[2023] UGTAT 14

## THE REPUBLIC OF UGANDA IN THE TAX APPEALS TRIBUNAL OF UGANDA AT KAMPALA APPLICATION NO. 114 OF 2022

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CAMAT FOUNDATION UGANDA LIMITED APPLICANT

**VERSUS**

UGANDA REVENUE AUTHORITY....................................

.................. RESPONDENT

BEFORE: DR. ASA MUGENYI, MR. GEORGE MUGERWA, MS. CHRISTINE KATWE.

## **RULING**

This ruling is in respect of penal tax of Shs. 154,115,711 resulting from Valued Added Tax (VAT) assessments issued by the respondent on the applicant.

The applicant deals in restaurant and other services. On 14^th April 2022, the respondent issued five additional VAT assessments for May 2020, August 2021, October 2021, December 2011, and January 2022 of Shs. 85,482,992 and penalties totalling to Shs. 154,115,711. The respondent raised the said assessment after disallowing input VAT on purportedly fictitious invoices issued by Sun Mutual Capital Limited.

Issues.

- 1. Whether the applicant is liable to pay the penal taxes as assessed by the respondent? - 2. What remedies are available to the parties?

The applicant was represented by Mr. Sidney Ojwee while the respondent by Mr. Alex Ssali Aliddeki.

The parties opted not to call witnesses but file submissions. The applicant contended that the dispute was one that required legal interpretation.

The applicant submitted that the penalties imposed by the respondent are not legal. It alleged that the respondent imposed penalties on it for knowingly and recklessly making

false and misleading statements to the latter. The basis for the penal tax was S. 65(6) of the VAT Act which by virtue of S. 58 of the Tax Procedure Code Act utilizes the words 'knowingly or recklessly' and imposes a penalty of double the tax where a taxpayer makes false or misleading statements or omissions. It submitted that there ought to be proof that the false statements or omissions were made with the express knowledge of the taxpayer. The applicant admitted that it employed Mark Kiyaga, who on his own accord and unknown to its directors and shareholders, generated fictitious invoices issued by Sun Mutual Capital Limited. The respondent lodged a criminal case against him on the said invoices.

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The applicant submitted that Black's Law Dictionary 9^th Edition defines "Knowing" as "Having or showing awareness or understanding; well informed... deliberate; Conscious." It submitted that 'knowledge' is further defined as "an awareness or understanding of a fact or circumstance, a state of mind in which a person has no substantial doubt about the existence of a fact". It also submitted that in Black's Law Dictionary, (supra) 'knowledge' and 'intention' are expounded on as follows.

"... Intention and knowledge commonly go together, for he who intends a result usually knows that it will follow, and he who knows the consequences of his act usually intends them. But there may be intention without knowledge, the consequence being desired but not foreknown as certain or even probable. Conversely, there may be knowledge without intention, the consequence being foreknown as the inevitable concomitant of that which is desired but being itself an object of repugnance rather than desire and therefore not intended certain or even probable...".

The applicant submitted that Black's Law Dictionary defines "reckless" "As conduct whereby the actor does not desire harmful consequence but nonetheless foresees the possibility and takes the risk." It submitted that recklessness involves a greater degree of fault than negligence but a lesser degree of fault than intentional wrongdoing. Reckless knowledge is a person's awareness that a prohibited circumstance may exist, regardless of which the person accepts the risk and goes on to act. The applicant submitted that its action of reporting its employee to the police, which triggered a manhunt for him shows that it could not have, knowingly and recklessly, got involved in invoice trading. It cited The Queen v Sault Ste Marie [1978] 2 SCR 1299, where the Supreme Court of Canada

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delineated the categories of fault in Canadian criminal law. Offences were divided into three types: i) Mens rea, ii) Strict liability and iii) Absolute liability. The applicant submitted that Dickson J stated that mens rea offences are those in which some positive state of mind such as intent, knowledge or recklessness must be proved by the prosecution either as an inference from the nature of the act committed or by additional evidence. It submitted further that recklessly or knowingly is behavioral, and it is a state of mind which ought to be strictly proved by whoever is alleging the same. It contended that such proof ought to be adduced before a competent court which makes the determination as to whether the accused acted recklessly or knowingly.

The applicant submitted that neither the applicant nor its members or employees have ever been tried or convicted in any competent court of the offences to which it is alleged to have committed. It cited Sande Pande Ndimwibo v Uganda Revenue Authority HCCS 424 of 2014, where URA imposed a double tax penalty on the plaintiff. It was held that for a penalty to be imposed, the applicant should have been given a fair hearing before an independent and impartial judicial body to make a finding of guilt for the alleged offences. The judge stated that.

"Non-compliance with the provisions of the Value Added Tax Act which is the law imposing tax under the authority of Parliament renders the act of the Commissioner General a nullity in law for noncompliance with provisions relating to imposition of penal tax. It was necessary before imposing the penal tax or any tax at all, for the first Plaintiff who was being accused of the commission of an offence by fraudulently misrepresenting the tax affairs of the company to the Defendant, to be given a hearing. Because he was being accused of the commission of a criminal offence, he needed to be charged before an independent tribunal established by law if he did not admit the commission of an offence".

The applicant submitted that considering the above judgment, a taxpayer can only be required to pay penal tax where he has been subject to a fair hearing before an independent court. The applicant further cited Airtel Uganda Ltd v Commissioner General, Uganda Revenue Authority Civil Appeal 40 of 2013 where the Court of Appeal held that.

"We note that prompt payment of taxes is necessary to support service delivery by the Government of Uganda. However, the tax tribunal which has the power of the High Court is required to apply the rules of natural justice. One of the cardinal rules of natural justice

is a right to a fair hearing. This is a non-derogable right under Article 44(c) of the Constitution. A person who has objected to a tax assessed, appealed against it, paid 30 percent of the tax assessed, paid interest on arrears cannot in our view be penalized for having sought redress to the Tax Appeals Tribunal. The law in our view protects him or her from penalties during the period of dispute resolution."

The applicant submitted that courts are reluctant to penalize taxpayers without an advent of a fair hearing before the courts of Judicature. It is therefore, highly unlikely that the Tax Appeals Tribunal will issue a ruling in contravention of the precedents set by the High Court and the Court of Appeal in regards to the issuance of penal tax by the respondent.

The applicant submitted that if the respondent was to argue that the actions of the agent are the actions of the applicant, criminal liability is personal in nature and this not being an offence of strict liability, its mandatory for the elements of the offence to be proved before a competent court before the said penalty can be charged. The applicant submitted that for the respondent to charge penalty, the applicant must first be tried by a competent court to prove the knowing and reckless.

The applicant submitted that in the financial year 2021/2022, S. 65(6) of the VAT Act was amended, and the words knowingly or recklessly were deleted. S. 65(6) of the VAT Act as amended no longer has the words knowingly or recklessly but still imposes a penal tax where a taxpayer makes a false or misleading statements or omissions, and this amounts to a strict liability offence since the mental element was taken out. The above Section as amended only provides for the punishment but does not make it an offence. S. 58 of the Tax Procedure Code Act still maintains the elements of knowingly and recklessly. Thus, to administer the provision of S. 65(6) of the VAT Act as amended, we have to go to the Tax Procedure Code Act. The long title to the Tax Procedure Code Act reads.

"An Act to provide for a code to regulate the procedures for the administration of specified tax laws in Uganda; to harmonize and consolidate the tax procedures under the existing laws and provide for related matters".

The applicant submitted that S. 2 of the Tax Procedure Code Act provides that "This Act shall apply to every tax law specified in Schedule 2". Under Schedule 2 of the Act, the

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VAT Act is listed under paragraph (c). The Tax Procedure Code Act is the procedural law for enforcement of the tax statutes as listed in the $2^{nd}$ schedule. Therefore, any inconsistence that arises in the two provisions that is S. 65(6) of the VAT Act and S. 58 of the Tax Procedure Code Act the Act providing for that particular branch of the law in the case the procedural enforcement takes precedence.

The applicant submitted that Professor J. Oloka Onyango in an overview of the Legal System in Uganda, on p.5 states that:

"Substantive law is the actual law as opposed to adjectival law while procedural law is the formal steps to be taken in an action or other judicial proceeding the procedural law of the penal Code is found in the Criminal Procedure Code Act. Procedural law lays down mechanisms through which substantive law can be enforced".

The applicant submitted that in this case, since the provisions provide for the same subject matter, but S. 58 of the Tax Procedure Code Act retains the words knowingly and recklessly and it's the procedural, it only follows that a taxpayer must be tried of an offence and convicted by a competent court before he is condemned to any punishment. The applicant submitted that the applicant has not been subjected to a hearing to prove whether it knowingly or recklessly made false statements or omissions to URA. It could not therefore be condemned to pay or suffer punishment for a crime without being subjected to a fair hearing and being properly convicted. The applicant prayed that the tribunal rules that it is not liable to pay the penalties and prayed for costs.

In reply, the respondent submitted that the burden of proof lies on the applicant to prove that the decision should not have been made or should have been made differently. S. 18 of the Tax Appeals Tribunals Act places the burden of proof on the applicant. S. 101 of the Evidence Act, states that he who alleges must prove. This position was re-echoed in Williamson Diamonds Limited v Commissioner General (2008) 4 TTLR 67, where the Tax Appeals Tribunal of Tanzania held that.

"The burden of proving that the assessment issued by the respondent is excessive or erroneous lies on the taxpayer (Appellant) and in no way it be shifted to the Respondent..." The respondent submitted that the applicant was involved in invoice trading which is VAT fraud. In Red Concepts Ltd v Uganda Revenue Authority Application 36 of 2018 the

Tribunal stated that "The standard of proof in civil cases is on a balance of probabilities and the burden of proof is on the applicant to prove that those invoices are not fictitious". The respondent contended that the applicant failed to discharge the burden that the assessment should not have been made.

The respondent cited S. 65(6) of the VAT Act and submitted that it issued a penalty assessment against the applicant for issuing fictitious invoices when claiming VAT input. The respondent established that Sun Mutual Capital Limited generated fictitious invoices used by the applicant to claim fictitious input VAT and therefore evade payment of proper VAT. The applicant employed Kiyaga Mark an accountant who generated fictitious invoices. The respondent rightfully raised the penalty assessment against the applicant.

The respondent cited Adventcity Limited v URA. Application 28 of 2018 which stated that.

"...where an application is before the Tribunal where one is challenging penal tax, he or she is already before a competent court which is empowered by the constitution to hear tax disputes."

The respondent submitted that it would be double jeopardy for a party to appear before a criminal court as well as a civil one to listen to tax disputes. S. 65(6) does not create an offence but refers to a civil infraction and the standard of proof required thereof on a balance of probability. The imposition of penal tax under the subsection does not call for a trial or pronouncement of guilt. It is sufficient that administrative steps and actions are followed in reaching the decision to impose penalty. Therefore, the penal tax was properly issued as investigations revealed fictitious invoices used by the applicant.

The respondent submitted that the applicant is liable under the principle of agency. An agency relationship is fiduciary in nature and the actions and words of an agent exchanged with a third party bind the principal. The applicant admitted that Mark Kiyaga, its accountant unknown to its directors and shareholders, generated fictitious invoices. Even where there was no authority to act for the principal by a consensual agreement, apparent or ostensible authority can be created by representations made by the principal to a third party. Such representations would be of the kind that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the apparent

authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. The respondent cited Doshi Hardware (U) Limited v Alarm Construction Ltd HCT-00-CC. CS 425-2003. The respondent submitted that this principle was further elucidated by Lord Diplock in *Freemen & Lockyer case p. 506* in which he observed the parameters are.

- "1) That a representation that the agent had authority to enter on behalf of the company into a contract of a kind sought to be enforced was made to the contractor for in other words a third party- addition mine. - 2) That such representation was made by a person or persons who had "actual" authority to manage the business of the company either generally or in respect of those matters to which the contract relates. - 3) That he (the contractor) was induced by such representations to enter into the contract, that he in fact relied upon it..." $\Box$

The respondent submitted that Mark Kiyaga was the applicant's employee which implies that the latter must be liable for the fraud of his agent committed in the course of the employment.

On conflict of laws, the respondent submitted that S. 65(6) of the VAT Act only provides for consequences and does not create any offence. Though the applicant submitted that that S. 58 of the Tax Procedure Code Act which still has the words knowingly and recklessly is procedural law and takes precedence, the respondent contended that procedural law cannot take precedence over principal law. It therefore, follows that interpretation of both provisions should be looked at to harmoniously interpret the two provisions. The respondent cited the Ontario Court of Appeal decision, Ayr Farmers Mutual Insurance Company v Wright, 2016 ONCA 789, where Simmons J. A., emphasized the centrality of a statute's purpose in determining the meaning of specific provisions in an Act. It submitted that even where the legislature has taken the trouble to define a term in a statute, the Court will assess the defined term by reference to the statute's purpose and history. The respondent submitted that it must always be born in mind that a statute is passed as a whole and not in Sections. The court's duty is to give effect to all the parts of the statute if possible. When there is a doubt about the meaning of words of a statute, these should be understood in the sense in which they harmonize with the subject of the

enactment and to the object which the legislature had in view. The respondent further cited Metropolitan Life Limited v Commissioner for the South African Revenue Services (2008) 4 ALL SA 558 (c) where the court was of the view that when faced with apparently conflicting provisions in tax legislation, the interpreter must endeavor to arrive at an interpretation which gives effect to the purpose of the legislature. Using both the purposive and harmonious rules of legislature interpretation, a court must read two allegedly conflicting statutes or instruments made to give effect to each if it can do so while preserving their sense and purpose. The preferred interpretative approach is for both provisions to be interpreted purposively and holistically in order to be given a clear meaning whenever plausible. The respondent submitted that there is no inconsistency as the section under which the penalty was raised is very clear. The respondent prayed that this application is dismissed with costs to it

In rejoinder, the applicant submitted though the respondent alleges that the former bought fictitious invoices from Sun Mutual Capital Limited, no evidence was adduced to prove it. Upon discovery of the invoices the matter was reported to the police. There is no evidence that the applicant participated in invoice trading. It cannot be said that the applicant knowingly dealt in fraudulent trade. The applicant cited Fredrick J. K. Zaabwe v Orient Bank and Others SCCA 4 of 2006 which defines 'fraud' as.

"... The intentional perversion of truth by a person for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right...."

The applicant submitted that O. 6 R. 3 of the Civil Procedure Rules requires that fraud is pleaded. It cited Kampala Bottlers Limited v Damanico (U) Ltd Civil Appeal 22 of 1992, where Platt JSC held that "Normally, where fraud is pleaded, particulars of the fraud must be given." It also cited Ouma & Another v Uganda National Roads Authority and Others Civil Suit 159 of 2018, where it was held that.

"Where no particulars of fraud are pleaded or particularized, the plaint should be struck out. This is not a mere technicality in form as submitted by Counsel for the Defendant. It is a substantive requirement."

It further cited Nagawa Agnes & another v Schawa Samuel and others Civil Suit No. 27 of 2012, where the judge held that. "In my mind, failure to plead particulars of fraud is a fundamental defect and not an irregularity curable by evidence or otherwise. Fraud must be pleaded and proved." The applicant also cited Lubega v Barclays Bank [1990-1994] EA 294, where Justice Manyindo DCJ, at page 303, held that "as far as fraud is concerned the requirement is that particulars of the alleged fraud are pleaded". The applicant also cited Okello $v$ Uganda National Examinations Board CA No. 12 of 1987 reported in [1993] II KALR 133 at 135 where Lubogo JSC held that; "O. 6 rule 3 of the CPR is mandatory in that the particulars of fraud and dates regarding the alleged fraud should be given". The applicant submitted that where a fraud is pleaded, it is necessary to give the particulars of fraud. Although the respondent alleges that the applicant committed VAT Fraud, it does not state exactly when it happened, how it happened and who was responsible. It did not adduce

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any facts to connect the applicant to the said fraud. The applicant submitted that it has never been involved in any invoice trading.

The applicant submitted that in fraud cases the standard of proof is higher than balance of probability and the burden of proof is on the respondent to prove that the applicant committed fraud. The applicant cited Elizabeth Nanteza Nabeta v Dr. Anthony Konde Civil Suit 391 of 2010 while quoting Kampala Bottlers Limited v Damanico (U) Limited, SCCA 22 of 1992, the court held that.

"Fraud must be strictly proved, the burden being heavier than one on balance of probabilities generally applied in civil matters, it was further held that; the party must prove that the fraud was attributed to the transferee. It must be attributable either directly or by necessary implication, that is; the transferee must be guilty of some fraudulent act or must have known of such act by somebody else and taken advantage of such act".

The applicant submitted that if the respondent contends that the former committed VAT fraud, the latter should prove that such act happened, and it was committed by the applicant and not any other person. The Tax Procedure Code Act provides for offences against agents. The framers of this law were aware that criminal liability cannot be transferred to another individual unless the contrary is proved. In the current case no evidence has been adduced to show that the applicant or its directors were responsible for the creation of the fictitious invoices.

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The applicant submitted that principle of agency is not applicable because there was no contract between it and its accountant to enter into illegal contracts. It cited S. 123(1) of the Contracts Act 7 of 2010 which states that,

"An agent with authority to do an act, has authority to do anything which is necessary to do the act, which is lawful".

The applicant further cited S. 160(1) of the Contracts which states that,

- $(1)$ Where an agent does more than he or she is authorized to do and a part of what the agent does is within his or her authority, can be separated from the part which is beyond his or her authority, only what the agent does within his or her authority shall be binding between the agent and the principal. - (2) Where an agent does more than he or she is authorized to do and what the agent does beyond the scope of his or her authority cannot be separated from what is within the scope of the authority of the agent, the principal is not bound by the transaction."

The applicant reiterated that its accountant acted illegally and outside his authority. Mark Kiyaga acted on his own peril and the applicant deals in selling food and has no accounting knowledge. It has since reported the accountant for this illegal act.

The applicant submitted that the respondent conceded that that a person who has committed the offence knowingly and recklessly under the law ought to be brought before a competent court which is empowered by the constitution to hear tax dispute. It submitted further that it should have been tried and convicted before being condemned to pay a penalty. The applicant submitted that the decision of Justice Christopher Izama Madrama in Sande Pande Ndimwibo v Uganda Revenue Authority HCCS 424 of 2014 is binding on this Tribunal.

Having read the submissions of the parties, this is the ruling of the tribunal.

The respondent raised five assessments which had principal tax of Shs. 85,482,992 and penalties totalling to Shs. 154,115,711 against the applicant after disallowing its input VAT claims on the ground that it used fictitious invoices issued by Sun Mutual Capital Limited. The applicant was aggrieved by the penal tax and objected, which was disallowed by the respondent. The applicant contended that it employed Mark Kiyaga,

who on his own accord and unknown to its directors and shareholders, generated fictitious invoices purportedly issued by Sun Mutual Capital Limited. A criminal case was lodged against Mark Kiyaga in respect of the fictious invoices.

The penal tax against the applicant was issued under the VAT Act. Before the amendment S. 65(6) of the VAT Act read.

"Where a person knowingly or recklessly.

iii.

- a. Makes a statement or declaration to an official of the Uganda Revenue Authority that is false or misleading in a material factor or - b. Omits from a statement made to an officer of the Uganda Revenue Authority any matter or a thing without which the statement is misleading in a material particular; and - The tax properly payable by the person exceeds the tax that was $\hat{L}^{\dagger}$ assessed as payable based on the false or misleading information. - ii. the amount of the refund claimed was false, or

the person submitted a return with an incorrect offset claim." In the new Section, 'knowingly' and 'recklessly' were omitted. The applicant submitted that said words are still part of the law by virtue of S. 58 of the Tax Procedure Code Act. The respondent cannot penalize the applicant if the statement were not made knowingly and recklessly. Therefore, it is important to understand their implications.

Black's Law Dictionary 10^th Edition p. 1003 defines "knowing" as "1. Having or showing awareness or understanding; well informed...deliberate; 2. Conscious." It further at p. 1462 defines "reckless",

"As being characterized by the creation of the substantial and unjustifiable risk of harm to others and by a conscious (and sometimes deliberate) disregard for or indifference to that risk; headless; rush. Reckless conduct is much more than a mere negligence, it is a gross deviation from what a reasonable person would do."

In 2021, S. 65(6) of the VAT Act was amended, and the words 'knowingly' and 'recklessly' were deleted. So, under the VAT Act, it is not necessary to prove that the applicant knowingly and recklessly make declarations using fictious invoices. Since S. 65 of the VAT Act omits the said words while S. 58 of the Tax Procedure Code Act maintains them,

the applicant contended that the Tax Procedure Code Act takes precedence over the VAT Act. It argued that the long title to the Tax Procedure Code Act reads.

"An Act to provide for a code to regulate the procedures for the administration of specified tax laws in Uganda, to harmonize and consolidate the tax procedures under the existing laws and provide for related matters".

The applicant submitted that S. 2 of the Tax Procedure Code Act provides that "This Act shall apply to every tax law specified in Schedule 2". Under schedule 2 of the Act, the VAT Act is listed under paragraph (c). It argued further that separate statutes must be read together, when possible, to achieve à harmonious statutory scheme. It is assumed that the legislature does not intend to create inconsistency. On the other hand, the respondent contended that the VAT Act is more specific to VAT issues. The applicant was penalized under the VAT Act. Therefore, the VAT Act takes precedence over the Tax Procedure Code Act when dealing with penal tax under the VAT Act.

It is a known principle of statutory construction that if statutes are in conflict, the later statute prevails over the earlier statute unless the earlier statute is clearer and more explicit. In Ocitti v Okello Civil Miscellaneous Application 54 of 2014 Justice Margaret Mutonyi stated.

"It is trite law that where an earlier statute is in conflict with a later one, the later statute prevails. This is based on the assumption that the legislature keeps abreast with the needs of the time and is wiser as time passes.

## This was espoused in the case of **Uganda Revenue Authority v Uganda Electricity** Board HCT-02-001-2006.

The assumption that the later statute should prevail dates way back in the 18^th Century as it was held in the case of Re Williams (1887) 36. CH. D 537 at page 578 that "And it appears to be a constitutional necessity as well as an established rule of construction that the last utterances of the legislative should prevail over earlier statutes inconsistent with it."

In this case the VAT Act was amended in 2021 while the Tax Procedure Code Act was enacted in 2014. As a starting point, the Tribunal shall assume that the amendment in the VAT Act is supposed to take precedence over the Tax Procedure Code Act if both statutes are addressing the same subject matter. As to whether they are on the same subject, we shall discuss that later.

The applicant does not dispute the fact that the declarations made by Mark Kiyaga in respect of the invoices issued by Sun Mutual Capital Limited were false and misleading. The applicant contends that before it was issued a penal tax assessment it ought to have been criminally prosecuted. The applicant cited Sande Pande Ndimwibo v Uganda Revenue Authority HCCS 424 of 2014, where Justice Madrama stated that.

"S. 65 (6) which imposes penalties also presupposes that an offence has been committed. While the first Plaintiff had not been convicted of any offence by the time the demand for the penal tax was imposed on him by the Defendant, the provisions for imposition of penal tax under S. 65 of the VAT Act envisage a trial before an independent tribunal established by law consistent with Article 28(12) of the Constitution of the Republic of Uganda. This means that the person who among other things is presumed innocent until convicted cannot pay the penalty prescribed for a convict unless he has admitted the offence or pleaded guilty."

...in other words, a penal tax cannot be imposed without a conviction save for the provisions of the Constitution of the Republic of Uganda

... anything done in violation of an Article of the Constitution is a nullity and of no effect under Article 2 of the Constitution of the Republic of Uganda which gives the constitution of the Republic of Uganda supremacy over all other laws."

The judge added.

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"Non-compliance with the provisions of the Value Added Tax Act which is the law imposing tax under the authority of Parliament renders the act of the Commissioner General a nullity in law for noncompliance with provisions relating to imposition of penal tax. It was necessary before imposing the penal tax or any tax at all, for the first Plaintiff who was being accused of the commission of an offence by fraudulently misrepresenting the tax affairs of the company to the Defendant, to be given a hearing. Because he was being accused of the commission of a criminal offence, he needed to be charged before an independent tribunal established by law if he did not admit the commission of an offence".

Emphasis is put on that for a penalty to be imposed, the applicant should have been given a fair hearing before an independent and impartial judicial body to make a finding of guilt for the alleged offences. The above decision was made on 26^th May 2017.

In order to resolve the issue of whether the applicant should pay penal tax, one of the pertinent questions to be decided on is whether the dispute is properly before the Tax Appeals Tribunal Should the applicant have been prosecuted in a criminal court instead of bringing the dispute to the Tribunal?

On 10^th July 2017, the Supreme Court decided in *Uganda Revenue Authority v Rabbo* Enterprises (U) Limited and another Civil Appeal 12 of 2004 that the Tax Appeals Tribunal is a court of first instance in tax disputes. The procedure before the Tax Appeals Tribunal is known. One should be appealing against an objection decision or taxation decision. If an assessment has penal tax, a taxpayer objects and an objection decision is made, and it appeals to the Tribunal, is the taxpayer properly before the Tribunal? If the law provides that a penalty should be criminally prosecuted, does the Tax Appeals Tribunal Act have jurisdiction where a matter should be subject to criminal prosecution? Black's Law Dictionary 10^th Edition p. 1416 defines prosecution as "1. The commencement or any carrying out of any action or scheme." Prosecution can be both civil and criminal. So, the question is, was the penal interest from the assessment which was maintained by the objection decision giving jurisdiction to the tribunal to determine it or was it one requiring criminal prosecution implying the Tribunal cannot handle it? If the Tribunal were to hold that tax disputes involving penal tax which are civil in nature should first be criminally prosecuted, would it not be abdicating from its duties to listen to tax disputes as provided for under Article 152 of the Constitution and as stated in the Supreme Court decision of Rabbo Enterprises? The Tribunal has to decide whether the High Court decision of Sande Pande Ndimwibo does not conflict with the Supreme Court decision of Rabbo Enterprises Limited where jurisdiction to listen to tax disputes was vested in the Tax Appeals Tribunal.

It is important to determine whether penalties or penal tax imposed on taxpayers are criminal or civil in nature or both. Where penalties or penal tax are both, it may mean that a taxpayer whose dispute is civil in nature may suffer double jeopardy if the dispute involving the principal tax is referred to the tribunal for hearing while the penal tax arising from the substantive tax is referred to a criminal court. The applicant argued that for penal tax to be imposed, one has to be charged in a criminal prosecution. It has been argued that for one to be criminally prosecuted, there must be actus rea and mens rea.

To get to the bottom of this dispute one has to unravel the meaning of penal tax, penalty, and their application. Black's Law Dictionary defines "penal" as "Of relating to or being a penalty or punishment, especially for a crime." The use of the word 'especially' in the definition means that the word 'penal' though used mostly for crimes is not limited to crime. Black's Dictionary at p.1313 further defines 'penalty' as follows.

"1. Punishment imposed on a wrongdoer, usually in the form of imprisonment or fine; especially., a sum of money exacted as punishment for either a wrong to the state or a civil wrong (as distinguished from compensation for the injured party's loss). Though usu. for crimes, penalties are also sometimes imposed for civil wrongs."

A penalty may be imposed contractually, for instance by banks in loan agreements. Such penalties are civil in nature as they may be enforced through a civil court when in dispute. Black's Law Dictionary further defines civil penalty (supra) as "A fine assessed for a violation of a statute or regulation..." The penal tax imposed on the applicant was for acting in violation of a statutory provision. Statutory penalty is defined by Black's Law Dictionary at p. 1314. as

"A penalty imposed for a statutory violation; esp. a penalty imposing automatic liability on a wrongdoer for violation of a statute's terms without reference to any actual damages suffered."

Therefore, penalties and penal tax may sometimes be civil in nature.

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In other jurisdictions, penalties under a statute maybe criminal or civil. For instance, by IRS in the US and the SRS in South Africa. Penalties maybe imposed against taxpayers who commit tax fraud. Tax fraud is defined in Black's Law Dictionary 10^th Edition at p. 1690 as tax evasion which it defines as, "The willful attempt to defeat or circumvent the tax law in order to reduce one's tax liabilities. Tax evasion is punishable by both civil and criminal penalties." Freeman law states that civil tax fraud generally results in penalties asserted against a taxpayer (loss of money or assets) whereas criminal tax fraud generally results in jail (loss of freedom) (Freemanlaw.com.). Therefore, conduct which constitutes criminal tax fraud may also be considered as civil tax fraud. Civil penalties may take the form of administrative action by revenue collecting bodies on taxpayers who do not comply with statutory provisions. It is up to the Revenue Collecting Authority to

determine whether to impose criminal tax penalties or civil penalties or both." In some criminal tax cases, a convicted person may also be required to pay civil tax and penalties as well as criminal fines. The difference between civil tax fraud and criminal tax fraud is in the requirement of standard of proof. The first is on a balance of probability while the other proof beyond reasonable doubt.

The applicant was penalized for giving false and misleading information. The Tribunal has to determine whether the penalties constituted criminal tax fraud or civil tax fraud. The Tribunal has to determine whether the VAT Act makes provision for both types of tax fraud and if not, which one is provided for. We already stated that the applicant was penalized under the VAT Act which takes precedence over the Tax Procedure Code Act. However, this will not stop us at looking at the same offence under the Tax Procedure Code Act

In order to understand whether penal tax is criminal or civil under the VAT Act, the Act must be read as a whole. The Tribunal has already cited S. 65 of the VAT Act. S. 66 of VAT Act throws some light on how penalties and penal tax are treated under the VAT Act. It reads.

## "66 Recovery of Penal Tax

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- (1) Where good cause is shown in writing, by the person liable to pay a penal tax the Commissioner General may remit in whole or party any penal tax payable other than the penal tax imposed or payable under Section 65 for late payment. - (2) Subject to subsection (3), the imposition of a penal tax is in addition to any penalty imposed as a result of a conviction for an offence under sections 51 to 64. - (3) No penal tax in payable under Sections 65 where the person has been convicted of an offence under section 51,55,59 in respect of the same act or omission. - (4) If a penal tax under Section 65 has been paid and the Commissioner General institutes a prosecution proceeding under Section 51, 55 or 59 in respect of the same act or omission, the Commissioner General shall refund the amount of penal tax paid, that that penal tax is not payable unless the prosecution is withdrawn"

S. 66 (2) of the VAT Act mentions penal tax which it distinguishes from penalties imposed as a result of a conviction. Penal tax means a tax imposed as a penalty for failure to perform an act required by or under a tax law (https://www.lawinsider.com/dictionary/penal-tax). A penalty is defined by Black's Law Dictionary (supra) p. 1312 inter alia as 1. Punishment imposed on a wrongdoer, usu. in the form of imprisonment or fine. Black's Law Dictionary at p. 408 defines 'conviction' as

"1. The act or process of judicially finding someone guilty of a crime, the state of having been proved guilty. 2. The judgement as by a jury verdict, that a person is guilty of a crime "

S. 62(2) of the Act states that convictions are from Sections 51 to 64, making them criminal in nature. S. 65 of the VAT Act is not included in the said Sections. Since there is no conviction under S. 65 it makes it civil in nature. It aims at punishing civil tax fraud,

Sections 66(3) and 66(4) of the VAT Act are to the effect that if someone has been convicted and fined a penalty for a crime, he cannot pay penal tax under S. 65, It clearly states that under S.65(3) no penal tax is payable under S. 65 if a person has been convicted. This is a manifestation that penal tax under S. 65 does not arise from criminal prosecution. Therefore, the Penal Tax under S. 65 does not relate to criminal conviction. S. 64 of the VAT Act clarifies that if a person has paid penal tax under S. 65 and prosecution is initiated against him the Commissioner shall refund the penal tax paid. The Sections, i.e., Sections 66(3) and 66(4) aim at preventing a taxpayer from suffering double jeopardy which may arise if one is charged with criminal tax fraud and civil tax fraud.

To throw more light on whether S. 65 of the VAT Act is dealing with civil tax fraud, one has to look at the amendments in the VAT Act dealing with criminal tax fraud in particular making false and misleading statements. Before S. 59 of the VAT Act was deleted a person would be convicted for making a false or misleading statement. Before S. 59 was deleted, it read.

"(1) A person who -

- (a) Makes a statement to an officer of the Uganda Revenue Authority that is false or misleading in a material particular; or - (b) Omits from a statement made to an officer of the Uganda Revenue Authority any matter or thing without which the statement is misleading in a material particular, commits an offence.

(2) A person who commits an offence under subsection (1) is liable on conviction to -

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- (a) where the statement or omission was made knowingly or recklessly, a fine not exceeding five hundred thousand shillings or to imprisonment for a term not exceeding five years or both! or - (b) in any other case, a fine not exceeding three hundred thousand shillings or to imprisonment for a term not exceeding six months, or both - (3) It is a defence to the accused person to prove that he or she did not know and could not reasonably be expected to have known that the statement to which the prosecution relates was false or misleading."

The said offence was deleted but reinstated in S. 58 of the Tax Procedure Code Act with some adjustments but still as a criminal offence. The same fate befell the other offences deleted in the VAT Act. What is important to note is that under S. 59 of the VAT Act. before it was deleted, a person would be made liable for a false and misleading statement just like under S. 65 of the VAT Act. It was not by accident that both sections deal with making false or misleading statements. S. 65 does not mention that for a person to be penalized he has to be convicted or commits an offence. This implies that the penal tax under S. 65 is not criminal but civil in nature while that under S. 59 it was criminal in nature. Under S. 59 one would be fined and or sentenced to imprisonment while under S. 65 one was charged penal tax. S.66 of the VAT Act restricts the application of penal tax to S₆₅ while penalties are issued to those convicted of crimes from Sections 51 to S.64. Though S. 59 was deleted it was reinstated in the Tax Procedure Code under S. 58 with some adjustments, making the offence of giving a false and misleading statement still criminal. S. 65 of the VAT Act was not deleted meaning the civil offence of making a false and misleading statement is still intact. Therefore, the attempt by the applicant to contend that S. 58 of the Tax Procedure Code Act takes precedence over S. 65 of the VAT Act is misconceived as each Section is handling the offence of making a false and misleading statement from a different perspective. One deals with criminal tax fraud while the other deals with civil tax fraud.

We already stated that S. 66(2) of the VAT Act seems to distinguish a penalty imposed as a result of conviction under S. 51 to 64 from penal tax arising under S. 65. S. 66(5) and 66(6) further state how penal tax should be treated. S. 66(5) of the VAT Act reads.

"Penal tax shall for all purposes of this Act be treated as a tax of the same nature as the output tax to which it relates and shall be payable in and for the same tax period as that output tax.

S. $65(6)$ states that.

"Penal tax shall be assessed by the Commissioner General in the same manner as the output tax to which it relates, and an assessment of penal tax shall be treated for all purposes as an assessment of tax under this Act."

The effect of S. $65(5)$ and S. $66(6)$ it to treat penal tax as output tax to which it relates. Under S. 66(6) of the Act the Commissioner General is required to issue an assessment in respect of penal tax. An assessment issued by the respondent connotes that the penal tax is civil in nature as it is not a charge sheet issued for criminal offences. Therefore, the VAT Act treats penal tax as tax assessed by the Commissioner General as different from penalties arising from the conviction of court. Under S. 66(1) the Commissioner General may remit penal tax and under S.67 of the VAT Act, he may refer a taxpayer's case to the Minister to remit or write off penal tax. If penal tax was resulting from criminal prosecution, wouldn't the Commissioner General's actions of remitting penal tax not be seen as an interference to the independence of the judiciary? Can a government official waive a sentence or penalty imposed by court? To state so would mean that when a minster writes off penal tax he is acting in contempt of court. This emphasizes that the penal tax imposed under S. 65 cannot be a result of criminal prosecution.

The Sande Pande Ndimwibo case raises some issues. Firstly, statute law takes precedence over case law. A legislature is always assumed to be right arising from Parliamentary sovereignty. Where provisions of a statute are impugned, it has to be done properly. All the offending provisions should be impugned. If not, they remain part of the law. For instance, when S. 65 of the VAT Act (which dealing with the substantive law) is deleted, the Commissioner General can still issue an assessment for penal tax under S. 66 of the VAT Act (which deals with procedure), the dispute will still end up before the Tribunal. The Tribunal will be moving in circles. This brings us to the second issue. A court decision cannot amend or nullify a statute whether substantially or not, on constitutional grounds, unless the court is a constitutional court giving a constitutional interpretation and making pronouncements on the validity of the provisions of a statute.

The impugned provisions infringing on the constitution and not one, are supposed to be struck out as a whole by the constitutional court. If there are still in operation, they are still law, and the Tribunal is supposed to give effect and or apply them. It is not clear why a constitutional court would hold civil tax fraud as unconstitutional because it is not criminal. Each serves its own purpose. There are other jurisdictions which have civil tax fraud, it has not been held to be unconstitutional. Thirdly, in light of the Supreme Court decision of Rabbo Enterprises which held that the Tax Appeals Tribunal is a court of first instance in tax disputes, it is not clear how a court which was exercising jurisdiction vested in another court can make a decision binding on the other court. The court making decisions should be exercising appellate jurisdiction and not that which was not vested in the other court. Lastly, where the decision of a court on the exercise of its jurisdiction by the Tribunal conflicts with that of a Supreme Court, the latter takes precedence. If civil tax fraud is properly before a Tribunal, it may abdicate from the jurisdiction vested in it if it refuses to listen to the dispute.

Article 28(1) of the Constitution provides that," In the determination of civil rights and obligations or any criminal charge, a person shall be entitled to a fair, speedy and public hearing before an independent and impartial court or tribunal established by law." The obligation not to make false and misleading statements to Uganda Revenue Authority is provided for under taxing laws. Article 152 of the Constitution provided for the establishment of Tax Appeals Tribunal to listen to tax disputes. The Tax Appeals Tribunal is an independent and impartial judicial body. As stated in the Rabbo Enterprise decision(supra) the Tax Appeals Tribunal is a court of first instance in listening to tax disputes. However, the dispute must not be criminal in nature as there are competent courts to determine criminal liability.

The tribunal already noted that penal interest issued under S. 65 is penal tax distinguished from penalties arising from convictions under S. 51 to S. 64 of the VAT Act. Therefore, if a taxpayer objects, an objection decision is made and an application for review if filed before the Tribunal, for the Tribunal to require that the taxpayer to first be prosecuted would be an abdication by it of the jurisdiction vested in it under the Constitution. The Tribunal notes that what was issued to the applicant by the respondent was a VAT

assessment containing penal tax and not a charge sheet. The applicant objected to an assessment and did not enter any plea before any other or criminal court. An objection decision was issued which the applicant is aggrieved of, hence filing this application. If the Tribunal were to agree with the applicant that it has to first be criminally prosecuted it means that this application for review should be dismissed for want of jurisdiction which would be to the applicant's detriment as its matter on civil tax fraud would not be determined. One wonders why the applicant would file an application in a wrong forum and shoot itself in the leg by raising a preliminary objection to the effect that the tribunal that does not have jurisdiction over its matter. Secondly, criminal prosecution of directors of companies for acts of employees at times maybe an embarrassment especially like in this case where they are not aware of the actions of the company's employees. The law made the offence one of strict liability. The need to find a person guilty of the alleged offence was overtaken by the amendment in the VAT Act that omitted the words "knowingly" and "recklessly". There is no need to prove mens rea. Once a person makes a false and misleading statement, he is assumed to be guilty. Directors may opt for civil punishment rather than imprisonment. On the part of Uganda Revenue Authority if it were to prosecute every person who makes a false and misleading statement it would become a busy body concerned more with prosecuting taxpayers rather than collecting taxes. Where a person does not deny that he made a false statement and is willing to pay the tax it is not necessary to prosecute him. The penal tax under S. 65 of the VAT Act was intended to punish people who make false and misleading statements including invoice trading. To ignore such activities, would be to encourage fraudulent actions which may affect tax collection. While the civil penal tax aimed at punishing the companies where the directors may not be aware of what is happening, the criminal penal tax aimed at the actual perpetrators of the tax fraud.

If the legislature decides to treat giving false and misleading information under S. 65 of the VAT Act as a civil wrong, the Tribunal cannot dispute it. The Tribunal cannot read or add 'conviction' or 'commits an offence' into S.65 of the VAT Act when it is not mentioned. The penalty imposed on the applicant under S.65 of the VAT Act. was not criminal but civil and statutory in nature. The VAT Act specifically created S. 59 to deal with the criminal aspect of giving false and misleading information. When S. 59 was deleted in the

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VAT Act. S. 58 of the Tax Procedure Code Act was enacted with adjustments to deal with the criminal aspect of giving false and misleading information. S. 65 of the VAT Act was not deleted nor repeated as it is in the Tax Procedure Code Act, leaving the civil aspect of giving false and misleading information in the VAT Act intact. The matter being civil in nature and a breach of a statutory tax obligation, it is within the mandate of the Tribunal under the Constitution and the Supreme Court decision of Rabbo Enterprise, to listen to the dispute involving civil penal tax.

Having determined the question of jurisdiction, the Tribunal will go to the one on whether the applicant is liable for the actions of Mark Kiyaga? The applicant does not deny that Mark Kiyaga made false statements and declarations using fictitious invoices from Sun Mutual Capital Limited. The applicant contended that Mark Kiyaga was acting on his own accord and the directors and shareholders were not aware of his actions. A criminal case was opened against Mark Kiyaga. The applicant does not deny that Mark Kiyaga was its employee. The Tribunal notes that companies are not physical entities. There are nonphysical entities that act through human beings known as directors and employees who include management and staff. Whereas the directors may oversee policies of the company, it is managed by the management, its activities are done by its staff. In tort an employer is in general liable for the acts of his employees while acting in the course of the employer's business or within the scope of employment. In Muwonge v Attorney General [1967] EA 17 it was stated that an act may be done in the course of employment of the employee so as to make his master liable even though it is done contrary to the orders of the master, and even if the servant is acting deliberately, wantonly, negligently, or criminally or for his own behalf, nevertheless if what he did is merely a manner of carrying out what he was employed to carry out, then his master is liable. The position in tax law would be no different from that of tort. Companies cannot file returns nor make statements or declarations to Uganda Revenue Authority. It is their employees who do that. A company is liable for the actions of its employees if they act for its benefit and or in the scope of their employment. The applicant did not address the issue as to whose benefit were the declarations or statements by Mark Kiyaga made for. The false declaration and statements were made in the applicant's VAT returns and not those of Mark Kiyaga. If there was any person to benefit from the false declarations, it would be

the applicant. It would claim VAT input tax and pay less VAT. There is no evidence that Kiyaga was personally benefitting from the false declarations. Therefore, the applicant's submission that the applicant should not be liable for the actions of Mark Kiyaga fails to extinguish the litmus test of employer's liability for the actions of an employee.

An employee cannot be equated to an agent under a contract. An employee is under a contract of service while an agent is under a contract for service. The liabilities of a principal for the actions of an agent differ from those of an employer for the actions of his employee. An employer is liable for the actions of his employee if there are done in the course of his employment. The Tribunal already noted that the accountant was filing returns for the benefit of the applicant and not for his own benefit. Any fictious invoices would reduce the applicant's tax liability and increases the input VAT claimed and not that of the accountant. In short, the applicant should have employed an honest accountant. Therefore, there is no reason why the applicant should not take the fall for the accountant's actions.

The applicant submitted that where fraud is the cause of action, it is necessary for the respondent to plead particulars of fraud. The action before the Tribunal is not one of tort, but a tax dispute. Under the Tax Appeals Tribunal Act and the Tax Procedure Code Act, it is the taxpayer who files an application before the Tribunal and not the respondent. the applicant further stated that "Although the respondent alleges that the applicant committed VAT Fraud, it did not state exactly when it happened, how it happened and who was responsible." There is no requirement for the respondent to prove fraud. The burden is on the taxpayer to prove that it was not involved in civil tax fraud. S. 18 of the Tax Appeals Tribunal Act provides that.

"In a proceeding before a tribunal for review of a taxation decision, the applicant has the burden of proving that —

- (a) where the taxation decision is an objection decision in relation to an assessment, the assessment is excessive; or - (b) in any other case, the taxation decision should not have been made or should have been made differently". - S. 26 of the Tax Procedure Code Act provides that.

- In any proceeding under this Act— - (a) for a tax assessment, the burden is on the taxpayer to prove that the assessment is incorrect; or - (b) for any other tax decision, the burden is on the person objecting to the decision to prove that the decision should not have been made or should have been made differently."

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The burden is on the applicant to prove that it did not make any statement or declaration to Uganda Revenue Authority that is misleading or false. The applicant did not call any witnesses to dispute the fact that false and misleading statements were made. There is also no evidence that Sun Mutual Capital Limited existed and it issued the impugned invoices. The applicant does not deny that Mark Kiyaga was not its employee and was acting in the scope of his employment. The applicant has not discharged the burden of proof placed on it.

In the circumstances, this application is dismissed with costs to the respondent.

Dated at Kampala this

DR. ASA MUGENYI **CHAIRMAN**

MR./GEORGE MUGERWA MEMBER

2023.

Christophatine

**MS. CHRISTINE KATWF MEMBER**