Tax assessment processes ought to be inclusive of all stakeholders (both tax payers and tax collectors)

Silver Chain Limited v Commissioner Income Tax & 3 others

Judicial Review No. 2 of 2016

High Court at Malindi

S J Chitembwe, J

November 24, 2016

Reported by Teddy Musiga

Constitutional Law – Right to fair administrative action- tax assessment - claim where the tax assessment was done without the Applicant’s input in terms of explanation – whether the Respondents violated the right to fair administrative action in assessing the amount of tax due from the Applicant – Constitution of Kenya, 2010, article 47.

Tax law – tax assessment – procedure - issuance of tax assessment notice – claim that a tax payer was not issued with a tax assessment notice to enable him to move the tax appeals tribunal to contest the assessment - whether the demand for the tax was malicious, irrational and oppressive as the Applicant was not given explanation as to how the computation was made – Tax procedures Act, section 29, Tax Procedures Act, section 51.

Brief facts

The applicants sought orders of certiorari to quash the decision of the 1^st, 2^nd and 3^rd respondents of November 22^nd, 2015 that arbitrarily levied unreasonable taxes against the applicant; that issued notice to enforce recovery measures and that issued a notice of distress. The applicant contended that the Tax Demand did not satisfy the requirement of a proper notice consistent with article 47 (1) of the Constitution.  They further contended that after the tax assessment they were not issued with a tax assessment Notice in accordance with the provisions of section 29 of the Tax Procedures Act to enable them exercise their right under section 51 of the Tax Procedures Act of 2015 to move the Tax appeals Tribunal to contest the assessment.

The Respondents contended that the application was fatally defective as the Applicant only served the substantive motion without the statement that was filed with the application for leave contrary to Rule 53 (1) of the Civil Procedure Rules

Issues

1. Whether the application was fatally defective as the Applicant only served the substantive motion without the statement that was filed with the application for leave.
2. Whether the Respondents violated the right to fair administrative action under article 47 of the Constitution in assessing the amount of tax due from the Applicant.
3. Whether the demand for the tax was malicious, irrational and oppressive as the Applicant was not given explanation as to how the computation was made.

Held

1. The substantive application was filed within the twenty-one (21) days period after the orders granting leave were issued.  The only requirement under Rule 53 (1) of the Civil Procedure Rules was that the application for leave had to be accompanied by a statement which gave the relevant details.  There was no requirement that the statement that was used to obtain leave to apply for Judicial Review had to be served upon the Respondents.  The file used to apply for leave to seek Judicial Review orders became spent when a substantive Judicial Review application was filed.  There were no defects in the application.
2. Once leave was granted, it did not become a pending suit.  The Applicant had to move to the next level and file a substantive motion in accordance with the rules, after which it could then be said that there was a pending suit.  Leave on its own could not sustain a suit.
3. Section 51 of the Tax Procedures Act provided an elaborate process to be followed when a tax payer objected to tax decisions made against him.  The outcome of such a decision escalated to an appeal to the Tax Appeals Tribunal established under the Tax Appeals Tribunal Act. A decision of the Tribunal could be subject to an appeal to the High Court.  An appeal to the Court of Appeal could follow.
4. As far as the procedure requiring checking of the records of a tax payer was concerned, the Respondents could not be faulted.  They followed the laid down procedure and the Applicant could have engaged the Respondents and give explanation of its operations.  The unfortunate thing was that the tax assessment was done without the Applicant’s input in terms of explanation.
5. The record showed that the process started on July 21, 2015.  The compliance check was to take place at the Applicant’s premises on August 5, 2015.  There was no correspondence until November 12, 2015 when the Respondents notified the Applicant about the outcome of the compliance check.  The letter dated November 11, 2015 raised the demanded sum of Kshs.40,509,954/=.  It was not established whether the Respondents engaged the Applicant in discussions while checking the records.  What could be deduced was that the Respondents unilaterally checked the records and made its own tax assessment.  That was why there was a claim for taxes for 18 months ending December, 2014. 
6. The Applicant was not given an opportunity to explain his position on the sales reports or the entire operations of the company.  What was being demanded as tax was what was unilaterally computed by the Respondents.  Although the Respondents were empowered by the law to assess what a tax payer ought to pay, it was prudent that while undertaking such an exercise, the tax payer had to be given an opportunity to explain its position.  The volumes of sales did not dictate the profit margins.  It all depended on the type of business.  The Applicant was running a restaurant.  If one only computed the sales volume without knowing the costs of those sales as well as other outgoings such as water, electricity and garbage collection bills, then the amount of tax demanded could not reflect the truth.
7.  It was lawful for the Kenya Revenue Authority to issue a distress notice or order against a tax payer’s property.  The presumption was that all lawful procedures would have been followed before the distress notice or order was issued. The Respondents were undertaking their statutory duties when they initiated the process of assessing the applicant’s taxes.  It was not the intention of the law that the Respondents should take away a tax payer’s records, evaluate them without involving the tax payer and then impose the amount of tax to be paid.  When the tax payer raised an objection, the response would be that the objection was late or that it was not valid since it did not state the grounds upon which it was raised.  Tax payment was a constitutional requirement and the country could not meet its obligations without receiving taxes from the tax payers.   Articles 209 and 210 of our Constitution gave powers to the government to impose tax.
8. The Respondents were within their lawful mandate when their officers visited business premises and evaluated the records for tax compliance purposes.  It was a known fact that most tax payers would take advantage of any laxity on the part of the Respondents and either under assess them or completely avoid paying the taxes.  Enforcement of tax compliance processes had to be carried out within the confines of the law.  The Constitution under article 47 called for fair administrative process.  When a tax payer was called upon to pay Kshs.40,619,379/=, such a person had to be given all the opportunities to have all his queries and doubts answered and the assessment clearly explained to him.  That was why the law had set up a procedure whereby those dissatisfied with the assessment could pursue appeals up to the Court of Appeal.
9. The determination of an assessment of tax on appeal under section 88 of the Income Tax Act was aimed at giving fiscal finality for the purpose of collecting tax and it did not overrule the right of a third appeal to the Court of Appeal provided under the law.
10. It was not clear when the applicant started paying taxes.  At least payment for previous years could act as a guide when subsequent years were assessed.  One had to take into account instances of deliberate self under assessment by tax payers.  Any tax assessment by the Respondents had to involve the tax payer.  The task of collecting taxes should not lead to discouraging tax payers from carrying on with their businesses.  If the tax payers close shop, there would be no taxes to be collected.  On the other hand, if no taxes were paid, there would be no funds to run government operations.  That called for a balance between the tax collectors and tax payers whereby the process became inclusive as opposed to being unilateral. 
11. There had to be fairness in the process of tax assessment.  If the court was of the view that the process used to assess the tax being demanded was not fair, orders of Judicial Review would be granted. The principle of fairness had an important place in the law for judicial review; and that in an appropriate case; it was a ground upon which the court could intervene to quash a decision made by a public officer or authority in purported exercise of a power conferred by law.
12. Disputes involving tax assessment had to be dealt with under the legal procedures set up by the law.  The Respondents were expected to discuss their assessment with a tax payer.  If the tax payer was not satisfied with the assessment, an objection form which could be standardized should readily be available to the tax payer to lodge his objection to the assessment.  The commissioner of that particular tax stream had to make his/her decision within the permitted period.  Appeals to the Tax Appeals Tribunal had to be allowed and if any party was dissatisfied by the decision of the Tax Appeals Tribunal, the matter could be brought to the courts.  The Courts were ill-equipped to know whether the tax assessment was proper or not.  Judicial Review cases did not delve deep into the computations or assessment made by the tax collector.  The domain of Judicial Review concerned itself with the process.
13. In revenue matters it was unusual to apply for Judicial Review because there were clear and well established procedures for appeal provided by the Taxes Management Act.  The Court however further observed that the fact that there was an alternative procedure available did not mean that an application for Judicial Review should never be made.  Judicial Review was, however, the procedure of the last resort and was a residual procedure which was available in those cases where the alternative procedure did not satisfactorily achieve a just resolution of the Applicant’s claim.
14.  The Applicant’s objection was considered to be invalid and time barred, the Applicant’s last resort was the Court.  It did not mean that the Applicant did not wish to pay the taxes.  All what it was seeking was a fair assessment of the payable taxes.  The assessment could give same results but he had to be explained how the computation was done.  It was indicated that a director of the Applicant visited the respondents’ offices and was explained the genesis of how the case ended up to the time distress measures were taken. 
15. Section 29 of the Tax Procedures Act provided for default assessment.  It gave the information that had to be indicated to a tax payer when the commissioner was notifying the tax payer on the assessed taxes.  The information included the manner of objecting to the assessment.
16. The subsequent communication from the respondents was the letter dated December 14, 2015.  It was a tax arrears demand notice and not a proper tax assessment notice.  Since the compliance check letter dated 12.11.2015 was not a proper tax assessment notice and of the fact that it made reference to some two sections of the law, that was section 50 of the VAT Act and section 84 of the Income Tax Act, which sections were deleted from the statutes the following month, during that transition period, it was difficult for the Applicant to know how the objection was to be pursued. 
17. The Applicant was not accorded the right to fair administrative action.  The assessment of the tax was unilateral, arbitrary and oppressive.  He was entitled to a clear explanation as to how the computation was made.  The Respondents’ own documents indicate that during the period June 2013 to July 31, 2015, the applicant’s total sales were Kshs.55,139,701/=.  The amount of principal tax demanded was Kshs.27,825,525/=.  That was almost 50% of the sales.  The costs of the sales and operating expenses were not included.  The assessment was oppressive. 
18. The judicial Review application did not delve deep into the decision itself but the court had to be satisfied that there was fairness in the whole process.  The respondents were of the view that the time for raising objection lapsed.  That would mean that the applicant had no other option but to pay the assessed tax.  The letters dated February 10, 2016 and March 19, 2016 called upon the applicant to contact two officers of the respondents if further clarification was required.  In essence therefore objection could still be raised had the Applicant sought the clarification and felt dissatisfied.  That would be in line with the spirit of the law requiring fair administrative action.
19. Since the Applicant was obligated to pay taxes, the Respondents were ordered to issue the Applicant with a fresh notice as required under the Tax Procedure Act.  The Respondents were at liberty to re-assess the tax payable once again and issue such notices as they deem necessary under the law.  The Applicant had to be in a position to either pay the tax or file an objection. 

Application allowed

Orders of certiorari issued quashing the decision of the 1^st, 2^nd and 3^rd respondents; to arbitrarily levy unreasonable taxes against the applicant, to issue notice to enforce recovery measures and to issue a notice of distress.

An order of prohibition issued prohibiting the Respondents from distressing, levying distress or otherwise distressing the goods and assets of the applicant pursuant to the Notice of Distress.

Each party to bear their own costs.