Panna Music Centre Ltd v Commissioner of Domestic Taxes [2023] KETAT 277 (KLR)

Panna Music Centre Ltd v Commissioner of Domestic Taxes (Appeal 429 of 2021) [2023] KETAT 277 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 277 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 429 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, AK Kiprotich, Grace Mukuha & Jephthah Njagi, Members

May 19, 2023

Between

Panna Music Centre Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company and deals with the sale of solar panel equipment and offers services to Multichoice and GoTV users. It operates in Eldoret town.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued an income tax assessment on October 5, 2018 for Kshs 1,662,585. 00 and the same being principal tax and the interest (principal - Kshs 1,431,609. 00 and interest - Kshs 230,975. 00) for the year 2016.

4. The Appellant objected to the assessment on November 19, 2018.

5. The Respondent upon review of the objection issued an objection decision for Kshs 1,431,609. 00 on April 5, 2019 rejecting the objection and giving the reasons for the same.

6. Consequently, the Appellant filed a Notice of Appeal dated July 14, 2021 and filed on July 21, 2021.

The Appeal 7. The Appeal is set on the Memorandum of Appeal dated July 14, 2021 and filed on July 21, 2021 raising one ground of appeal as follows:a.That the Commissioner of Domestic Taxes erred in law and fact by not according the Appellant the opportunity to deduct expenditure(s) wholly and exclusively incurred by it in the production of income contrary to section 15(1)7 of the Income Tax Act.

Appellant’s Case 8. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:a.The Appellant’s Statement of Facts dated July 14, 2021 and filed on the July 21, 2021. b.The written submissions dated May 30, 2022 and filed on the same date

9. The Appellant upon being assessed on October 5, 2018 objected on November 19, 2018 against the assessment and stated that the reason for the late objection is because the Appellant is a family business and the main Director fell sick.

10. The Appellant prayed in its submissions for an opportunity to deduct the expenditures incurred by it in the production of the income and also prayed that the tax assessment for the year 2016 be Kshs 108,990. 00

11. The Appellant also averred that it gave all the necessary documents to assist in the computation of income including financial statements for the year of assessment but the Commissioner ignored them. It stated that it had annexed the same to the Appeal.

12. The Appellant prayed for an opportunity to deduct expenditure(s) wholly and exclusively incurred in the production of income and in the course of business in accordance with Section 15(1) of ITAas read together with Section 16(1)(a) which provides as follows:“15(1)For the purposes of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act ,be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under Section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income of any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”16. (1)“Save as otherwise expressly provided, for purposes of ascertaining the total income of a person for a year of income, no deduction shall be allowed in respect of (a)Expenditure or loss which is not wholly or exclusively incurred by him in the production of income;”

13. In the same vein, the Appellant argued that the Commissioner’s assessment was irrational and unreasonable in the circumstances and absurd in concluding that a business with a turnover of Kshs 4,772,033. 00 would incur a mere Ksh 0. 00 in its expenses. It submitted that the decision to allow Kshs 0 claimed as business expenses is irrational and constitutes bad faith and unreasonable exercise of power.

14. The Appellant also submitted that whereas the Respondent has power to assess and demand payment of taxes due, the statutory power ought to be exercised reasonably, rationally and properly. The Appellant relied on several cited cases in support of the argument including Republic vs KRA Ex-Parte Aberdare Freight Services Ltd & 2 Others[Misc Civil Appl, No 946/2004] eKLR; Keroche Industries Ltd vs KRA & 5 Others [Misc Civil Appl No 743/2006] and Republic vs Commissioner of Co-operatives Ex-Parte Kirinyaga Tea Growers Sacco [1999] 1EA 245.

15. The Appellant also averred that the Respondent upon receipt of its objection did not respond to it concerning the objection as to whether the same was validly lodged and therefore, the Appellant argued, the same is validly filed as per the requirements of Section 50(3) and (4) of the TPA.

16. The Appellant states that it has paid the tax not in dispute amounting to Kshs 108,990. 00.

Appellant’s Prayers 17. The Appellant prays for:a.The setting aside of the KRA’S tax decision to assess income tax at Kshs 1,431,609. 00. b.Annulment of the tax decision.

Respondent’s Case 18. The Respondent’s case is premised on the following:a.The Respondent’s Statement of Facts dated December 17, 2021. b.The supplementary Statement of Facts dated March 8, 2022 and filed on the same date.c.The written submissions dated June 30, 2022 and filed on July 1, 2022.

19. The Respondent averred that the dispute arose due to an assessment made by the Respondent on the Appellant in Corporate Income tax for Kshs 1,431,609. 00 in principal tax and ksh 230. 975. 00 in interest made on October 15, 2018 and the Appellant objected to the same to the extent of Kshs 10 of the entire assessment on November 11, 2018.

20. The Respondent upon reviewing the objection, issued an objection decision on April 5, 2019 and which decision rejected the Appellant’s objection on grounds that:a.the objection was lodged out of time contrary to Section 51(2) of the TPAb.the Appellant had only objected to Kshs. 10 which meant that there were admitted taxes of Kshs 1,431,599. 00 which was due and payable in accordance with Section 51(3) (b) of the TPA which ought to have been simultaneously paid with the lodging of the objection.c.disallowed expenses were not fully supported by invoices and proof of payment and the Appellant failed to provide documentation in support of its objection as required under Section 51(3) of the TPA.

21. On the first issue raised by the Appellant in its Memorandum of Appeal that it was not allowed to deduct expenditure exclusively incurred in the production of income, the Respondent averred that to determine the claim there must be an establishment of the disallowed expenses first as per the provisions of Section 15 of the Income Tax Act. This, it said, can only be ascertained with the production of documentation on expenses in support of its case.

22. The Respondent also stated that the burden of proving that a tax decision is wrong lies with the taxpayer and on this issue it relied on the provisions of Section 56 of the TPA and the case of Alice Wanjiru Ruhiu vs Messianic Assembly of Yahweh [2021] eKLR.

23. On the issue of the Respondent carrying out additional amendments the Respondent relied on the provisions of Section 31 of the TPA which authorizes it to carry out additional assessments. On the same issue the Respondent relied on the case of Digital Box Ltd vs Commissioner of Investigations & Enforcement[TAT NO 115 /17].

24. On the validity of the objection the Respondent relied on Section 51 (3)(b) of the TPA which provides that the amount which is not in dispute must be paid in full before the notice of objection is lodged and that the provision in issue was not observed by the Appellant.

25. That the Appellant also failed to keep proper records as required by Section 23 of the TPA to enable the Respondent determine the tax liability in issue. That due to this failure the Respondent had to assess the same with the information available and in regard to the issue relied on the cases of Primarosa Flowers Ltd vs Commissioner of Domestic Taxes[2019] eKLR; PZ Cussons East Africa Ltd vs KRA[2013] eKLR; and Tumaini Distributors Co (K) Ltd vs Commissioner of Domestic Taxes [2020] EKLR.

26. The Respondent in answering to the Appellant’s submissions that it is irrational, absurd and unreasonable for the Respondent to view a business with a turnover of Kshs 4,772,035. 00 to incur a mere Kshs 0. 00 in expenses and that the Respondent failed to appreciate the voluminous operating expenses in issue the Respondent relied on the case of Leah Njeri Njiru vs Commissioner of Investigations & Enforcement (HCCOMMITA/E002/2020) with regard to the issue that every expense has to be documented. In a case where a party fails to do the same the conclusion that maybe made in the circumstances, however absurd or irrational it may seem, the same has been necessitated by the failure of the Appellant to produce documents.

Respondent’s Prayers 27. The Respondent prayed for the Appellant’s Appeal to be set aside with costs.

Issues for Determination 28. The Tribunal having considered the pleadings, submissions of the parties, and the facts of the matter, determined that the following are the issues for determination:a.Whether the Respondent’s objection decision was proper in lawb.Whether the tax assessments by the Respondent were proper in law.

Analysis and Findings a) Whether the respondent’s objection decision was proper in law 29. The Appellant was assessed by the Respondent for Kshs 1, 662,585. 00 (principal income tax 1,431,609. 00 and interest of ksh 230, 975. 00) on October 5, 2018 for the year 2016.

30. The Appellant objected to the assessment and the same was acknowledged by the Respondent on November 19, 2018. Thereafter there was no correspondence between the parties until April 5, 2019 when the Respondent issued the Confirmation Assessment Notice rejecting the appellant’s objection.

31. The TPA provides that once a tax payer is served with an assessment by the Respondent the former is legally required if they do not agree with the assessment to consequently file a notice of objection. The Commissioner upon receipt of the taxpayer’s notice of objection is legally required to determine whether the same is in order within a stipulated time as per Section 51 (4) of the TPA which provides as follows:“Where the Commissioner has determined that a notice of objection lodged by a tax payer has not been validly lodged, the Commissioner shall immediately notify the tax payer in writing that the objection has not been validly lodged”.

32. The Appellant was not notified of any invalidity in its lodged notice of objection but the Respondent subsequently rejected the same on April 5, 2019 when he also confirmed the assessment.

33. The law also requires that the Commissioner has to issue an objection decision within sixty days from the date of the receipt of the notice of objection as per Section 51 (11) of theTPA which states as follows:“The Commissioner shall make the objection decision within sixty days from the date of receipt of-a)the notice of objection; orb)any further information the Commissioner may require from the tax payer failure to which the objection shall be deemed to be allowed”

34. The Commissioner issued its decision on April 5, 2019 well outside the provisions of Section 51 (11) of the TPA. The wordings of the Section in issue are couched in a mandatory manner and have no room for wiggling out of the same. Any objection decision issued outside the stated statutory timelines is therefore not proper in law.

35. The law is very clear on the necessity and strict adherence to legal timelines in affecting legal procedures and on this the Tribunal takes into consideration the holding in the case of TAT 127 of 2020, BIC East Africa Ltd vs Commissioner of Customs & Border Control, where the Tribunal held that;“Additionally, the Tribunal finds the Respondent's late response to the review application to be in gross violation of Section 229 (5) of the EACCMA 2004 which stipulates that the where the Respondent had not communicated his or her decision within the specified time of 30 days, the review application shall be deemed to have been allowed by the Respondent. To contextualize this, as of 7th June 2019 the Appellant's review application was deemed allowed meaning that it had not tax liability in the eyes of the law. It also meant that the Appellant was well within its right to apply for a refund of the taxes paid earlier under protest. Our resolve in this regard is further cemented in light of the fact that Section 229 (4) & (5) of the EACCMA are cushioned in mandatory terms, hence the Respondent was not allowed to extend the same timelines. (See Associated Battery Manufacturers Limited versus Respondent of Customs Services (TAT Appeal No 1 of 2015).”

36. A similar holding, with regard to the issue of observing timelines, was made in the case of Nicholas Kiptoo Arap Korir Salat vs IEBC & 6 Others[2013] eKLR, where the Court of Appeal held as follows;-“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned.”

37. In light of the foregoing analysis and the case law quoted the Tribunal finds that the Commissioner failed to issue an objection decision to the Appellant’s notice of objection within the stipulated time and the consequential objection decision issued on the April 5, 2019 was improper in law.

38. In the circumstances the other issue raised in the matter for determination has been rendered moot.

Final Decision 39. The Tribunal on the basis foregoing analysis finds that the Appeal is merited and accordingly proceeds to makes the following Orders:a.The Appeal be and is hereby allowedb.The Respondent’s objection decision dated April 5, 2019 be and is hereby set asidec.Each party to bear its own costs.

40. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 19TH DAY OF MAY, 2023. ……………………….ERIC N. WAFULACHAIRMAN…………………………CYNTHIA B. MAYAKAMEMBER…………………………ABRAHAM K. KIPROTICHMEMBER………………………GRACE MUKUHA……………………JEPHTHAH NJAGIMEMBER