[2024] KETAT 1597 (KLR)

Algarve Distributors Limited v Commissioner of Investigations & Enforcement (Appeal E781 of 2023) [2024] KETAT 1597 (KLR) (Commercial and Tax) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1597 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal E781 of 2023

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

November 22, 2024

Between

Algarve Distributors Limited

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya. Its core activities include logistical support, transport and other auxiliary activities.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent investigated the affairs of the Appellant for the period 2017 and subsequently issued it a notice of assessment dated 24th March 2022.

4. The Appellant objected to the assessment vide its Objection letter dated 22nd April 2022 and the Respondent issued its invalidation Objection decision on 5th May 2022.

5. Aggrieved by the Respondent’s decision, the Appellant lodged its Notice of Appeal dated 22nd September 2023.

The Appeal 6. The Appellant’s Appeal is premised on its Memorandum of Appeal dated 22nd September 2023 filed on 11th November 2023. The said Appeal was premised on the following grounds:a.That Respondent erred in law and fact by rendering a decision outside of the stipulated time as enumerated by Section 51(11) of the TPA and the Section being the Procedural law and couched in mandatory terms the Objection stood allowed.b.That the Respondent erred in law and fact by raising the additional assessment on an approach that contravened the applicable Sections of the VAT and Tax Procedure Act.c.The Respondent erred in fact and law by bringing to charge bank transfers of related parties, intercompany bank transfers, and unpaid and returned cheques which do not constitute chargeable income under the Income Tax Act.d.The Respondent erred in law and in fact in confirming assessments based on assumptions as market-estimated figures rather than on actual and production records availed to the Respondent.e.The Commissioner failed to appreciate the model business conducted by the Appellant and proceeded to disregard the Appellant’s accounts invoices, audited financial statements, general Ledgers, bank Statements, reconciliations of the turnover and other related documents provided to it.

Appellant’s Case 7. The Appellant set out its case on its Statement of Facts dated 22nd September 2023 and filed on 11th November 2023 and Written Submissions dated 8th August 2024 and filed on 12th August 2024.

8. The Appellant stated that the Respondent conducted an audit on its business and issued an assessment on 22nd April 2022 from where it lodged its Objection dated 22nd April 2022.

9. That the Respondent issued its Invalidation Objection decision on 5th May 2022 and on subsequent diverse dates including 21st June 2022, 2nd February 2023 and 4th July 2023.

10. That the Appeal was filed on 22nd September, 2023 and the Statement of Facts was served on 30th April, 2024 which was six 96 months after the date of service of the Appeal.

11. The Appellant stated that it supplied the Respondent with audited accounts, invoices, audited financial statements, General Ledgers, Bank Statements, Reconciliations of the turnover and other related documents.

12. The Appellant asserted that the Respondent failed to appreciate that the costs incurred in generating the chargeable income were not considered by the Respondent in raising the additional assessment.

13. The Appellant stated that it explained its diversification and unique business model which included but was not limited to poultry rearing and cereals which called for cash injection, particularly from Dorcas Wanjiru.

14. That the Respondent failed to appreciate that the profit margin in the cereal and poultry industry was at 15. 59% and not the 17% margin that was adopted by the Appellant.

15. That the Respondent:a.Failed to give reasons for invalidating the notice of objection by offering mere generalities.b.Did not comply with the provisions of the Tax Procedures Act when issuing the Objection decision which is statute-barred and therefore null and void.c.Demand for principal tax of Kshs. 70,119,951. 39 is unfounded, unreasonable, unjustified and not based on any material facts.

16. The Appellant argued that it provided reconciliations and explanation for each bank account, every single deposit and their sources. That this fact has not been disputed because not every single deposit in an account can be deemed to be an income.

17. That it proved the sources of its income and that the Respondent has not disputed nor controverted this assertion meaning that it had made a prima facie case against the Respondent and shifted the burden to the Respondent to prove its position as was stated in Kenya Revenue Authority Versus Man Diesel & Turbo Se, Kenya [2021] eKLR and Usafi Services limited Versus commissioner of Domestic taxes (TAT No. 1094 of 2022 {2023} KETAT 875 [KLR].

18. That there was no basis, nexus, explanation or reasons that guided the Respondent to issue an additional assessment against the Appellant and hence its justified prayer to have it set aside.

Appellant’s prayer 19. the Appellant prayed that the Tribunal do find that it is not liable to pay the cumulative principal tax of Kshs. 70,119,951. 39 demanded by the Respondent.

Respondent’s Case 20. The Respondent has opposed this Appeal with the support of its Statement of Facts dated 30th April 2024 and Written Submissions dated 9th July 2024.

21. The Respondent raised a Preliminary Objection on a point of law stating that the Appeal ought to be struck out on the following grounds:a.The Appeal has been filed out of time contrary to the provisions of Section 51(2) of the Tax Procedures Act and Section 13 of the Tax Appeals Tribunal Act.b.The Respondent issued its Objection decision on 24th August 2023 and the Appeal was filed on 11th November 2023 which was 79 days late. That leave was not sought and obtained to file the Appeal out of time.c.The Tribunal lacks the jurisdiction to hear and determine the matter.

22. The Respondent stated that it invalidated the Appellant’s Objection under Section 51(3) of the Tax Procedure Act on the premise that it had failed to attach any supporting documentation.

23. That the Appellant was accordingly informed of this shortcoming and/or non-compliance vide a notice dated 5th May 2022 and advised to validate the objection.

24. The Respondent averred that at the time of assessment, Section 51(11) of the TPA provided that the Commissioner shall make a decision within 60 days from the date of receipt of the objection or any other information the Commissioner may require from the taxpayer.

25. The Respondent stated that the Appellant provided the supporting documentation on various dates with the last batch of documents provided on 4th July 2023. That the objection was thus validated.

26. That time began running on the 4th July 2023 and the Objection decision was issued on 24th August 2023 which was within the prescribed sixty (60) days time limit.

27. The Respondent averred that the Appellant consistently purchased bottles from Milly Glass Limited and closures from Torrent E.A Limited. That however, there was no indication to show that the supplies had been sold and captured on the sales records.

28. The Respondent averred that:a.Its investigations identified under declarations of income on the ITC2 returns and under declarations of VAT turnovers on the VAT returns.b.It conducted an analysis of third-party information obtained from the company suppliers and data obtained from the Respondents’ internal database and it was confirmed that the Appellant has been purchasing bottles, caps and flavours over the years.c.It independently obtained bank statements for the bank accounts operated by the Appellant namely; SBM Bank (Kshs 0652367452001 and USD 0652367452002), Equity 0260274877662 and DTB 0601242002. d.It analysed the accounts while taking into account adjustments for related party transfers, and fixed deposits where the same were identifiable.e.It issued its letter of findings dated 10th December 2021 via email on 12th December 2021 with tax liability of Kshs. 985,662,223. 00 inclusive of VAT and Income tax.

29. Accordingly, the Respondent issued its tax assessment vide a letter dated 24th March 2022 confirming the taxes due per the findings.

30. The Respondent identified the following issues for determination in its written submissions.i.Whether the Appeal is valid.ii.Whether the Objection decision dated 24th August 2024 was proper in law.iii.Whether the Respondent erred in applying the banking analysis method in raising the assessments.

31. The identified issues were discussed as hereunder:

Whether the Appeal is valid. 32. That the Appeal herein was filed on 11th November 2023, which was seventy-nine (79) days beyond the required statutory timelines. That the Appellant did not make an application for enlargement of times and hence the reason for its argument that the Tribunal has been stripped of all jurisdiction to hear the matter as was stated in Owners of the Motor Vessel “Lillian’s” Versus Caltex (Kenya) Limited (1989) eKLR.

Whether the Objection decision dated 24th August 2024 was proper in law 33. The Respondent submitted it is bound to issue a decision where there has been a validity lodged notice of Objection by dint of Section 51(11) of the Tax Procedures Act.

34. That it issued the Appellant with additional assessment with respect to VAT and Income tax on 24th March 2024 and the Appellant objected to it on 22nd April 2022.

35. That it informed the Appellant that its Objection was invalid and requested it to provide information and documents within 7 days of 5th May 2022.

36. The Respondent averred that it had an engagement on 24th May 2022 with the Appellant and documents were provided on diverse days between 21st June 2022, and 2nd February 2023 and the last document was received on 4th July 2023.

37. The Respondent submitted that under Section 51 (11) of the Tax Procedures before the amendment by the Finance Act 2022, time started running from 4th July 2023 at the time of assessment and it issued its objection decision on 24th August 2023 within the prescribed sixty (60) days.

Whether the Respondent erred in applying the banking analysis method in raising the assessments. 38. The Respondent postulated that it has the right and power to investigate tax affairs and accounts of the taxpayer, demand documents and employ its best judgment in determining the tax due.

39. That courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment as was stated in the case of Bachmann v. The Queen, 2015 TCC 51 and Hole v. The Queen, 2016 TCC 55.

40. That the onus is on the Appellant to prove its averment that the banking analysis was misapplied in arriving at the assessment using the two ways of challenging the application of the banking analysis method as was held in Hole v. The Queen, 2016 TCC 55.

41. The Respondent took the view that the Appellant did not provide any reasonable basis for departing from the banking analysis method or to show how the Respondent erred in the use of the banking analysis method and thus the ground is unjustified.

42. That the Appellant thus failed to discharge its burden of the proof against the Respondent who provided unchallenged and uncontroverted evidence to prove the correctness of the tax assessments.

The Respondent’s Prayer 43. The Respondent’s prayer to the Tribunal was for orders that the Tribunal:a.Upholds the Objection decision dated 24th August 2023b.Dismisses the Appeal with costs.

Issues For Determination 44. The Tribunal has gleaned through the party's pleadings, submissions and documents is of the view that the following issues fall for its determination:a.Whether the Appeal is valid.b.Whether the Objection decision dated 24th August 2024 is unlawful and unjustified for contravening Section 51(11) of the TPA.c.Whether the Respondent erred in its tax assessment.

Analysis And Determination Whether the Appeal is valid. 45. The Respondent argued under this head that the Appeal herein was filed on 11th November 2023, which was seventy-nine (79) days beyond the required statutory timelines and that the Appellant did not seek and obtain leave for enlargement of time. That the Tribunal is thus stripped of jurisdiction to hear the matter as was stated in Owners of the Motor Vessel “Lillian’s” Versus Caltex (Kenya) Limited (1989) eKLR.

46. The Appellant averred that it filed its Appeal on 22nd September 2023 which was within the prescribed timelines.

47. Section 13(1) of the TAT Act provides as follows regarding timelines for filing an Appeal before the Tribunal:“(1)A notice of appeal to the Tribunal shall—(a)be in writing or through electronic means;(b)be submitted to the Tribunal within thirty days of receipt of the decision of the Commissioner.”

48. The Appellant was thus required to file its Appeal within the prescribed limit of 30 days. The Objection decision was issued on 24th August 2023, the Appellant was thus required to file its Appeal on or before 23rd September 2023.

49. The Tribunal has gleaned through the pleadings presented before it and the Judiciary’s e-filing system and it has confirmed that whereas the Objection decision herein was issued on 24th August 2023, the Notice of Appeal was filed via email to the Tribunal on 22nd September 2023.

50. The Appeal was thus filed within time and is valid.

Whether the Objection decision dated 24th August 2024 is unlawful and unjustified for contravening Section 51(11) of the TPA. 51. The Appellant submitted that the Respondent’s objection was issued 60 days after the receipt of its objection. That the said objection contravened Section 51(11) of the TPA and is thus unlawful.

52. The Respondent submitted that it issued the Objection decision on 24th August 2023 which was within the prescribed 60 days which began running from 4th July 2023.

53. The Tribunal has looked at the documents presented before it and has discerned the following as the chronological events in this Appeal:a.An invalidation notice was issued on 5th May 2022 on the premise that the Appellant’s Objection failed to meet the requirements under Section 51(3) of the TPA.b.The Appellant was directed to provide documents within 7 days from the date of the invalidation notice.c.The Objection decision was issued on 24th August 2024

54. The Respondent pleaded that it held engagement and meetings with the Respondent before the issuance of the said decision on diverse dates including 24th May 2022, 21st June 2022 and 2nd February 2023. That the Appellant supplied the last batch of its documents and validated its Appeal on 4th July 2023.

55. The Appellant confirmed this position when it stated in its Statement of Facts that it had indeed supplied the final documents on 4th July 2023.

56. Section 51(11) of the TPA (2022 version) read as thus:“The Commissioner shall make the Objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

57. The Commissioner was thus required to make its decision within 60 days of receipt of further information that it had requested the Appellant to supply.

58. The Appellant conceded that it provided the requisite documents on 4th July 2023. The Objection decision was thus due on or before the 3rd September 2023.

59. The Objection decision dated 24th August 2024 was thus issued within time and is is hence lawful.

Whether the Respondent erred in its tax assessment. 60. The Appellant argued that the Respondent erred in assessing it using the banking method for the reasons:-a.It did not appreciate the nature of its businessb.It applied exaggerated margins on its profits which was not in agreement with the average industry margins.c.It provided all documents that had been requested by the Respondent.d.It included capital injections as part of its revenue in arriving at its assessed tax.

61. The Respondent on its part asserted that banking analysis is an acceptable method of tax assessment and the onus lay with the Appellant to prove that this test was misapplied by proving the non-income items that were taxed or the fact that it had provided sufficient documents to dispute the assessment.

62. The issue of application of banking analysis was discussed in the classical case of Hole V The Queen, 2016 TCC 55 where the court stated as thus:-“There are two ways in which a taxpayer can challenge a bank deposit analysis; The first is to prove that his or her records are adequate and thus that his or her income should have been determined using those records. The second, and more common method is to challenge the actual determination of income made by the Minister under the bank deposit analysis.”

63. It is thus clear that a taxpayer can challenge the Respondent’s application of the banking method if it proves that its records are adequate and its assessment should have been determined as per those records.

64. Both parties agree that the Appellant supplied documents on 4th July 2023. The Respondent affirmed that it was supplied with the remainder of the document that it had requested on 4th July 2023 and hence the reason why it validated the Objection. The Appellant also confirmed that it supplied the following final documents that were requested of it on 4th July 2023:a.Audited accountsb.Invoicesc.Audited financial statementsd.General ledgerse.Bank statementsf.Reconciliations of the turnoverg.Other related documents.

65. The Tribunal has gleaned through the Objection decision dated 24th August 2023 and it has discerned that the documents provided by the Appellant were considered by the Respondent in arriving at its Objection decision.

66. The said Objection decision specifically stated that it considered the following documents supplied by the Appellant in arriving at its decision. The relevant portions of the said objection decision read as follows:“3. 3.1. 3 You provided schedules and copies of bank statements to support the non-income items and the Commissioner has made adjustment accordingly to exclude the non-income items to the extent the same have been supported.

3. 1.4 From the review of the bank statements provided it was noted that there was no indication that you engaged in the business of manufacturing alcohol beverages nor sale of the same to third parties as had been noted in the investigation report.

3. 1.5 From the analysis it was noted that there was no trend in the in the bank statements where substantial deposits were made by various entities (mostly alcohol dealers and restaurants) and subsequently transferred to related party accounts.…………….…………………………

3. 2.3 To this effect you provided sample invoices to demonstrate the nature of the costs incurred however in view of the fact that the same could not support the costs in full, you requested the Commissioner to consider using the applicable margins as the two business lines were highly undocumented.”

67. The foregoing is an indicator that the documents provided by the Appellant like schedules, bank statements, invoices and related documents were indeed considered by the Respondent in arriving at its decision.

68. Moreover, the Respondent stated that it was hence obliged to apply the banking method on the basis that:-a.the documents were insufficientb.the Appellant had admitted the unavailability of recordsc.the Appellant implored it to apply alternative methods to determine the taxes payable.

69. The Tribunal has analysed the pleadings and documents availed to it and it is of the view that the Respondent indeed considered the documents presented by the Appellant in arriving at its Objection decision.

70. The Respondent thereafter proceeded to determine the Appellant’s a tax liability based on its bank statements but while applying the average profitability margin when determining the Appellant’s taxable income.

71. The burden of proving that a tax assessment was not justified in this case lay with the Appellant under Section 30 of the TAT Act which provides as thus:“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; or(b)in any other case, that the tax decision should not have been made or should have been made differently”

72. The Appellant has not presented anything before the Tribunal to challenge the Respondent’s assessment. It has also not shown that there was a specific piece of evidence which could have affected the quantum of its assessment and that the same was not considered by the Respondent when it issued its Objection decision.

73. The burden of proof that the Appellant was required to discharge in this case to overturn the Respondent’s assessment was discussed in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] KEHC 4148 (KLR) where it was stated as thus:-“Burden of Proof at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a taxpayer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner’s position. This is the basic principle.”

74. This burden lies on the Appellant in the first instance, and it never shifts unless the Appellant tables sufficient evidence to show that the tax assessment that had been levied against it is not justified. The Appellant has not placed sufficient evidence before the Tribunal to persuade it that the assessment done by the Respondent was not justified. It has instead engaged in providing explanations as to why it is not liable to pay the tax assessed without providing the evidence to support its assertion.

75. The settled law that the burden of proof in tax cases lies with the taxpayer was stated in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where court stated as thus:“The party that carries the burden of proof must produce evidence to meet a threshold or standard in order to prove their claim. If a party fails to meet their burden of proof, their claim will fail.Burden of Proof at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a Taxpayer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner‘s position. This is the basic principle.”

76. The Appellant thus had a duty to show that the Respondent erred in the adoption of the banking method to succeed in setting aside that assessment. Failure to discharge this burden would mean that the Respondent’s assessment would stand proved.

77. The fact that the Respondent is at liberty to apply a banking method in cases where it is left with no option other than to apply its best judgement to determine the tax liability of a taxpayer was discussed in the case of Moses Kiarie Kuria vs.Commissioner of Domestic Taxes TAT 508 of 2021 where it was held that;“Where the Respondent has relied on the banking analysis method, it is obliged to exercise the best judgment to ensure that the taxpayer is liable for the correct amount of tax.”

78. The Respondent was hence obliged to consider all material facts and evidence put before it, and based on that material make a decision that is reasonable and not arbitrary. The Tribunal concurs that the use of banking method to determine the Appellant’s liability was thus fair in the circumstances because the Appellant left the Respondent with no option other than to apply its best judgment to determine the Appellant’s liability.

79. The fact that the Respondent can apply its best judgement to issue an assessement is supported by Section 29(1) of the TPA which provides as thus:“Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment")”

80. The Tribunal thus finds and holds that the material placed before the Respondent by the Appellant was not sufficient to disprove the Respondent’s tax assessment. The Respondent acted fairly, reasonably and was thus justified in its decision of applying its best judgment to determine the Appellant’s tax liability.

Final Decision 81. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed;b.The Respondent’s Objection decision dated 24th August 2023 be and is hereby upheld; and,c.Each party is to bear its own costs.

82. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER, 2024ERIC NYONGESA WAFULA CHAIRMANABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBERDR. RODNEY - MEMBERO. OLUOCH -MEMBER