REPUBLIC OF KENYA
IN THE HIGH COURT AT NAIROBI
MILIMANI COMMERCIAL & TAX DIVISION
HCCOMMITA NO. E202OF 2024
WEBTRIBE LIMITED T/A JAMBO PAY …. …………………….APPELLANT
VERSUS
COMMISSIONER OF LEGAL SERVICES AND BOARD COORDINATION………………………………………………………RESPONDENT
(Being an appeal arising from the judgement of the Tax Appeals Tribunal delivered in Nairobi on 13 th June 2024 in Tax Appeals Tribunal Appeal No. 114 of 2023)
JUDGMENT
Introduction
1. The Appellant is a limited liability company duly incorporated in Kenya and its principal business activity is being a payment service provider (PSP), duly licensed and regulated by the Central Bank of Kenya (CBK) under the National Payment System Act, Cap 491A of the Laws of Kenya (NPSA) and the National Payment System Regulations, 2014 (the Regulations).
3. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority (KRA) 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.
4. Through a letter dated 16/05/2019, the appellant was served with a notice of tax investigations. The investigations covered the period between January 2015 and December 2019 for corporation tax and Value Added Tax. On 16/06/2021, the Respondent issued preliminary investigation findings to the appellant relating to a reconciliation of its banking receipts and recognized revenue. The VAT status of the appellant’s s commissions from the provision of automated revenue collection services and the nature of payments made from the Respondent’s bank accounts to that of its directors.
5. The appellant responded on 17/06/2021 and after correspondence between the parties, the Respondent issued iTAX assessments on 21/02/2022. Through a letter dated 23/02/2022, the Respondent advised the appellant of additional corporate tax assessments of kshs 25,481,299/= and additional VAT assessments of kshs 210,721,841/=.
6. The appellant objected on 18/03/2022 and the Respondent issued an objection decision on 23/12/2022 Ref: I&E/DTIS/NBI/225/019. In the decision the summary of taxes due was stated to be corporation Tax @30% Ksh 16,290, 295 and VAT@16% Ksh 204 ,181,725.
7. Aggrieved by the said decision, the Respondent appealed to the Tax Appeals Tribunal.
Appeal before the Tax Appeals Tribunal
8. The appellant vide Memorandum of appeal dated 3 rd February 2023 raised the following grounds;
a) The Respondent erred in law by issuing an objection decision outside the statutory time of sixty(60) days contrary to section 51(11) of the Tax Procedures Act, Cap 469B of the Laws of Kenya (TPA).
b) The Respondent erred in law and fact in assessing VAT for the periods between January 2015 and 2017 which periods were beyond the five-year time limitation period contrary to section 31(4)(b)(i) of the TPA.
c) The Commissioner erred in law and fact by assessing VAT on the taxpayers Revenue Collection Services as they are exempted from VAT under paragraph 1(m) as read with paragraph 1(b) of part II of the first schedule to the VAT Act, Cap 476 Laws of Kenya.
d) The Respondent erred in law and fact by violating the taxpayers right to legitimate expectation that their income from the revenue collection services qualify as VAT exempt based on the Commissioner’s failure to provide a contrary position to the Appellant’s letter dated 18/07/2016.
e) The Respondent erred in law and fact by assessing corporation tax without considering some of the necessary adjustments in the banking analysis carried out.
9. The Tribunal found merit in the appeal partially and gave the following orders;
a) The Appeal be and is hereby partially allowed.
b) The Respondent’s objection decision dated 23/12/2022 be and is hereby varied as follows;
i. The corporation tax assessment of kshs 25,481,299/= be and is hereby upheld; and
ii. The entire VAT assessment of kshs 210,721,841/= be and is hereby expunged.
c) Each party to bear its own costs.
10. Aggrieved by that judgment, the Appellant herein appealed to this court, via a Memorandum of Appeal dated 3 rd February 2023, and raised the following grounds;
a) The Tribunal erred in law and in fact in returning a finding that the Respondent in issuing its objection decision was in compliance with Section 31 and Section 51 (11) of the Tax Procedures Act, 2015 as it relates to the statutory limitation of time for issuance of an objection decision.
b) The Tribunal erred in law and fact by returning a finding that the Appellant did not discharge its evidentiary burden pursuant to Section 51(3)(c) of the Tax Procedures Act, 2015 in relation to the Corporation Tax assessment.
c) The Tribunal erred in law in varying the Corporation Tax assessment amounts in the Respondent’s Objection Decision without providing reasons for its determination contrary to the provisions of Section 29 of the Tax Appeals Tribunal Act, 2013.
11. Directions were given that the appeal be canvassed through written submissions.
12. I did not find separate submissions by the appellant in this appeal but being similar to the appeal E203 of 203 emanating from the same decision of the tribunal I took the liberty of taking into account the parties’ submissions in that appeal.
Appellant’s Submissions
13. It was submitted that the Tribunal erred by upholding a time barred objection decision in favor of the Appellant. Relying on section 51 (11) of the TPA, it was submitted that the moment the sixtieth day lapsed after the Respondent had received the notice of objection by the appellant t, the objection was deemed allowed by operation of the law. Reliance was placed on Republic -vs- Kenya Revenue Authority ex-parte M-Kopa Kenya Limited [2018] eKLR where the court stated:
“106. …In this case the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under Section 51 (11) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed.”
14. Further reliance was placed on Morgan Air and Sea Freight Logistics Kenya -vs- the Commissioner of Domestic Taxes, TAT No. 286 of 2020 , where the Tribunal held that;
“18. The TPA at Section 51 (11) obligates the Respondent, in mandatory terms no less, to render an objection decision within sixty (60) days of receipt of an objection notice. In this case, the Respondent has not rendered an objection decision within the stipulated statutory timeline; in fact, there is no objection decision at all to this date. This Section also, again in mandatory terms, further states that in the event the Respondent fails to make an objection decision, the objection shall be deemed allowed.
19. The effect of this is that the Respondent’s various rejection notices to the Appellant’s refund claims cease to have force in law as it has accepted the Appellant’s claim.”
15. It was submitted that section 51 (11) of the TPA must be read with perfect strictness in accordance with the rule of interpretation of tax statutes which provides that one must look merely at what is clearly said as there is no room for intendment, assumption or presumption in interpreting taxing legislation. Reliance was placed on Mount Kenya Bottlers Limited & 3 others -vs- Attorney General & 3 others [2019] eKLR where the Court of Appeal pointed out that:
“... ‘Nevertheless, taxation is clearly “penal” within this section of the Code, and must not be enforced by the courts unless clearly imposed’…The same principles as above, were accepted and applied in the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1921] KB 64 where Ronlat J, restated the principle in these words: “in a taxing Act clear words are necessary in order to tax the subject…It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly on the language used…”
16. It was submitted that the appellant lodged a valid objection on 14/03/ 2022 hence the respondent was required to issue the objection decision on or before 14/05/2022. It was contended that the Tribunal erroneously found that the 60-day period started running from the last correspondence between the Respondent and one of the appellant’s directors.
17. It was submitted that there are two (2) relevant versions of Section 51 (11) of the TPA - the version prior to the amendment by the Finance Act, 2022 (the Previous Version) and the version after the amendment by the Finance Act, 2022 (the Amended Version). It was submitted that the Amended Version was effective 01/07/ 2022 and is the one that is applicable to the objection decision issued on 23/12/2022. It was submitted that the general rule in the construction of statutes is that they do not have a retrospective application unless it is the express intention of Parliament for them to apply retrospectively and in that case, they would expressly state so. Reliance was placed on Commissioner of Income Tax -vs- Pan African Paper Mills (E.A.) Limited [2018] where the Court of Appeal held:
“20. We are guided by the case of Yew Bon Tew v Kenderaan Bas Mara [1982] 3 All ER 833 where the Privy Council held as follows: “Apart from the provisions of the interpretation of statutes, there is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation…”
18. It was submitted that the appellant and its director are two distinct persons with separate tax liabilities. That even if it were the case that the Previous Version of Section 51(11) of the TPA was applicable, the Tribunal’s finding that the Respondent’s objection decision was proper in law was premised on a misapprehension of Company Law when it held, at paragraph 103 of its Judgement, that since there were electronic mails between the Respondent and one of the appellant’s directors between March 2022 and October 2022, then the objection decision was issued within time on 23/12/2022. That, the holding was despite the fact that the Tribunal acknowledged that the correspondence between the appellant’s director and the Respondent were in relation to the appellant’s director’s own personal tax assessment. It was contended that the Respondent’s discussion with the director was in relation to the director who had received an assessment in his personal capacity under his own personal identification number (PIN).
19. It was submitted that even if the assessment of its director was linked to that of the appellant, the fact remains that they were to be treated as two separate assessments as they are two separate persons. Reliance was placed on Stephen Kimathi Mutiso -vs- Commissioner of Domestic Taxes, TAT No. 187 of 2019 where the Tribunal noted that;
“35…. the law recognizes the company and the director as two distinct and separate legal persons…”
20. It was contended that even if it were the case that the information provided
by the director was relevant in the investigations on the appellant’s tax affairs, the Appellant cannot turn around to say that, the fact that they were in contact with the director who shared information with the Respondent in relation to his personal tax matters, means that the same was in relation to the appellant’s assessment. That allowing such reasoning will create dangerous precedents in the assessment of corporate taxpayers where it may be believed that a director’s tax assessment will inevitably have undesirable consequences on the companies they serve, yet these are supposed to be two separate and distinct persons with distinct tax registrations as well as tax liabilities.
21. It was submitted that the Tribunal was right in its computation of the five-year timeline in partially invalidating the assessments by the Appellant. Relying on section 31 (4) (b) (i) of the TPA, it was submitted that the Respondent had no basis to assess the appellant beyond the statutory timelines and was bound by the rule of strict interpretation of taxation statutes as set out in the case of Mount Kenya Bottlers Limited (supra). That , the TPA is a tax statute as set out in its section 2.
22. It was submitted that an amended tax assessment should be issued within five (5) years from the date the taxpayer submitted the self-assessment return . That the appellant filed its VAT return for the month of January 2017 on 20/02/2017 hence an assessment for this period and beyond was limited to be issued between 20 th February 2017 and 20 th February 2022 . That, the Respondent issued an assessment dated 23/02/2022 which was a period outside the statutory timeline for the amendment of assessments under Section 31 of the TPA. That, the assessment between January 2015 and January 2017 was out of time hence the Tribunal was right to find that the Respondent did not meet the requirements of Section 31 of the TPA at the time of amending the appellant’s assessment.
23. .It was submitted that the Respondent is misdirecting this court by stating that the appellant charged for VAT and failed to remit the same It was submitted that the Respondent’s assertion is tantamount to allegations of fraud or tax evasion against the appellant hence, he who alleges must prove. Reliance was placed on National Social Security Fund Board of Trustees -vs- Commissioner of Domestic Taxes [2016] eKLR where the court stated;
“There is a world of difference between an assertion and proof . That which a party states to be his case is an assertion . The party needs to adduce evidence to support his said assertion , with a view to proving his case.”
24. It was submitted that the Respondent’s allegations in this regard are wholly in bad faith, outside the confines of its pleadings and should not to stand in this Honourable Court.
Respondent’s Submissions
25. The Respondent identified the issues for determination to be;
a) Whether the Respondent’s objection decision was within the stipulated time lines as envisaged by the TPA .
b) Whether the Corporation tax assessment was justified.
Whether the Respondent’s Objection decision was within the stipulated timelines as envisaged under the Tax Procedures Act
26. In response to the argument by the Appellant that the Respondent erred in assessing their tax declarations for the periods between January 2015 and January 2017, which periods they alleged were beyond the five-year time limitation contrary to Section 31 (4) of the Tax Procedures ; thee Respondent submitted that its investigations into the tax affairs of the Appellant were commenced on 16th May 2019, for the period between January 2015 and December 2019 for corporation tax and Value added Tax. The respondent relied on Section 31 (4) (b) (ii) of the Tax Procedures Act, which states:
(4) The Commissioner may amend an assessment—
(a) In the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or (b) In any other case, within five years of— (i) For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or
(ii) For any other assessment, the date the Commissioner notified the taxpayer of the assessment.
27. Arguing that the appellant’s assessment fell within the category of any other assessment , the Respondent argued that it was within the time lines provided , which was within 5 years from the date the appellant was notified of the assessment which was 16th May 2019. Further that this provision of the law granted the respondent the liberty to review the Appellant’s tax affairs until the year 2014 (sic)and therefore was proper in raising assessment for the period between 2015 and 2019.
28. It was submitted that the Appellant had lodged an invalid Objection as it was not supported by all the relevant Documentation. That the Respondent thus afforded the Appellant numerous opportunities to supply all documentation as was allowed by Law. That the last one was given on 24th October 2022 as indicated in the objection decision. That it was evident from the objection decision dated 23rd December 2022 that the Appellant and the Respondent had been in communication as the letter makes reference to supply of additional documents by the Appellant on 12th September, 2022 and 24th October, 2022 in support of the objection.
29. Regarding the alleged conflation of the appellant’s and the appellant’s tax issues, the Respondent submitted that while considering the Appellant’s notice of objection it noted that the Appellant and its directors to wit; Danson Muchemi and Winter Anyango’s tax assessments were intricately interrelated. That during consideration, the Appellant had indicated in their notice of Objection that there was a sale of shares agreement dated 5th January 2014 among other documentation that had a bearing on both the director and the company. That the Respondent issued the Appellant with the tax assessments on 23rd February, 2022 with a tax liability of Kshs. 236,203,139/- for the Appellant and Kshs. 7,787,042 for one of the Appellant’s Directors i.e., Danson Muchemi Njunji.
30. It is the Respondent’s position that it duly issued its objection decision as required by law within the statutory limitation of 60 days.
31. Consequently, the Appellant issued a notice of objection dated 18th March, 2022 objecting the tax assessments and the Respondent consequently, issued the Objection decision on 23rd December 2022 well within the 60 days of receiving the last documentation.
32. The Respondent relied on Section 51 (11)(b) 2021, of the TPA which provides:
(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of—
(a) the notice of objection; or
(b) any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.
33. The respondent urged the court to bear in mind that the notice of objection was lodged on 18th March 2022 before the amendment to section 51(11) b of the Tax Procedures Ac t, by Section 44 of the Finance Act, 2022.
34. That the last documentation having been received on 24th October 2022 the objection decision dated 23rd December 2022 was within the requisite statutory limit of 60 days.
Whether the Corporation tax assessments was justified
35. The Respondent argued that the burden was upon the appellant “ to prove that a tax decision is wrong/incorrect ” as required by 56(1) of the Tax Procedures Act,2015 . That the Appellant having failed to provide the necessary documents to object to the Assessment the respondent was justified in issuing additional corporation tax .
36. The respondent relies on Section 51(3) of the Tax Procedures Act 2015 provides that for a Notice of Objection to be valid, the taxpayer has to precisely state the grounds of objection, has to pay all the taxes not in dispute and provide all the relevant documents in support of the objection. It states:
“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;
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.
c. All the relevant documents relating to the objection have been submitted .
37. For the respondent’s mandate to require the production of documents from a taxpayer for the purposes of obtaining full information, the respondent relied on Section 59(1) of the Tax Procedures Act, 2015 which states;
“ For the purposes of obtaining full information…the Commissioner or an authorised officer may require any person, by notice in writing, to—
(a) produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability…
(b) furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice...
38. It is submitted that section 31(1) of the Tax Procedures Act fortifies that position stating;
Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—
(a)in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period; (b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or
(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.
39. It is submitted that the law puts emphasis on the Appellant’s duty to avail the requisite documents in support of its objection in default of which the Respondent can only make a decision based on the information in its possession. Hence the additional corporation tax was justified.
Duty of Court
40. Section 56(2) of the Tax Procedures Act provides that an appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal is on a question of law only. In John Munuve Mati -vs- Returning Officer Mwingi North Constituency & 2 others [2018] eKLR , the Court of Appeal summarized what amounts to “matters of law” as follows;
“The interpretation or construction of the Constitution , statute or regulations made thereunder or their application to the sets of facts established by the trial Court. As far as facts are concerned, our engagement with them is limited to background and context and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law that is the province of the trial court.”
41. I have considered the grounds of appeal, the statement of facts, the rival submissions and entire record. I consider the following as the issues emerging determination ;
i. Whether the objection decision was issued compliance with Section 31 and Section 51 (11) of the Tax Procedures Act, 2015 as it relates to the statutory limitation of time for issuance of an objection decision.
ii. Whether the Appellant discharged its evidentiary burden pursuant to Section 51(3)(c) of the Tax Procedures Act, 2015 in relation to the Corporation Tax assessment.
iii. Whether the variation of the Corporation Tax assessment amounts in the Respondent’s Objection Decision was supported by reasons as required by Section 29 of the Tax Appeals Tribunal Act, 2013.
Analysis & determination
Whether the Respondent amended the taxpayer’s returns within the timelines prescribed by the law.
42. The Respondent issued the Appellant with a notice of tax assessment for the period January 2015 to December 2019 on 23/02/2022.
43. According to Section 24 of the TPA the Commissioner is not bound by the taxpayer’s self-assessment and can issue an amendment. It states;
(1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.
(2) The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.
44. The Power to amend is provided for under Section 31 of the TPA thus;
(1) Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions , from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that;
……………………………………………..
……………………………………………..
(4) The Commissioner may amend an assessment;
(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or
(b)in any other case, within five years of;
(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or
(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment:
Provided that in the case of value added tax , the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.
45. A plain reading of this indicates that there is no time limit to the exercise of this power in cases of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer but in nay other case, there is only a 5 year window.
46. T he determination of this issue depends on the interpretation of the above provision and it is trite that in interpreting tax statutes, the court should do so strictly without leaving room for intendment, implication or presumption as held in Stanbic Bank Kenya Limited -vs- Kenya Revenue Authority (2009) eKLR . Similarly, in Commissioner of Investigations and Enforcement -vs- Libya Oil Kenya Ltd (Income Tax Appeal E104 of 2021) [2024] KEHC 3624 (KLR) (Commercial and Tax) (15 April 2024), the court stated that; “It is trite that Tax Statutes are to be strictly interpreted and there is no room for imputing that which has not been legislated into statute by Parliament.”
47. The notice of tax investigations to the taxpayer was made by the Respondent via a letter dated 16/05/2019 (KRA 1). The letter indicated that the taxpayer was under investigation for the offence(s) of tax evasion which included but was not limited to acts of fraud i.e under declaration of corporation tax and VAT. Further, the letter indicated that preliminary findings showed unpaid VAT of kshs 114,088,006/=. In a letter dated 16/06/2021 (KRA 2), the Respondent informed the taxpayer that its findings therein constituted tax offences for which the commissioner was at liberty to institute criminal proceedings. There is no evidence that the said criminal proceedings were ever instituted hence no basis of finding that the additional assessments were made as a result of ‘ gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer’ so as to reach a conclusion that the Respondent was at liberty to do the amendment at any time as provided for by section 31(4)(a) of the TPA.
48. The appellant filed its VAT return for the month of January 2017 (Appendix 8) on 15/02/2017 thus bringing the matter within the purview of section 31(4) (b) of the TPA. This section requires the Commissioner to amend an assessment within five years from the date the taxpayer submitted the self-assessment return. This means that an amendment of the assessment for January 2017 should have been done by 15/02/2022. Consequently, the amendments for the period January 2015 to January 2017 were time barred and the Tribunal was correct in its finding.
Whether the objection decision was issued on time
49. The Respondent’s notice of objection is dated 14/03/2022 and admittedly received by the Appellant on 16/03/2022. The objection decision was issued on 23/12/2022.
50. The applicable law at the material time was section 51(11) of the Tax Procedures Act (TPA) as amended by the Finance Act No. 23 of 2019 which came into operation on 07/11/2019. The amendment provided that;
“32. Section 51 of the Tax Procedures Act, 2015 is amended by deleting sub section (11) and substituting therefor the following new sub section;
(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of;
a) The notice of objection, or
b) Any further information the Commissioner may require from the tax payer.
Failure to which the objection shall be deemed to be allowed.”
51. The Respondent argued that the applicable law was the one amended by the Finance Act 2022 which became effective on 01/07/2022. However, that amounts to retrospective application of the law because the said amendment was not in place in March 2022 when the notice of objection was lodged.
52. The Tribunal opined that the objection decision should have been issued around 13/05/2022 if there had been no communication between the parties. The communication referred to are electronic mails between the Respondent and Appellant’s Director dated 31/03/2022, 22/08/2022, 02/09/2022, 12/09/2022 and 24/10/2022.
53. I have looked at the emails cited and the subject in all of them was ‘Ob
[...truncated]
IN THE HIGH COURT AT NAIROBI
MILIMANI COMMERCIAL & TAX DIVISION
HCCOMMITA NO. E202OF 2024
WEBTRIBE LIMITED T/A JAMBO PAY …. …………………….APPELLANT
VERSUS
COMMISSIONER OF LEGAL SERVICES AND BOARD COORDINATION………………………………………………………RESPONDENT
(Being an appeal arising from the judgement of the Tax Appeals Tribunal delivered in Nairobi on 13 th June 2024 in Tax Appeals Tribunal Appeal No. 114 of 2023)
JUDGMENT
Introduction
1. The Appellant is a limited liability company duly incorporated in Kenya and its principal business activity is being a payment service provider (PSP), duly licensed and regulated by the Central Bank of Kenya (CBK) under the National Payment System Act, Cap 491A of the Laws of Kenya (NPSA) and the National Payment System Regulations, 2014 (the Regulations).
3. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority (KRA) 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.
4. Through a letter dated 16/05/2019, the appellant was served with a notice of tax investigations. The investigations covered the period between January 2015 and December 2019 for corporation tax and Value Added Tax. On 16/06/2021, the Respondent issued preliminary investigation findings to the appellant relating to a reconciliation of its banking receipts and recognized revenue. The VAT status of the appellant’s s commissions from the provision of automated revenue collection services and the nature of payments made from the Respondent’s bank accounts to that of its directors.
5. The appellant responded on 17/06/2021 and after correspondence between the parties, the Respondent issued iTAX assessments on 21/02/2022. Through a letter dated 23/02/2022, the Respondent advised the appellant of additional corporate tax assessments of kshs 25,481,299/= and additional VAT assessments of kshs 210,721,841/=.
6. The appellant objected on 18/03/2022 and the Respondent issued an objection decision on 23/12/2022 Ref: I&E/DTIS/NBI/225/019. In the decision the summary of taxes due was stated to be corporation Tax @30% Ksh 16,290, 295 and VAT@16% Ksh 204 ,181,725.
7. Aggrieved by the said decision, the Respondent appealed to the Tax Appeals Tribunal.
Appeal before the Tax Appeals Tribunal
8. The appellant vide Memorandum of appeal dated 3 rd February 2023 raised the following grounds;
a) The Respondent erred in law by issuing an objection decision outside the statutory time of sixty(60) days contrary to section 51(11) of the Tax Procedures Act, Cap 469B of the Laws of Kenya (TPA).
b) The Respondent erred in law and fact in assessing VAT for the periods between January 2015 and 2017 which periods were beyond the five-year time limitation period contrary to section 31(4)(b)(i) of the TPA.
c) The Commissioner erred in law and fact by assessing VAT on the taxpayers Revenue Collection Services as they are exempted from VAT under paragraph 1(m) as read with paragraph 1(b) of part II of the first schedule to the VAT Act, Cap 476 Laws of Kenya.
d) The Respondent erred in law and fact by violating the taxpayers right to legitimate expectation that their income from the revenue collection services qualify as VAT exempt based on the Commissioner’s failure to provide a contrary position to the Appellant’s letter dated 18/07/2016.
e) The Respondent erred in law and fact by assessing corporation tax without considering some of the necessary adjustments in the banking analysis carried out.
9. The Tribunal found merit in the appeal partially and gave the following orders;
a) The Appeal be and is hereby partially allowed.
b) The Respondent’s objection decision dated 23/12/2022 be and is hereby varied as follows;
i. The corporation tax assessment of kshs 25,481,299/= be and is hereby upheld; and
ii. The entire VAT assessment of kshs 210,721,841/= be and is hereby expunged.
c) Each party to bear its own costs.
10. Aggrieved by that judgment, the Appellant herein appealed to this court, via a Memorandum of Appeal dated 3 rd February 2023, and raised the following grounds;
a) The Tribunal erred in law and in fact in returning a finding that the Respondent in issuing its objection decision was in compliance with Section 31 and Section 51 (11) of the Tax Procedures Act, 2015 as it relates to the statutory limitation of time for issuance of an objection decision.
b) The Tribunal erred in law and fact by returning a finding that the Appellant did not discharge its evidentiary burden pursuant to Section 51(3)(c) of the Tax Procedures Act, 2015 in relation to the Corporation Tax assessment.
c) The Tribunal erred in law in varying the Corporation Tax assessment amounts in the Respondent’s Objection Decision without providing reasons for its determination contrary to the provisions of Section 29 of the Tax Appeals Tribunal Act, 2013.
11. Directions were given that the appeal be canvassed through written submissions.
12. I did not find separate submissions by the appellant in this appeal but being similar to the appeal E203 of 203 emanating from the same decision of the tribunal I took the liberty of taking into account the parties’ submissions in that appeal.
Appellant’s Submissions
13. It was submitted that the Tribunal erred by upholding a time barred objection decision in favor of the Appellant. Relying on section 51 (11) of the TPA, it was submitted that the moment the sixtieth day lapsed after the Respondent had received the notice of objection by the appellant t, the objection was deemed allowed by operation of the law. Reliance was placed on Republic -vs- Kenya Revenue Authority ex-parte M-Kopa Kenya Limited [2018] eKLR where the court stated:
“106. …In this case the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under Section 51 (11) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed.”
14. Further reliance was placed on Morgan Air and Sea Freight Logistics Kenya -vs- the Commissioner of Domestic Taxes, TAT No. 286 of 2020 , where the Tribunal held that;
“18. The TPA at Section 51 (11) obligates the Respondent, in mandatory terms no less, to render an objection decision within sixty (60) days of receipt of an objection notice. In this case, the Respondent has not rendered an objection decision within the stipulated statutory timeline; in fact, there is no objection decision at all to this date. This Section also, again in mandatory terms, further states that in the event the Respondent fails to make an objection decision, the objection shall be deemed allowed.
19. The effect of this is that the Respondent’s various rejection notices to the Appellant’s refund claims cease to have force in law as it has accepted the Appellant’s claim.”
15. It was submitted that section 51 (11) of the TPA must be read with perfect strictness in accordance with the rule of interpretation of tax statutes which provides that one must look merely at what is clearly said as there is no room for intendment, assumption or presumption in interpreting taxing legislation. Reliance was placed on Mount Kenya Bottlers Limited & 3 others -vs- Attorney General & 3 others [2019] eKLR where the Court of Appeal pointed out that:
“... ‘Nevertheless, taxation is clearly “penal” within this section of the Code, and must not be enforced by the courts unless clearly imposed’…The same principles as above, were accepted and applied in the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1921] KB 64 where Ronlat J, restated the principle in these words: “in a taxing Act clear words are necessary in order to tax the subject…It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look fairly on the language used…”
16. It was submitted that the appellant lodged a valid objection on 14/03/ 2022 hence the respondent was required to issue the objection decision on or before 14/05/2022. It was contended that the Tribunal erroneously found that the 60-day period started running from the last correspondence between the Respondent and one of the appellant’s directors.
17. It was submitted that there are two (2) relevant versions of Section 51 (11) of the TPA - the version prior to the amendment by the Finance Act, 2022 (the Previous Version) and the version after the amendment by the Finance Act, 2022 (the Amended Version). It was submitted that the Amended Version was effective 01/07/ 2022 and is the one that is applicable to the objection decision issued on 23/12/2022. It was submitted that the general rule in the construction of statutes is that they do not have a retrospective application unless it is the express intention of Parliament for them to apply retrospectively and in that case, they would expressly state so. Reliance was placed on Commissioner of Income Tax -vs- Pan African Paper Mills (E.A.) Limited [2018] where the Court of Appeal held:
“20. We are guided by the case of Yew Bon Tew v Kenderaan Bas Mara [1982] 3 All ER 833 where the Privy Council held as follows: “Apart from the provisions of the interpretation of statutes, there is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation…”
18. It was submitted that the appellant and its director are two distinct persons with separate tax liabilities. That even if it were the case that the Previous Version of Section 51(11) of the TPA was applicable, the Tribunal’s finding that the Respondent’s objection decision was proper in law was premised on a misapprehension of Company Law when it held, at paragraph 103 of its Judgement, that since there were electronic mails between the Respondent and one of the appellant’s directors between March 2022 and October 2022, then the objection decision was issued within time on 23/12/2022. That, the holding was despite the fact that the Tribunal acknowledged that the correspondence between the appellant’s director and the Respondent were in relation to the appellant’s director’s own personal tax assessment. It was contended that the Respondent’s discussion with the director was in relation to the director who had received an assessment in his personal capacity under his own personal identification number (PIN).
19. It was submitted that even if the assessment of its director was linked to that of the appellant, the fact remains that they were to be treated as two separate assessments as they are two separate persons. Reliance was placed on Stephen Kimathi Mutiso -vs- Commissioner of Domestic Taxes, TAT No. 187 of 2019 where the Tribunal noted that;
“35…. the law recognizes the company and the director as two distinct and separate legal persons…”
20. It was contended that even if it were the case that the information provided
by the director was relevant in the investigations on the appellant’s tax affairs, the Appellant cannot turn around to say that, the fact that they were in contact with the director who shared information with the Respondent in relation to his personal tax matters, means that the same was in relation to the appellant’s assessment. That allowing such reasoning will create dangerous precedents in the assessment of corporate taxpayers where it may be believed that a director’s tax assessment will inevitably have undesirable consequences on the companies they serve, yet these are supposed to be two separate and distinct persons with distinct tax registrations as well as tax liabilities.
21. It was submitted that the Tribunal was right in its computation of the five-year timeline in partially invalidating the assessments by the Appellant. Relying on section 31 (4) (b) (i) of the TPA, it was submitted that the Respondent had no basis to assess the appellant beyond the statutory timelines and was bound by the rule of strict interpretation of taxation statutes as set out in the case of Mount Kenya Bottlers Limited (supra). That , the TPA is a tax statute as set out in its section 2.
22. It was submitted that an amended tax assessment should be issued within five (5) years from the date the taxpayer submitted the self-assessment return . That the appellant filed its VAT return for the month of January 2017 on 20/02/2017 hence an assessment for this period and beyond was limited to be issued between 20 th February 2017 and 20 th February 2022 . That, the Respondent issued an assessment dated 23/02/2022 which was a period outside the statutory timeline for the amendment of assessments under Section 31 of the TPA. That, the assessment between January 2015 and January 2017 was out of time hence the Tribunal was right to find that the Respondent did not meet the requirements of Section 31 of the TPA at the time of amending the appellant’s assessment.
23. .It was submitted that the Respondent is misdirecting this court by stating that the appellant charged for VAT and failed to remit the same It was submitted that the Respondent’s assertion is tantamount to allegations of fraud or tax evasion against the appellant hence, he who alleges must prove. Reliance was placed on National Social Security Fund Board of Trustees -vs- Commissioner of Domestic Taxes [2016] eKLR where the court stated;
“There is a world of difference between an assertion and proof . That which a party states to be his case is an assertion . The party needs to adduce evidence to support his said assertion , with a view to proving his case.”
24. It was submitted that the Respondent’s allegations in this regard are wholly in bad faith, outside the confines of its pleadings and should not to stand in this Honourable Court.
Respondent’s Submissions
25. The Respondent identified the issues for determination to be;
a) Whether the Respondent’s objection decision was within the stipulated time lines as envisaged by the TPA .
b) Whether the Corporation tax assessment was justified.
Whether the Respondent’s Objection decision was within the stipulated timelines as envisaged under the Tax Procedures Act
26. In response to the argument by the Appellant that the Respondent erred in assessing their tax declarations for the periods between January 2015 and January 2017, which periods they alleged were beyond the five-year time limitation contrary to Section 31 (4) of the Tax Procedures ; thee Respondent submitted that its investigations into the tax affairs of the Appellant were commenced on 16th May 2019, for the period between January 2015 and December 2019 for corporation tax and Value added Tax. The respondent relied on Section 31 (4) (b) (ii) of the Tax Procedures Act, which states:
(4) The Commissioner may amend an assessment—
(a) In the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or (b) In any other case, within five years of— (i) For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or
(ii) For any other assessment, the date the Commissioner notified the taxpayer of the assessment.
27. Arguing that the appellant’s assessment fell within the category of any other assessment , the Respondent argued that it was within the time lines provided , which was within 5 years from the date the appellant was notified of the assessment which was 16th May 2019. Further that this provision of the law granted the respondent the liberty to review the Appellant’s tax affairs until the year 2014 (sic)and therefore was proper in raising assessment for the period between 2015 and 2019.
28. It was submitted that the Appellant had lodged an invalid Objection as it was not supported by all the relevant Documentation. That the Respondent thus afforded the Appellant numerous opportunities to supply all documentation as was allowed by Law. That the last one was given on 24th October 2022 as indicated in the objection decision. That it was evident from the objection decision dated 23rd December 2022 that the Appellant and the Respondent had been in communication as the letter makes reference to supply of additional documents by the Appellant on 12th September, 2022 and 24th October, 2022 in support of the objection.
29. Regarding the alleged conflation of the appellant’s and the appellant’s tax issues, the Respondent submitted that while considering the Appellant’s notice of objection it noted that the Appellant and its directors to wit; Danson Muchemi and Winter Anyango’s tax assessments were intricately interrelated. That during consideration, the Appellant had indicated in their notice of Objection that there was a sale of shares agreement dated 5th January 2014 among other documentation that had a bearing on both the director and the company. That the Respondent issued the Appellant with the tax assessments on 23rd February, 2022 with a tax liability of Kshs. 236,203,139/- for the Appellant and Kshs. 7,787,042 for one of the Appellant’s Directors i.e., Danson Muchemi Njunji.
30. It is the Respondent’s position that it duly issued its objection decision as required by law within the statutory limitation of 60 days.
31. Consequently, the Appellant issued a notice of objection dated 18th March, 2022 objecting the tax assessments and the Respondent consequently, issued the Objection decision on 23rd December 2022 well within the 60 days of receiving the last documentation.
32. The Respondent relied on Section 51 (11)(b) 2021, of the TPA which provides:
(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of—
(a) the notice of objection; or
(b) any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.
33. The respondent urged the court to bear in mind that the notice of objection was lodged on 18th March 2022 before the amendment to section 51(11) b of the Tax Procedures Ac t, by Section 44 of the Finance Act, 2022.
34. That the last documentation having been received on 24th October 2022 the objection decision dated 23rd December 2022 was within the requisite statutory limit of 60 days.
Whether the Corporation tax assessments was justified
35. The Respondent argued that the burden was upon the appellant “ to prove that a tax decision is wrong/incorrect ” as required by 56(1) of the Tax Procedures Act,2015 . That the Appellant having failed to provide the necessary documents to object to the Assessment the respondent was justified in issuing additional corporation tax .
36. The respondent relies on Section 51(3) of the Tax Procedures Act 2015 provides that for a Notice of Objection to be valid, the taxpayer has to precisely state the grounds of objection, has to pay all the taxes not in dispute and provide all the relevant documents in support of the objection. It states:
“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;
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.
c. All the relevant documents relating to the objection have been submitted .
37. For the respondent’s mandate to require the production of documents from a taxpayer for the purposes of obtaining full information, the respondent relied on Section 59(1) of the Tax Procedures Act, 2015 which states;
“ For the purposes of obtaining full information…the Commissioner or an authorised officer may require any person, by notice in writing, to—
(a) produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability…
(b) furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice...
38. It is submitted that section 31(1) of the Tax Procedures Act fortifies that position stating;
Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—
(a)in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period; (b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or
(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.
39. It is submitted that the law puts emphasis on the Appellant’s duty to avail the requisite documents in support of its objection in default of which the Respondent can only make a decision based on the information in its possession. Hence the additional corporation tax was justified.
Duty of Court
40. Section 56(2) of the Tax Procedures Act provides that an appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal is on a question of law only. In John Munuve Mati -vs- Returning Officer Mwingi North Constituency & 2 others [2018] eKLR , the Court of Appeal summarized what amounts to “matters of law” as follows;
“The interpretation or construction of the Constitution , statute or regulations made thereunder or their application to the sets of facts established by the trial Court. As far as facts are concerned, our engagement with them is limited to background and context and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law that is the province of the trial court.”
41. I have considered the grounds of appeal, the statement of facts, the rival submissions and entire record. I consider the following as the issues emerging determination ;
i. Whether the objection decision was issued compliance with Section 31 and Section 51 (11) of the Tax Procedures Act, 2015 as it relates to the statutory limitation of time for issuance of an objection decision.
ii. Whether the Appellant discharged its evidentiary burden pursuant to Section 51(3)(c) of the Tax Procedures Act, 2015 in relation to the Corporation Tax assessment.
iii. Whether the variation of the Corporation Tax assessment amounts in the Respondent’s Objection Decision was supported by reasons as required by Section 29 of the Tax Appeals Tribunal Act, 2013.
Analysis & determination
Whether the Respondent amended the taxpayer’s returns within the timelines prescribed by the law.
42. The Respondent issued the Appellant with a notice of tax assessment for the period January 2015 to December 2019 on 23/02/2022.
43. According to Section 24 of the TPA the Commissioner is not bound by the taxpayer’s self-assessment and can issue an amendment. It states;
(1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.
(2) The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.
44. The Power to amend is provided for under Section 31 of the TPA thus;
(1) Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions , from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that;
……………………………………………..
……………………………………………..
(4) The Commissioner may amend an assessment;
(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or
(b)in any other case, within five years of;
(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or
(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment:
Provided that in the case of value added tax , the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.
45. A plain reading of this indicates that there is no time limit to the exercise of this power in cases of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer but in nay other case, there is only a 5 year window.
46. T he determination of this issue depends on the interpretation of the above provision and it is trite that in interpreting tax statutes, the court should do so strictly without leaving room for intendment, implication or presumption as held in Stanbic Bank Kenya Limited -vs- Kenya Revenue Authority (2009) eKLR . Similarly, in Commissioner of Investigations and Enforcement -vs- Libya Oil Kenya Ltd (Income Tax Appeal E104 of 2021) [2024] KEHC 3624 (KLR) (Commercial and Tax) (15 April 2024), the court stated that; “It is trite that Tax Statutes are to be strictly interpreted and there is no room for imputing that which has not been legislated into statute by Parliament.”
47. The notice of tax investigations to the taxpayer was made by the Respondent via a letter dated 16/05/2019 (KRA 1). The letter indicated that the taxpayer was under investigation for the offence(s) of tax evasion which included but was not limited to acts of fraud i.e under declaration of corporation tax and VAT. Further, the letter indicated that preliminary findings showed unpaid VAT of kshs 114,088,006/=. In a letter dated 16/06/2021 (KRA 2), the Respondent informed the taxpayer that its findings therein constituted tax offences for which the commissioner was at liberty to institute criminal proceedings. There is no evidence that the said criminal proceedings were ever instituted hence no basis of finding that the additional assessments were made as a result of ‘ gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer’ so as to reach a conclusion that the Respondent was at liberty to do the amendment at any time as provided for by section 31(4)(a) of the TPA.
48. The appellant filed its VAT return for the month of January 2017 (Appendix 8) on 15/02/2017 thus bringing the matter within the purview of section 31(4) (b) of the TPA. This section requires the Commissioner to amend an assessment within five years from the date the taxpayer submitted the self-assessment return. This means that an amendment of the assessment for January 2017 should have been done by 15/02/2022. Consequently, the amendments for the period January 2015 to January 2017 were time barred and the Tribunal was correct in its finding.
Whether the objection decision was issued on time
49. The Respondent’s notice of objection is dated 14/03/2022 and admittedly received by the Appellant on 16/03/2022. The objection decision was issued on 23/12/2022.
50. The applicable law at the material time was section 51(11) of the Tax Procedures Act (TPA) as amended by the Finance Act No. 23 of 2019 which came into operation on 07/11/2019. The amendment provided that;
“32. Section 51 of the Tax Procedures Act, 2015 is amended by deleting sub section (11) and substituting therefor the following new sub section;
(11) The Commissioner shall make the objection decision within sixty days from the date of receipt of;
a) The notice of objection, or
b) Any further information the Commissioner may require from the tax payer.
Failure to which the objection shall be deemed to be allowed.”
51. The Respondent argued that the applicable law was the one amended by the Finance Act 2022 which became effective on 01/07/2022. However, that amounts to retrospective application of the law because the said amendment was not in place in March 2022 when the notice of objection was lodged.
52. The Tribunal opined that the objection decision should have been issued around 13/05/2022 if there had been no communication between the parties. The communication referred to are electronic mails between the Respondent and Appellant’s Director dated 31/03/2022, 22/08/2022, 02/09/2022, 12/09/2022 and 24/10/2022.
53. I have looked at the emails cited and the subject in all of them was ‘Ob
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