January 22, 2019
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.
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.
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.