Where There is Any Ambiguity in The Tax Law , Then Such Ambiguity is To Be Construed in Favour of The Taxpayer

Case Study: Commissioner of Domestic Taxes v Mansart Engineering Limited (Income Tax Appeal E010 of 2023) [2024] KEHC 15208 (KLR) (28 November 2024) (Judgment)

Sometime in the year 2020, MEL was subjected to a tax audit by KRA in relation to the tax period for the years of income May 2017 to February 2021.

Following the tax audit, KRA issued the taxpayer with a pre-assessment notice dated 11th September 2020 requiring the taxpayer to amend its tax (VAT) returns within 14 days from the date of the notice and pay to KRA the correct taxes (VAT) in relation to undeclared sales to Kenya Rural Roads Authority.

MEL did not amend the returns within the stipulated 14days as had been directed by KRA. KRA consequently raised an additional VAT assessment on 24th February 2021 for the tax period May 2017 to January 2019 in the sum of Kshs. 1,311,141/-

Dissatisfied with the tax assessment, MEL on 19th March 2021 lodged an Objection with KRA, objecting to the additional VAT assessment, requesting to be allowed to amend its returns so as to be able to claim input VAT for the period assessed.

On 12th August, KRA issued its Objection Decision on MEL’s Objection of 19th March 2021, confirming the VAT Assessment of 24th February 2021 on the ground that all the input VAT which MEL had sought to claim were time-barred under Section 17(2) of the VAT Act, 2013.

KRA therefore confirmed the additional VAT Assessment of Kshs. 1,311,141.

MEL, dissatisfied with KRA’s Objection Decision, filed an appeal in the TAT challenging KRA’s decision.

On 23rd December 2022, the Tribunal rendered its judgment in the matter and allowed MEL’s appeal on the basis that KRA’s Objection Decision was issued outside the timelines prescribed under section 51(11) of the Tax Procedures Act.

Aggrieved by the Judgment of the TAT, KRA lodged an appeal to the High Court on 20th February 2023 on the grounds that; –

• The Honourable Tribunal failed to appreciate the mandatory provisions of Section 51(3) of the Tax Procedures Act with regard to the threshold required for a valid objection.
• ·Section 51(11) of the Tax Procedures Act is a procedural law. The Tribunal ought to have given more weight to the substantive issue as opposed to the procedural technicalities.
• The Tribunal erred in both fact and law by failing to consider the relevant material evidence placed before it and thus arriving at a wrong conclusion.
• The Tribunal issued a judgment without considering the arguments raised by KRA in its pleadings and the submissions filed before the Tribunal and thereby giving a one-sided judgment to the detriment of KRA contrary to the provisions of Section 29 of the Tax Appeals Tribunal Act.
• That in any event, the delay was not inordinate given the complexity of tax matters

KRA submitted that:

• contrary to the finding by the Tribunal, its Objection Decision of 12th August 2021 was made only thirty-one (31) days after receipt of the requisite information from MEL. That this was within the sixty (60) days provided under

Section 51(11) of the Tax Procedures Act, as it then existed

• the Tribunal by concluding that the Objection Decision was issued beyond the statutorily prescribed sixty days fell in error by applying retrogressively, a 2022 amendment of Section 51(11) of the TPA
• prior to the amendment in 2022, the Tax Procedures Act provided under Section51(11) of the Act that the sixty days was to start running from the date of receipt of “any further information KRA may require from the taxpayer.”
• Section 17(2) of the VAT Act restricts the period to six (6) from the date of supply or importation.
• the supplies in question were made between 1st May 2017 and 31st May 2017 and therefore the six months within which the input VAT was to be claimed expired on 30th November 2017. However, MEL only claimed input VAT in respect of those supplies on 19th March 2017, which was well over sixteen (16) months from the date of the supply.
• MEL’s claim was time-barred and therefore the Tribunal ought not have made a decision which has the effect of allowing MEL to claim input VAT which is by law prohibited.
• the Tribunal erred in failing to appreciate that section 17 of the VAT Act only allows deduction of input VAT where, among others, the taxpayer provides requisite documentation under Section 17(3) in support of the claim. That in the instant case, no such documentation was provided and therefore MEL’s objection was not valid as required under Section 51(3) of the Tax Procedures Act.

In its judgement on 28/11/2024, the High Court observed that:

• contrary to the finding by the Tribunal, KRA’s Objection Decision of 12th August 2021 was made within thirty-one (31) from the date of receipt of the requisite information from the Respondent. That this was well within the sixty (60) days provided under Section 51(11) of the Tax Procedures Act, as it then stood.(KRA won on this ground)
• pursuant to the six-month restriction imposed under section 17(2) for taxpayers to claim input VAT, supplies that were made by MEL for the period covered by the tax audit ought to have been claimed latest six months after January 2019, that is by July 2019. Input VAT for supplies that were made in May 2017 ought to have been claimed six months thereafter, that is, by November 2017.
• However, MEL , in its submissions dated 9thMay 2022 before the Tribunal argued that they had by their letters of 26th June 2017 and 26th February 2019 sought KRA’s assistance to amend their returns under section 31 of the Tax Procedures Act so as to claim the input VAT for the period and supplies n question.
• There was however no evidence that the returns were amended. In fact, KRA in its Objection Decision denied ever receiving the two letters by MEL. According to KRA, the two letters did not have any stamp from KRA acknowledging receipt.
• the Tribunal in its Judgment, after examining the evidence adduced by the parties on the two letters, found in favour of MEL stating that they were convinced that the letters by MEL and the accompanying documents were received by KRA’s officer, one Salina Kigen on the 26th June 2017 and 26th February 2019. Consequently, the Tribunal was therefore satisfied that the documents were submitted by KRA within the six months required in law.
• Section 31 of the Tax Procedures Act permits taxpayers who have made self-assessments to apply to KRA for the amendment of the self-assessment within a period of five (5) years from the date of the Assessment. The Section also gives KRA the discretion to either reject or accept the amended self-assessment; and where he rejects the amendments, then he is to provide the reasons thereof to the taxpayer within thirty (30) days from the date of receipt of the application.

Section 31 of the TPA provides that

31. Amendment of assessments

(1)Subject to this section, KRA 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 KRA’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 (Cap. 476), 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.

(2)A taxpayer who has made a self-assessment may apply to KRA, within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer’s self-assessment.

(3)Where an amended self-assessment return has been submitted under subsection (2), KRA may accept or reject the amended self-assessment return and where he rejects, he shall furnish the taxpayer with the reasons for such rejection within thirty days of receiving the application.

(4)KRA may amend an assessment—

(a)in the case of gross or willful 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 KRA 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.

• From a reading of section 31 of the Tax Procedures Act, it is evident that the law does not specify whether the application for amendment is to be done manually (as was the case herein) or electronically (on i-tax)
• the amendments were not accepted by KRA. It is also clear that KRA did not communicate to MEL its rejection of the proposed amendments. The question then, is, what would be the consequence of such an action on the part of KRA? would it then mean that the amendments as proposed by MEL were automatically accepted upon the expiry of the 30 days stipulated under Section 31(2) of the Act?
• Section 31(2) does not prescribe any consequence for the failure on the part of KRA to communicate its rejection of an amendment proposed by a taxpayer under that section of the Act
• It is trite law that in tax law, where there is any ambiguity, then such ambiguity is to be construed in favour of the taxpayer
• KRA was deemed to have accepted MEL’s application for amendment and that the documents submitted vide MEL’s letters of 26th June 2017 and 26th February 2019 were accepted by KRA to be in conformity with those specified under Section 17(3) of the VAT Act.

KRA lost on the second ground

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