[2023] KETAT 94 (KLR)

Aburo General Contractors Limited v Commissioner of Investigations & Enforcement (Tribunal Appeal 824 of 2020) [2023] KETAT 94 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 94 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 824 of 2020

RM Mutuma, Chair, RO Oluoch & E.N Njeru, Members

March 17, 2023

Between

Aburo General Contractors Limited

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a private limited liability Company incorporated in Kenya in accordance with the Companies Act. Its main form of business is construction.

2. The Respondent a is principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under section 5(2) of the Act, with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all tax revenues in accordance with those laws.

3. The Appellant’s business affairs for the tax period 2015 to 2019 were investigated by the Respondent for its commercial dealings with the County Government of Isiolo and the Child Welfare Society of Kenya.

4. The Respondent, through a letter dated 19th January 2021, informed the Appellant of the tax investigations findings which revealed total tax of Kshs. 59,796,648. 00 inclusive of penalties and interests as due and payable by the Appellant.

5. The Appellant disputed the statement of findings thereafter the Respondent issued additional assessment for the period 2016 to 2019 of Kshs. 7,732,678. 00 as VAT and Kshs. 34,036,195. 00 as Corporation tax on 17th June 2021.

6. On the 15th July 2021 the Appellant raised objections to the additional assessments on iTax and the Respondent vide a letter dated 10th August 2021 requested the Appellant to provide documents to support its objection which were provided on the 8th September 2021.

7. The Respondent issued an Objection decision on 26th October 2021 but dated 19th October 2021, confirming VAT of Kshs. 7,732,405. 00 and Income Tax of Kshs. 20,933,871. 00

8. The Appellant, being dissatisfied with the Respondent’s Objection decision and assessment, filed a Notice of Appeal dated 19th November 2021.

The Appeal 9. The Appeal is premised on the following grounds as listed in the Memorandum of Appeal dated 6th December 2021 and filed on even date:-i.The Commissioner issued a late objection decision on 19th October 2021. The Appellant objected on the 15th July 2021, this makes the objection decision late by 34 days contrary to Section 51(11).ii.The Commissioner erred in law and fact refused to recognise allowable expenses incurred by the Appellant as the same was actually incurred.iii.The Respondent erred in law and fact refused to acknowledge and bring into effect the Appellant’s allowable expense as they were duly incurred as is evident in the filled VAT inputs, despite the Appellant providing evidence of the allowable expenses, and while raising assessment on VAT he did not in any way recognise the input, that was duly filled.iv.Despite the Appellant proving he incurred valid expenses while doing business the commissioner elected to ignore all the documentary evidence presented before him contrary to Section 37A (2) “Where a person has no documentation to support expenditure, such a person shall be allowed as deduction of 40% of the expenditure.”v.The Commissioner erred in law and in fact rejected the Appellant’s objection on Corporation tax (IT2) despite the Appellant providing all the evidence as required. Thus, the Respondent did not even bother to look at the records allowable.vi.The Demand on Value Added Tax is all erroneous and void as he deliberately ignored to recognise input duly filled for the periods in question on iTax, this, we feel was malicious and done to punish the Appellant for the reasons only known to the Respondent.vii.The Respondent erred in law by failing to take into account and apply Section 17(2) and (3) of the VAT Act 2013 which provides for the taxpayer to support deduction of input tax.viii.The Respondent is mandated by law to access and take into account the documentary evidence provided by the Appellant to support their case.

The Appellant’s Case 10. The Appellant’s case was premised on its Statement of Facts dated and filed on 6th December 2021 and stated as hereunder:

11. It stated that there was no request to audit the Appellant business for any period, nor any form of communication either in writing or electronic was ever given by the Respondent to either audit or intention to audit. That it received the demand totaling Kshs. 7,732,405. 00 and Kshs. 20,933,871. 00.

12. It averred that pursuant to applicable provisions of the law, the Appellant through a letter dated 15th July 2021 raised an objection to the Respondent’s assessment and the Respondent made an objection decision on 19th October 2021.

13. It contended that the two assessments were excessive and that it ought to only pay the principal tax less allowable expenses. That the Respondent should be allowed to deduct allowable amounts from the Appellant’s Input if they were never deducted. The Appellant can also verify through the Appellant’s suppliers if indeed they ever incurred the costs.

The Appellant’s prayers 14. The Appellant prayed for judgment against the Respondent that this Honourable Tribunal be pleased to:-i.Set aside the assessment under review herein;ii.Substitute the Assessment under review herein in line with the Appellant’s computations set out under the Appellant’s Statement of Facts and recognise the allowable expenses;iii.Put on hold any other intended action by the Respondent until the Appeal is fully determined and heard as the assessment done and rejection of the Objection were in bad faith;iv.In the alternative to (b) above, and further to (a) above, this Honourable Tribunal be pleased to vary the assessments herein as per its wisdom;v.Order the Respondent to pay costs of this appeal to the Appellant;vi.Issue any other order favorable to the Appellant as it may find just and expedient to issue; andvii.The Respondent considers the documentary evidence provided by the Appellant to support their case.

The Respondent’s Case 15. The Respondent’s case is premised on its Statement of Facts dated and filed on 20th January 2022.

16. It stated that Sections 24 and 28 of the Tax Procedures Act, 2015 allow a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information.

17. It stated that Section 77 of the Income Tax Act and Section 31 of the Tax Procedures Act allow the Respondent to issue additional tax assessments where the taxpayer has been assessed for a lesser amount based on any additional available information and to the best of its judgement.

18. It further stated that additional VAT and Income Tax Assessments were based on the analysis of the Appellant’s VAT3 and the IT2C returns vis a vis the bankings.

19. It averred that the variance in the Appellant’s bankings and its filed VAT3 and IT2C returns was used to calculate the undeclared turnover and the subsequent applicable tax.

20. It reiterated that at the objection stage the Appellant availed documentation in support of expenses totaling Kshs. 4,993,682. 00 which were allowed in line with Section 15 of the Income Tax Act and the unsupported expenses were disallowed under Section 16 of the Income Tax Act.

21. It contended that the loss carried forward of Kshs. 50,736. 00 for the financial years 2016 and the Withholding Tax and VAT Withholding Tax deducted were taken into consideration.

22. It averred that the input VAT claimed was unsupported thus disallowed with the filed VAT returns compared to the net bankings and the variance used to calculate the underpaid taxes.

23. It was posited that the Appellant was put to task to explain the variance between the declared sales and its filed VAT3 and the IT2C returns vis a vis the bankings but it failed.

24. It stated that under Section 56 of the Tax Procedures Act, the burden of proof lies with the Appellant to prove that he availed documentary evidence to the Respondent which was ignored in the calculation of the additional tax assessment and that the documents in support of input VAT were beyond the stipulated six months period contrary to Section 17(2) of the VAT Act and were thus disallowed.

25. It averred that it is empowered under Section 31 of the Tax Procedures Act to amend original assessments based on available information and best judgement and that the Objection Decision dated 19th October 2021 is proper based on the information available to the commissioner and was issued within the statutory timelines.

The Respondent’s prayers 26. The Respondent prayed for Orders that:i.The Objection Decision dated 19th October 2021 confirming the additional tax assessments of VAT of Kshs. 7,732,405. 00 and Income Tax of Kshs. 20,933,871. 00 for the tax period 2016, 2017,2018, and 2019 be upheld;ii.This Appeal be dismissed with costs to the Respondent as the same is without merit.

Appellant’s SubmissionsThe Appellant filed its undated submissions on 3rd October 2022 as follows:- On whether the Respondent was right to issue the Objection Decision of 19th October 2021 declining the Appellant’s objection 27. The Appellant submitted that its objection was not late as the Respondents, vide a letter dated 15th July 2021 and after several meetings with the Appellant, confirmed its assessment and advised the Appellant to file an Objection within the stipulated time.

On whether the Objection Decision was made as per the stipulated timelines 28. The Appellant submitted that vide an iTax objection acknowledgment dated 15th July 2021, it raised an objection and the Commissioner made an objection decision 94 days later on the 19th October 2021. This was contrary to the stipulated time granted by the Tax Procedures Act that which was in complete violation of Section 51(4) which provides that:“where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the Objection has not been validly lodged.”

29. It relied on the following cases:a.Tax Appeal No. 1 of 2015, Associated Bakery Manufacturers Limited v. Commissioner of Customs Services;b.Judicial Review Application No. 346 of 2019 Vivo Energy Kenya Limited v. Commissioner of Customs and Border Control, Kenya Revenue Authority and another;c.Civil Appeal No. 158 of 2017, Fleur Investments Limited v. Commissioner of Domestic Taxes and Another; andd.TAT No. 547 of 2019 Tenar Industries v. Commissioner of Domestic Taxes.

30. It further submitted that in the Respondent’s Objection decision it was clear that the Objection was not satisfactory of the Respondent and went on to acknowledge that the Appellant provided all the relevant documents during the objection communication stage. Further that the main reason for the rejection of the objection was that input VAT was not allowed as they were time-barred compared to taxable income and taxable supplies. The Respondent did not have any withholding taxes against any taxable supplier and the Respondent never produced the Withholding taxes or the name of the suppliers. All the documents requested by the Commissioner were however supplied. (sic)

On whether the Respondent’s conducted an audit on the Appellant to understand his business and mode of operations 31. It submitted that the Respondent never conducted nor called for an audit of the Appellant’s business. It added that Section 58(1) of the Tax Procedures Act gives the Commissioner powers to inquire into the affairs of the person under any tax law and shall at all times have full and free access to all lands, buildings, places to inspect all goods, equipment, devices and records.

32. It reiterated that the Respondent erred in failing to consider and apply section 17(2) and (3) of the VAT Act, 2013 which provided for the nature and type of documentation which should be provided by a taxpayer to support deduction of input tax.

On whether the Appellant was entitled to allowable expenses 33. The Appellant argued that despite proving that it incurred valid expenses while doing business, the Commissioner elected to ignore all the documentary evidence presented before it contrary to Section 37A(2) of the VAT Act which provides thus:“where a person has documentation to support expenditure, such a person shall be allowed a deduction of 40% of the expenditure.”

34. It reiterated that the Commissioner erred in law and in fact, when it rejected the Appellant’s Corporation Tax (IT2) despite the Appellant providing all the evidence as required meaning that the Respondent did not even bother to look at the records provided by the Appellant.

On whether the Respondent made a correct computation in raising the confirmed assessments 35. It argued that the Respondent, while raising assessments on Income tax, did not consider any cost of sales of the business despite the Appellant having filled the same on Input VAT for the year under dispute.

36. It contended that the Respondent is mandated by law to access and consider the documentary evidence provided by the Appellant to support its case. Instead, the commissioner in this appeal solely relied on the Appellant’s bank statements contrary to the Tribunal’s ruling in the case of Appeal No. 70 of 2017 Afya X Ray Center Limited v. Commissioner of Domestic Taxes where it was held:“the Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner. The Respondent in this case could have used industrial margins to determine the Appellant’s profits and subject that figure to the 30% and 16% taxes rather than a topline of 30% and 16% on the bank deposits.”

RESPONDENT’S SUBMISSIONSThe Respondents Submissions is dated 26th September 2022 and filed on 23rd September 2022. On whether the Respondent’s Objection Decision dated 19th October 2021 was proper in law 37. The Respondent submitted that the Appellant Objected to the tax demand dated 17th June 2021 on 15th July 2021. That the Respondent requested the Appellant to avail the supporting documents on 10th August 2021 and the Appellant availed the additional documents on 8th September 2021. It further submitted that the Objection decision was issued on 26th October 2021 vide a letter dated 19th October 2021 within the statutory timelines of 60 days.

38. It quoted Section 51 (11) and (3) of the Tax Procedures Act, 2015 which provide that:-“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.” “(3) A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if— (a) the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; (b) in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and (c) all the relevant documents relating to the objection have been submitted.”

39. It cited the case Tax Appeals Number 369 of 2019 Histoto Limited v. The Commissioner of Domestic Taxes where it was stated that:-“a notice of appeal is considered to be validly lodged if it precisely states the grounds of the objection, the amendments required to be made to correct the decision, the reasons for the amendments, the taxpayer should have paid the entire amount of tax due not in dispute and provide all the relevant documents relating to the decision.”

40. It argued that the Appellant herein availed the documents in support of the Objection on 8th September 2021 and as such the 60-day period envisaged in statute started running on that day and not 15th July 2021.

41. It relied on Tax Appeals Tribunal No. 271 of 2020 Sampesa Agency Ltd v. Commissioner of Investigations and Enforcement where the Tribunal cited Tax Appeals Number 255 of 2020 ESL Forwarders Limited v. Commissioner of Domestic Taxes where it was held that:-“this Section enjoins the Commissioner to render an objection decision within 60 days. This section also underscores two ways of calculating the 60 days within which the decision would be delivered. In the first instance the commissioner must deliver an objection decision within 60 days of receipt of the Notice of Objection. In our view, this first option will apply when a taxpayer has lodged a valid objection decision and the Commissioner is satisfied with both the objection notice and the supporting documents thereof. The second way of calculating the 60 days stipulated in Section 51(11)(b); the commissioner shall render an objection decision within 60 days of receipt of any further information the Commissioner may require from the taxpayer.”

42. It submitted that the Appellant did not comply with the provisions of the law in filing a valid objection and their assertion that the Objection Decision issued on 19th October 2021 was late is not only false but also misguided.

43. It asserted that the taxable income was established through the banking analysis method vis a vis the declared sales in the VAT3 and IT2C.

44. It cited the case Tax Appeals Number 115 of 2017 Digital Box Ltd v. Commissioner of Investigations and Enforcement where it was held that:-“…further, the courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment. This was held to be in the case of Bachmannv.The Queen, 2015 TCC 51 where the court stated that: “this court has recognised that in an appropriate case a bank deposit analysis is an acceptable method to compute income.”

45. It submitted that under Sections 58 and 59 of the Tax Procedures Act, 2013 the Appellant is under a legal obligation to produce documents and allow for inspection to enable the Respondent determine the Appellant’s tax liability which the Appellant failed to comply with.

46. It further cited the case of Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR where the court stated that:“The Commissioner clearly explained that it based its decision, the statement of accounts and returns the Company had filed. The Tribunal appreciated this fact when it concluded that it was the duty of the Company to provide all the documents and that the Commissioner was entitled to rely on the self-assessments and returns lodged by the Company in the absence of any other documents.”

47. It also submitted that the expenses of Kshs. 4,993,682. 00 which were supported with documentation were allowed in line with Sections 15 and 16 of the Income Tax Act. The unsupported expenses were however disallowed because the Appellant had failed to keep records as is provided in Section 23 of the Tax Procedures Act.

48. It quoted the decision in the case of Leah Njeri Njiru v. Commissioner of Investigations and enforcement Kenya Revenue Authority & Another [2021] eKLR where it was stated as follows:-“As I understand the Appellant, the Commissioner ought to have presumed the expenses incurred by her in light of the nature of her business and income she was making notwithstanding that these expenses were unsupported. This is a misapprehension as the burden of proving one’s income and expenses lies with the taxpayer. The only way the commissioner could have allowed deductions of expenses as per Section 15(1) of the ITA is if they were supported to its satisfaction. This is in line with Section 54A (1) of the ITA which follows A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

49. It posited that the Appellant claimed Input VAT beyond the stipulated statutory six months contrary to Section 17(2) of the VAT Act, 2013 and the same were disallowed. It added that it is trite law in any proceedings, the burden shall be on the taxpayer to prove that a tax decision is incorrect by providing relevant evidence to prove the same which onus of proof was on the Appellant to prove that the additional assessments were erroneous.

50. It relied on the Australian case Mulheim v. Commissioner of taxation (2013) where the Federal Court of Australia held that:-“the onus of proving that an assessment issued by the commissioner is excessive can only be discharged by the taxpayer by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied must show that the amount of money for which tax is levied the assessment exceeds the actual substantive liability of the taxpayer”

Issues For Determination 51. Upon perusing the pleadings and documentation produced before it, together with the submissions, the Tribunal is of the opinion that the following are the issues for determination:a.Whether the Respondent’s Objection Decision dated 19th October 2021 is time-barred; andb.Whether the Respondent erred in confirming its Additional Assessment for Income Tax and VAT.

Analysis And Findings 52. The Tribunal wishes to analyse the issues as herein-under:

Whether the Respondent’s Objection Decision dated 19th October 2021 is time- barred. 53. The Appellant objected to the Respondent’s additional assessment on 15th July 2021 whereupon the Respondent requested for documents in support of the Objection. The documents were then provided by the Appellant on 8th September 2021. The Objection Decision was rendered by the Respondent on 19th October 2019.

54. The Appellant contends that the Respondent issued a late objection decision on 19th October 2021 making the Objection decision late by 34 days contrary to Section 51(11).

55. On its part, the Respondent argues that it requested the Appellant to avail the supporting documents on 10th August 2021 and the Appellant availed the additional documents on 8th September 2021. It further submitted that the Objection decision was issued on 26th October 2021 vide a letter dated 19th October 2021 within the statutory timelines of 60 days. It quoted Section 51 (11) and (3) of the Tax Procedures Act, 2015.

56. Section 51 (11) of the TPA provides that the Respondent has specific timelines in which to issue an Objection decision. It states as thus:-“The Commissioner shall make the Objection Decision within sixty days from the date of receipt of–a.the notice of objection; orb.}any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

57. The Tribunal is of the view that the above Section is best explained by the The Sampesa Agency case (supra), that this Section underscores two ways of calculating the 60 days within which the decision would be delivered. First option being when a taxpayer has lodged a valid objection and the second way of calculating the 60 days is on receipt of any further information the Commissioner may require from the taxpayer.

58. The Tribunal concurs with the Respondent that its decision was not time- barred as it was delivered within the stipulated 60-day timeline as per the law immediately following the provision of the documents by the Appellant. In other words, the Tribunal finds that the Objection decision issued by the Respondent followed the law and is therefore valid.

b) Whether the Respondent erred in confirming its Additional Assessment for Income Tax and VAT. 59. The Appellant argued that the Respondent failed to consider all the documentation provided in support of the Objection while making its Objection decision. It further argued that the Respondent ought to have carried out an audit so as to determine the correct expenses for deduction in arriving at the taxable income and input VAT deductible.

60. That the Respondent deliberately failed to recognise input VAT duly filed for the periods in question.

61. The Respondent on its part argued that the assessment was arrived at through banking analysis method vis a vis the declared sales in VAT3 and IT2C and that expenses which were supported by documentation totaling Kshs. 4,993,682. 00, were taken into consideration. It added that it considered the Appellant’s documents and disallowed its Input VAT claims because they were time-barred.

62. The Respondent submitted that it used all the information available to it including the Appellant’s own documentation and its best judgment to determine the Appellant’s tax liability in accordance with the law.

63. The Tribunal has had occasion to peruse the documents filed by the Appellant in support of its case including the Memorandum of Appeal, the Statement of Facts and the various correspondence between itself and the Respondent. No documents or workings relating to the disallowed expenses and / or the input VAT not considered have been adduced by the Appellant in its bundle of documents.

64. The Tribunal cites its previous decision in the case of Digital Box Limited v Commissioner of Domestic Taxes (TAT No. 115 of 2017) where it relied on the case of Alfred Kioko Muteti v Timothy Miheso & Another [2015] eKLR where the court held that:“… thus, the burden of proof lies on the party who would fall if no evidence at all were given by either party…”

65. Given the circumstances of this Appeal, it was incumbent upon the Appellant to prove its case, further Section 30 of the Tax Appeals Tribunal Act clearly lays the burden of proving the case on the Appellant where it provides as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving—a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

66. For that reason, the Tribunal finds the Appellant has not discharged its burden of proof in showing that the Respondent erred in confirming its Additional Assessment for Income Tax and VAT. For which reasons the Tribunal does not find any fault with the impugned Objection Decision.

Final Decision 67. The upshot to the foregoing analysis is that the Appeal has no merit and the Tribunal consequently makes the following Orders;-i.The Appeal be and is hereby dismissed;ii.The Respondent’s Objection decision issued on 26th October 2021 but dated 19th October 2021, confirming VAT and Income Tax additional assessments be and is hereby upheld; andiii.Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ……...................ROBERT M. MUTUMACHAIRPERSON……...................RODNEY OLUOCHMEMBER……...................ELISHAH NJERUMEMBER*