[2024] KETAT 1672 (KLR)

Acer Petroleum Limited v Commissioner of Domestic Taxes (Tax Appeal E736 of 2023) [2024] KETAT 1672 (KLR) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1672 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E736 of 2023

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

November 21, 2024

Between

Acer Petroleum Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private Limited liability Company incorporated in Kenya registered under the Companies Act, licensed to carry out the business of import, export and wholesale of petroleum products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the KRA 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 KRA 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 and 2 of the First Schedule to the KRA Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent raised assessments dated 5th June 2023 in relation to Value Added Tax, Corporation tax and Withholding Tax for the period 2017 to 2020 amounting Kshs 276,744,423. 00.

4. The Appellant objected to the Respondent’s assessments vide a letter dated 5th July 2023. Upon consideration of the objection, the Respondent issued objection decision dated 14th September 2023 wherein the Respondent demanded the Appellant to pay a total of Kshs 280,278,486.

5. The Appellant being aggrieved with the objection decision lodged the Appeal herein vide a Notice of Appeal dated and filed on 13th October 2023.

The Appeal 6. The Appeal is based on the memorandum of appeal dated and filed on 27th October 2023 raising the following grounds of appeal:a.That the Respondent erred in law by imposing Corporation Tax on an approach that contravenes the applicable sections of the Income Tax Act and Kenyan jurisprudence.b.That the Respondent erred in law by imposing withholding tax on an approach contravening the applicable sections of the Income Tax Act (ITA) and Kenyan jurisprudence.c.That the Respondent erred in law by imposing Value Added Tax on an approach contravening the applicable sections of the Value Added Tax Act and Kenyan jurisprudence.

Appellant’s Case 7. The Appellant relied on its statement of facts dated and filed 21st October 2023; the witness statement of Mr. Steve Okoth dated 20th August 2024 and 29th November 2023 which was adopted as evidence in chief by the Tribunal on 11th September, 2024. The Appellant also filed its written submissions dated 30th September 2024 thereby complying with the directions of the Tribunal.

8. The Appellant’s case is that the Respondent audited the Appellant to ascertain its tax compliance when filing Corporation Tax, Withholding Tax, and Value Added Tax returns. This process was set in motion via the Respondent’s letter dated the 24th March 2022. Consequently, the Respondent issued the Notice of Additional Assessment on the 5th June 2023. The Corporation Tax assessed amounted to Kshs 252,337,068, the Withholding Tax assessed was Kshs 2,664,584, and the VAT assessed was Kshs 21,742,771, amounting to Kshs 276,744,423 inclusive of penalties and interest.

Statutory Assessment Timelines 9. The Appellant raised issues concerning statutory assessment timelines. The Appellant asserted that tax laws detest a situation in which taxpayers' tax-related concerns loom over them for an endless amount of time. As a result, tax statutes impose strict deadlines for transactions, applications, and decisions. The Appellant asserted that the Respondent is barred from auditing and assessing amounts in these periods beyond five years as per Section 31(4) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”). It argued that a taxpayer is only obliged to maintain records for five years as per Section 23 of the TPA.

10. That the assessment on the 5th of June 2023 on Corporation Tax, Pay As You Earn, Withholding Tax, and Value Added Tax for 2016 to 2021, the Appellant opined that the periods in question are far beyond 2018. The Appellant stated that it is only obliged to maintain some records beyond the timelines; the assessment cannot be raised now.

11. The Appellant argued that the Respondent’s action of issuing an assessment beyond five years after the stipulated timelines is contrary to not only the provisions of Section 31(4) and 23 of the TPA but also offends Article 210(1) of the Constitution which states that, "no tax or licensing fee may be imposed, waived or varied except as provided by legislation.”

A. Corporation Tax Salaries and wages variance 12. The Appellant stated that salaries and Wages expenses are incurred wholly and exclusively in producing taxable income. As such they are tax deductible as per Section 15(1) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).

13. The Appellant’s case is that the difference cited by the Respondent results from how casual/temporary employee benefits are accounted for within the staff costs. The Appellant argued that it hired casual workers for various tasks. Concerning Pay as You Earn (PAYE), the Appellant also argued that most workers needed to fit into the tax brackets outlined in Head B, 1 of the Third Schedule to the ITA. It maintained that tax cannot be charged on the payments made to casual employees. To affirm our position, the Appellant relied on the schedule of details relating to casual employees.

14. Additionally, the Appellant stated that part of the expenses booked as staff costs in the financial statements are not subject to PAYE. It argued that the Respondent should not have considered items like accommodation expenses, NSSF and medical expenses in the computation of PAYE.

Sales variances- Sales as per income tax return vs VAT Account in 2019 15. The Appellant asserted that whereas the Respondent indicated that the sales, as declared in the income tax return in 2019, were under declared by Kshs 1,379,501. 00 because the total VAT sales turnover for the year was higher by that amount, the Appellant stated that the Respondent was wrong on this matter as it did not capture Other Income, which was declared in the income tax returns as indicated in sales in IT2C vs VAT3 Reconciliations.

16. To demonstrate this issue, the Appellant relied on IT2C and VATS3 returns for the year in issue. The Appellant relied on VAT 3A returns and Sales Ledgers to support its position. The Appellant also argued that actual position is negligible and much less than the amount cited by the Respondent.

Sales variances- Sales as per income tax return vs bank deposits in 2017 and 2020 17. The Appellant stated that it deals in importing, exporting, and wholesale petroleum products and that for the sales made, the Appellant receives payment from its customers through bank accounts held at ABSA Bank Kenya Plc, Equity Bank, [&M Bank Limited and Stanbic Bank.

18. It however, stated that some of the entries in the bank accounts are not sales and are interbank transfers between accounts held by the Appellant, therefore, are not sales. The Appellant argued that once the transfers by the Appellant between its various bank accounts are excluded from the banking, there would be no pending variance.

Stock Movement Analysis 19. The Appellant stated that the applicable law is section 3(2) (a)(i) and 4 of the ITA which levies tax on income earned by a business in Kenya. It also argued that the Respondent considered unrecorded inventory, categorized as undisclosed sales, income for taxation purposes. Inversely, the Appellant asserted that its inventory is adequately documented or recorded. Therefore, the Appellant countered the Respondent's suggestion or implication that there were sales that were not correctly accounted for or "undisclosed sales”. To evidence this position, the Appellant relied on a stock reconciliation.

20. The Appellant also stated that in 2017, it purchased stocks worth 42,477,231. 07 litres and made sales of 41,086,601. 30 litres. That the variance of 1,390,629. 77 litres was due to stock losses incurred through the Kenya Pipeline Company and eevaporation and spillage accounting for 0. 8% of the purchases made.

21. The Appellant noted the use of average prices for the year by the Respondent, which according to the Appellant, is misleading. Instead, the Appellant stated that Petroleum products market prices are volatile and can vary drastically within a week and that the selling price may not have a direct correlation with the purchase price.

Disallowed Expense 22. The Appellant pleaded that it disclosed all expenditures incurred from the 1st January to the 31st December for 2017, 2018, 2019 and 2020. The disclosure was made while preparing annual accounts, tax computations, and income tax returns. It argued that the expenses were: travel and accommodation charges; business development; cost-sharing expenses; custom duty variances; discount expense; electricity and water expense; employee benefits expenses; facilitation charges direct; general expenses; hospitality and depot expenses; insurance expenses; legal and membership fees; loss incurred on the claim; office expenses; rent expenses; rent for the parking lot at Rongai; repair and maintenance; and vehicle running expenses

23. The Appellant argued that it revealed its expenses as required under section 15 of the ITA, which grants it the authority to deduct costs incurred solely and specifically to generate business income.

Travel and accommodation charges 24. It was the Appellant’s case that in the years 2019 and 2020, it incurred travel and accommodation expenses used to facilitate business operations and that its employees travel for work-related purposes, such as attending meetings, conferences, or visiting clients and that these expenses were incurred to maintain and expand the business hence the subtracted the same as the operating costs.

25. The Appellant reiterated that these expenses were claimed within the legal provisions of the ITA. To affirm this position, the Appellant relied on petty cash vouchers and Ledgers.

Business development 26. According to the Appellant, it incurred these expenses in market research, sales and marketing, networking, product development, and training its employees among others. It added that in the 2019 financial statements, the financial documents specified the operating expenses as Kshs 2,893,863. 00.

27. The Appellant reiterated that these expenses were claimed within the legal provisions of the ITA. To affirm its position, the Appellant relied on Petty cash vouchers and Ledgers.

Cost-sharing expense 28. On this issue, it stated that the Appellant and its related parties optimised resources by sharing certain expenses. For example, the Appellant argued that they collectively funded using assets, infrastructure, or personnel, which might otherwise be underutilised or inefficiently allocated. By doing so, it argued that they reduce the overall cost burden on individual entities, making the business more cost effective.

29. The Appellant argued that in the 2018 financial statements, indicates operating expenses as Kshs 4,599,107,000. 00. The Appellant averred that the cost-sharing expense is documented in the trial balance as Kshs 637,891. 00 and these expense line has yet to be claimed in the Income Tax Return therefore cannot be disallowed again. To support its claim the Appellant relied on cost sharing expense agreement; and Ledgers.

Custom Duty Variances 30. On this the Appellant argued that it incurred custom duties on importing goods into the country but the Respondent demanded taxes for the year 2017.

31. The Appellant stated that the Respondent is barred from auditing and assessing amounts in these periods beyond five years as per Section 31(4) of the "TPA" as the taxpayer is only obliged to maintain records for five years as per Section 23 of the TPA.

32. Therefore, the Appellant argued that the Respondent’s action of issuing an assessment beyond five years after the stipulated timelines is contrary to not only the provisions of Section 31(4) and 23 of the TPA but also offends Article 210(1) of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) which states that, "no tax or licensing fee may be imposed, waived or varied except as provided by legislation." Therefore, the Appellant urged the Tribunal to set aside the assessment of Kshs 63,888,910.

Custom Duty Variance 2019 33. The Appellant stated that its analysis of the customs statistical data provided by the Respondent, there was a variance between the customs entry expense declared at the border and in the financial statements.

34. The Appellant contended that the Respondent is flat-out and grossly inaccurate in the statement that customs declared at the entry and the amounts reported in the financial statements are much more. To support its case, the Appellant relied on Customs statistical data 2019; Equity PLC bank statements; and Sample invoices and respective custom entries.

Customs Duty Variance 2020 35. That the variance was Kshs 35,899,576. 00 for the year 2020 based on the Appellant’s analysis of the customs statistical data provided by the Respondent, the variance between the customs entry expense declared at the border and in the financial statements was Kshs 35,868,880. 00.

36. That an examination of its 2019 Equity bank statements, the Appellant argued that it disbursed a sum of Kshs 184,083,744. 00 in customs duties to the Respondent which addressed the matter of outstanding taxes, as there is no variance.

Discount expense 37. The Appellant’s case is that it occasionally provided product discounts to customers intending to boost sales and deplete its inventory, in the 2018 financial statements, the operating expenses was Kshs 4,599,107,000. 00.

38. The discount expense is documented in the trial balance as "BDO1708 DISCOUNT EXPENSE," as indicated in Transaction 515 and amounts to Kshs 106,098. 00.

39. The Appellant stated that in the 2019 financial statements, the financial documents specified the operating expenses as Kshs 2,893,863. 00. It however, stated that the Income Tax Return has not claimed these expense lines therefore, cannot be disallowed.

Electricity and water expense 40. The Appellant averred that electricity and water are essential operational costs used in facilitating business operations. It asserted that in the 2019 financial statements, the financial documents specified the operating expenses as Kshs 2,893,863. 00. As per the income tax return, the Appellant booked the expenses as Kshs 1,116,199. 00 as amount claimed however, Kshs 1,084,685 .00 was disallowed.

Employee benefits expense 41. The Appellant stated that it expended on employee benefits, i.e., NSSF, NHIF, cash benefits, and noncash benefits which represent an investment in the workforce's human capital, and these expenditures can directly and indirectly influence income generation. The Appellant stated that it subtracted the expenses as operating expenses in the financial statements.

42. The Appellant stated that it claimed Kshs 1,670,886. 00 yet Kshs 527,457. 00 was disallowed notwithstanding that the deduction complied with the legal stipulations outlined in Section 15(1) of the ITA and that the Respondent can confirm that the employee benefits were duly documented in the PAYE Returns submitted by the Appellant. The Appellant therefore, prayed that the assessment be invalidated for being contrary to the applicable law.

Facilitation charges direct 43. The Appellant averred that it incurred facilitation charges expenses that streamline processes, enhance efficiency, reduce risks, and improve the business's overall operations. It stated that the 2019 financial statements deducted the expense as an operating expense.

44. The Appellant reaffirmed that these expenditures were asserted per the legal guidelines outlined in the ITA. The Appellant therefore prayed for the annulment of the assessment.

General expenses 45. The Appellant submitted that the general expenses, also referred to as operating expenses, are essential for running a business efficiently and, indirectly, generating income. That in the 2018 financial statements, the financial documents specified the operating expenses as Kshs 4,599,107,000 while in the 2017 financial statement, the general expenses were documented as "expenses by nature”, totaling Kshs 2,876,824,501. 00.

46. The Appellant stated that in the Trial balance, general expenses referenced as “66. 30. 00. 000 General expenses -General and trading” amounted to Kshs 20,668,579 for the year ended 2018.

47. The Appellant averred that in the 2017 Income Tax Return did not claim expense therefore it cannot, be disallowed. The Appellant reaffirmed that the expenditures claimed in the 2018 Income Tax Return were asserted by the legal guidelines outlined in the ITA.

Hospitality and depot expenses 48. The Appellant asserted that it expended on costs associated with hosting and the operation and upkeep of storage facilities. The 2019 financial statements deducted the expense as an operating expense. It argued that the Financial Documents specified the operating expenses as Kshs 4,599,107,000. 00.

49. It argued that the Respondent disallowed Kshs 19,048,998. 00 and Kshs 2,218,121. 00 for 2019 and 2020, respectively. The Appellant reiterated that these expense lines were not claimed in 2019- and 2020 income tax returns and therefore cannot be disallowed.

Insurance expenses 50. The Appellant argued that it has accrued costs associated with insurance expenditures, which serve as a means of risk management and safeguarding. Insurance protects against unforeseen events and losses, promoting business continuity, asset preservation, and adherence to legal requirements, all of which foster income generation and enduring financial security.

51. It stated that the 2019 financial statements deducted the expense as an operating expense. It argued that the Financial Documents specified the operating expenses as Kshs 4,599,107,000. 00 The Appellant argued that in the income tax return, insurance costs were subtracted as a financial expense, totalling Kshs 3,441,543. 00 for 2019 and Kshs 1,826,129. 00 for 2020.

52. The Appellant stated that the Respondent disallowed Kshs 1,541,964. 00 for 2019 and Kshs 566,764. 00 for 2020. The Appellant therefore, prayed that this assessment be vacated.

Legal and membership fees 53. The Appellant stated that it accrued charges essential for dealing with legal matters and covered fees for professional associations and trade organisations to which it was affiliated. The 2019 financial statements deducted the expense as an operating expense. The Appellant maintained that Financial Documents specified the operating expenses as Kshs 4,599,107,000. 00.

54. It averred that the amount of Kshs 2,501,938. 00 was subtracted as an eligible expense in the 2019 income tax return calculation, and Kshs 1,476,978. 00 was deducted for the year 2020. The Appellant therefore, prayed that this assessment be vacated.

Loss incurred on a claim 55. The Appellant argued that it accrued personal expenses when seeking compensation for a loss it had sustained due to a financial setback triggered by an insured event, leading to the filing of an insurance claim. From the financial statements for 2019, it argued that the cost was subtracted as an operational expenditure. It stated that the financial documents indicate that operational expenses amounted to Kshs 4,599,107,000. 00.

56. That Kshs 292,854. 00 was subtracted as an expense in calculating the 2019 income tax return but the Respondent disallowed Kshs 262,854. The Appellant reiterated that these expenses were claimed in compliance with the legal provisions stated in the ITA.

Office expenses 57. The Appellant argued that it incurred expenses used in the day-to-day operations of its office. In the financial statements for 2019, the cost was subtracted as an operational expenditure. It stated that the financial documents indicate that operational expenses amounted to Kshs 4,599,107,000. 00. It maintained that no deduction was explicitly sought for the preparation of the Income Tax return. Nevertheless, the Respondent rejected a sum of Kshs 262,854. 00. It argued that since this expense line has not been claimed in the Income Tax Return, it cannot be disallowed.

Rent expense 58. The Appellant’s case was that this expense was incurred in association with leasing operating space. In the financial statements for 2019, the cost was subtracted as an operational expenditure. It stated that the financial documents indicate that operational expenses amounted to Kshs 4,599,107,000.

59. The Appellant stated that Kshs 1,908,103. 00 was subtracted as an expense in calculating the 2019 income tax return but Respondent disallowed Kshs 855,517. 00. The Appellant submitted that these expenditures were asserted by the legal regulations outlined in the ITA.

Rent for the parking lot at Rongai 60. The Appellant averred that the cost is linked to the Appellant renting a location in Rongai for parking vehicles. In the financial statements for 2019, the cost was subtracted as an operational expenditure. The Appellant asserted that the financial documents indicate that operational expenses amounted to Kshs 4,599,107,000. 00. It argued that no deduction was explicitly sought for the preparation of the Income Tax return but the Respondent rejected a sum of Kshs 262,854. 00.

61. The Appellant argued that since these expense lines have not been claimed in the Income Tax Return, they cannot be disallowed.

Repair and maintenance 62. The Appellant stated that repair and maintenance expense refers to the costs incurred by the Appellant to keep assets, equipment, property, or facilities in good working condition and to address wear and tear, damage, or other issues that may arise over time.

63. The Appellant referred the Tribunal to financial statements specifically, note 5 where the expenses were recorded as an operational cost.

64. The Appellant stated that Kshs 213 294 .00 deductions were explicitly sought to prepare the Income Tax return but the Respondent rejected a sum of Kshs 151,676. 00. The Appellant reaffirmed that these expenditures were asserted by the legal regulations outlined in the ITA.

Repair and maintenance expenses 65. The Appellant’s case was that repair and maintenance expense refers to the costs incurred by the Appellant to keep assets, equipment, property, or facilities in good working condition and to address wear and tear, damage, or other issues that may arise over time. It stated that the 2019 financial statements recorded the expense as an operational cost where the financial documents specify that operational expenses totalled Kshs 4,599,107,000. 00.

66. The Appellant asserted that no deduction was explicitly sought for the preparation of the Income Tax return but the Respondent rejected a sum of Kshs 3,420,076. 00. The Appellant asserted that since these expense line had not been claimed in the Income Tax Return, it cannot, therefore, be disallowed.

Vehicle running expenses 67. The Appellant asserted that it accrued costs for the operation and upkeep of vehicles, including fuel, maintenance and repairs, licensing, and inspections. The 2019 financial statements deducted the expense as an operating expense. It noted that the Financial Documents specified the operating expenses as Kshs 4,599,107,000.

68. The Appellant stated that Kshs 2,778,002. 00 was claimed as an eligible expense for 2019, and Kshs 954,626 for 2020 but the Respondent rejected Kshs 802,413 for 2019 and Kshs 174,760 for 2020. The Appellant reaffirmed that these expenditures were asserted per the legal regulations outlined in the ITA.

Rent receivable 69. That the sale of transit goods, wrongly captured as "rent receivable" in the 2019 books, has not been sufficiently explained. The amount of Kshs 27,973,000. 00 is thus "disallowed", and tax is charged at 30%.

70. The Appellant stated that the Respondent incorrectly selected figures when assessing the transaction. That as per the trial balance, the sum associated with rent income receivable stands at Kshs 205,413. 00 yet the Respondent picked Kshs 27,973,000. 00. Therefore, the Appellant prayed for a reconsideration of the assessment.

71. Further, the Appellant argued that it informed the Respondent that during the preparation of the financial statements, the auditors misunderstood the transaction, incorrectly categorising it as "rent receivable" when, in fact, it was a sale in transit transaction. Which sale ultimately did not occur after previous indications or plans of a sale, and the related financial transactions initiated were cancelled or reversed. It stated that what was initially expected to be a sale did not materialise, and any associated financial actions were undone.

72. The Appellant emphasised that the Respondent faced difficulties identifying transaction in the sales ledger due to its reversal. The Appellant relied on sales figures showing to whom the sales were made. The Appellant stated that since there was no actual sale and consequently no income on which tax could be imposed, the Appellant prayed that the assessment be invalidated.

B. Withholding Tax 73. The Appellant argued that the Respondent reviewed the Appellant's compliance concerning withholding tax on transactions, namely:i.Interest on Whitehorse Commodities Limited Loan for the years 2019 and 2020;ii.Hospitality charges;iii.Documentation charges;iv.Marking charges for the years 2019 and 2020;v.Calibration expenses for the years 2019 and 2020;vi.Audit fees; andvii.Legal fees.

74. The Appellant further averred that Respondent took the position that there were shortfalls in taxes that should have been pinned on the transactions, charging an additional tax assessment amounting to Kshs 823,845. 00.

75. The Appellant asserted that Withholding tax is levied under Sections 10 and 35 of the ITA. It averred that withholding tax is deducted at source from the following sources of income:i.Interestsii.Dividends;iii.Royalties;iv.Management or professional fees (including consultancy, agency or contractual fees)v.Commissions;vi.Pensions;vii.Rent received by non-residents; andviii.Other payments specified.

Interest on Whiterose Commodities Ltd Loan in 2019 and 2020 76. The Appellant averred that the Respondent charged a total tax of Kshs 549,235. 00 in 2019, which included a principal tax of Kshs 378 783. 00. a penalty of Kshs 18,939. 00 and interest of Kshs 151,513. 00. The Appellant argued that the Respondent charged tax on the same in 2020, totalling Kshs 518,965 yet this interest amount was not paid, and a reading of Line 7. 1 of the income tax return (IT2C) of 2019 indicates zero interest expense was claimed. The Appellant therefore, stated that there is no point in charging withholding tax on interest which has neither been paid nor expense claimed.

77. The Appellant maintained that tax point for withholding tax is the moment of payment. The Appellant further stated that Kenya's Court of Appeal, on the 5th February 2019, made a ruling that withholding tax may be applicable upon actual delivery of money or any other valuable consideration or an earlier moment when the expense is accrued that is booked as an expense.

78. The Appellant argued that the Ruling in Kenya Revenue Authority v Republic (Exparte Fintel Ltd) [2019] eKLR Civil appeal no. 311 of 2013 exonerated it. . It maintained that in this case, neither the money was paid nor was there an expensing of the amount. It thus argued that there was no basis for the Respondent's contention. The Appellant added that an amount of Kshs 549 235 (for 2019) and Kshs 518 965 (for 2020) should be removed from the withholding tax assessment.

Hospitality Charges in 2020 79. The Appellant argued that hospitality refers to storage services provided by Kenya Pipeline Corporation Ltd ("KPC") and other hospitality service providers. It added that storage services do not fall within the types of services subject to withholding tax under Sections 10 and 35 of ITA. The Appellant further added that it is not an agency service (as there is no creation of a contractual or legal interface with an agent), nor is it a management or consultancy service. Consequently, the Appellant averred that the tax amount of Kshs 12 884 should, therefore, be excluded from tax.

Marking and calibration charges 80. The Appellant’s case on this issue was that marking charges relate to the costs of marking or labelling petroleum containers and tanks. The Appellant asserted that calibration charges are paid for measuring products in tanks, metering systems, and scales used in the handling, transport, and sale of petroleum products are accurate and reliable. This ensures that customers are billed accurately for the quantity of products received and helps maintain trust in the market.

81. The Appellant stated that these services are not consultancy or any services in Sections 10 and 35 of ITA. There being no legal basis for the charge of withholding tax on these services, the Appellant argued that the tax should be set aside.

Audit and Legal fees paid 82. To substantiate that payments for audit and legal fees have been settled, the Appellant relied on the withholding tax payment registration numbers for 2019 and 2020. The Appellant maintained that there is no deficit in the payment of these taxes therefore, it prayed that the withholding tax assessment be set aside for being contrary to the applicable law.

C. Value Added Tax Sales variances — VAT Returns vs the Audited Accounts 83. The Appellant’s case was that the Respondent conducted an audit to verify that the Appellant had not understated sales when filing for VAT purposes. The Respondent identified a sales discrepancy between the submitted VAT returns and the Audited Accounts, resulting in an additional tax assessment of Kshs 472,953.

84. The Appellant cited the provisions of Section 5(1) of the Value Added Tax Act, CAP 476 of the Laws of Kenya (“VAT Act”) which levies value-added tax on taxable supplies made by a registered person in Kenya.

85. The Appellant stated that it is involved in the import, export, and wholesale distribution of petroleum products and that the Finance Acts of the corresponding years have evolved the tax handling of petroleum products. That in 2017, petroleum products were initially granted an exemption, effective from the 1st September 2013, with a three-year transition period set to end on the 1st September 2016. However, on the 9th June 2016, the Finance Act of 2016 extended the exemption classification for these products. Then, on the 1st September 2018, an 8% VAT was introduced for petroleum products.

86. The Appellant asserted that the Respondent cannot charge VAT on exempt items on exempt items under the VAT Act.

87. The Appellant also argued that 2016 and 2017 years are time-barred for the Respondent to raise additional tax. Nevertheless, the variance is disputed due to exempt sales not being declared exempt between November 2016 and March 2017 but as NIL returns.

88. The Appellant argued that despite the relatively insignificant difference in 2017 concerning the amount in question, it is unquestionable that VAT was only applicable to petroleum products on the 1st September 2018. The Appellant therefore, argued that the entire assessment amount before 1st September 2018 should be disregarded.

Transit Goods Income: “Rent income receivable” 89. The Appellant averred that the Respondent verified that the sale of transit goods, wrongly captured as "rent receivable” in the 2019 books, was not sufficiently explained. The amount of Kshs 27,973,000. 00 was thus "disallowed", and tax was charged at 16%.

90. The Appellant asserted that the Respondent incorrectly selected figures when assessing the transaction. It relied on the trial balance which it argued indicated that the sum associated with rent income receivable stands at Kshs 205,413. 00, yet the Respondent has picked Kshs 27,973,000. 00. Therefore, the Appellant prayed that a reconsideration of the assessment be done.

91. The Appellant argued that it informed the Respondent that the auditors misunderstood the transaction during the preparation of the financial statements, incorrectly categorising it as "rent receivable" when it was a sale in transit transaction. It added that it ultimately did not occur after previous indications or plans of a sale, and the related financial transactions initiated were cancelled or reversed. The Appellant maintained that what was initially expected to be a sale did not materialise, and any associated financial actions were undone. Furthermore, the Appellant stated that the Respondent faced difficulties identifying the transaction in the sales ledger due to its reversal.

92. Apart from the foregoing, the Appellant averred that since there was no actual sale and consequently no income on which tax could be imposed, the Appellant urged the Tribunal to invalidate the assessment.

93. In addition, the Appellant argued that the fundamental idea of VAT is that it is applied when goods or services are both supplied and used or consumed within the territory of Kenya. It argued that VAT is typically levied on transactions within the country’s borders, where the goods or services are provided and utilised in Kenya. This concept helps ensure that VAT is primarily applied to economic activities that directly benefit or impact the local economy. Therefore, the Appellant maintained that sales in transit should be exempt from VAT since the origination and utilisation of the goods do not occur within Kenya but at the goods’ destination.

Stock movement analysis 94. It was the Appellant’s contention that the Respondent considered unrecorded inventory, categorised as undisclosed sales, income for taxation purposes. The Appellant asserted that its inventory has been adequately documented or recorded meaning that it kept accurate records of all the items in stock. The Appellant disagreed with the Respondent's suggestion or implication that sales were not adequately accounted for or "undisclosed sales”.

Sales variance- Bank deposits vs VAT Returns 95. On this issue, the Respondent indicated that it compared the credits in the Appellant's bank statements and the sales entries in the accounting records, uncovering a difference that supports the supplementary assessment of the taxable amount of Kshs 35,671,513. 00.

96. The Appellant asserted that it deals in importing, exporting, and wholesale petroleum products. For the sales made, the Appellant argued that it receives payment from its customers through bank accounts held at ABSA Bank Kenya Plc, Equity Bank, I&M Bank Limited and Stanbic Bank. However, Appellant noted that some of the entries in the bank accounts are not sales and are interbank transfers between accounts held by the Appellant. The Appellant maintained that there is no pending variance therefore, the assessment should be set aside.

Disallowed common input tax on exempt supplies 97. The Appellant contended that the Respondent did not restrict input value added tax on common inputs, disallowing input tax on exempt supplies amounting to Kshs 5,785,523. 00. On the other hand, the Appellant argued that it engages in mixed supplies, encompassing both exempt and taxable supplies. The Appellant stated that it is permitted by law to request input value-added tax refunds as long as it is registered for VAT.

98. The Appellant relied on Section 17 of the VAT Act to argue the essential requirement under the Section is that the input tax is incurred, and so incurred to make taxable supplies, the input tax was incurred directly towards making vatable sales and that the sales were declared to the Respondent through the VAT returns.

99. The Appellant argued that it applies the formula stipulated in Section 17(6) of the VAT Act to apportion the input VAT incurred in making the vatable supplies.

100. The Appellant submitted that the right of input tax deduction is an integral part of the VAT mechanism. As a taxable person who makes a transaction regarding VAT, the Appellant argued that it incurred input tax on Vatable sales and that the purchases were declared to the Respondent through the VAT returns.

101. It asserted that the Respondent must provide the Appellant with a clear explanation regarding the method used to calculate and disallow the input VAT. It stated that the lack of transparency left the Appellant in a state of uncertainty, therefore, there is a pressing need for a comprehensive clarification of the rationale behind these disallowances to ensure a fair and equitable resolution of this matter. Based on the foregoing, the Appellant urged the Tribunal to invalidate the assessments.

102. The Appellant also relied on its written submissions to further support its case. The Appellant put elaborate submissions and cited a number of case laws therefore. The Tribunal highlight some of the case laws in summary.

103. In its written submissions, the Appellant relied on the cases of Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR); Kenya Revenue Authority v Standard Chartered Bank Kenya Ltd (2018) eKLR; Kenya Revenue Authority v Fintel Ltd (2019) eKLR; Kenya Revenue Authority v Del Monte Kenya Ltd Tax Appeal Tribunal Appeal No. 8 of 2015; and Kenya Revenue Authority v Sasini Tea & Coffee Ltd Tax Appeal Tribunal Appeal No. 13 of 2016 to argue that the Respondent has a duty to observe statutory timelines.

104. The Appellant relied on the cases of Income Tax v Pan African Paper Mills (E.A.) Limited [2018] eKLR and KRA v. CFC Stanbic Bank Limited [2018] eKLR to submit that tax liabilities must be based on legitimate business expenses. The Appellant also cited the case of CIT v Woodlands Park Ltd [2005] UKHL 22 to submit that all costs associated with generating income should be accounted for fully in tax determinations.

105. Among other case laws, the Appellant relied on the case of Keroche Industries Ltd vs. the Kenya Revenue Authority and Five Others to submit that taxation can only be done on clear words and that taxation cannot be on intendment. The Appellant submitted that the assessments are statute time barred and that the assessments are erroneous. Consequently, the Appellant urged the Tribunal to set aside the assessments.

Appellant’s Prayers 106. In light of the preceding, the Appellant urged this Honourable Tribunal to uphold the Appeal and set aside the additional assessment raised by the Respondent amounting to Kshs 280,278,486.

The Respondent’s Case 107. In response to the appeal, the Respondent lodged a Statement of facts 30th October 2023 and a witness statement of Mr. Ndirangu, filed on 24th July 2024 and adopted by the Tribunal as evidence in chief on 11th September, 2024. The Respondent also filed its written submissions on 1st October 2024 in compliance with the directions of the Tribunal.

108. The Respondent stated that it raised assessments in relation to Value Added Tax, Corporation tax and Withholding Tax for the period 2017 to 2020 amounting to Kshs 276,744,423. 00 vide assessment dated 5th June, 2023. Upon the Appellant filing its notice of objection dated 5th July 2023, the Respondent argued that vide an electronic mail dated 7th July 2023 requested for documents drawing the Appellant’s attention to Section 51 of the TPA.

109. The Respondent argued that the Appellant failed to provide sufficient transaction documents for review therefore, the Respondent issued its objection decision and communicated the same vide a letter dated 19th July, 2023. The Appellant then filed the appeal.

110. The Respondent stated that vide an electronic mail of 19th July 2023 the Appellant forwarded other documents noting that should have been the last day of the Respondent to issue its decision. Therefore, the Respondent argued that it did not have sufficient time to review the documents.

(i) Income Tax Salaries and wages variances- KShs 4,376,876. 00 111. With regards to this issue, the Respondent stated that the variance was identified as the difference between the staff costs claimed in the financial statements and the staff costs that had been declared for PAYE purposes. The Respondent expected the Appellant to provide the following to support their ground that these were casual payments: a schedule of payments to casuals with full details such as their names, national identification number, telephone number, amount paid, date work done; and proof of payment clearly mapped to bank statements to support that the amount was actually incurred.

112. It was the Respondent’s case that from appendixes provided such information was not available. It argued that has the Appellant availed such information it would have enabled the Respondent to verify if the cost was actually incurred and if each payment was below the PAYE threshold for each casual payment. In the absence of the said information and documentation the assessment was confirmed as issued by the Respondent.

Sales variances (Kshs 1,379,501)- VAT returns vs Audited Accounts 2019 113. Regarding this issue, the Respondent stated that it charged Corporation tax on the variance as it was noted the aggregated VAT turnover was more than the income tax return declared. The Respondent averred that the Appellant in its objection, stated that the variance was a result of export sales. From this explanation, the Respondent averred that this was not factually true since even export sales are to be subjected to Income Tax and the Respondent established that in the Appellant’s monthly VAT return they had not declared any exported sales. Based on this finding the Respondent confirmed the assessments as issued earlier.

Sales variances (43,222,866)-Bank deposits vs Accounts 2017 and 2020 114. In relation to this issue, the Respondent argued that it compared the Appellant’s credits in bank statement with sales declared and noted the credits were more. It asserted that the Appellant provided a reconciliation and all bank statements. It also admitted that the bank statements were provided and it is from them that the variance was established. However, the Respondent noted that the Appellant did not provide an explanation in the form of reconciling schedule and supporting documents showing the amounts that were causing the credits to be more than the income declared. It asserted that had this been provided, the Respondent would have been able to determine if the said credits had been declared for tax purposes or did not attract tax due to the nature of the transaction.

115. Due to absence of an adequate verifiable justification as to why the variance should not be subjected to tax the Respondent rejected the grounds of objection in full and confirmed the assessment on this amount.

Stocks movement analysis Kshs 263,204,338. 00 116. The Respondent stated that it noted some discrepancies in stocks upon analysis of movement of the opening stock, purchases, sales and closing stocks translated in units. It argued that it requested for verifiable proof as to why there was this variance in stocks and the same was not provided.

117. The Respondent pointed out that at the objection stage the Respondent noted that the Appellant did not state any ground of objection in their notice. However, the Appellant attached the stock schedules from Kenya Pipeline Company showing the stocks.

118. That these were the same documents that had been provided at assessment stage and upon the analysis that the Respondent stated that had identified the discrepancy which the Appellant was supposed to reconcile and provide verifiable information to support why there was stock discrepancy in the first place as all stocks purchased should find itself in sales or closing stock. The Respondent maintained that where it does not, then justifiable reasons with verifiable proof ought to be provided. The Respondent averred that the Appellant failed in their duty to first provide a ground of objection and second to provide evidence to support why there was stock discrepancy. Based on this finding the Respondent confirmed assessment as issued.

Disallowed expenses 119. The Respondent stated that it verified the Appellant's invoices for various expense head as claimed in the financial statement and partially disallowed part of the expenses due to lack of supporting documentations. Specifically, the Respondent stated that the Appellant failed to provide the invoices, lease agreement and proof of payments mapped to bank statements to show the same had been incurred and paid for.

120. That due to materiality of customs duty expense variance, the Respondent pointed out that the following issues in attempt to explain as to why the expense was disallowed:i.From the financial statements, the expense was compared with amount actually paid to the Respondent at point of entry and the figures was found to be more than what had been paid as customs duties.ii.The Respondent requested for evidence to establish the reason for the variance, however it noted that the Appellant only provided bank statements without providing the mapping of the same with the attendant scheduled of customs entry numbers.iii.The schedule of customs entries and amount paid was missing.iv.Had the Appellant mapped the documents to bank statements would have enabled the Respondent to verify the customs entry that might have been missed when verifying the expense if any.

Rent Receivable 121. The Respondent averred that in the Appellant’s audited financial statements for year 2019 there was a line item with this amount but the same was not traced in the sales ledger showing how the same had been declared for Income tax. whereas the Appellant stated this was a mistake done by the auditors and this were sales in transit and therefore should not be charged income tax, the Respondent upon review of the documents attached it could established the following:i.How the transit sales were treated in the tax computation for year 2019 and 2020. The Respondent stated that normally transit sales would be taxed in the year the same are earned and this was not demonstrated.ii.The accounting entries and corresponding ledgers for passing this transit sales as alluded to in the notice of objection were not provided.iii.The specific breakdown of the sales and the sales invoice to show customers to whom the sales were made to.

122. The Respondent argued that in absence of the needed information, the Respondent confirmed the assessment.

Withholding Income Tax 123. The Respondent’s case is that upon analysis of the documents provided and the legal provisions relating to charging of withholding tax, it established the following:i.Section 35(6) of the ITA was deleted in 2016 therefore any assessments covering period 2016 to October 2019 were dropped due to lack of charging section.ii.Section 39 of the TPA came into effect from 7th November 2019 and thus amounts to attracting withholding tax and have been prorated to factor November and December 2019.

124. Based on the above findings the Respondent amended the assessment partially to Kshs 1,004,345. 00. The Respondent stated that the credit for amounts already paid (Kshs 180,500. 00) is given in itax and reflects as paid.

VAT 125. It was the Respondent’s case that upon review of documentation, grounds of objection and basis of assessment, the Respondent established that there was lack of proper verifiable documents. Therefore, the Respondent confirmed the assessment. Considering the findings and as per the notice of assessment the Respondent stated that it partially accepted the Appellant’s notice of objection. The Respondent therefore, argued that the additional principal tax of Kshs 181,329,423. 00 remains due and payable.

126. Finally, the Respondent relied on its written submissions wherein the Respondent highlighted the documents that it based its decision on.

Respondent’s prayers 127. Based on the foregoing, the Respondent prayed that this Tribunal be pleased to dismiss the appeal with costs to the Respondent as the same lack merit.

Issues for Determination 128. The Tribunal having considered the parties’ pleadings, documents and written submissions puts forth the following issues for determination:a.Whether the Respondent’s Objection Decision dated 14th September 2023 is statutorily time barred.b.Whether part of the assessments are statutorily time barred.c.Whether the Respondent erred in confirming income tax.d.Whether the Respondent erred in confirming withholding tax.e.Whether the Respondent erred in confirming VAT.

Analysis And Findings 129. The Tribunal wishes to analyse the issues as hereunder:

(a) Whether the Respondent’s Objection Decision dated 14th September 2023 is statutorily time barred. 130. The Respondent raised income tax, withholding tax and VAT assessments vide a letter dated 5th June 2023. The Appellant objected to the assessments vide a letter dated 5th July 2023. The Respondent issued objection decision dated 14th September 2023 confirming the assessments.

131. The issue is whether the Respondent’s objection decision dated 14th September 2023 is statutorily time barred. The Tribunal is raising this issue suo moto. Section 51(11) of the TPA provides as follows:‘‘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.’’

132. This Tribunal has in numerous judgments held that where the Respondent fails to issue ifs objection decision within 60 days as provided for under section 51(11) of TPA, the taxpayer’s objection stands allowed by operation law. In Eastleigh Mall Limited v Commissioner of Investigations & Enforcement Income Tax Appeal E068 of 2020, the High Court held as follows:“It is clear from the forgoing that the provisions of section 51(11) of the Tax Procedures Act are mandatory. They are not cosmetic. Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the taxpayer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.”

133. In addition, while making the decision in relation section 51(11) of TPA before the said law was amended by the Finance Act of 2022, the Court in Equity Group Holdings Limited v Commissioner of Domestic Taxes (Civil Appeal E069 & E025 of 2020) [2021], observed as follows;“Section 51 (11) of the TPA is couched in peremptory terms. Having correctly found that the decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159(2) (d). First, there was no decision at all. The decision had ceased to exist by operation of the law…’’

134. Further, in Republic v Commissioner Of Customs Services Ex-Parte Unilever Kenya Limited [2012] eKLR, the court held that if the Commissioner does not render a decision within the stipulated period, the objection is deemed as allowed by operation of the law.

135. The Appellant having objected to the assessments vide a letter dated 5th July 2023, and the Respondent having issued objection decision dated 14th September 2023, the Tribunal finds and holds that the Respondent issued its decision beyond 60 days contrary to the provisions of section 51(11) of the TPA. Consequently, the Appellant’s notice of objection stood as allowed by operation of law.

136. The Tribunal having established the foregoing, it is moot to analyse the remaining issues.

Final Decision 137. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and makes the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s assessments dated 5th June 2023 and the resultant objection decision dated 14th September 2023 be is hereby set aside.c.Each party to bear its own cost.

138. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. ………………………………….CHRISTINE A. MUGACHAIRPERSON………………………….. …………….……………..BONIFACE K. TERERMEMBER…………..……………… ……….…..…………….ELISHAH N. NJERUMEMBER…………..……………… ……….…..…………….EUNICE N. NG’ANG’AMEMBER…………..……………… ……….…..…………….OLOLCHIKE S. SPENCERMEMBER