Willful neglect is a ground for the taxman to assess tax beyond the 5-year statutory period

Case Study: MICHAEL NDICHU MBURU VS KRA

The background of this case is that KRA carried out investigations into the business operations of MNM to confirm tax compliance of the company and MNM as its director. The said investigations covered the years 2013-2017 to establish whether MNM under-declared his income during that period

Following the investigations, KRA wrote to MNM vide its letter dated 4th September 2018, communicating its preliminary findings and affording MNM an opportunity to respond to the issues raised by 13th September 2018. Meetings were held between MNM and KRA, where MNM was asked to provide KRA with specific documents that would be used to determine MNM’s tax liability.

KRA considered the said documents and issued its notice of assessment for Ksh.99,960,19.00 vide its letter dated 24th April 2019, being income tax inclusive of penalties and interest. MNM objected to this demand vide his letter dated 22nd May 2019.

KRA asked for documents relating to the issues raised in the objection. After considering MNM’s objection and documents submitted, KRA issued its objection decision dated 23rd July 2019, confirming that taxes of Ksh.20,448,466.00.

MNM appealed to the TAT

Among the grounds of appeal was that:

  • the assessment of tax for the year of income 2013 was unlawful since the same related to a period beyond the statutory 5 years
  • KRA erred in law and, in fact, by charging the shortfall penalty and late payment interest

In its judgement, the tribunal found that MNM willfully neglected to file tax returns therefore it was lawful for KRA to assess tax for the year 2013 as stipulated under section 29(6) of the Tax Procedure Act

MNM appealed to the High Court

MNM asserted that the tribunal erred in determining that the assessment of tax for the year of income 2013 is lawful despite it being a tax assessment relating to a period beyond the statutory 5 years.

On the other hand KRA submitted that the law allows it to issue an assessment beyond the statutory period in instances of fraud, willful neglect or evasion by MNM as provided under section 29(6) of the Tax Procedures Act 2015.

Section 29(5) and (6) of the Tax Procedures Act states:

“ (5) Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.

(6) Subsection (5) shall not apply in the case of gross or willful neglect, evasion, or fraud by a taxpayer.”

In its decision on 27/03/2023, the High Court observed that:

  • The record shows that MNM did not file returns for the period under investigation contrary to his obligation under Section 52B of the Income Tax Act which states that every individual chargeable to tax under this Act shall for any year of income commencing with the year of income 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income. Therefore, I it was lawful for KRA to assess tax for the year 2013 as stipulated under section 29(6) of the Tax Procedure Act.
  • MNM failed in his obligation to file tax returns as stipulated under section 52B of the Income Tax Act. He also did not pay taxes during that period .Section 72D of the Income Tax Act provided that “where any amount of tax remains unpaid after the due date, a penalty of 20% shall immediately become due and payable.”

Section 84 of the Tax Procedures Act states:

“ 84.Tax shortfall penalty

(1) This section applies to a person

(a) if that person knowingly makes a statement to an authorized officer that is false or misleading in a material particular or knowingly omits from a statement made to an authorized officer any matter or thing without which the statement is false or misleading in a material particular; and

(b) if the tax liability of that person or of another person computed on the basis of the statement made by that person is less than it would have been had the statement not been false or misleading (the difference being referred to as the “tax shortfall”).

(2) Subject to subsections (3) and (4), a person to whom this section applies shall be liable to a tax shortfall penalty of—

(a) seventy-five per cent of the tax shortfall when the statement or omission was made deliberately.”

It was therefore lawful for KRA to charge MNM 20% of the tax payable for the period as a penalty and interest of 1% per month or part thereof.

As such MNM Lost.

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Willful neglect is a ground for the taxman to assess tax beyond the 5-year statutory period



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