[2024] KETAT 1324 (KLR)

Angwen v Commissioner of Investigations & Enforcement (Tax Appeal E626 of 2023) [2024] KETAT 1324 (KLR) (6 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1324 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E626 of 2023

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

September 6, 2024

Between

Kennedy Onyango Angwen

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is an individual taxpayer and a businessman dealing in various supplies and services.

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 Respondent carried out an investigation into the tax affairs of the Appellant for the years 2015 – 2019. It then proceeded to issue its tax investigations findings dated 8th September 2020 and confirmed the same vide assessments dated 23rd June, 2022.

4. Aggrieved with the assessment, the Appellant objected vide an objection dated 29th June 2023. The Respondent issued its objection confirming the assessment vide a letter dated 24th August 2023.

5. Aggrieved by the Respondent’s decision, the Appellant lodged at the Tribunal a Notice of Appeal dated 22nd September 2023 and filed on 25th September 2023.

The Appeal 6. The Appeal is based on the Memorandum of Appeal dated and filed on 25th September 2023 which raised the following grounds:i.That the Commissioner issued a confirmation notice notifying its intention not to amend or vacate the additional assessments on Income tax contrary to the Appellant’s objections.ii.The additional Income tax assessments which have been confirmed by the Commissioner are disputed.iii.That the Appellant has made an application to the Tribunal to have the matter arbitrated by the ADR Committee as the Appellant has relevant documents to support his case which include: bank statements and financial statements.

Appellant’s Case 7. The Appellant urged this Appeal through its Statement of Facts filed on 25th September 2023 and written submissions dated 30th March 2024 and filed on the even date.

8. He stated that the Commissioner erred in raising additional assessments for the periods of 1st January, 2015 to 31st December, 2015, 1st January, 2016 to 31st December, 2016, 1st January, 2017 to 31st December, 2017, 1st January, 2018 to 31st December, 2018 and 1st January, 2019 to 31st December, 2019.

9. The Appellant argued that the assessment orders are based on income categorized as commission which was not earned by the Appellant.

10. The Appellant stated that he attached all the necessary documentary evidence including bank statements and financial statements to support and prove that the additional tax confirmed was excessive and punitive.

11. He submitted that some of the documents requested were difficult to obtain because the cereals were obtained from an open-air market where documentation is hardly available.

12. The Appellant averred that the Respondent’s interpretation that he was making payments to Mumias Sugar Company Ltd from his personal bank account on behalf of Kenlab Enterprises in which he is a director was wrong.

13. He asserted that as a director of the company, it was appropriate to source for funds which do not require negotiations and legal technicalities with minimum delay whenever necessary hence his financial contribution in late December 2016 and early January 2017.

14. The Appellant identified three issues for determination in his written submissions:a.Whether the Commissioner can lawfully issue assessments in contravention to section 29 of the Tax Procedures Act;b.Whether the Commissioner can be said to have complied with Section 3(2) of the Income Tax Act; andc.Whether the Commissioner is compliant with section 37A (2) of the Tax Procedures Act.

15. The identified issues for determination were subsequently discussed in an omnibus manner in the Appellant’s submissions.

16. The Appellant submitted that the Respondent failed to adhere to Section 3(2) of the Income Tax Act which requires income tax to be based on gains or profits and that in this instance, the Respondent relied solely on bank statement entries which identified Kshs 294,464,808. 00 in determining income and ignored all the explanations and documents advanced by the Appellant to demonstrate that the money was not commission earned.

17. The Appellant further submitted that the Respondent disallowed the cost of sales or otherwise any expenses that were used in the generation of income in contravention of the provisions of Section 15 of the Income Tax Act, which allows for the deduction of expenses incurred wholly and exclusively in the production of the income.

18. The Appellant also submitted that not all expenses can be supported by receipts like the procurement of cereals from local jua kali markets and individual traders which don’t come with receipts.

19. The Appellant submitted that he would go bankrupt if the decision is allowed. He relied on the case of Silver Chain Limited v Commssioner of Income Tax & 3 others [2016] ekLR, where Justice S.J Chitembwe as was then stated that:-“The task of collecting taxes should not lead to discouraging taxpayers from carrying on with their businesses. If the taxpayer's close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid, there will be no funds to run government operations. This calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as opposed to being unilateral. There must be fairness in the process of tax assessment.’’

20. The Appellant submitted that Section 23(1)(c) of the Tax Procedures Act requires taxpayers to retain documentation for 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.

21. Further, the Appellant cited the provisions of Section 29(5) of the Tax Procedures Act which provides that the Commissioner may assess a person provided that the assessment shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.

22. He submitted that the Commissioner issued an assessment for the periods 2015 to 2018. Thus, the audit period covered was more than 5 years. He also submitted that the Respondent should not have issued an assessment for any period beyond the year 2019 which is the last period within the prescribed five-year limit at time when the assessment was issued.

23. The Appellant further stated that the Respondent must exercise its power diligently, fairly and prudently. He relied on the case of in Doody v The Home Secretary of State [1993]1 All ER 151 to support this assertion.

24. The Appellant posited that the Respondent's assessment ought to be set aside in on the strength of the decision in Republic vs. Commissioner of Co-operatives ex-parte Kirinyaga Tea Growers Co-operative Savings and Credit Society Ltd [1999] 1 EA 245 (CAK) where it was held that statutory powers can only be exercised validly if they are exercised reasonably, rationally and properly and no statute ever allows any public officer to exercise statutory power arbitrarily or capriciously. The Appellant also cited the case of Republic v Kenya Revenue Authority ex parte Aberdare Freight Services Limited [2004] eKLR where it was held that ‘it is now an accepted principle in this field of law that statutory powers and duty must be exercised and performed reasonably and fairly.’

Appellant’s Prayers 25. The Appellant prayed for the following orders:a.That the Appeal be allowed;b.That the Respondent's demand for income tax additional assessment amounting to Kshs. 88,339,442. 00 has no basis in fact or in law and the entire assessment was arbitrary and unjust, and the same be set aside;c.That the Appellant will be highly prejudiced unless the application is allowed since the Appellant is not in a position to pay for the assessed taxes, which were excessive, estimated and made on procedural technicalities; andd.That the Appellant is amenable to ADR facilitate settlement of the matter.

The Respondent’s Case 26. The Respondent’s case is premised on its Statement of Facts dated 18th October 2023 and filed on the even date; and the written submissions dated and filed on 15th April 2023.

27. The Respondent’s case is that it investigated the Appellant upon receipt of intelligence that he was making payments to Mumias Sugar Company Limited from his bank account on behalf of Kenlab Enterprises. The investigations covered income tax for the years 2015 – 2019.

28. That the investigation was based on the banking analysis method focusing on the taxpayer's account held at Equity Bank and analysed the gross deposits of Kshs 56,330,013. 00 for the year 2015; Kshs 63,314,842. 00 for the year 2016; Kshs 96. 917,866. 00; Kshs 58,273,337. 00 for the year 2017; Kshs 19,628. 750. 00 for the year 2019; all totalling to Kshs 294,464,808. 00. The Respondent deemed the gross deposits to be the taxpayer's income and thus subjected the same to Corporation income tax at the rate of 30%.

29. That it cconsequently issued a tax investigation findings dated 8th September 2020 and confirmed the same vide assessments dated 23rd June 2022. The Appellant objected thereof vide a letter dated 29th June 2023. That it arrived at the decision that the said objection did not comply with the provisions of Section 51(3) of the Tax Procedures Act, No. 29 of 2015 whereof it requested the Appellant vide a letter dated 10th July 2023 to validate it within seven (7) days.

30. That the Appellant provided the relevant supporting documents vide an email dated 12th July 2023 effectively validating the objection. That therefore, the 60 days contemplated under Section 51(11)(b) of the Tax Procedure Act started running on 29th June 2023 when the taxpayer lodged his objection.

31. That the Respondent having considered the objection issued its objection decision dated 24th August 2023 wherein it affirmed all the taxes assessed as due and payable and rejected the Appellant's claim in its entirety.

a. On Whether the Commissioner raised assessments based on non-existing commission income 32. The Respondent asserted that the basis of the assessments was the banking analysis method that is, the credit deposits in the Appellant's accounts were taken as income and subjected to tax.

33. According to the Respondent, the banking analysis method is one of the recognised methods in which the Respondent in the process of tax administration can use in the determination of taxes ex post facto in a self-assessment regime. According to the Respondent, this position was given credence in the case of Digital Box Limited v Commissioner, Investigations and Enforcement (Tax Appeal Tribunal Act 115 of 2017.

34. The Respondent stated that under the banking analysis method, the Appellant has only two ways of challenging the application of the method.a.The Appellant has to demonstrate that entries in the bank do not constitute income and support the same by way of supporting documentation.b.Demonstrate that he has documents required to be kept by the taxpayer under Section 23 of the Tax Procedures Act, 2015 so as to render the application of the banking analysis inapplicable.

35. According to the Respondent, the taxpayer failed to provide any supporting documentation to support the costs of sales or otherwise any expenses that were used in the generation of income to discharge its burden of proof as was stated in the case of Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal EO28 of 2020) (2022] KEHC52 (KLR) (Commercial and Tax) (4 February 2022) (Judgment).

36. It was its position that the Appellant cannot benefit from its failure to keep records under the provisions of Section 23 of the Tax Procedures Act, 2015.

b. On Whether the Appellant provided the requisite documentation to support its objection and the Appeal herein 37. The Respondent stated that the Appellant was required to produce documentation such as invoices and evidence of payment of services in support of the ground for adjustment of the costs of sales and other expenses incidental to the generation of income.

38. The Respondent maintained that the Appellant has failed to demonstrate in any manner the production of the requisite documents, that the Appellant cannot be heard to state that the documents were adequate as the same had not been particularised and demonstrated otherwise to enable a departure from the assertion that the documents were insufficient or not provided.

39. On whether the Commissioner erred in rejecting the Appellant's objection, the Respondent maintained that it followed due process in rejecting the objection.

40. On the issue of assessments being outside the statutory limit of five years, the Respondent stated that the issue was not raised or even alluded to by the taxpayer in its pleadings and therefore it follows that all the parties are bound by their pleadings.

41. According to the Respondent, it is not in dispute that the Appellant was issued with a notice of tax investigations on 19th April 2019. It asserted that taking into account the provisions of Section 29 of the Tax Procedures Act, 2015 the Appellant had not filed any returns. That it was thus entitled to audit from the year 2014. in this regard, it cited the case of Mzuri Sweets Limited v Commissioner of Investigations and Enforcement Tribunal in TAT Appeal No. 574 of 2020 wherein the Tribunal.

42. On the issue of burden of proof, the Respondent submitted that the Appellant failed to discharge its burden of proof under Section 56 of the Tax Procedures Act 2015 and Section 107 of the Evidence Act.The Respondent relied on the cases of Leah Njeri Niru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & Another [2021] eKLR and Republic v Kenya Revenue Authority: Proto Energy Limited (Ex-parte) (Judicial Review Application E023 of 2021) 2022] KEHC 5 (KLR) to support the proposition that in any Tax Court, the taxpayer must show the Commissioner's determination to be incorrect.

43. The Respondent submitted that it was at liberty to use its best judgment while relying on the little available information provided by the Appellant to decide his tax liability as was stated in the case of Commissioner of Domestic Taxes vs. Metoxide Africa Ltd HCITA No. 121 of 2021.

Respondent’s prayers 44. The Respondent prayed for an order that the Tribunal dismisses the Appeal with costs and be pleased to uphold the Respondent's confirmation of assessment as proper and in conformity with the provisions of the law.

Issues for Determination 45. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts and written submissions, puts forth the following issues for determination:a.Whether the Respondent’s objection decision was time barred.b.Whether the Respondent’s assessments are statute time-barred; andc.Whether the Respondent’s assessments were justified.

Analysis and Findings a. Whether the Respondent’s objection decision was time barred. 46. The documents provided by the Appellant show that the objection application was acknowledged as received in the iTax system on 29th June 2023. Section 51(11) of the TPA thus required the Respondent to issue its objection decision on or before the 28th of August 2023.

47. Section 51(11) of the TPA provides as thus:“(11)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.”

48. The Objection decision in this Appeal was issued on 24th August 2023, which was within the prescribed timelines. This ground of appeal is trifling and amounts to very little, it is thus dismissed.

b. Whether the Respondent’s assessments are statute time-barred 49. The Appellant submitted that the Respondent's assessments are time-barred because they were issued beyond five years contrary to Section 29(5) of the Tax Procedure Act and that the taxpayer is only required to keep a document for five years as provided for under Section 23 of the Tax Procedures Act.

50. The Respondent opposed this position for the reason it issued a notice of tax investigations on 19th April 2019. The Respondent also stated that taking into account the fact that the Appellant had not filed any returns, the Respondent was entitled to audit up to the year 2014 and thus the period 2015 - 2019 is well within the prescribed time frame under the provisions of Section 29 of the Tax Procedures Act. To support its position, the Respondent relied on this Tribunal’s decision in Mzuri Sweets Limited v Commissioner of Investigations and Enforcement TAT Appeal No. 574 of 2020.

51. The Tribunal notes that the Respondent demanded taxes for the period 2015 to 2019 in its assessment dated 23rd June 2022. It is significant to point out that the assessment was made within the reporting period for the year 2021 which was due to lapse on 30th June 2022. The year 2021 would thus not be included in the computation of time under Section 29(5) of the TPA.

52. The statutory timelines within which the Respondent should demand taxes are expressly provided for under Section 29(5) of the Tax Procedures Act. The Section provides as follows:“(5)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.6. Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer. ”

53. The five-year statutory limit period for assessment in this case as per Section 29(5) of the TPA would thus run from 2016 to 2020 and the effective reporting period would thus be on the 30th June 2021. It hence follows that the assessment issued on the 23rd June 2022 could only cover the period upto 2016. Any assessment made beyond the year 2016 is thus void as was stated in in Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) (Commercial and Tax) (10 November 2023) (Judgment) where it was stated thus:“In this regard, under section 31(4) of the Tax Procedures Act, an amendment outside the 5 years can only be permitted if there is evidence of wilful neglect, evasion, or fraud by or on behalf of the taxpayer…The legal position is that all assessments ought to be made within 5 years except when there is evidence of gross or wilful neglect, evasion or fraud on the part of the taxpayer. This also goes hand in hand with the provisions of section 23 of the Tax Procedures Act which requires a taxpayer to retain documents for the same period. The implication is that, after 5 years, since no assessment can be made, the taxpayer is absolved of his burden of maintaining such records.”

54. Section 29(6) of the TPA provides as follows regarding cases where the Respondent may issue assessments beyond 5 years;“Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

55. The fact of the issues of gross or wilful neglect, evasion or fraud on the part of a taxpayer ought to be proved to negate the provision of Section 29(5) of the TPA was discussed in Africa Oil Kenya BV v Commissioner of Domestic Taxes (Tax Appeal E024 & E051 of 2020 (Consolidated)) [2022] KEHC 15967 (KLR), where the Court held as thus:“On this issue I agree with the tribunal that the commissioner did not allege, let alone prove any wilful neglect on the part of the appellant. Wilful or gross neglect entails an intentional or reckless failure to carry out a legal duty. There is no evidence on record of such conduct on the appellant’s part.”

56. The Tribunal notes that the allegation of fraud or wilful neglect was not pleaded or propounded by the Respondent in this case. Consequently, the Tribunal finds that the Respondent was not justified in issuing an assessment against the Appellant beyond the five-year statutory limit period.

c. Whether the Respondent’s assessment was justified. 57. Having determined that the 2015 assessment was unlawful, then what remains for the Tribunal’s determination is whether the 2016 to 2019 assessments were justified.

58. The Tribunal notes the following as the documents submitted by the Appellant in this Appeal;a.Objection application acknowledgement slips,b.Assessment orders,c.Financial statements andd.The objection decision dated 24th August 2023.

59. The financial statements were not accompanied by the bank's primary documents namely bank statements, invoices and receipts around which this dispute revolved. Put another way, other than its financial statements the Appellant did not share or provide the primary documents to enable the Tribunal to appreciate the crux of his objection and also determine whether the Respondent erred in its analysis of these primary documents.

60. The Respondent also decried the Appelant's failure to provide documents as the main reason that caused it to rely on the best judgment in its assessment.

61. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act place the burden to prove that the Commissioner’s decision was wrong on the Appellant as was affirmed in the cases of Digital Box Limited v Commissioner of domestic investigations and Enforcement [2020] and Darwine Wholesalers Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) where it was held as follows:“Under section 59 of the TPA and section 43 of the VAT Act, the Commissioner is expressly empowered to ask for additional information to ascertain the tax chargeable. This legal position aligns with sections 107 and 112 of the Evidence in that the balance of proof lies with the party with the knowledge of facts. Further Section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the TPA impose the burden of proof on the taxpayer to prove that an assessment was wrong or that it was excessive.”

62. Consequently, the Tribunal finds that the Appellant's failure to provide documents to support its objection left the Respondent with no option other than to apply its best judgment to determine the Appellant's tax liability. Nothing has been tabled before the Tribunal to show that the Respondent acted whimsically, unfairly, illegally and or capriciously in applying its best judgement under Section 31(1) of the TPA in determining the Appelant's tax liability for the years 2017, 2018 and 2019.

Final Decision 63. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal is partially merited and consequently issues the following Orders; -a.The Appeal be and is hereby partially allowed;b.The Respondent's objection decision dated 29th June 2023 be and is hereby varied as follows:i.The Respondent’s tax assessment for the year 2015 be and is hereby set aside.ii.The Respondent’s tax assessments for the years 2016, 2017, 2018 and 2019 be and are hereby upheld.c.The Respondent is hereby directed to recompute and issue the Appellant with a tax assessment for the period 2016, 2017, 2018 and 2019 to align with order (b) above within Thirty (30) days from the date of delivery of this Judgment.d.Each party is to bear its own costs.

64. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 6TH DAY OF SEPTEMBER, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERGLORIA A. OGAGA - MEMBERABRAHAM K. KIPROTICH - MEMBER