[2024] KETAT 1295 (KLR)

Alpha Taleo Capital Limited v Commissioner of Domestic Taxes (Tax Appeal E420 of 2023) [2024] KETAT 1295 (KLR) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1295 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E420 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

August 23, 2024

Between

Alpha Taleo Capital Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private liability company incorporated under the Kenyan Companies Act whose primary business is offering retail services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5(1), the Respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5(2) with respect to the performance of its functions under subsection (1), the Respondent is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Appellant was issued with additional tax assessment orders by the Respondent being KRA202304577196 (yr.2022), KRA202304576343 (yr.2021). KRA202304575580 (yr.2020). KRA202304574076 (yr.2019). Dissatisfied by these assessments, the Appellant lodged an objection against them vide a letter dated 28th April 2023 and was issued with an acknowledgement receipt by the Respondent. Subsequently, on 26th June 2023, the Respondent issued the Appellant with its objection decision.

4. Aggrieved by the said decision, the Appellant lodged the instant Appeal to the Tribunal on 13th July 2023 vide a Notice of Appeal dated 11th July 2023.

The Appeal 5. The Appellant’s appeal is premised on the following ground as laid out in its Memorandum of Appeal dated 12th July 2023 and filed on 28th July 2023;i.The additional assessment on VAT for the period of December 2019 -December 2022 had been amended for the period in question and had factored the input VAT tax which had not been declared and claimed; andii.The expenses incurred for the period had not been factored.

Appellant’s Case 6. The Appeal is anchored on the Appellant’s Statement of Facts dated 12th July 2023 and filed on 28th July 2023.

7. The Appellant contended that the Respondent issued it with additional assessments order numbers KRA202304577196 (yr.2022), KRA202304576343 (yr.2021), KRA202304575580 (yr.2020), KRA202304574076 (yr.2019),

8. The Appellant filed its objection to the assessments in the letters dated 28th April 2023 and through the system on the same date. On 26th June 2023, the Respondent issued an Objection decision for VAT on additional assessments for a tax liability of Kshs. 3,803,859. 24.

9. The Appellant dissatisfied with the said Respondent’s decision that confirmed the assessment above, filed a Notice of Appeal on 11th July. 2023.

10. The Appellant stated that the Respondent contended that the Appellant did not provide any records to support the input claimed for the period under review.

11. In conclusion, the Appellant prayed that this Tribunal makes the following orders:a.That this Appeal be allowed.b.That the Respondent’s assessment be set aside based on the following reasons:i.The Respondent erred in law and in fact by assessing additional VAT on the Appellant of Kshs. 3,803,859. 24 which was computed without considering the undeclared input tax and claims and expenses for the period which had not been factored therein; andii.The Respondent erred in law and in fact by assessing VAT tax on the Appellant which returns for the period in review had been amended and had featured in the input VAT tax which had not been declared.

Respondent’s Case 12. Upon service, the Respondent filed its Statement of Facts dated 23rd August 2023 in which it averred as follows;

13. The Respondent conducted a review on the Appellant’s iTax ledger account and found a variance between turnover declared in the consolidated VAT returns and the grossed-up turnover from withholding credits for years 2019 to 2022

14. The Respondent proceeded and raised the additional assessments to charge tax on variances established in the self-assessed returns and turnover for years 2019 to 2022 under additional assessments order numbers –KRA202304577196 (yr.2022), KRA202304576343 (yr.2021), KRA202304575580 (yr.2020), and KRA202304574076 (yr.2019) on the 30th March 2023.

15. The Appellant filed its objection to the assessments in the letters dated 28th April 2023 this being within the 30 days stipulated timelines. The Appellant vide electronic mail correspondence was informed by the Respondent that their objection was not validly lodged on the 2nd May 2023. The Appellant failed to validate the objection notice.

16. The Appellant having failed to provide the supporting documents for review the Respondent confirmed the assessments, and communicated the same on 26th June, 2023.

17. The Respondent sought to rely on Sections 29, 31, 51 and 56 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) and Section 17 of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).

18. The Respondent identified the following issues for determination in its Statement of Facts:i.Whether the Respondent erred in law by issuing an additional assessment of Kshs. 3,803,859. 24?ii.Whether the Respondent’s objection decision is proper in law?

19. The Respondent reiterated its position as stated in the objection decision communicated to the Appellant and in response to the Memorandum of Appeal and Statement of Facts of the Appellant stated as follows:

20. In response to ground (i) of the Memorandum of Appeal and the Statement of Facts, the Respondent averred that the Appellant made no amendments relating to VAT but made amendments to Income Tax which was not under review.

21. In response to ground (ii) the Respondent averred that the Appellant did not provide sufficient evidence to support the inputs claimed for the period under review. Section 17 of the VAT Act provides that any person who claims input tax needs to provide documentation on the taxable supplies and one of the documents to be presented include an original tax invoice issued for the supply or a certified copy of the same. These documents were not presented by the Appellant and as such the Respondent was justified in raising the VAT assessments.

22. The Respondent placed reliance on TPA which under Section 56 places the onus of proof in tax objections on the taxpayer to avail evidence that would support a contrary assessment or that would have guided the Respondent in arriving at a different objection decision.“Section 56 (1) in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

23. The Respondent relied on the case of Metcash Trading Limited Vs Commissioner for the South Africa Revenue Services and another Case CCT 3/2000, where Justice Kriegler opined that: -“But the burden of proving that the Commissioner was wrong rests on the vendor. Because VAT is inherently a system of self-assessment based on vendor’s own record, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection decision”

24. The Respondent averred that the assessment was issued based on the information availed to it as a result of the variance between turnover declared in the consolidated VAT returns and the grossed-up turnover from withholding credits for years 2019 to 2022.

25. The Respondent further averred that the objection decision dated 26th June 2023 was proper in law as the Appellant did not provide any records to support the inputs claimed for the period under review.

26. In conclusion, the Respondent made the following prayers to the Tribunal:a.The Respondent’s objection decision dated 26th June 2023 was proper in law and the same be affirmed; andb.This Appeal be dismissed with costs to the Respondent

Parties’ Written Submissions 27. The instant Appeal was canvassed by way of written submissions. The Appellant’s submissions are dated 27th February 2024 and filed on 28th February 2024 whereas the Respondents’ submissions are dated 22nd February 2024 and filed on 23rd February 2024.

28. The Appellant’s submissions only set out the background of the case and enumerated the grounds of its Appeal and identified the issues for determination.

29. The Appellant submitted that the additional assessment on VAT for December 2019 to December 2022 had been amended for the period in question and had factored the input VAT tax which had not been declared and claimed. In addition, the expenses incurred for the period had not been factored in.

30. The Appellant identified the following issues for determination:i.Whether the Appellant had provided sufficient relevant documentary evidence in support of the objection ground of VAT Tax for Ksh 3,803,859. 00 exclusive of penalty and interest.(ii)Whether the Respondent erred in law and fact by assessing VAT tax on the Appellant which was computed disregarding the input taxes and sales which were not declared(iii)Whether the Respondent erred in fact and law by assessing VAT by overcharging the same for not being declared and not considering the costs incurred and expenses.

31. The Appellant filed a list and bundle of Authorities dated 27th February 2024 but no submissions were made as to how they support the Appellant’s case.

32. The Appellant urged the Tribunal to set aside the Objection Decision dated 26th June 2023 and to allow the appeal and further that the Honourable Tribunal withdraws all the additional assessments for the reasons that firstly, the Respondent erred in fact and law by assessing VAT by overcharging the same for not being declared and not considering the costs incurred and expenses and secondly, the Respondent erred in fact and law by assessing VAT by overcharging the same for not being declared and not considering the costs incurred and expenses.

33. The Respondent’s submissions identified two issues for determination:i.Whether the assessments on VAT raised by the Respondent contravened the VAT Act.(ii)Whether the Appellant has discharged its burden of proof as required by law

34. The Respondent submitted that in as much as the Appellant contended that the Respondent erred in law by raising additional assessments on VAT for the period 2019 to 2022 as the same had been amended factoring in the input VAT tax which had not been declared and claimed, the true position is that the Appellant made no amendments to the VAT tax returns, instead it made amendments to its Income Tax returns which were not under review. The Respondent further submitted that the assessments it issued were done in strict conformity with the provisions of Section 29 of the TPA, since it specified the amounts assessed as tax, penalty, interest, the period the assessment relates, the due date for payment and the manner of objecting the assessments.

35. The Respondent submitted that the law provides that once a taxpayer fails to submit a tax return in accordance with the provisions of the tax law, the Commissioner may, based on such information as may be available and to the best of its judgment make an assessment. The Respondent further submitted that it is a well-established principle of VAT law that a taxable person who makes transactions in respect of which VAT is deductible may deduct the VAT in respect of the goods or services acquired by him, provided that such goods or services have a direct and immediate link with the output transaction in respect of which VAT is deductible.

36. The Respondent relied on the provisions of Section 17 (1) of the VAT Act and contended that the Appellant has a right to claim input tax as provided for by the law and therefore entitled to inputs. However, this right is not an absolute entitlement but rather a qualified one as provided for under Sections 17(2) and (3) of the VAT Act. For this reason, a taxpayer that claims input tax must prove that it made purchases of a taxable supply and that there existed documentation to prove that indeed the purchases were actually made. The Respondent relied on the South African case of Metcash Trading Limited v Commissioner for the South African Revenue Service and Another (supra) and argued that the Appellant’s claims for input VAT were not supported with the required documentation or proof of taxable supplies as provided for by the law.

37. The Respondent referred to the provisions of Sections 51 and 56 of the TPA, and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) and contended that in tax disputes, the burden of proof falls on the taxpayer who seeks to claim that a demand is wrong. Therefore, it cited the case of Primarosa v Commissioner of Domestic Taxes [2019] eKLR and asserted that by failing to provide the supporting documents, the Appellant did not discharge its burden of proving that the Respondent’s tax decision was incorrect.

Issues For Determination 38. Upon consideration of the pleadings, documents and written submissions of the parties, the Tribunal has identified a single issue for its determination:Whether the Respondent’s objection decision dated 26th June 2023 was justified

Analysis And Determination. 39. The Tribunal will proceed to analyse the single issue for determination that it has identified as outlined hereinunder:

Whether the Respondent’s objection decision dated 26th June 2023 was justified. 40. The Appellant’s case is founded on the fact that the additional assessment on VAT for the period of Dec 2019-Dec 2022 had been amended and had factored in the input VAT tax which had not been declared and claimed, and the expenses incurred for the period had not been factored. Input VAT is provided for under Section 17(1) of the VAT Act which provides as follows:“Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.” (Emphasis provided.)

41. From the record, it is evident that vide a letter dated 18th April 2023, the Respondent notified the Appellant that there are supplies for which withholding VAT was deducted but it failed to declare the sales relating to the said supply. Therefore, the income relating to the supply had been brought to charge and the Appellant was required to make payment of the tax due within thirty days from the date of this notice. As a result, the Appellant was issued several assessment orders which it objected to vide letters dated 28th April 2023.

42. In the said letters, the Appellant stated that they have amended their returns for the period in question and factored in the Input VAT tax which was neither declared nor claimed, and all other expenses for the same period. The Appellant further stated that they will declare all the invoices and purchases for the period in their amended returns and file the Income Tax as per actual business operations showing true and fair view of the Company.

43. It is noteworthy that the Respondent in compliance with the provisions of Section 51 (4) of the TPA vide an electronic mail sent on 2nd May 2023 informed the Appellant that its objections to the additional assessments did not fully meet the conditions of Section 51 (3) of the TPA and asked it to fully comply with the said provisions. Subsequently, vide a letter dated 26th June 2023, the Respondent issued its objection decision to the Appellant’s objections where it declined the Appellant’s objections and confirmed its additional VAT assessments issued to the Appellant on grounds that the Appellant failed to provide any records to support the inputs claimed for the period under review,

44. Indeed, pursuant to the provisions of Section 56(1) of the TPA and Section 30 of the TATA, the burden of proving that a tax decision is wrong lies with the taxpayer. As explained above herein, the Appellant in its objections to the additional assessment of its VAT tax liability asserted that they will declare all the invoices and purchases for the period in their amended returns and file the Income Tax as per actual business operations showing true and fair view of the Company. The Respondent in its Statement of Facts and submissions confirmed that the Appellant made amendments to its Income Tax returns but made none to its VAT returns.

45. It is not disputed that the Appellant’s objections to the Respondent’s tax decision was not accompanied by any documentation. Notably, Section 43 of the VAT Act makes it mandatory for a taxpayer to keep transaction documents which ordinarily are always in the possession and custody of the taxpayer in safe custody for a period of 5 years so as to enable proper and seamless assessment by the taxman at the time of assessment. Section 59 of the TPA also states as follows with relation to production of documents –“(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-a.produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.2. If the person required to produce documents under subsection (1)(a) is a financial institution-a.the documents shall not, while they are being examined, be removed from the premises of the financial institution or other premises at which they are produced;b.the Commissioner or authorised officer carrying out the examination may make copies of such documents for the purposes of any report relating to the examination; andc.the confidentiality of the information obtained in the course of the examination by the Commissioner or authorised officer shall be maintained and the information shall be used solely for the purposes of the tax laws.3. The Commissioner or authorised officer may require that the information referred to in subsection (1) be-a.given on oath, verbally or in writing, and, for that purpose, the Commissioner or authorised officer may administer the oath; orb.verified by a statutory declaration or in any other manner that the Commissioner may prescribe…”

46. In this case, the Appellant did not dispute the fact that it did not make any amendments to its VAT returns. The Tribunal also notes that the Appellant never responded to the Respondent’s request to comply with the provisions of Section 51 (3) of the TPA neither did it provide the Respondent with any documentation in support of its objection.

47. Accordingly, the Respondent proceeded to issue an objection decision rejecting the Appellant’s objection and confirming its assessment of the Appellant’s VAT tax liability. In Commissioner of Taxes v Galaxy Tools Ltd [2021] eKLR, the Court held as follows:“With greatest respect, the Tribunal got it wrong. What the respondent had done by producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that; he had carried investigations on the alleged suppliers and concluded that they never existed, that there was no supply of any goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction. All this was laid before the Tribunal.”

48. From the foregoing, this Tribunal is of the considered opinion that the Appellant did not discharge its burden of proof by at the very least providing documentary evidence in support of its objection.

49. Consequently, the Tribunal finds that the Respondent’s objection decision dated 26th June 2023 was justified.

Final Decision. 50. The upshot of the above is that the Appellant’s Appeal is bereft of merit and the Tribunal makes the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 26th June 2023 be and is hereby upheld.c.Each party to bear its own costs.

51. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 23RD DAY OF AUGUST, 2024CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBEROLOLCHIKE S. SPENCER - MEMBERMEMBER MEMBER