[2024] KETAT 621 (KLR)

Ali v Commissioner, Investigation & Enforcements (Tax Appeal 935 of 2022) [2024] KETAT 621 (KLR) (19 April 2024) (Judgment)

Neutral citation: [2024] KETAT 621 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 935 of 2022

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & T Vikiru, Members

April 19, 2024

Between

Abdi Mohamed Ali

Appellant

and

Commissioner, Investigation & Enforcements

Respondent

Judgment

Background 1. The Appellant is a director of Mega Wholesaler Limited, a limited liability company duly incorporated under the Companies Act. The Appellant is registered for income tax- residential individual and VAT obligation.

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

3. The Respondent conducted investigation on the tax affairs of the Appellant and vide a letter dated 11th May 2022, the Respondent issued the Appellant with a tax assessment for income tax and VAT of Kshs. 129,387,507. 00

4. The Appellant vide a letter dated 27th May 2022, lodged an objection to the assessment.

5. The Appellant and the Respondent exchanged correspondence that resulted to validation of the objection on 21st June 2022.

6. The Respondent vide a letter dated 16th August 2022, issued an objection decision confirming the principal tax liability of Kshs. 129,387,507. 00

7. The Appellant being aggrieved with the Respondent’s objection decision lodged a Notice of Appeal at the Tribunal on the 17th August 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 31st August 2022:-i.That the Respondent erred in law and facts and issued an invalid objection decision contrary to Section 51(9) and Section 10 of the Tax Procedures Actii.That the Respondent erred in law by contradicting Section 23 (I)(C) and Section 31(7) of the Tax Procedures Act 2015 and Section 43 of the VAT Act by assessing period beyond five years.iii.That the Respondent erred in law and fact by aggregating all the bank deposits as business income contrary to Section 3 (2a) of the Income Tax Activ.That the Respondent erred in law and facts by demanding tax that are unreasonable and unfair as per Article 210 and 201(b)(i) of the Constitution of Kenya 2010v.That the Respondent's actions are contrary to the legitimate expectations on the operations of the taxpayer, as per Section 15 of the Income Tax Act and Article 47(1)(2) of the Kenya Constitution 2010.

Appellant’s Case 9. The Appellant’s case is premised on the following documents before the Tribunal: -a.His Statement of Facts filed on 31st August 2022b.His Written Submissions dated 10th August 2023 and filed on 11th August 2023.

10. The Appellant submitted that the Respondent acted ultra vires in its tax assessment by assessing his taxable income for a period exceeding five years, which is contrary to Section 23 (1)(c) of the Tax Procedures Act that provides that:-“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.”

11. The Appellant averred that the additional assessment with regards to the year of income 2015-2016 amounted to the Respondent acting ultra vires because the investigations began sometime in 2021 and the assessment was issued in May 2022; therefore, five years contemplated by the Section 29 (5) of the Tax Procedures Act could only be up to the year 2017.

12. The Appellant submitted that the Respondent could have conducted its assessment for a period exceeding five years if there were cases of wilful neglect or fraud as stipulated by Section 29 (6) of the Tax Procedures Act.

13. The Appellant averred that the Respondent did not provide sufficient proof that there was fraud or wilful neglect on the part of the Appellant, hence the assessment of the year of income 2015-2016 was without basis in law.

14. The Appellant relied on the case of Kenya Revenue Authority V Jimmy Mutuku Kiamba [2015J eKLR, where it analysed the provisions of the repealed Section 79 of the Income Tax Act that granted the Respondent powers to assess outside the statutory period of 7 years in cases of wilful neglect or fraud. It was stated as follows: -

15. The Appellant submitted that he had at no time been tried or convicted of a criminal offence in relation to fraud thus the Respondent could not purport to rely on the provisions of Section 29(6) to assess the Appellant’s taxable income outside the five-year statutory period.

16. The Appellant relied on the case of Alfred Kioko Muteti Vs Timothy Miheso & Another [2015] eKLR, where it was held that:“Thus the burden of proof lies on the party who would fail if no evidence at all were given by the party ....pleadings are not evidence and it is not enough to pleas particulars of negligence and make no attempt in one's testimony in court to demonstrate by way of evidence how the accident occurred .....it is trite law that he who alleges must prove and that the burden does not shift to the adverse party even if the case proceeds by way of formal proof and or undefended."

17. The Appellant in addition submitted that the Section 107(1) of the Evidence Act provides that:“whoever desires any court to give judgment as to any right or liability dependent on the existence of facts which he asserts, must prove those facts exist."

18. The Appellant further relied on the case of Miller v Minister of Pensions (1947] 2 ALL ER 372 – 373 where Lord Denning held that:“That degree is well settled. It needs not reach certainly, but it must carry a high degree of probability. Proof beyond a reasonable doubt does not mean proof beyond the shadow of doubt. The law would prevail to protect the community if it admitted fanciful possibilities to deflect the course of justice. If the evidence is so strong against a man as to leave only a remote possibility of his favour which can be dismissed with the sentence of course it is doubt but nothing short of that will suffice."

19. The Appellant averred that the Respondent erred by taxing credits from loans proceeds, bounced cheques/EFT reversals, related parties deposits and interbank transfers which were clearly narrated and properly disclosed in the bank statements thus violating Section 3 (2)(a) of the Income Tax Act.

20. The Appellant submitted that he provided proper narrated reconciliations to the Respondent on 26th July 2022 but the latter dismissed it without any founded basis.

The Appellant’s Prayers 21. Appellant prayed that the Tribunal finds that: -a.The Appeal be upheldb.The Respondent's demand for additional taxes and confirmation of assessment be struck out entirely.c.Cost of the Appeald.Any other remedies that this Tribunal may determine.

Respondent’s Case 22. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 30th September 2022 and filed on even date.b.The Respondent’s Written Submissions dated and filed on 6th March 2023. c.The Respondent’s List of documents dated and filed on 6th March 2023.

23. The Respondent submitted that it received intelligence that the Appellant was under-declaring his taxable income which led to the Respondent conducting an assessment on the Appellant’s taxable income for the years 2015, 2016, 2017, 2018, 2019, and 2020.

24. The Respondent stated that the procedure of lodging an objection is provided by Section 51 (2),(3)&(4) of the Tax Procedures Act which provides as follows:“(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.

3. A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under Section 33(1); andc.all the relevant documents relating to the objection have been submitted.

4. Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

25. The Respondent averred that the Appellant's objection vide a letter dated 30th May 2022 did not meet the requirements provided for under Section 51 (2)(3)(4) of the Tax Procedures Act because he had failed to provide all relevant documentation related to the objection.

26. The Respondent submitted that the Appellant’s objection was considered as per the requirements of Section 51 (8) of the Tax Procedure Act.

27. The Respondent averred that the decision to invalidate the objection met the requirements under the Act. That the decision needed to be in writing, and it had to contain the breakdown of the decision and the reason for the decision as per Section 51 (9) & (10) of the Tax Procedure Act which state:“(9)The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.10. An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

28. The Respondent averred that Section 31 (4) of the Tax Procedures Act provides the exemption under which the Respondent may conduct assessments beyond the five-year limit. The Respondent stated that the use of “or” in the provision has disjunctive function which separated Section 31(4)(a) from 31(4)(b). The Respondent averred that the use of the term “at any time” in the Section intonated an indefinite period. That in this case, the Respondent established wilful neglect by the Appellant hence there was no time limit set.

29. The Respondent submitted that the investigations found that the company made huge cash deposits into its bank accounts during the demonetization period where the Appellant received Kshs. 470,559,164. 00 from the years 2015 to 2020.

30. The Respondent submitted that the Appellant had declared an income turnover of Kshs.184,519,579. 00 therefore, creating a variance between the net income established by the Respondent and the income tax turnover declared by the Appellant that indicated under declaration of income amounting to Kshs. 286,039,585. 00. That the Respondent subjected the variance to tax payable of Kshs.82,643,376. 00

31. The Respondent submitted that on VAT the Appellant declared net income taxable amounting to Kshs. 470,559,164. 00 while the investigations revealed the VAT turnover amounted to Kshs. 178,408,343. 00. That the Respondent established a variance of Kshs.292,150,821. 00 on which it charged VAT amounting to Kshs.46,744,131. 00

32. The Respondent averred that Sections 29 and 31 of the TPA allowed it to issue an assessment based on best judgment relying on all the information at its disposal.

33. The Respondent submitted that it used the information available to it through third-party engagements (i.e., the Appellant's bankers) and to the best of its judgment in making amendments to the original assessment of the Appellant for the periods under investigations because the Appellant failed to demonstrate loan items and inter-bank transfers alleged.

34. The Respondent submitted that having used the banking method to raise the assessment, the burden of proof shifted to the Appellant to explain which of the deposits that had been included in the assessments were not from a taxable source, were already taxed or were not income.

35. The Respondent relied on the case of TAT 551 of 2021 Atronix Limited-vs- Comm DTD where the Tribunal found that:“…upon the Appellant failing to provide sufficient documents to prove its objection it gives the Respondent the leeway to invoke and take into consideration and rightly so the provisions of Section 24(2) of the TPA. The Tribunal finds that the Appellant failed to provide material information for the Respondent to determine the appropriate taxes payable on its part and to that extent the Respondent appropriately resorted to alternative information for taxation. The Tribunal therefore finds that the Respondent did not misapply the law in making the assessments in issue…”

36. The Respondent further relied on the case of Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2022] KEHC 52 (KLR) (Commercial and Tax) where the court held as follows:-“In line with Section 56(1) of the TPA, the tax payer bears the burden of proving that assessment made by the Commissioner is incorrect……. the burden imposed on the taxpayer does not exist in a vacuum, it also buttressed by the obligation on the taxpayer to maintain records. Section 54A of the ITA provides that: 54A(1) A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deed, contracts and vouchers which in the opinion of the Commissioner, are adequate.(2)For purposes of this Section, the carrying on business includes any activity giving rise to income other than employment income.(3)Any person who contravenes the provisions of sub-Section (1) shall be liable to such penalty not exceeding twenty thousand shillings as the Commissioner may deem fit. The aforesaid provision is augmented by Section 23(1)(B) of the TPA which imposes a duty on the taxpayer to keep records required under any law so as to enable the person’s tax liability to be readily ascertained. 27. The duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self- assessment. This system relies on the taxpayer making full and good faith disclosures in their tax declaration and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer. Whether the taxpayer has provided sufficient evidence to meet the threshold of proof required to discharge its burden must of course depend on the nature of the subject or transaction and the circumstances of the case bearing in mind the aforesaid duty placed on the taxpayer to keep records.”

37. The Respondent posited that Section 4(3) of the Tax Procedures Act mandated it to ensure due compliance with tax laws by any taxpayer while Section 24(2) of the TPA provided that:-“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

38. The Respondent submitted that it had complied with the law during the assessment and that had the Appellant been fully compliant with his tax obligations, then there would not be any investigations and assessment issued against him, hence there cannot be legitimate expectation against the clear provisions of statute. The Respondent in this regard relied on the case of Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) wherein the Court stated:Para 66 “…..Discussing legitimate expectation, H. W. R. Wade & C. F. Forsyth55 states thus:-55(Administrative Law, by H.W.R. Wade, C. F. Forsyth, Oxford University Press, 2000, at pages 449 to 450. )“It is not enough that an expectation should exist; it must in addition be legitimate….First of all, for an expectation to be legitimate it must be founded upon a promise or practice by the public authority that is said to be bound to fulfil the expectation….. Second, clear statutory words, of course, override an expectation howsoever founded….. Third, the notification of a relevant change of policy destroys any expectation founded upon the earlier policy…."Para 67 Statutory words override an expectation howsoever founded. A decision maker cannot be required to act against clear provisions of a statute just to meet one’s expectations otherwise his decision would be out rightly illegal and a violation of the principle of legality, a key principle in Rule of Law. There cannot be legitimate expectation against the clear provisions of a statute……”

39. The Respondent further relied on the case of Communications Commission of Kenya & 5 others v Royal Media Services Limited & 5 others [2014] eKLR, where the Supreme Court, in considering the issue of legitimate expectation, stated that:“.269The emerging principles may be succinctly set out as follows:a.there must be an express, clear and unambiguous promise given by a public authority;b.the expectation itself must be reasonable;c.the representation must be one which it was competent and lawful for the decision-maker to make; andd.there cannot be a legitimate expectation against clear provisions of the law or the Constitution.”

Respondent’s Prayers 40. The Respondent prayed that this Tribunal:-a.Upholds the Objection decision dated 16th August 2022. b.Dismisses this Appeal with costs to the Respondent.

Issues For Determination 41. The Tribunal having considered the pleadings filed and the written submissions made by the parties, is of the considered view that the Appeal herein distils into two issues for determination: -a.Whether the Respondent's additional tax assessments in respect of VAT and income tax for the period 2015 to 2016 are time barred.b.Whether the Respondent was justified in confirming the additional assessments.

Analysis And Determination 42. The Tribunal having established the issues for its determination proceeded to analyze them as hereunder.

Whether the Respondent's assessments were justified. 43. The Appellant contended that the Respondent acted Ultra vires in its assessment of the years of income 2015 and 2016 contrary to Section 29 of the TPA.

44. Section 29 (5) of the TPA provides as follows regarding timelines for assessments:“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.”

45. The timelines for VAT and Income tax are provided for in the VAT Act and the Income Tax Act, respectively. VAT returns are filed monthly, Section 44 of the VAT Act provides that:“44. Submission of returns(1)Every registered person shall submit a return, in the prescribed form and manner, in respect of each tax period not later than the twentieth day after the end of that period.”

46. Income Tax returns are to be filed not later than the last day of the sixth month after the reporting period in accordance with Section 52B of the Income Tax Act which states that:“Final return with self-assessment(1)Notwithstanding any other provision of this Act—(b)every person, other than an individual chargeable to tax under the Act, shall for any accounting period commencing on or after 1st January, 1992, furnish to the Commissioner a return of income, including a self assessment of his tax on such income, not later than the the last day of the sixth month following the end of his year of income”

46. Given that the Respondent assessed VAT and Income tax for the period 2015 to 2020 on 11th May 2022, a count of the five-year limit shows that:i.VAT assessed for the period before March 2017 is time barred while VAT assessed from April 2017 is within the statutory timelines.ii.Income tax for year 2015 is time barred while income for the year 2016 onwards is not time barred since the last reporting date was June 2017 hence the five-year limit would have lapsed on 30th June 2022.

Whether the Respondent was justified in confirming the additional assessments 47. having identified the statutorily barred VAT and income tax assessments, the question that remains concerning the assessments made within the statutory timelines is whether the Respondent’s assessments were justified. The answer to this question is to be found under Section 29(6) of the TPA, which provides as follows:“Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer."

48. The Respondent on its part sought to invoke the provisions of Section 31(4)(a) of the TPA which provides that:(4)The Commissioner may amend an assessment—a.in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; orb.in any other case, within five years of—

49. The Respondent submitted that the above Section provided exemption under which the Respondent may conduct assessments beyond the five-year limit. The Respondent stated that the use of “or” in the provision has a disjunctive function which separated Section 31(4)(a) from 31(4)(b). The Respondent averred that the use of the term “at any time” in the Section intonated an indefinite period.

50. The Respondent argued that in this case, it had established wilful neglect by the Appellant hence there was no time limit set. The Respondent alleged that the Appellant made huge cash deposits during the demonetization period and that Appellant had under-declared its income informing the Respondent’s action to assess it beyond the five-year limit.

51. Apart from the above provisions of Section 29(5) & (6), Section 23(1)(c) of the TPA provides as follows regarding keeping of records:“A person shall-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."

52. The Respondent having acted beyond the statutory limitations of time, the burden fell upon it to proof that there was wilful neglect or fraud. The Tribunal is guided by its decision in the case of Gitere Kahura Investments Ltd vs Commissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019, where it held that pursuant to Sections 107 and 108 of the Evidence Act, the burden of proof falls upon the Respondent who must prove that the Appellant's failure to file returns was motivated by gross or wilful neglect to file returns, attempt to evade paying taxes or fraud by the taxpayer.

53. The Appellant averred that the Respondent erred by taxing credits from loans proceeds, bounced cheques/EFT reversals, related parties deposits and interbank transfers which were clearly narrated and properly disclosed in the bank statements thus violating Section 3 (2)(a) of the Income Tax Act.

54. The Appellant submitted that he provided proper narrated reconciliations to the Respondent on 26th July 2022 but the latter dismissed it without any founded basis.

55. The Respondent on its part countered that the Appellant did not provide sufficient supporting documents to show that the alleged under-declared incomes were not revenue earned by the Appellant.

56. Section 56 of the TPA is unequivocal that once the Respondent raises an assessment, the burden of proof falls on the Appellant to show that the assessment is excessive or incorrect. Section 56(1) of the TPA provides that:“In any proceedings under this part, the burden of proof shall be on the taxpayer to prove that a tax decision is incorrect.”

57. Section 30 of the TAT Act enjoins the taxpayer to bear the burden of proof. It provides that:“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.”

58. Tribunal gleaned through the documents provided by the Appellant and found that he had only provided bank statements and reconciliations. The Appellant failed to provide the documents requested for by the Respondent to demonstrate its relationship with related parties as well as the loan agreements to demonstrate that the loan credits were not revenue.

59. Based on the above the Tribunal finds that the Appellant did not discharge its burden of proof to challenge the Respondent’s assessment by providing supporting documents, this position is supported by the case of Primarosa Flowers Ltd v Commissioner of Domestic Taxes HCITA NO. 19 of 2017, where the Learned Judge cited with approval the case of Mulherin v Commissioner of Taxation [2013] FCAFC 115, where the court held.“…in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that an assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

60. The Tribunal finds that the Respondent did not err in making assessment on the Appellant save for the periods beyond the allowable five-year timelimit as highlighted above.

61. The Tribunal therefore finds that the Respondent did not err in confirming the assessments for:a.VAT for the years of income from April 2017 to 2020b.Income tax for the years 2016 to 2020

Final Decision 62. The upshot of the foregoing is that the Appeal partially succeeds. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 16th August 2022 is hereby varied as follows:i.The VAT assessment for the period April 2017 to 2020 be and is hereby upheld.ii.The Income tax assessment for the period 2016 to 2020 be and is hereby upheld.iii.The additional VAT assessment for the periods 2015 to March 2017 and Income tax assessments for the year 2015 are hereby set aside.iv.The Respondent to recompute the assessment relating to VAT by excluding VAT for the period 2015 to March 2017 within Thirty (30) days of the date of delivery of this Judgement.v.The Respondent to recompute the assessment relating to Income tax by excluding the year 2015 within Thirty (30) days of the date of delivery of this Judgement.c.Each Party to bear its own costs.

63. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19THDAY OF APRIL, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. ODHIAMBO - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERTIMOTHY B. VIKIRU - MEMBER