[2024] KETAT 554 (KLR)

Agrochemicals and Food Company Limited v Commissioner of Domestic Taxes (Appeal E016 of 2023) [2024] KETAT 554 (KLR) (Civ) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 554 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal E016 of 2023

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, W Ongeti & E Komolo, Members

March 22, 2024

Between

Agrochemicals And Food Company Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal activity is manufacturing.

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, in a letter dated 3rd February 2022, notified the Appellant of its intention to conduct an audit covering the period January 2017 to December 2021 on the Appellant’s Value Added Tax (VAT), excise duty, Pay as You Earn (PAYE) and withholding tax (WHT) obligations.

4. The Respondent carried out an audit exercise on the Appellant and issued it with a notice of assessment in a letter dated 15th September 2022 demanding taxes amounting to Kshs. 1,268,054,221. 00 comprising Excise duty, Pay as You Earn (PAYE), Value Added Tax (VAT) and withholding tax (WHT) principal, interest and penalties, and reducing Corporate tax losses by Kshs. 356,002,279. 00.

5. The Appellant objected to the assessments in a letter dated 14th October 2022 and received by the Respondent on the same date. The Respondent issued its objection decision in a letter dated 13th December 2022 partially allowing the objection and confirming additional assessments amounting to Kshs. 1,243,986,739. 00 comprising Excise duty, VAT and WHT principal, interest and penalties, and reducing Corporate tax losses by Kshs. 355,306,851. 00.

6. Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal dated and filed on 12th January 2023.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal filed on 8th February 2023 which raised the following grounds: - i. Withholding Taxa.The withholding tax (WHT) demanded of Kshs. 634,644,435. 00 was accrued before the year 2008. The audit was to cover the period from 2017 to 2021, therefore, demanding this tax is not justified since it is beyond five years as stipulated by the Tax Procedures Act. The Commissioner should have restricted themselves to the period of the audit. The inclusion of this amount in the audit of 2017 to 2021 would be ultra vires to the Act. The Commissioner has brought matters that are out of scope to this audit and this should be removed. This is in tandem with Section 3. 0 Observations and Findings subsection b on Withholding Income Tax in the objection decision dated 13th December 2022. b.The loan in question is a Government loan. The Government confirmed this as recently as 12th July 2022 as per the attached letter in Appendix VI. Under Section 14 of the Income Tax Act, Government loans are not subject to WHT and therefore the demand for WHT by the Commissioner is misplaced and ill-advised.c.Based on a determined case between Kenya Revenue Authority ex-parte Fintel Limited HC Misc. Civil Application No. 1768 of 2004 where the High Court ruled in favor of Fintel Limited. Although the matter was appealed and the ruling of the High Court was overturned on 5th February 2019, this tax matter still stands guided by the decision of the High Court since it is a matter of a date earlier than 2019 and since tax rulings do not apply retrospectively, the decision by the High Court on this matter being for taxes prior to 2019 still stands.d.The computation of the assessment for the years 2016 to 2020 is erroneously based on the assumption that the withholding tax point ine.above applied retrospectively and that the withholding tax exemption referred to in b) above would be determined in favor of KRA.f.Under Section 37(2) of the Tax Procedures Act, the Commissioner can refrain from assessing or recovering an unpaid tax, and the liability in relation to the tax shall be deemed to be extinguished or the tax shall be deemed to be abandoned or remitted, as the case may be. In the company's financial statements, the Office of the Auditor General has indicated material uncertainty related to the going concern of the company throughout the period from 2017 to date. In view of this,and considering the financial situation of the company, it is the Appellant’s submission that the company is clearly unable to pay the tax demanded.g.Given the significant Government shareholding in the company, the public interest is best served if this matter is determined at the Ministerial level before any demand for tax is lodged.h.The request for withholding tax exemption has not been ironed out yet and is currently under process between the Ministry of Finance and the Ministry of Agriculture. Enforcing the tax at this point will adversely prejudice the possible outcome of this discussion.

ii.Excise Taxi.Under the reconciliation of extra neutral alcohol (ENA) production, the Appellant had requested a transfer of credit arising from the overpayment of Kshs. 69,420. 00 from the paid amount of Kshs. 414,180. 00 to the due tax of Kshs. 344,760. 00. The Respondent’s has not captured/ confirmed this position in its decision.j.Under the input-output analysis, the Appellant provided the stock reconciliation and additionally attached a reconciled working for the wet and dry yeast which is the basis of the assessment. The Large Taxpayers’ Office in their assessment erroneously used the total molasses consumed and did not adjust for yeast production. Unfortunately, despite us providing this information, the Commissioner did not adjust their computation and as such his position remains erroneous. (Appendix VIII) Indicates the correct figures previously shared.k.The revised summary of the excise taxes in the objection decision is overstated. The opening stock, received molasses, alcohol consumed and closing stock is incorrect for the year 2018. If the errors on the opening stock and molasses consumed for the year 2018 are corrected, there will be no tax liability as indicated in Appendix VII.iii. - Corporation Tax and VATl.Under the extension of losses beyond 10 years, the Appellant notes that the Commissioner has confirmed the assessments without considering that the matter is still pending with the office of the Commissioner General for determination. The Appellant also attaches its letter dated 8th February 2022 and the Treasury's response with regard to the matter (Appendix I).m.The variance of Kshs. 80,698,904. 00 is arrived at after charging Kshs. 92 per litre based on the erroneous computation of molasses consumed. If this error is corrected there will be no variance on the income declared.n.The correction of this error would also remove the claim on additional VAT of Kshs. 42,518,882. 00. Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Its Statement of Facts dated and filed on 25th January 2023 and the documents attached to it.

9. The Appellant stated that the Respondent issued to it a notice of assessment dated 15th September 2022 assessing a total tax of Kshs. 1,268,054, 221. 00 which comprised principal tax of Kshs. 1,113,243,470. 00, penalties of Kshs. 34,248,367. 00 and interest of Kshs. 120,526,384. 00.

10. The Appellant further stated that it objected to the assessments on iTax.

11. The Appellant stated that it held physical meetings with the Respondent’sIndependent Review of Objections team to explain its grounds of objection, and subsequently shared additional information as requested after the physical meeting.

12. That after the objection review, the Respondent issued its objection decision in a letter dated 13th December 2022 which revised tax payable to Kshs. 1,243,986,739. 00.

Appellant’s prayers 13. The Appellant prayed for the Tribunal: -a.To consider vacating the demand for withholding tax because the loan is a Government loan.b.To suspend issuance of the withholding tax assessment until the matter is resolved and direction given by the two concerned ministries.c.To use the correct computations for the molasses as per the records availed by the Appellant.d.To suspend confirmation of the assessment due to the extension of the losses until the matter is determined.

Respondent’s Case 14. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 24th February 2023 and the documents attached to it.i.Withholding Tax

15. The Respondent stated that the Appellant had incurred interest on loans guaranteed by the Government of Kenya at a rate of 7. 5% and as a result, the Respondent charged WHT on the interest.

16. The Respondent averred that the above was communicated to the Appellant through the pre-assessment letter to which the Appellant responded that it has been exempted from WHT by the National Treasury in a letter dated 27th September 2010.

17. The Respondent further added that the Appellant had made a submission to the Permanent Secretary of State Department for Crop Development and Agricultural Research, Ministry of Agriculture, Livestock, Fisheries and Co-operatives, seeking exemption from paying WHT on accrued interest on a loan guaranteed by the Government of Kenya and for a write off the loan of Kshs. 10,142,918,611. 00.

18. The Respondent stated that it reviewed the Appellant’s response to the assessment together with the availed documents and concluded that the loan agreements did not expressly grant an exemption from tax.

19. The Respondent further stated that the letter dated 27th September 2010 from the National Treasury refers to the granting of an exemption in accordance with the provisions of Paragraph 11 of the Fifth Schedule to the Income Tax Act; a provision which the Respondent stated is incorrect as it does not exist.

20. The Respondent submitted that Paragraph 11 of the First Schedule to the Income Tax Act which allows for the Minister to exempt certain incomes in the public interest where he certifies that they are required to be paid free of tax by the terms of an agreement to which the Government is a party, does not apply to the Appellant’s case because the loan agreement in this case does not have a clause or an article expressly exempting payment of WHT.

21. The Respondent further stated that the letter from the National Treasury did not grant an exemption from tax but rather, that it communicated directions to the Appellant to provide documents for the processing of the waiver of taxes.

22. The Respondent cited Section 14 of the Income Tax Act and emphasised that the loan agreement does not have a clause or an article expressly exempting payment of WHT and for this reason, the interest on the Appellant’s loan does not in any way qualify as exempt from tax.

23. The Respondent additionally averred that the Appellant did not provide evidence that the interest on its Government-guaranteed loan is exempt from tax.

24. The Respondent averred that in reliance on the High Court ruling in Fintel Limited v Kenya Revenue Authority, the Appellant asserted that because the WHT of Kshs. 634,644,435. 00 accrued before the year 2008 the Respondent was not justified in demanding this tax since it is beyond five years.

25. In response to the Appellant’s assertion, the Respondent stated that this High Court ruling was appealed against and that the Court of Appeal ruled in favour of Kenya Revenue Authority. The Respondent further stated that the High Court ruling did not amend the Income Tax Act, therefore, the Appellant’s reliance on the same is immaterial. Further, that the said judgment is a judgment in personam; not in rem which means that it was specific to Fintel Limited, and thus inapplicable in this matter.

26. The Respondent added that it cannot disallow the interest charged in the financial statements since the same had been claimed in the Appellant’s books and supported by the documents provided by the Appellant.

27. Further, that the WHT charged by the Respondent is well within statutory requirements since the same was charged against interest incurred as opposed to when the loan was acquired; that interest is on an annual accrual basis. That the period of assessment in this case therefore falls within the period of interest accrual.

Excise Duty 28. In response to the Excise duty tax charge upon the Appellant, the Respondent cited Section 5 of the Excise Duty Act which allows it to impose Excise duty.

29. The Respondent stated that in carrying out the audit exercise, it compared the alcohol produced based on molasses received to the declarations in the excise duty returns and noted some variances.

30. The Respondent averred that the above was communicated through the assessment letter and the Appellant responded by indicating that not all molasses were used for the production of extra neutral alcohol (ENA) but also for dry and wet yeast. That the explanation was deemed to be unsatisfactory as the Appellant did not provide the evidence for production of dry and wet yeast, which was the basis for the assessment.

31. The Respondent cited Section 56 of the Tax Procedures Act which places on the Appellant the burden to prove that a tax decision is incorrect, which according to the Respondent, the Appellant failed to discharge to the Respondent's satisfaction.

32. The Respondent averred that it adjusted the molasses computation by adding back the component that related to the production of dry and wet yeast which led to the Excise duty charge on the unreconciled variance, resulting in additional excise duty of Kshs. 192,970,618. 00 plus penalties and interest.

Corporation Tax 33. The Respondent averred that while the Appellant made a request to the Ministry of Finance for direction to utilise accumulated losses beyond 10 years, no response was provided. The Respondent therefore confirmed the corporation tax losses reduction as issued.

34. The Respondent further averred that the turnover determined at Kshs. 92 per litre from the variances in the Appellant's ENA production was also added back to the Appellant’s computation of taxable income.

35. The Respondent stated that the Corporate tax losses reduction charged on the Appellant was rightfully determined.

Respondent’s prayers 36. The Respondent prayed that the Tribunal:a.Finds the Respondent decision of December 13, 2022 and tax demand were properly issued as provided under law.b.Dismisses this Appeal with costs to the Appellant as the same is without merit.

Issues For Determination 37. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent was justified in issuing a WHT assessment on interest.b.Whether the Respondent was justified in finding a positive variance in ENA production, issuing additional Excise duty and VAT assessments, and reducing the Appellant’s Corporate tax losses.

Analysis And Findings 38. The Tribunal analysed the issues that call 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.

a. Whether the Respondent was justified in issuing a WHT assessment on interest 39. The Respondent stated that the Appellant had incurred interest on loans guaranteed by the Government of Kenya at a rate of 7. 5% and as a result, in its notice of assessment dated 15th September 2022, the Respondent charged withholding tax (WHT) on the interest and maintained that contrary to the Appellant’s assertion, the interest is not exempt from tax.

40. The total WHT confirmed by the Respondent in its objection decision was Kshs. 841,732,740. 00 comprising Kshs. 634,644,435. 00 being principal tax, interest and penalties assessed in a notice of assessment dated 27th November 2008, interest of Kshs. 105,156,783. 00 for June 2016 to June 2020, penalties of Kshs. 20,708,831. 00 for June 2016 to June 2020, and principal tax of Kshs. 42,005,830. 00 for June 2016, Kshs. 39,340,655. 00 for June 2017, Kshs. 41,235,247. 00 for June 2018, Kshs. 41,842,062. 00 for June 2019, and Kshs. 42,664,511. 00 for June 2020.

41. The Appellant disputed this tax assessment and submitted that the WHT of Kshs. 634,644,435. 00 was accrued before the year 2008 which is beyond five years as stipulated by the Tax Procedures Act and should be removed from the present assessment in dispute, and further that the interest is exempt from income tax or should be exempted from income tax.

42. The Tribunal reviewed the parties' pleadings on the matter and the applicable laws and determined that it is useful to analyse the WHT assessment in two parts:a.WHT assessment initially issued by the Respondent in the notice of assessment dated 27th November 2008. b.WHT assessment issued by the Respondent for the periods ending June 2016, June 2017, June 2018, June 2019 and June 2020.

i. WHT assessment initially issued by the Respondent in the notice of assessment dated 27th November 2008. 43. The Respondent stated in its objection decision that the WHT of Kshs. 634,644,435. 00 comprising principal tax of Kshs. 294,142,882. 00, penalties of Kshs. 88,242,862. 00 and interest of Kshs. 252,258,691. 00 relates to a previous assessment raised on 27th November 2008, which the Appellant contested and has not paid

44. The Tribunal notes that the Respondent further stated in its objection decision that the WHT of Kshs. 634,644,435. 00 should be excluded from the computation of the present WHT assessment because it relates to a previous assessment.

45. It is not in dispute by the Appellant and the Respondent that the WHT of Kshs. 634,644,435. 00 was accrued before 27th November 2008, that the assessment pertains to periods beyond five years before the date of the notice of assessment dated 15th September 2022, and that both parties concur that the amount should be excluded from the total assessed tax in the present dispute.

46. Consequently, the Tribunal finds that the Respondent erred in including the Kshs. 634,644,435. 00 in the summary of taxes in its objection decision, and the Respondent erred in proceeding to plead its position on the tax in its Statement of Facts contrary to its statement in the objection decision.

ii. WHT assessment issued by the Respondent for the periods ending June 2016, June 2017, June 2018, June 2019 and June 2020. 47. The Respondent issued default assessments of WHT on interest for the periods ending June 2016, June 2017, June 2018, June 2019 and June 2020 in a notice of assessment dated 15th September 2022.

48. The Tribunal notes that before delving into the merits of the assessment, it is important to consider the statute of limitation regarding assessments by the Respondent. The statute of limitation determines the period for which the Respondent is permitted to assess back taxes. After this period has lapsed, a tax assessment notice may not be issued or amended.

49. Section 29(5) of the Tax Procedures Act (TPA) provides that: -“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”

50. The Tribunal observes that the Respondent issued default assessments of WHT for the periods ending June 2016 and June 2017 in the notice of assessment dated 15th September 2022 which was more than five years.

51. The Tribunal notes that for the Respondent to be allowed to issue a default assessment beyond the statutory period, it must prove gross or wilful neglect, evasion or fraud by a taxpayer under Section 29(5) of the TPA which provides that: -“Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

52. The burden of proof for gross negligence and wilful intent of a taxpayer lies with the Respondent, which in the instant case, the Respondent failed to prove.

53. The Tribunal reiterates its holding in TAT 226 of 2022 Telkom Kenya Limited v The Commissioner of Domestic Taxes where it was held that: -“The Tribunal is bound by the requirement of Section 31(4)(a) which states that the Respondent can only amend an assessment beyond 5 years in situations of “willful neglect, evasion or fraud” irrespective of whether the issue was raised by the Appellant. In the present case, no evidence of willful neglect, evasion or fraud was tendered before the Tribunal. In the circumstances, the Tribunal finds fraud was tendered before the Tribunal. In the circumstances, the Tribunal finds that the Respondent that the Respondent erred in law and in fact by issuing VAT and Excise duty assessments for the year 2015 outside the five-year statutory limit.”

54. Based on the foregoing, the Tribunal finds that the Respondent erred in law by assessing WHT for the periods ending June 2016 and June 2017.

55. The Tribunal proceeded to analyse the applicability of WHT to the interest incurred by the Appellant for the periods ending June 2018, June 2019 and June 2020. The Tribunal examined the parties’ pleadings and the evidence adduced by the parties in support of their respective cases.

56. The Respondent assessed WHT on the Appellant’s interest expense.Conversely, the Appellant challenged the WHT assessment, asserting in part that WHT was not payable before 5th February 2019 as the tax liability had not yet been triggered as the Appellant had only accrued the interest expense but not paid it, and further asserting in part that the interest is exempt from tax.

57. It is well accepted and anchored in law that the onus of proving that a tax decision is wrong, excessive or incorrect lies upon a taxpayer. Section 56(1) of the Tax Procedures Act (TPA) and Section 30 of the Tax Appeals Tribunal Act (TAT) provide as follows:Section 56(1) of the TPA: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”Section 30 of the TAT Act: -“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;b.in any other case, that the tax decision should not have been made or should have been made differently.”

58. The Tribunal is further guided by the holding in the case of Digital Box Limited v Commissioner of Investigations and Enforcement [2020] where the Tribunal held: -“…in this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment. Thus, according to the provisions of the Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant.”

59. The Tribunal observes that in support of the Appellant’s assertion that the WHT on interest is not applicable:a.The Appellant cited Section 14 of the Income Tax Act.b.The Appellant attached to its Appeal written correspondences between the Appellant, the Ministry of Agriculture, the National Treasury, and the Commissioner of Domestic Taxes, discussing the Appellant’s application through the Ministry of Agriculture for exemption of WHT on the interest expense.c.The Appellant cited Section 37(2) of the TPA and decried its inability to pay the tax assessed.d.The Appellant submitted that the tax point of WHT before 5th February 2019 when the Court of Appeal overturned the judgement in Fintel Limited HC Misc. Civil Application No. 1768 of 2004, was upon payment and not upon accrual of a qualifying expense.

60. The Tribunal analysed the Appellant’s assertion that the interest expense, in this case, is exempt from tax under Section 14 of the Income Tax Act which provides that: -“(1)Notwithstanding anything in Part II, interest payable on the securities specified in Part II of the First Schedule shall be exempt from tax to the extent so specified.2. The Minister may, by notice in the Gazette, provide that the interest payable on any loan charged on the Consolidated Fund or on the revenues of any local authority, shall, in so far as that interest is income which accrued in or was derived from Kenya, be exempt from tax, either generally or only in respect of interest payable to persons who are not resident.”

61. Part II of the First Schedule to the Income Tax Act lists securities, the interest on which is exempt from tax. The Tribunal perused all the documents that the Appellant provided in its Appeal and noted that the Appellant did not attach the loan agreement between it and its lender or any other relevant document to enlighten the Tribunal of the nature of the loan and to enable the Tribunal to determine whether the loan in question was classifiable under the securities on which interest is exempt from tax under this provision of the law. In this case, the Tribunal finds that the Appellant failed to prove that the interest expense was exempt from tax under Section 14(1) of the Income Tax Act as read together with Part II of the First Schedule to the Income Tax Act.

62. The above notwithstanding, the Tribunal notes that Part II of the First Schedule to the Income Tax Act was repealed effective from 25th April 2020 by Section 2 of the Tax Laws (Amendment) Act, 2020. Therefore,any provision therein, albeit not buttressed by the Appellant as applicable using evidence, did not apply to the assessment for June 2020.

63. Further, for the income tax exemption provided in Section 14(2) of the Income Tax Act to apply, the Appellant must demonstrate that the interest payable is income which accrued in or was derived from Kenya and is on any loan charged on the Consolidated Fund or the revenues of any local authority. The Tribunal perused all the documents that the Appellant provided in its Appeal and noted that the Appellant did not attach the loan agreement between it and its lender, or proof that its loan is charged on the Consolidated Fund, or any other relevant document to enlighten the Tribunal of the nature of the loan and to enable the Tribunal to determine whether the interest is exempt from tax under this provision of the law. In this case, the Tribunal finds that the Appellant failed to prove that the interest expense was exempt from tax under Section 14(2) of the Income Tax Act.

64. The Tribunal also reviewed the Appellant’s submission that it was in the process of obtaining exemption from payment of WHT, seemingly under Section 37(2) of the TPA. Based on the evidence adduced by the Appellant, the Appellant has not been granted any exemption from payment of WHT on interest by the Commissioner of Domestic Taxes, and has also not been granted exemption from payment of WHT on interest by the Cabinet Secretary to the National Treasury. The Appellant merely attached inconclusive correspondences between it, the Ministry of Agriculture, the National Treasury and the Commissioner of Domestic Taxes on its application for exemption. On this basis, the Tribunal finds that the Appellant failed to discharge its burden of proving that the interest expense in question is exempt from tax.

65. The Tribunal finally analysed the Appellant’s submission that the tax point of WHT (before 5th February 2019 when the Court of Appeal overturned the judgement in Fintel Limited HC Misc. Civil Application No. 1768 of 2004), was upon payment and not upon accrual of a qualifying expense. The Tribunal reviewed all the documents that the Appellant attached to its Appeal and found that the Appellant did not provide evidence of whether it had paid the interest before 5th February 2019 or whether it had merely accrued the interest. For this reason, the Tribunal did not delve into determining the applicability of the Appellant’s submission on the tax point of WHT.

66. Due to the Appellant’s failure to discharge its burden of proof regarding the exemption from WHT of the interest in this dispute and its failure to provide evidence that it had merely accrued the interest expense and not paid it, the Tribunal finds that the Respondent was justified in issuing the WHT additional assessments for June 2018, June 2019 and June 2020.

67. The Tribunal, however, finds that despite the WHT on interest being applicable for the tax periods from 9th June 2016 to 6th November 2019, the Respondent lacks the powers to collect and recover the WHT principal, penalties and interest from the Appellant in these tax periods, following the deletion of Section 35(6) of the ITA by Section 9 of the Finance Act of 2016 effective from 9th June 2016. Section 35(6) of the ITA read as below before its deletion: -“35 (6) Where a person who is required under this section and in accordance with the rules made under section 130, to deduct tax—a.fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted; orb.fails to remit the amount of a deduction to the Commissioner on or before the twentieth day following the month in which the deduction was made or ought to have been made,the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”

68. To buttress its finding on the Respondent’s powers of collection and recovery of WHT not deducted by the Appellant for periods between 9th June 2016 and 6th November 2019, the Tribunal relies on TAT 304 of 2019 Pevans East Africa Limited v Commissioner of Domestic Taxes [2019] where the Tribunal held that: -“79. The Tribunal is alive to the fact that the Finance Act 2016 amended Section 35 of the ITA by deleting subsection 35 (6). The import of this amendment was that where a person has failed to withhold tax as prescribed, the Commissioner cannot demand the tax not withheld from the person who should have withheld. Consequently, the Respondent cannot demand tax from the Appellant as if it was tax due from it. It is also appreciated that when parliament intended withholding tax to be recovered from the withholding tax agent as if it was tax due, the legislation clearly stated so.”

69. The High Court upheld the Tribunal’s decision on the collectability of WHT not deducted and remitted in Commissioner of Domestic Taxes v Pevans East Africa Limited & 6 others (Tax Appeal E003 of 2019) [2022] KEHC 10392 (KLR) where the Court held: -“42. I am in agreement with the Tribunal that prior to 2016, section 35(6) of the ITA provided that the commissioner could claim taxes from a payer who fails to make a deduction as though the taxes were due from them. However, the amendment introduced by the Finance Act, 2016 deleted the said section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same and that this position remained until the enactment of the Finance Act, 2019 came into force on November 7, 2019 when the previously deleted provisions of section 35(6) of the ITA were now reintroduced and reproduced as a new section 39A under the TPA.43. Consequently, I therefore find and hold that during the subject years of 2018 and 2019, the Commissioner could not collect the WHT that ought to have been deducted by the Respondents from the punters and that all the Commissioner could do was seek the same from the punters directly.”

70. In view of the aforesaid analysis, the Tribunal concludes that the Respondent has no legal basis for collecting and recovering the WHT which the Appellant failed to deduct from interest on the loan for June 2018 and June 2019 and the resultant penalties and interest as tax due and payable by the Appellant.

71. Consequently, the Tribunal finds that the Respondent was justified in assessing and demanding WHT for June 2020. b. Whether the Respondent was justified in finding a positive variance in ENA production, issuing additional excise duty and VAT assessments,and reducing the Appellant’s deficit carried forward under the Income Tax Act (corporate tax losses). 72. The Respondent stated that it conducted a variance analysis of the extra neutral alcohol (ENA) production quantities declared by the Appellant in itsExcise duty returns and the expected ENA production quantities by analysing the stock movement of molasses. From this analysis, the Respondent averred that the Appellant had cumulatively under-declared ENA production quantities for the periods ending June 2018, June 2019 and June 2020. Consequently, the Respondent: -a.Computed Excise duty on these variances and assessed the Appellant additional Excise duty of Kshs. 192,610,618. 00 plus interest and penalties.b.Computed VAT on the turnovers arising from these variances plus the additional Excise duty and assessed the Appellant additional VAT of Kshs. 42,121,200. 00 plus interest and penalties.c.Computed the turnovers arising from these variances and determined that the Appellant's deficit carried forward under the Income Tax Act (Corporate tax losses) should be reduced by Kshs. 80,698. 904. 00.

73. The Respondent further stated in its objection decision that despite it having received the Appellant’s documents in support of the stock reconciliation, the Appellant did not provide the evidence for the production of dry and wet yeast which was the basis for the assessment. The Appellant objected to the variances determined by the Respondent, citing that the opening and closing stocks in the Respondent’s workings were wrong; the Appellant provided its workings of the variances based on its records of the transactions.

74. The Tribunal reviewed the matter before it in detail and considered that it is important to determine the root cause of the Respondent amending the Appellant’s self-assessments and whether the Appellant sufficiently proved that the Respondent’s assessments were wrong.

75. The Tribunal reviewed the notice of assessment which raised this audit issue and found that the Respondent merely issued the Appellant with a schedule of its analysis of variances. The Tribunal further noted that besides the analysis of variances, the Respondent did not provide the source of the data that it used as a basis for its assessment, which, according to the Respondent’s objection decision, was molasses consumption in the production of dry and wet yeast.

76. The Tribunal further reviewed the Respondent’s Statement of Facts and the attachments to it and found that likewise, the Respondent only provided the analysis of variances without any reference to its source of the data.

77. The Tribunal also analysed the Appellant’s pre-assessment communication with the Respondent on the variances so determined and its objection to the Excise duty and VAT assessments and deficit carried forward (corporate tax losses) reduction that arose from the Respondent’s variance analysis and the documents it attached in support of the same.

78. In its review, the Tribunal noted that the Appellant provided to the Respondent and the Tribunal the stock movement schedules showing molasses stock receipts, stock consumption and closing stock numbers in support of its stock reconciliation, results of which varied from the Respondent’s figures. The stock movement schedules provided by the Appellant further broke down the molasses consumption numbers between molasses consumed in the production of ENA, and molasses consumed in the production of dry and wet yeast. Further, the Appellant demonstrated that the molasses procured for the period ended 30th June 2018 was 36,562 tons according to its annual report for the year ended 30th June 2018, which was audited by the Office of the Auditor General.

79. Indeed, the Tribunal during proceedings presumes that the Respondent’s assessment is correct until the taxpayer produces competent and relevant evidence to support his position. To discharge this burden, the taxpayer must furnish sufficient evidence to satisfy the required standard of proof and it is only then that the burden can shift.

80. Being that the TAT Act does not set the standard of proof to be met in proceedings, the Tribunal approached this Appeal on the basis that the burden was on the Appellant to demonstrate on a preponderance of probability that the decisions of the Respondent against which it appealed were wrong. The court in the case of Bar L Ranch, Inc. v. Phinney, (426 F.2d 995, 998-99 (5th Cir. 1970)) took a similar approach where the court held that the taxpayer need only show that an assessment is arbitrary and that the burden of proof would then be on the Government to show the existence and the amount of any deficiency.

81. The Tribunal is further guided by the holding in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR that: -“The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The Commissioner’s determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

82. The Tribunal refers to Section 31(1) of the TPA which provides that the Commissioner may amend an assessment by making alterations or additions, from the available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer for a reporting period to ensure that the taxpayer is assessed in respect of the correct deficit carried forward and that the taxpayer is liable for the correct amount of tax in respect of a tax period.

83. The Tribunal observes that the Appellant, during pre-assessment, the objection review and proceedings before the Tribunal, clearly stated that the Respondent’s numbers were incorrect. In addition, through providing stock movement schedules and stock reconciliations, the Appellant established that the Respondent’s figures were erroneous. Accordingly, the Tribunal finds that the Appellant discharged its burden of proof in establishing that the stock movement figures it used to determine the variances were correct, as required under Section 56(1) of the TPA and Section 30 of the TAT Act. After the Appellant discharged its burden of proof, the Respondent was obligated to dismantle the Appellant’s evidence in explanation and evidence. However, the Respondent failed to do so in its response to the Appeal.

84. In Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 the Court stated that:“The taxpayer's initial onus of "demolishing" the Minister's exact assumptions is met where the appellant makes out at least prima facie case... Where the Minister's assumptions have been "demolished by the appellant, "the onus .... shifts to the Minister to rebut the prim a case" made out by the appellant and to prove the assumptions ... The law is settled that unchallenged and uncontradicted evidence "demolishes" the Minister's assumptions; ...Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed; and even if the evidence contained ''gaps in logic, chronology, and substance", the taxpayer's appeal will be allowed if the Minister fails to present any evidence as to the source of income.”

85. The Tribunal observes that the Respondent’s silence on the evidence produced by the Appellant was as loud as its contention that the Appellant had failed to produce sufficient evidence. It would have been helpful if the Respondent had devoted some time to prove that the evidence provided by the Appellant was incorrect.

86. Further, the Tribunal finds that the Commissioner's use of best judgement to arrive at an assessment does not exist in a vacuum and should be reasoned with reliable information. The Tribunal is guided by the Court’s finding on the application of ‘best judgement’ in Saima Khalid v The Commissioner for Her Majesty’s Revenue & Custom s Appeal No. TC/2017/02292, where the Court observed that: -“29. The requirements for a decision to be to the best of HMRC’s judgement were set out in the High Court case of Van Boeckel v C & E Commissioners where Woolf J, as he then was, said:“…The very use of the word ‘judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them …What the words ‘best of their judgment’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on commissioners will fairly consider all material placed before them and, on that material, come to a decision which is reasonable and not arbitrary as to the amount of tax which is due...”

87. Based on the foregoing, the Tribunal finds that the Respondent was not justified in finding that the Appellant had cumulatively under-declared ENA production quantities. Further, the Tribunal finds that the Respondent erred in assessing the Appellant for additional Excise duty and VAT, and reducing the deficit carried forward under the Income Tax Act (Corporate tax losses) of the Appellant.

Final Decision 88. The upshot of the above analysis is that the Tribunal finds that the Appeal partially succeeds and accordingly proceeds to make the following orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 13th December 2022 be and is hereby varied as follows:i.The WHT assessment of Kshs. 634,644,435. 00 relating to the assessment referred to in the notice of assessment dated 27th November 2008 be and is hereby set aside.ii.The WHT assessment of principal taxes, plus interest and penalties for June 2016, June 2017, June 2018 and June 2019 be and are hereby set aside.iii.The WHT assessment of principal tax plus interest and penalty for June 2020 be and is hereby upheld.iv.The additional Excise duty of Kshs. 192,610,618. 00 plus interest and penalties cumulatively assessed for the periods June 2018, June 2019 and June 2020 arising from the Respondent’s ENA production variances be and is hereby set aside.v.The additional VAT of Kshs. 42,121,200. 00 plus interest and penalties cumulatively assessed for the periods June 2018, June 2019 and June 2020 arising from the Respondent’s ENA production variances be and is hereby set aside.v.The cumulative reduction of the deficit carried forward under the Income Tax Act (Corporate tax losses) of Kshs. 80,698. 904. 00 for the years June 2018, 2019 and 2020 arising from the Respondent’s ENA production variances be and is hereby set aside.c.Each party to bear its own costs.

89. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OFMARCH, 2024. GRACE MUKUHACHAIRPERSONGLORIA A. OGAGAMEMBERJEPHTHAH NJAGIMEMBERDR. WALTER J. ONGETIKOMOLO MEMBERDR. ERICKMEMBER