[2023] KETAT 1013 (KLR)

Zitko Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal 620 of 2022) [2023] KETAT 1013 (KLR) (8 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1013 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 620 of 2022

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

September 8, 2023

Between

Zitko Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered under the Companies Act, 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 and 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 issued a VAT Automated Assessment via email to the Appellant on 15th November 2019 for disallowed input purchases for March and May 2018 for the amounts of Kshs. 507,336. 00 and Kshs. 873,087. 00 respectively.

4. The Appellant objected to the additional assessments on 26th November 2019 and on 14th March 2020 and the Respondent issued an objection decision confirming its assessment.

5. Aggrieved by the Objection decision, the Appellant lodged the ensuing Appeal on 27th February 2021 and filed 15th June 2022.

The appeal 6. In its Memorandum of Appeal dated 27th February 2021 and filed on 15th June 2022, the Appellant premised its Appeal on the following grounds; -a.The Respondent erred in both law and fact in assessing additional tax on the Appellant while the said assessment relates to input tax on purchases.b.The Respondent erred in both law and fact by failing to investigate the Appellant’s averments that the additional assessment relates to actual purchases from its suppliers.c.The Respondent erred in both law and fact by issuing an objection decision hastily to adhere to statutory timelines and in the process failed to accord the Appellant sufficient time to provide documentary evidence.

The appellant’s case 7. The Appellant set down its case in;a.Its Statement of Facts dated 27th February 2022 and filed on 15th June 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 14th February 2023 and filed on the 17th February 2023.

8. It stated that it ascertained that the additional assessment is related to purchase input tax disallowed by the Respondent’s VAT Automated Assessment system and having noted the error, it wholly objected to the additional assessment which was thereafter fully rejected by the Respondent while it was in the process of providing the relevant documentary evidence in support of the Objection.

9. It averred that the amount owed is unacceptable as the input tax disallowed was fully and wholly incurred in the course of business.

10. It further averred that the Respondent failed to carry out due diligence on the Appellant’s suppliers to verify the purchases in question. It added that the Respondent’s actions are unfounded, arbitrary, and disregard natural justice.

11. The Appellant presented its submissions in its pleadings dated 14th February 2023 and filed on 17th February 2023 as hereunder.

12. It cited Section 51 (1) and (2) and Section 31 of the Tax Procedures Act 2015 and submitted that the returns for VAT for the period in question were done correctly at the self-assessment platform. It added that the Respondent failed to consider the input tax on purchases thus arriving at an erroneous conclusion.

13. It submitted that it lodged an objection to the assessment and gave the precise reason being that the Respondent did not consider its input tax.

14. It relied on Section 51(3) and (4) of the Tax Procedures Act and maintained that the Respondent sat on its Objection for more than 4 months while it had the responsibility of determining the validity of the notice of objection.

15. The Appellant submitted that the Respondent did not communicate within the requisite 14 days that the Objection was invalid but waited four months to issue an objection decision fully rejecting the objection.

16. It argued that it had legitimately expected that the objection was deemed as allowed due to the operation of the law notwithstanding the fact that the Respondent failed to consider that input VAT still persisted.

17. It submitted that it deals in construction and makes purchases of materials to be made thus incurring input tax which the Respondent failed to consider by making an erroneous additional assessment.

The appellant’s prayers 18. The Appellant prayed for orders that the Honourable Tribunal:a.Be pleased to allow this Appeal.b.Be pleased to compel the Respondent to review the additional assessment demand vide the assessment orders of 15th November 2019 and the subsequent tax decision orders made.c.Be pleased to grant any further orders it deems fit.d.The costs of this Appeal be granted to the Appellant.

The respondent’s case 19. The Respondent’s case is premised on;a.Its Statement of Facts dated 31st August 2022 and filed on 1st September 2022 together with documents attached thereto.b.The Respondent’s written submissions dated and filed on 20th February 2023.

20. The Respondent cited Sections 51 (1), 31 (1), and 51 (8) of the Tax Procedures Act and stated that the Appellant failed to provide documents for review upon lodging its objection.

21. It averred that under Section 56 (1) of the Tax Procedures Act, the burden shall be on the taxpayer to prove that a tax decision is incorrect and it is upon the Appellant, to provide documents to rebut the additional assessment which it failed to do.

22. It reiterated that its assessment and objection decision are within the law as the Appellant failed to submit all relevant documents for review.

23. The Respondent relied on Sections 31 and 56 (1) of the Tax Procedures Act and submitted that the Appellant had a duty to prove its position and that the Respondent had erred in its assessment.

24. It cited the following cases:-a.Grace Njeri Githua v Commissioner of Investigations and Enforcement (TAT No. 102 of 2018) where the Tribunal held that:-“In this Appeal, the Appellant has not provided the Tribunal with enough evidence to show that the net income the Respondent has based the tax assessment on was not income or is subject to further cost deduction in arriving at a net profit. It is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is not due from her.”b.Digital Box Limited v Commissioner of Investigations and Enforcement [2020] where the Tribunal stated that:-“the question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56 of the Tax Procedures Act states that: “In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.” Section 30 of the Tax Appeals Tribunal Act similarly provides that “In a proceeding before the Tribunal, the appellant has the burden of proving(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently. In this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment. Thus, according to the provisions of the Evidence Act, the Tax Procedures Act, and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant. The Tribunal is of the view that the Appellant did not discharge its burden of proof in showing that the Respondent used extraneous considerations and documents other than those prescribed by the law. The averments made by the Appellant did not amount to evidence.”

25. It argued that the Appellant had not made an effort to provide evidence disputing the assessment at the Objection stage or before this Honourable Tribunal.

26. The Respondent relied on Section 52 (3) of the Tax Procedures Act to submit that the Appellant’s Objection did not meet the threshold prescribed therein adding that it was an abuse of procedure thus its assessment should be upheld.

27. It cited Section 51 (8) of the Tax Procedures Act and the case of Tax Appeals Tribunal Number 125 of 2017 Ngurumani Traders Limited vs. Commissioner of Investigations and Enforcement where the Tribunal held that:-“From the foregoing, the Appellant’s failure to lodge a proper Objection meant that the Respondent was at liberty to confirm the assessment...”

28. It submitted that the Appellant did not submit a valid objection thus necessitating the Commissioner to confirm the assessment and the Appellant had no regard for procedure and was not interested in pursuing a proper objection to the Respondent’s assessment.

The respondent’s prayers 29. The Respondent, therefore, prayed for the Tribunal to find that:a.The Respondent’s assessments issued on 15th November 2019 and confirmation notices issued on 14th March 2020 be upheld.b.This Appeal be dismissed with costs.

Issues for determination 30. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts with the documents attached thereto, and Submissions, the Tribunal puts forth the following issues for determination:a.Whether the Respondent’s Objection Decision dated 14th March 2020 was time-barred; andb.Whether the Respondent was justified in issuing the Objection decision.

Analysis and Findings 31. The Tribunal wishes to analyze the issues as herein under.

Whether the Respondent’s Objection Decision dated 14th March 2020 was time-barred. 32. The Appellant averred that it lodged an objection to the assessment and gave the precise reason which was that the Respondent did not consider its input tax. It added that the Respondent sat on its Objection for more than 4 months and did not communicate within the requisite 14 days that the Objection was invalid but waited four months to issue an objection decision fully rejecting the Objection. It maintained that it had legitimately expected that the Objection was deemed as allowed due to the operation of the law.

33. It was the Respondent’s assertions on the other hand, that the Appellant had a duty to prove that the Respondent had erred in its assessment. It added that the Appellant had neither made an effort to provide evidence disputing the assessment at the objection stage nor before this Honourable Tribunal and that the Appellant did not submit a valid objection, showing no regard for procedure, was not interested in pursuing a proper objection necessitating the Respondent to confirm the assessment.

34. The procedure for objecting to an assessment made by the Commissioner is stipulated under Section 51 of the Tax Procedures Act of 2015 which provides that:-“(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.(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged and request the taxpayer to submit the information specified in the notice within seven days after the date of the notice.(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.”

35. The Tribunal notes that it is not in dispute that the Respondent issued an Automated Assessment via email to the Appellant on 15th November 2019 for disallowed input purchases for March and May 2018 for the amount of Kshs. 507,336. 00 and Kshs. 873,087. 00, respectively.

36. It is also not disputed that the Appellant lodged an Objection to the additional assessments on 26th November 2019 and the Respondent issued an Objection decision on 14th March 2020 confirming its assessment.

37. The Tribunal has not had occasion to interrogate the Objection and the Objection decision as the same have not been provided by either party but there is no dispute as to the contents of those documents. The Tribunal therefore takes judicial notice of the correctness of the contents of the documents as presented by the parties.

38. 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.

39. The Tribunal finds that the Respondent acted in contravention of Section 51 (4) of the Tax Procedures Act (supra), and in so doing, the Objection decision issued 4 months after the Objection was time-barred and by operation of the law the Appellant’s objection was deemed allowed by the Respondent’s failure to issue an objection decision within sixty days.

Whether the Respondent was justified in issuing the Objection Decision. 40. Given the foregoing finding, the Tribunal finds no need to delve into the remaining issue for determination as the same has been rendered moot.

Final decision 41. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following orders;-a.The Appeal be and is hereby allowed.b.The Objection Decision dated 14th March 2020 be and is hereby set aside.c.Each party to bear its own costs.

42. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF SEPTEMBER, 2023ROBERT M. MUTUMA.............CHAIRPERSONELISHAH N. NJERU.............MEMBERMUTISO MAKAU.................MEMBERBONIFACE K. TERE.............MEMBERDR. WALTER ONG..............MEMBER