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Court of AppealAllowedCivil Appeal No. 251 of 2008· [2015] KECA 566 (KLR)

Highway Furniture Mart Limited v Commissioner of Valued Added Tax & another [2015] KECA 566 (KLR)

Court of Appeal
3 July 2015
HOH. M. OkwenguPhilomena Mbete MwiluP. M. MwiluJOJ. Otieno-Odek
4,309 words in judgment
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The bottom line

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Kenya's Court of Appeal quashed a Kshs 19 million VAT assessment, ruling tax authorities can't tax a business that isn't legally a 'taxable person.'

What this practically means

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Executive summary

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The Court of Appeal allowed an appeal by Highway Furniture Mart Limited against the dismissal by Wendoh, J of its judicial review application seeking certiorari to quash a VAT assessment of Kshs. 19,372,167 for 1993-1999 and prohibition of its enforcement. The Commissioner had registered the appellant under the repealed VAT Act, backdated registration to 1st September 1993, and assessed tax using the appellant's income tax returns. The Court restated the Wednesbury principle that judicial review of discretionary power examines the process of its exercise, not the merits. Construction work became a taxable service only in 1993; the government contract relied upon was performed between 1986 and 1990, with the later payments representing pre-1993 services, and the 1993 directors' report reflected activities generating audited income rather than activities carried on that year. The Court held the key statutory phrase was 'taxable person': absent evidence the appellant provided taxable goods or services in the assessment period, the Commissioner acted without jurisdiction, on rumour and extraneous considerations, and could not properly register, backdate or assess. The Court also held that judicial review was proper without a statutory objection since objecting would have conceded the Act's applicability. The appeal was allowed, the High Court judgment set aside, certiorari and prohibition issued, and the appellant awarded costs in both courts.

Key legal issues

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01

Whether the respondent properly exercised its statutory discretion in registering the appellant, backdating registration to 1993 and assessing VAT on income tax returns

Holding

The discretion was improperly exercised: the evidence (a 1986-1990 government contract and the 1993 directors' report) did not establish that the appellant was a taxable person providing taxable services in 1993-1999, so the assessment was made without jurisdiction and upon extraneous matters.

Reasoning

Construction work became VAT-designated only in 1993. The government contract was performed between 1986 and 1990; the later payments were for pre-1993 services. The 1993 directors' report listed activities generating the audited income, not necessarily activities carried out in 1993. Using income tax returns as the basis of a VAT assessment without establishing taxable supplies took into account extraneous and irrelevant matters and ignored relevant statutory criteria, rendering the assessment whimsical and based on rumour, hence an abuse of discretion and without jurisdiction.

p. 7
02

The proper scope of judicial review of discretionary powers (Wednesbury standard)

Holding

Judicial review of a statutory discretion is confined to the process of its exercise - relevant and irrelevant considerations and reasonableness - not the merits of the decision.

Reasoning

Relying on Wednesbury and Chief Constable of North Wales Police v Evans, the Court restated that the court is not a court of appeal from an administrative body; it examines whether lawful authority has been abused by unfair treatment. Where the discretion is exercised outside the statute's four corners or on extraneous matters, the court will intervene to ensure the discretion is neither abused nor exceeded.

p. 3
03

Whether the appellant was obliged to pursue the statutory objection procedure before coming to court

Holding

No; judicial review was proper because filing an objection would have conceded the applicability of a law that did not apply to the appellant.

Reasoning

Since the appellant established that it was not providing taxable goods or services during the period, its failure to lodge an objection under the VAT Act could not be faulted. The objection mechanism presupposes that the Act applies; a party denying that threshold jurisdiction may go directly to court.

p. 7

Legal principles established

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  • A court reviewing an exercise of executive discretion does not sit as an appellate court on the merits; it may interfere only where relevant factors were not taken into account, irrelevant factors were taken into account, or the discretion was exercised unreasonably.
  • The statutory power to assess tax on 'such evidence as may be available' may only be exercised against a 'taxable person'; a tax authority cannot properly register, assess or backdate VAT against a person for whom there is no evidence of carrying on taxable goods or services.
  • A taxpayer who contends that the VAT Act does not apply to it at all is not obliged to file an objection under that Act before resorting to judicial review.
  • Payments received in an accounting year in respect of services rendered in earlier years do not, of themselves, evidence that taxable services were carried on in the later year.

Court orders

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  1. 1.Appeal allowed
  2. 2.Judgment of the High Court and the order dismissing the appellant's notice of motion dated 20th December, 2001 set aside
  3. 3.An order substituting therefor an order allowing the appellant's motion
  4. 4.Orders of certiorari and prohibition issued as sought in the motion (quashing the assessment and prohibiting its enforcement)
  5. 5.Appellant awarded costs of the motion in the High Court and costs of the appeal

Authorities

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Legislation

  • Value Added Tax Act (Cap 476, repealed)Sections 3; Sixth Schedule paragraphs 9 and 22(a); Seventh Schedule paragraph 9(1); section 68(2) of the Value Added Act No. 35 of 2013 (savings)
  • Value Added Act No. 35 of 2013Section 68(2)
  • Income Tax ActAnnual returns provisions
  • Civil Procedure Rules (former edition)Order 53

Cases cited (6)

  • Associated Provincial Picture Houses Vs. Wednesbury Corporation
    [1947] 2 ALL ER 680
  • R v Inland Revenue Commissioners, exparte National Federation of Self Employed and Small Businesses Ltd
    [1982] AC 617
  • Republic Vs. Commissioner of Income Tax Ex-parte SDV Transami (Kenya) Limited
    [2005] eKLR
  • Chief Constable of North Wales Police vs Evan
    [1982] 3 ALL ER
  • Atul Shah & Others vs Commissioner of Value Added Tax
    H.C. Misc. Appl. No. 88 of 1988
  • Highway Furniture Mart Limited v Permanent Secretary Office of the President & Another
    [2006] eKLR
On appeal from
High Court of Kenya at Nairobi
H.C. Misc. Civil Case No. 1482 of 2001
Jurisdiction invoked
First appellate jurisdiction under the Appellate Jurisdiction Act over appeals from the High Court (judicial review application decided under Order 53 of the former Civil Procedure Rules)

Key timeline

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Practical implications

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Frequently asked questions

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Cite this brief

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Cite this brief

Caselaw, "Highway Furniture Mart Limited v Commissioner of Valued Added Tax & another [2015] KECA 566 (KLR)", Case Analysis (2015). Civil Appeal No. 251 of 2008. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2015/566/eng@2015-07-03

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.