Federal High Court Holds that FIRS Lacks the Powers to Impose Turnover Assessment on the Value of Properties

Summary

On 29 November 2018, the Federal High Court (the Court)
delivered a Judgment on the imposition of turnover assessment in a
case between Theodak Nigeria Limited (Theodak) v Federal Inland
Revenue Service (FIRS). Based on the Judgment, the FIRS acted ultra
vires the powers granted to it under the Companies Income Tax (CIT)
Act, by imposing turnover assessment on Theodak based on the value
of its property.

The Court reached this decision on the grounds that the turnover
of a company has to be connected to the company’s normal trade or
business activities and that the value of a company’s property
cannot amount to its turnover.

Details
In November 2016, the FIRS issued a notice to Theodak demanding a
sum of over N94 million as chargeable tax for the year 2015. The
FIRS had assessed Theodak to tax by subjecting 20% of the value of
its property, Theodax Plaza, to CIT in the absence of any filed
returns for 2015.

In response to the Demand Notice, Theodak instituted an action
at the Federal High Court, Abuja. The crux of the issues before the
Court was whether the FIRS had the powers to assess Theodak to
deemed income tax based on the value of its property. Theodak
argued that applying deemed income tax based on the value of a
company’s property is inappropriate because “value of property
occupied or used by a company” is not listed as income chargeable
to tax under Section 9 of the CIT Act.

Responding to Theodak, the FIRS argued that it had a wide range
of powers to assess delinquent and defaulting taxpayers, including
its powers to exercise Best of Judgment assessment under Section 65
of the CIT Act. In addition, the FIRS contended that based on
Sections 69 and 76 of CITA, the action before the Court was
incompetent because Theodak failed to object to the assessment
within 30 days and the assessment had become final and
conclusive.

The Court ruled in favour of Theodak holding that the value of
Theodax Plaza could not be deemed to be its turnover for the year
because the turnover of a company has to be tied to the company’s
trade or business activities. However, the Court stated that
imposing turnover assessment on the value of a company’s disposed
properties would be acceptable where a company is in the business
of selling property and such company fails to file its annual tax
returns.

Regarding the FIRS’ contention that the assessment had become
final and conclusive, the Court held that a company is not under
any obligation to file their objections with the FIRS given that
Section 69(1) of CITA states that a company may apply to the Board
for review in the event of a dispute. The Court further emphasized
that the use of the word “may” in the section implies that
application to the Board is discretionary and not mandatory.

Implications
Based on this Judgment, the FIRS lacks the powers to impose
turnover assessment on the properties of taxpayers even when such
taxpayers have failed to file their tax returns. Thus, unless a
company is engaged in property dealing, the FIRS is not permitted
to use valuation of properties as turnover basis of assessment
since valuation of properties is clearly different from business
turnover/income. More so, the Judgment is in line with the
established legal principle that where an administrative body is
exercising discretionary powers granted to it by the law, it must
do so reasonably. Thus, taxpayers whose properties have been
assessed to CIT now have legal and judicial bases to challenge the
legality of such assessments.

Furthermore, the Court’s decision also suggests that the use of
the word may in Section 69(1) of the CIT Act places no obligation
on taxpayers to file their objections with the FIRS before
approaching the Courts. It is important to note that this is a
clear departure from a well-accepted principle that where a
taxpayer fails to object to an assessment within the time
stipulated by statute, such assessment would become final and
conclusive if it was issued in accordance with the law. In
addition, it is important to note that the word may has also been
held to be the equivalent of shall in a number of tax cases. Thus,
the word may might also be read to impose a legal obligation to
file an objection with the FIRS in the event of a dispute.

Moreover, the Courts had previously held that where a statute
prescribes a legal line of action for determination of an issue,
the aggrieved party must exhaust all the remedies in that law
before going to court. It is hoped that the issue on the obligation
of a taxpayer to object to a disputed assessment would be further
clarified by a superior court.

Notwithstanding the above, companies that have been served with
Demand Notices/Assessments based on the value of their properties
should seek professional advice from their tax consultants in order
to determine the appropriateness or otherwise of such
assessments.

Culled from andersentax.ng^[1]