[2024] KETAT 1461 (KLR)

Acrowood Imports & Exports Limited v Commissioner of Domestic Taxes (Tribunal Appeal E796 of 2023) [2024] KETAT 1461 (KLR) (Civ) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1461 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tribunal Appeal E796 of 2023

E.N Wafula, Chair, G Ogaga, RO Oluoch, AK Kiprotich & Cynthia B. Mayaka, Members

October 4, 2024

Between

Acrowood Imports & Exports Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, engaging primarily in the sale of timber.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent issued the Appellant with Corporation tax, Pay As You Earn (PAYE) and Value Added Tax (VAT) additional assessments in its letter of findings of tax review dated 7th June 2023.

4. The Appellant objected to the Corporation tax, PAYE and VAT additional assessments on 28th July 2023.

5. The Respondent issued an objection decision on 25th September 2023 rejecting the Appellant’s objection in its entirety.

6. The Appellant, being dissatisfied with the Respondent’s objection decision, filed its Notice of Appeal dated 24th October 2023.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 13th November 2023 and filed on 14th November 2023 which raised the following grounds: -a.That the Respondent erred in fact by failing to consider supporting documentation and explanations to support the alleged undeclared income.b.That the Respondent erred in both law and fact in deeming all bank receipts made to the Appellant’s banks as business income and consequently imposing Corporation tax and VAT on the same without regard to the source of funds.c.That the Respondent erred in both law and fact in finding that the withdrawals made by the director were benefits subject to PAYE tax.d.That the Respondent erred in both law and fact in finding that the Appellant made vatable supplies based on the purported undeclared imports.

Appellant’s Case 8. The Appellant’s case is also premised on its Statement of Facts dated 13th November 2023 and filed on 14th November 2023 and the documents attached to it.

9. The Appellant stated that on 7th June 2023, it was issued with tax review findings covering the period 2019/2020 to 2021/2022 encompassing Corporation tax, Value Added Tax (VAT) and Pay As You Earn (PAYE) and alleging a total tax liability of Kshs. 58,274,592. 00.

10. That on 28th July 2023, the Appellant lodged an objection to the tax findings as provided under Section 51 of the Tax Procedures Act citing various grounds of objection.

11. The Appellant further stated that on 25th September 2023, the Respondent upheld the assessments citing its dissatisfaction with the explanations and documents provided by the Appellant.

12. That the Appellant lodged a Notice of Appeal with the Tribunal on 24th October 2023, being aggrieved by the Respondent’s decision to confirm the assessment.

13. The Appellant stated that the Respondent’s tax decision is based on purported undeclared sales, involving comparisons of stock declarations with debtors’ balances, imports versus declared turnover and banking analyses for specific years.

14. The Appellant contended that for the financial year 2019/2020, the Respondent used non-sales figures (other receivables) totalling Kshs. 9,291,938. 00 in charging additional taxes for Corporation tax and VAT.

15. The Appellant asserted that it provided a detailed explanation of the various figures relied upon by the Respondent. That Kshs. 4,027,231. 00 under VAT control was input VAT on purchases not claimed, Kshs. 16,000. 00 under VAT recoverable was VAT on 2020 audit fees not claimed, Kshs. 490,000. 00 was amount receivable from Links Freight Limited, a related party, and Kshs. 4,758,707. 00 was amount receivable from Farmal General Merchants, a related party.

16. The Appellant argued that for the financial year 2020/2021, the Respondent erroneously with intent to collect undue taxes used incorrect and excessively high import figures that do not reflect the true and fair tax position of the Appellant in the computation of the alleged undeclared sales of Kshs. 23,236,498. 00 which was subjected to Corporation tax and VAT of Kshs. 8,574,268. 00 and Kshs. 27,622,289. 00 respectively.

17. The Appellant averred that in charging VAT on account of undeclared imports for the financial year 2020/2021, the Respondent assumed that the alleged undisputed imports of Kshs. 144,761,543. 00 (an amount the Appellant claimed to be unaware of how it was arrived at by the Respondent) were fully sold and not declared in the VAT returns. In response to this finding by the Respondent, the Appellant submitted that, in a taxing law, there is no room for intendment as to a tax and nothing is to be implied. That the Respondent’s assumptions do not portray the correct tax position of the Appellant’s business transactions during the period under review.

18. The Appellant further argued that the Respondent erroneously included non-sales deposits in the banking method relied on in the computation of Corporation tax and VAT and therefore overstated the bank receipts resulting to the overstatement of the taxable income. The Appellant affirmed that not all deposits made to the said accounts relate to sales. That some deposits to the said account are contra entries, output VAT and non-revenue deposits.

19. The Appellant stated that it sticks to its stand that the documentations and explanations provided are enough to justify the amounts in question.

20. The Appellant clarified that its director’s withdrawals from the Appellant’s bank accounts were for purchasing timber and for covering direct and indirect costs necessary for the company’s operations. The Appellant argued that such payments do not fall under PAYE as they are in respect of expenses consumed by the Appellant and not the Appellant’s employee/director.

21. The Appellant averred that it had purchases which were declared in the tax returns and the payments for those purchases were made through the withdrawals made by the directors.

22. The Appellant submitted that in line with Section 2 as read together with Section 5 and Section 37 of the Income Tax Act, the Appellant was under no obligation to account for PAYE on the expenses that were consumed in running its business activities. That these expenses were consumed by the Appellant who is a separate legal entity from the directors. That the expenses paid for through the director’s cash withdrawals were wholly and exclusively incurred to generate taxable income.

23. The Appellant concluded that based on the above analysis, the Respondent’s demand for Corporation tax, VAT and PAYE relating to the respective financial years as per the confirmed assessments, has no basis in fact or in law, and prayed that this Honourable Tribunal sets aside the said assessments.

Appellant’s prayers 24. The Appellant prayed that the Tribunal:a.Do set aside and annul in its entirety the objection decision.b.Grants the Appellant the cost of this Appeal.c.Do make such further orders as it may deem fit and just.

Respondent’s Case 25. The Respondent’s case is premised on the Respondent’s Statement of Facts dated and filed on 13th December 2023.

26. The Respondent stated that it conducted a compliance check with a view to confirm the importation of goods by the Appellant which had not been correctly declared in the Appellant’s VAT and income tax returns.

27. That to determine taxable income the Respondent conducted a comprehensive analysis of the Appellant’s returns, bank statements, balance sheets and customs import data.

28. The Respondent further stated that according to the data set obtained from customs, the Appellant in 2020 imported goods totalling Kshs. 324,974,444. 00 and Kshs. 225,132,860. 00 in 2021.

29. The Respondent asserted that for the year 2020, the Appellant did not make any declarations for VAT or income tax, and for the year 2021, the Appellant only declared VAT sales worth Kshs. 42,594,368. 00 against total imported goods of Kshs. 225,132,860. 00.

30. The Respondent averred that income was also compared to bankings, and variances established were subjected to VAT and income tax.

31. The Respondent further averred that during the banking analysis, it was established that there were directors’ drawings amounting to Kshs. 7,160,000. 00, which the Respondent subjected to Pay As You Earn (PAYE).

32. The Respondent affirmed that this assessment was on undeclared income and not inputs.

33. It was the Respondent’s statement that it issued the Appellant with the tax findings for the period 2019 to 2020 and 2021 to 2022 on 7th June 2023 which included Corporation tax, PAYE and VAT which amounted to Kshs. 58,274,592. 00.

34. That on 28th July 2023, the Appellant lodged a notice of objection to the tax findings in line with Section 51 of the Tax Procedures Act raising various grounds of objection.

35. The Respondent stated that it issued its objection decision on 25th September 2023 confirming the assessment on grounds that the Appellant did not provide documents to support its grounds of objection and that the Appellant appealed this decision.

36. In response to the Appellant’s first ground of appeal, the Respondent stated that the Appellant only provided bank reconciliations but did not provide the supporting documentation to these reconciliations. That due to limitation of scope, the assessment was confirmed.

37. In response to the Appellant’s second ground of appeal, the Respondent stated that the Appellant in its grounds stated that some of the income received was not business income without providing any supporting documentation.

38. In response to the Appellant’s third ground of appeal, the Respondent stated that the Appellant did not provide transactional documents to support that the withdrawals were actually for payment of expenses incurred for the business.

39. In response to the Appellant’s fourth ground of appeal, the Respondent stated that the Appellant did not provide transactional documents to support the grounds that the imports were not vatable supplies.

40. The Respondent submitted that he who comes to equity must come with clean hands, and that in the present instance the Appellant appears to have brought this Appeal without clean hands and in bad faith.

41. The Respondent averred that the Appellant did not provide any documentation and has still has not provided any documentation with its Appeal. The Respondent cited Section 56(1) of the Tax Procedures Act to submit that the burden lies with the Appellant to prove that the tax decision was erroneous as it claimed.

42. The Respondent further stated that it is not bound by the Appellant’s returns or information provided by, or on behalf of the Appellant and that the Respondent may the assess Appellant’s liability using any information available to it.

43. The Respondent cited Section 31(1) of the Tax Procedures Act and submitted it may amend the Appellant’s tax assessment by making alterations or additions based on the available information and to the best of its judgement to ensure that the Appellant is liable to the correct amount of tax payable.

44. The Respondent asserted that the Appellant’s grounds herein are spurious and unsupported as the Appellant has failed to discharge its burden of proof. Further, that the Appeal was brought in bad taste as the Appellant was engaged by the Respondent and given several opportunities to provide proof, but failed to do so.

45. The Respondent reiterated the provisions of Section 56(1) of the Tax Procedures Act, Section 30 of the Tax Appeals Tribunal Act, and Section 107 of the Evidence Act, and stated that the Appellant has not proven that the Respondent’s decision is incorrect or unlawful, that, therefore, the Appellant has not discharged its burden of proof.

46. The Respondent concluded that the Appellant’s Appeal is not supported by documentary proof showing why the Respondent’s assessment and objection decision are erroneous, and the same is without merit thus ripe for dismissal.

Respondent’s prayers 47. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s decision of 25th September 2023 as valid and in conformity with the provisions of the law.b.Finds the taxes of Kshs. 50,097,573. 00 (being Corporation tax, PAYE and VAT) as due and payable.c.Finds that the Appeal herein is without merit and dismisses it with costs to the Respondent.

Issue For Determination 48. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:Whether the Respondent was justified in issuing the objection decision dated 25th September 2023.

Analysis And Findings 49. The Tribunal analysed the issue that calls for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.

50. The Respondent conducted a compliance check which involved an analysis of the Appellant’s tax returns, bank statements, balance sheets and customs import data.

51. It was the Respondent’s statement that it issued the Appellant with the tax findings for the periods 2019 to 2020 and 2021 to 2022 on 7th June 2023 which included Corporation tax, Pay as You Earn (PAYE) and Value Added Tax (VAT) assessments.

52. The Appellant lodged a notice of objection to the entire assessment on 28th July 2023.

53. The Respondent issued its objection decision on 25th September 2023 confirming the assessments and stated that its reasons were that the Appellant did not provide documents to support its grounds of objection.

54. The Appellant appealed against the objection decision in the instant Appeal.

55. The Tribunal’s analysis of the issue for determination will be under the accounting periods assessed for Corporation tax and VAT assessments, and separately for the PAYE assessment.

56. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal (TAT) Act place the burden of disproving the Commissioner’s decisions upon the taxpayer. To satisfy this burden, a taxpayer ought to submit all the relevant evidentiary material in its possession.

57. Section 54A(1) of the Income Tax Act envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. The legislation provides as 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.”

58. Section 43 of the VAT Act envisages that a person carrying on a business must keep certain records and documents and avail the same to the Commissioner for inspection. It provides as follows: -“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial copies number order;(b)of all credit and debit notes issued, in chronological order;(c)purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.”

59. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.”

60. Section 23(1) of the Tax Procedures Act also provides that a taxpayer is required to keep records as follows: -“A person shall—(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

61. In the absence of relevant documentation to facilitate the assessment of a tax liability, the Respondent is empowered under Section 31(1) of the Tax Procedures Act (TPA) to use its best judgement in making its tax assessment.

Accounting period 2019/2020 62. The Respondent assessed Corporation tax and VAT for the period 2019/2020 based on debtors/receivables account balance of Kshs. 9,291,938. 00 and bank deposits of Kshs. 999,000. 00. The Respondent averred that the Appellant did not provide any documentation in its dispute against the assessments and has still has not provided any documentation with its appeal.

63. The Appellant disputed the Respondent’s assessment for 2019/2020 stating that the Respondent used non-sales figures (other receivables) totalling Kshs. 9,291,938. 00 in charging additional taxes for Corporation tax and VAT. The Appellant explained that the debtors/receivables comprised Kshs. 4,027,231. 00 under VAT control which was input VAT on purchases not claimed, Kshs. 16,000. 00 under VAT recoverable which was VAT on 2020 audit fees not claimed, Kshs. 490,000. 00 which was an amount receivable from Links Freight Limited, a related party, and Kshs. 4,758,707. 00 which was an amount receivable from Farmal General Merchants, a related party.

64. The Tribunal finds that the Appellant was expected to prove that Kshs. 4,027,231. 00 under VAT control and Kshs. 16,000. 00 under VAT recoverable which the Appellant claimed to be unclaimed input VAT, with supporting records and documents such as the VAT control account, proof that the input VAT was not claimed and the purchase invoices or import documentation which the input VAT related to.

65. The Tribunal also finds that the Appellant was expected to prove that the Kshs. 490,000. 00 and Kshs. 4,758,707. 00 which it claimed to be amounts receivable from related parties were non-sales figures by demonstrating with evidence of what the amounts receivable from its related parties comprised, if indeed they were non-sales amounts.

66. The Tribunal reviewed the record of appeal and notes that besides the averments by the Appellant that the amounts in the debtors/receivables account, so explained, were non-sales items, the Appellant did not present any documentation to prove that the amounts did not comprise sales.

67. The Tribunal further observes that the Appellant did not address the issue of the bank deposit of Kshs. 999,000. 00 in the period 2019/2020 that the Respondent determined to be sales and assessed Corporation tax and VAT on. Additionally, the Appellant did not provide any evidence in support of its dispute against the assessments.

68. Contrary to the Appellant’s requirement under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act prove that the Commissioner’s assessments are incorrect or excessive, the Appellant neglected to present to the Tribunal any relevant source documents that it is required to keep under Section 54A(1) of the Income Tax Act, Section 23(1) of the Tax Procedures Act and Section 43 of the Value Added Tax Act to substantiate its tax position.

69. Based on the foregoing, the Tribunal finds that the Respondent was justified in assessing Corporation tax and VAT for the period 2019/2020.

Accounting period 2020/2021 70. The Respondent assessed Corporation tax and VAT for the period 2020/2021 based on the variance between import amounts that it claimed to have derived from the Appellant’s customs data and the sales declared by the Appellant in its income tax and VAT returns.

71. The Appellant argued that in charging VAT on account of undeclared imports for the financial year 2020/2021, the Respondent assumed that the alleged undisputed imports of Kshs. 144,761,543. 00 (an amount the Appellant claimed to be unaware of how it was arrived at by the Respondent) were fully sold and not declared in the VAT returns.

72. The Tribunal finds that the Appellant was required to prove that the import amounts of Kshs. 144,761,543 established by the Respondent were incorrect, as it alleged, by adducing evidence of its actual import amounts in the period 2020/2021, and demonstrating with documentation the amount of imported goods that it sold during that period.

73. The Tribunal reviewed the record of appeal and observes that the Appellant did not present any documentation to prove its correct import amounts for the period 2020/2021, despite the Appellant averring that the total imports determined by the Respondent were incorrect. Furthermore, the Appellant failed to provide evidence to disprove the Respondent’s assertion that it had fully sold imported goods amounting to Kshs. 144,761,543. 00 during the period 2020/2021.

74. The Appellant failed to furnish the Tribunal with any relevant source documents it is required to keep under Section 54A(1) of the Income Tax Act, Section 23(1) of the Tax Procedures Act and Section 43 of the Value Added Tax Act to validate its tax position, despite the law under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly placing a burden on the Appellant to prove its case.

75. In light of the aforementioned, the Tribunal concludes that the Respondent was justified its assessment of Corporation tax and VAT for the period 2020/2021.

Accounting period 2021/2022 76. The Respondent assessed Corporation tax and VAT for the period 2021/2022 based on the debtors/receivables balance and bank deposits.

77. The Appellant argued that the Respondent erroneously included non-sales deposits in the banking method relied on in the computation of Corporation tax and VAT and therefore overstated the bank receipts resulting to the overstatement of the taxable income. The Appellant affirmed that not all deposits made to the said accounts relate to sales. That some deposits to the said account are contra entries, output VAT and non-revenue deposits.

78. The Tribunal reviewed the record of appeal and notes that besides the averments by the Appellant that the amounts in the debtors/receivables account and the bankings, so explained, were non-sales items, the Appellant did not present any documentation to prove that the amounts did not comprise sales. Moreover, the Appellant did not prove with evidence its averments that some deposits to its bank account are contra entries, output VAT and non-revenue deposits.

79. Despite the law under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly placing a burden on the Appellant to prove its case, the Appellant did not adduce any relevant source documents that it is required to keep under Section 54A(1) of the Income Tax Act, Section 23(1) of the Tax Procedures Act and Section 43 of the Value Added Tax Act to support its tax position.

80. Based on the foregoing, the Tribunal finds that the Respondent was justified in assessing Corporation tax and VAT for the period 2021/2022.

PAYE assessment 81. The Respondent averred that during the banking analysis, it was established that there were directors’ drawings amounting to Kshs. 7,160,000. 00, which the Respondent subjected to Pay As You Earn (PAYE).

82. The Appellant averred that its director’s withdrawals from the Appellant’s bank accounts were for purchasing timber and for covering direct and indirect costs necessary for its operations. The Appellant argued that such payments do not fall under PAYE as they are in respect of expenses consumed by the Appellant and not the Appellant’s employee/director.

83. The Appellant further averred that it declared purchases in its tax returns and the payments for those purchases were made through the withdrawals by the directors.

84. The Tribunal reviewed the record of appeal and notes that besides the averments by the Appellant that the withdrawals of cash by its director were used for the purchase of timber and payment of the Appellant’s operating costs, the Appellant did not furnish the Tribunal with competent documentary evidence in support of its case.

85. The documents and records in support of the business transactions enumerated by the Appellant are clearly outlined under Section 54A(1) of the Income Tax Act, and despite the law requiring the Appellant to keep documents and records which in the opinion of the Commissioner, are adequate for the purpose of computing tax, the Appellant did not present any of this documentation for review by the Tribunal in its Appeal.

86. Due to the Appellant’s failure to support its assertions, the Tribunal was unable to confirm if the withdrawals by the Appellant’s directors were utilised to pay for the Appellant’s business costs.

87. The Appellant failed to prove that the withdrawals from its bank accounts by its director were not drawings, and thus failed to prove that the withdrawals were not taxable emoluments. Therefore, the Tribunal was not persuaded that the Respondent erred in assessing PAYE on the unsupported withdrawals by the Appellant’s director.

88. Consequently, the Tribunal finds that the Appellant did not discharge its burden of proof and that the Respondent was justified in assessing PAYE for the periods 2020, 2021 and 2022.

Final Decision 89. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 25th September 2023 be and is hereby upheld.c.Each party to bear its own costs.

90. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH DAY OF OCTOBER, 2024. ERIC NYONGESA WAFULACHAIRMANGLORIA A. OGAGA DR. RODNEY O. OLUOCH MEMBER MEMBERABRAHAM K. KIPROTICH CYNTHIA B. MAYAKA MEMBER MEMBER