Property & Real Estate | |
Property & Real Estate | |
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Wednesday, January 30, 2019 4.30PM / KPMG
The Federal High Court (FHC) sitting in
Abuja recently gave a judgement in favour of Theodak Nigeria Limited (TNL
or “the Company” or “the plaintiff”) in its lawsuit against the Federal Inland
Revenue Service (FIRS or “the defendant”).
The issue for determination was whether
the FIRS had statutory power to deem the value of the Company’s property to be
its turnover for any year of assessment (and impose income tax thereon) based
on the provision of Section 30 of the Companies Income Tax (CIT) Act, Cap. C21,
Laws of the Federation of Nigeria (LFN), 2004.
Background
The Federal High Court
(FHC) sitting in Abuja recently gave a judgement in favour of Theodak Nigeria
Limited (TNL or “the Company” or “the plaintiff”) in its lawsuit against
the Federal Inland Revenue Service (FIRS or “the defendant”).
The issue for
determination was whether the FIRS had statutory power to deem the value of the
Company’s property to be its turnover for any year of assessment (and impose
income tax thereon) based on the provision of Section 30 of the Companies
Income Tax (CIT) Act, Cap. C21, Laws of the Federation of Nigeria (LFN), 2004.
Background Generally,
CIT is payable on the profits of a company “accruing in, derived from, brought
into or received in Nigeria1” in respect of any trade or business that may have
been carried on.
The CIT Act requires
every company to file its tax returns for every year on a self-assessment
basis, containing the amounts of profits from every source, with the FIRS.
Section 30 of CIT Act empowers the FIRS to assess a company on a fair and reasonable
percentage of the turnover from its trade or business where either the business
produces no assessable profits; where the assessable profits are less than
might be expected to be, or where the true assessable profits cannot be
ascertained.
Facts
of the case and issues for determination
The FIRS alleged that
the Company did not file its income tax returns for 2015 and thereby failed to
pay its income tax liability for that year.
Hence, the FIRS invoked the provisions of Section 30(1)(a) of the CIT Act by deeming 20% of the ascertained value of a property admitted to be owned by the Company to be the CIT payable, and issued its assessment notice for the amount.
Dissatisfied with the FIRS’ action, TNL filed an appeal at the FHC arguing that:
Thus, the Company urged
the FHC to declare that the value of its building was not the same as its
turnover, and that the FIRS’ action was ultra vires its statutory powers under
the CIT Act. The plaintiff also prayed the FHC to set aside the FIRS’ assessment
and restrain the defendant from enforcing the recovery of the alleged tax
liability. The FIRS, on its part, argued that Section 30(1)(a) of the CIT Act
gave it a wide range of power to assess delinquent taxpayers to tax, and
therefore had the statutory power to impose its best of judgment assessment on
TNL based on the value of the Company’s property. This was on the ground that
TNL had failed to file its tax returns despite several notices issued by the
FIRS. The defendant also argued that the assessment was final and conclusive
because the plaintiff failed to object within 30 days as provided by the CIT
Act.
The plaintiff also
prayed the FHC to set aside the FIRS’ assessment and restrain the defendant
from enforcing the recovery of the alleged tax liability. The FIRS, on its
part, argued that Section 30(1)(a) of the CIT Act gave it a wide range of power
to assess delinquent taxpayers to tax, and therefore had the statutory power to
impose its best of judgment assessment on TNL based on the value of the
Company’s property.
This was on the ground
that TNL had failed to file its tax returns despite several notices issued by
the FIRS. The defendant also argued that the assessment was final and
conclusive because the plaintiff failed to object within 30 days as provided by
the CIT Act.
Decision
After considering the arguments of both parties, the FHC held that:
Based on the foregoing, the FHC issued a perpetual injunction restraining the FIRS and or its agents from enforcing any actions against the Company on the basis of the property assessment.
Comments
The FHC’s judgement on
the power of the FIRS to assess a company to CIT based on value of its
properties has, hopefully, put paid to the controversy attendant on the
initiative taken by the FIRS to use properties owned by taxpayers as basis for
their assessment to tax.
The CIT Act is clear on
the categories of income chargeable to income tax, which should be respected by
the tax authorities.
Also, as one of the
canons of taxation is equity, taxpayers should be assessed to the right amount
of tax in proportion to their income, only. The FHC judgement that a taxpayer
has the discretion to seek redress in the court in the first instance, without
first going through the administrative process of objecting to a tax assessment
by the FIRS, is quite instructive.
The decision essentially
invites tax payers to weigh their options and forum shop at two levels.
Firstly, in deciding whether to bother objecting to an FIRS tax assessment as
provided for in the tax legislation for an initial administrative dispute
resolution protocol and, secondly, in deciding whether to refer a tax dispute to
the Tax Appeal Tribunal (TAT) at all.
Consequently, this
decision may inadvertently lead to a shortening of the tax resolution
procedures provided in tax legislation and therefore an early widening of the
gates to litigation at the FHC level for cases that may actually not be ripe
for adversarial resolution.
As full litigation can
be costly and time-consuming, and as judges are also not necessarily as hands
on with respect to tax technical issues as the FIRS itself, or the TAT, we are
in favour of encouraging taxpayers to explore the less adversarial protocols
available under the tax legislation before referring disputes to the FHC for
resolution.
While a taxpayer cannot
be denied the constitutional right of access to the courts, the pursuit of
administrative resolution of a tax dispute through objection to a tax
assessment by the FIRS should not be totally rejected.
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