absa bank vis-à-vis the amounts declared in the Appellant’s tax returns.

31. The Respondent averred that its analysis revealed total gross deposits of Kshs 3,493,147,787. 00 from where it deducted output VAT and also compared his expected income with the income already declared by the Appellant.

32. That the resultant variance was subjected to Corporation tax at 25% and 30% amounting to Kshs. 653,371,807. 00 and VAT at 16% amounting to Kshs. 482,772,492. 00.

33. That on 30th November 2023, the Appellant filed a late notice of objection disputing the entire tax assessment and it requested him vide an email to provide certain supporting documents.

34. That the Appellant provided bank statements which were deemed to be insufficient thereby prompting it to issue its Objection decision on 29th January 2024 confirming the assessment.

35. The Respondent identified the following issues for determination in its Statement of Facts and proceeded to argue them in an omnibus manner:i.Whether the tax assessments issued by the Respondent based on bank deposits analysis were correct.ii.Whether the Respondent’s objection decision was issued out of time.iii.Whether the Respondent erred in registering the Appellant for VAT and subsequently assessing the Appellant for VAT?

36. The Respondent averred that during the investigations it adopted the banking test to analyse and arrived at a taxable income.

37. That the anomalies noted in the Appellant’s returns which formed the basis of the assessment were as follows:a.On VAT, the Appellant made vatable supplies but failed to declare the same in his returns.b.There were variances noted in the Appellant’s banking Vis-à-vis his returns.

38. That the charged additional Corporation tax and VAT assessment were within the purview of Section 31(1) of the Tax Procedures Act, 2015 and thus valid as was stated the case of Digital Box vs. Commissioner of Investigations and Enforcement [TAT Appeal No 115 of 2017].

39. The Respondent posited that as much as the Appellant argued that part of the deposits in his accounts were payments on behalf Amigo Hardware for the purchase of hardware supplies, the said Appellant did not provide sufficient evidence to fully support the assertion.

40. That the Appellant simply provided bank statements with highlighted figures (deposits) referring to the payments made on behalf of the hardware but did not provide corresponding invoices, Amigo Hardware sales ledgers and the hardware’s returns to demonstrate that the said deposits were made on behalf of the Hardware and were declared in Hardware returns under the period in question.

41. The Respondent took the position that the Appellant did not discharge his burden hence there wasn’t any justification to vacate the assessment.

42. The Respondent contended that while the Appellant maintained that part of the deposits were funds paid by different traders across the Country which would later be transferred to a pool for outsourcing goods from China, the Respondent stated the Appellant only provided bank statements with highlighted figures and stated that those were the deposits from the pool.

43. The Respondent averred that the Appellant ought to have provided evidence of the following documents,i.Corresponding payments made to suppliers in China,ii.Invoices from the Chinese Company /suppliersiii.Evidence of delivery of the alleged outsourced goods from China to the Kenyan traders.iv.Evidence of the alleged imported goods.

44. It was its position that in the absence of the said documents, it could not alter the assessment in favour of the taxpayer.

45. The Respondent stated that contrary to the Appellant’s allegation that he was not registered for VAT, it had registered the Appellant for VAT as evidenced in the Appellant’s VAT ledger.

48. That in any event the Respondent had the discretion to register a taxpayer for VAT if such a taxpayer had failed to register himself for VAT obligation under Section 34(6) and (7) of the TPA. That consequently, its action of registering the Appellant and assessing him for VAT was well enshrined and supported under the law.

49. That the Appellant became aware of his obligations upon registration and even proceeded to object to the same.

50. That the Appellant has also not presented any evidence before this Tribunal to support the allegation that he was not registered for VAT.

46. The Respondent averred that:a.The VAT assessment for 2023 was captured in the notice of assessment and it was thus not assessed in error.b.The Appellant did not provide documents to support its expenses for its consideration.c.The documents provided by the Appellant did not adequately support his expenses.d.The Appellant was involved in cases of double claimed invoices for the same expenses.e.The Appellant acted contrary to the law when he failed to keep and provide records when requested by the Commissioner.f.A simple arithmetic of counting the days one by one would lead to the correct number of days, confirming the decision was issued within the stipulated timelines.g.By virtue of the Appellant lodging the late objection through iTax on 30th November 2023, he agreed and acknowledged that indeed he had not lodged his objection through the proper channels for the Respondent to act on the same.h.The objection was issued in time and within 60 days because it was lodged on 30th November 2023 and the decision was issued on 29th January 2024. 1.The Respondent stated as follows regarding the validity of its objection decision:a.That the Appellant admitted in Paragraph 2. 4 of his Statement of Facts that he made an application for late objection on 30th November 2023. b.That the Objection decision was issued on 29th January 2024 which was within the stipulated 60 days.c.That the notice of objection issued on 29th September 2023 was sent to individual emails and it bounced/ was not delivered meaning that the said individuals did not receive the said emails.d.That the Appellant failed to validate his objection with supporting documents.1. The Respondent maintained that it did not misapply the law in making the assessments in issue.2. The Respondent submits that the assessment enjoys statutory presumption of correctness and the pendulum is on the taxpayer to dislodge that presumption by providing information in support of the objection. As such, by failing to provide comprehensive documents, the Appellant failed to discharge that burden and at no point can it be said to have shifted to the Respondent.3. In buttressing the above assertion, the Respondent relied on the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR.

Respondent’s Prayers 51. The Respondent prayed to the Tribunal to find that: -a.That the Objection decision dated 29th January 2024 was correctly issued.b.The confirmed tax liability of Kshs. 84,924,686. 49 is due and payable.c.This Appeal be dismissed with costs.

Issues For Determination 52. The Tribunal has gleaned through the pleadings, documents and submissions presented by the parties in this Appeal and is of the view that the issues falling for its determination are the following:a.Whether the Objection decision 29th January 2024 was valid.b.Whether the Respondent erred in issuing additional VAT and Income tax assessment against the Appellant.

Analysis And Determination56. The Tribunal shall analyse the issues that have fallen for its determination in a sequential manner as follows:a.Whether the Objection decision dated 29th January 2024 was valid.

53. Section 51(11) of the TPA provides that:“Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of objection, the objection shall be allowed.”

54. Both parties agree that Section 51(11) of the TPA is couched in mandatory terms. Their point of departure is how to calculate these days to determine the validity of the impugned Objection decision.

55. The Appellant took the position that it filed its objection on 29th September 2023 and received the objection decision 122 days later on the 29th January 2024.

56. On its part, the Respondent’s position was that it received an application for late objection on 30th November 2023 and issued its Objection decision on 29th January 2024 within the 60-day time limit.

57. The Tribunal has looked at the documents filed by both parties and it has discerned the chain of events in this matter to be as follows:a.The assessment was issued on 7th September 2023. b.The Appellant objected to the said assessment vide a 4-page letter dated 29th September 2023. c.The said objection letter was sent to the Respondent vide an email of 29th September 2023 at 12. 38 PM. The e-mail read as follows in the relevant part:“Please find attached the objection letter and the accompanying supporting documents”d.The Respondent issued a 14-day demand for tax arrears on 7th November 2023. e.The Appellant filed an application for late objection which was acknowledged as received by the Respondent on 30th November 2023. His stated reason for the late objection application read as follows:“The assessment had been through a letter on 07/09/2023 and objection also done through a letter on 29/09/2023 send via email’f.The Objection decision was issued on 29th January 2024. 1.It is thus clear from the above chain of events that:a.The Appellant indeed filed his objection regarding the assessments of 7th September 2023. b.The said assessment was sent to the Respondent and copied to its officers who were handling the assessment and whose emails were as follows: Kennedy.Wakoli@kra.go.ke, Koech.William@kra.go.ke and Masna.Abdi@kra.go.kec.There is no evidence on record that the emails bounced back or that they were never received.d.The on-line application for late objection by the Appellant reiterated the reason for his late application to the effect that he had already filed his objection on 7th September 2023. 2.The Tribunal notes that the Appellant had indeed filed his notice of objection on the 29th September 2023. There is no evidence as alleged by the Respondent that this notice which was copied to 3 officers in the following respective emails: Kennedy.Wakoli@kra.go.ke, Koech.William@kra.go.ke and Masna.Abdi@kra.go.ke was never received or that these were not officers of the Respondent who were involved in this assessment.3. There is further no evidence that these officers ever got in touch with the Appellant regarding this email either to request clarification or further documents or simply to advise him that his objection was not valid or that it had been sent to the wrong parties.4. Having received the said objection through its lawful officers, the Respondent was obliged to act on it within the stipulated mandatory timelines of 60 days. The Respondent however, chose to ignore this objection. Its attempt to demand for tax from the Appellant through it letter dated 7th November 2023 led the Appellant to file for late objection wherein he insisted and reiterated his earlier position that he had already filed his objection on 29th September 2023.

62. The Tribunal has further noted that the notice of objection of 29th September 2023 in response to an assessment issued on 7th September 2023 was filed within time as was required of him under Section 51(2) of the TPA which provides as thus: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.”

63. The Appellant’s objection was filed about 22 days after receipt of the assessment. It was thus filed within the required timelines. He was thus not required under any circumstances to file an application requesting the Respondent for leave to file a late objection under Section 51(6) of the TPA.

64. The application for leave to file his objection out of time was thus merely intended as a ruse to vex the Respondent and lull it into sleep. It succeeded in this regard with aplomb when the Respondent went into deep slumber and only woke up to issue its objection decision on 29th January 2024.

65. The said decision should have been issued on or before the 28th November 2023. its failure to do so meant that its objection decision issued on 29th January 2024 was late by about 60 days and hence invalid as was affirmed in the case of Commissioner of Domestic Taxes v Sketchers Limited (Tax Appeal E011 of 2023) [2024] KEHC 5569 (KLR) (Commercial and Tax) (8 May 2024) (Judgment), where the court stated as thus:-“The delay by the Commissioner to issue a decision within 60 days of receiving the objection is not a procedural technicality and the Tribunal did not have any discretion to consider the substance of the matter once it determined that the Objection Decision was made late. Once it was determined that the Objection Decision was made late, this also meant that the issue of whether the objection was valid or not was immaterial. There is no provision in the TPA that stipulates that only validly lodged objections have to be determined within 60 days. The Commissioner’s delay in delivering the Objection Decision within 60 days of receiving the objection meant that the objection was allowed by operation of law. Failure to render the Objection Decision in time was fatal and the Commissioner could not demand any taxes therein. The Tribunal was therefore correct in its judgment.” (Emphasis added)

66. The above position has been restated by the court in Commissioner of Investigations and Enforcement v Rama Auto Parts [2023] KEHC 3100 (KLR) and Vivo Energy Kenya Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority & another [2020] eKLR). It will be no different in this case considering that superior courts have remained consistent that statutory timelines under Section 51(11) of the TPA are mandatory provisions, and that breach thereof is not curable.

67. That being the law, it follows that the Appellant’s Objection dated 29th September 2023 stood allowed as a matter of law on the 28th of October 2023 when the Respondent failed to render its decision within 60 days.

68. Having held that the said Objection decision is a nullity, the Tribunal shall not delve into the other issue that had been identified for its determination as it has been rendered moot.

Final Decision 69. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to issue the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 29th January 2024 be and is hereby set aside.c.Each party is to bear its own costs.

70. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER, 2024. ERIC NYONGESA WAFULACHAIRMANGLORIA A. OGAGA ABRAHAM K. KIPROTICHMEMBER MEMBERDR. RODNEY O. OLUOCHMEMBER