[2023] KETAT 562 (KLR)

Baha Safety Company Limited v Commissioner of Domestic Taxes (Tax Appeal 345 of 2022) [2023] KETAT 562 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 562 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 345 of 2022

RM Mutuma, Chair, RO Oluoch & EN Njeru, Members

June 29, 2023

Between

Baha Safety Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act. Its principal activity is providing occupational safety services which includes the design and installation of safety signs, supply of safety equipment and provision of safety training.

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 is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 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 reviewed the Appellant’s Value Added Tax (VAT) and Corporation Income tax returns for the tax periods of January 2016 to December 2018.

4. The Respondent issued the Appellant with Corporation income tax additional assessments on 18th June 2021, and on 1st October 2021, the Appellant objected to the additional assessments.

5. The Appellant, on 1st October 2021, applied to the Respondent requesting to be allowed to file a late notice of objection, which the Respondent allowed.

6. The Respondent reviewed the Appellant’s objection and issued an objection decision on 23rd February 2022 in a letter dated 18th February 2022. The Respondent confirmed Corporation income tax assessments of Kshs. 680,543. 00 in 2016, Kshs. 244,919. 40 in 2017 and Kshs. 3,581,564. 40 in 2018.

7. The Appellant, being dissatisfied with the Respondent’s objection decision, lodged its Appeal at the Tribunal in a Notice of Appeal dated and filed on 6th April 2022.

The Appeal 8. The Appeal is premised on the following grounds as listed in the Memorandum of Appeal dated 8th April 2022 and filed on 27th June 2022: -a.That in arriving at the additional assessment, the Respondent relied on a return declared by the Appellant which was incorrectly captured, thus double-counted sales.b.That in arriving at the additional assessments, the Respondent demanded for payment of the tax even after the Appellant explained to the Respondent that there was an error of data input.c.That the Respondent communicated the assessment in good time but the assessment could not be accessed by the Appellant since the party who had access to the Appellant’s email address is deceased, thus the Appellant could not file an objection in the required timelines.d.That the Respondent subsequently sent to the Appellant the confirmation of the notice of assessment, and the Respondent’s debt office issued a demand notice for the amount of tax to be paid.e.That for purposes of appealing, the Appellant had to make a visit to the Respondent’s offices in order to trace the objection decision which the Respondent had issued.f.That the Respondent was demanding for taxes including where the Appellant’s client, BPCCL, had issued a wrong withholding tax certificate which was later cancelled and the Appellant’s client wrote a letter to admit the error that the withholding tax payment was meant for another supplier and reversed the transactions.g.That the Appellant provided some documents to explain the case of double-counting of income, but the Appellant was limited since they could not access all the other documents which were under the custody of the deceased director.h.That the Appellant explained to the Respondent that the alleged tax pending was unrealistic and at any point their client, BPCCL, has never awarded the Appellant big tenders and they were not liable to pay unrealistic taxes.i.That the Appellant’s accountant made an error in filing the December 2018 VAT return and put a figure under exempt sales. That all the Appellant’s sales transactions are vatable at the standard rate, and they have never dealt with exempt supplies. That it is unfortunate that an explanation of the return entry could not be obtained because the Appellant’s accountant is deceased, thus the ambiguity on the issue.

The Appellant’s Case 9. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Appellant’s Statement of Facts dated on 8th April 2022 and filed on 27th June 2022 with the documents attached thereto.ii.The Appellant’s written submissions dated 25th November 2022.

10. The Appellant stated that the Respondent issued it with additional assessments for the years of income 2016, 2017 and 2018 and demand letters dated 20th July 2021, 2nd September 2021 and 29th September 2021 reminding it to pay the taxes within seven (7) days. It claimed that the demand letters were sent to its email which was at the time inaccessible to it.

11. The Appellant stated that the Respondent called it requesting to visit the Respondent’s tax station in Malindi to clarify why the Appellant was silent about the assessments and demand letters.

12. The Appellant stated that the Respondent advised it to file a late objection and give sufficient reasons attaching evidence, and to pay the taxes not in dispute. The Appellant stated that it explained to the Respondent that its director who was in charge of its email was sick and was now deceased, resulting in the communication breakdown.

13. The Appellant stated that it objected to the additional assessments on 1st October 2021 in a letter dated 30th September 2021.

14. The Appellant stated that the Respondent requested it to produce detailed reports and records for review of the objection. The Appellant submitted that it notified the Respondent that it does not have a fully-fledged office because its income was tender-based and the income earned could not pay permanent employees and office rent. On this background, the Appellant stated that the documents requested by the Respondent were in the custody of its directors who it stated, were aged and sick. The Appellant submitted that its director who was in custody of its documents became deceased.

15. The Appellant submitted that the Respondent advised it to amend its accounts to match the turnovers declared in the VAT returns for the tax periods 2016, 2017 and 2018.

16. The Appellant submitted that the amount of Kshs. 12,170,951. 00 declared as exempt sales in the December 2018 VAT return was wrong, and that its previous accountant erroneously entered the amount in the December 2018 VAT return. It averred that the entry exaggerated its income more than the income earned by it as per the withholding tax certificates and that it has never earned such an amount of income since it started operations.

17. It was the Appellant’s submission that the income which the Respondent used to determine the additional assessments related to two withholding tax certificates which it claimed were issued erroneously by its client, BPCCL, and that are now cancelled in iTax.

18. The Appellant submitted that it explained to the Respondent that their main client is BPCCL and that all the payments by BPCCL are channeled through the bank after tax has been withheld. It claimed that it had provided to the Respondent the payments by BPCCL as evidence during the review of the declarations for years in question.

19. The Appellant submitted that it provided to the Respondent supporting documents, but that it faced a challenge in retrieving all supporting documentations as they were under the custody of the deceased director.

20. To reinforce its explanation that it was a challenge to retrieve supporting documentations, the Appellant argued that although the law states that a company is a legal person, its operations were run by the directors.

21. The Appellant submitted that the Respondent should not anticipate such kind of taxes since they do not exist.

The Appellant’s Prayers 22. The Appellant prays for orders that:a.The Appeal be allowed;b.The additional assessments raised by the Respondent be set aside.

The Respondent’s Case 23. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 25th July 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 22nd November 2022 and filed on 23rd November 2022 together with the legal authorities filed therewith.

24. The Respondent stated that the dispute arose from a return review that was conducted on the Appellant which determined that there were variances in the sales declared on the VAT returns and sales declared in Corporation income tax returns for the periods 2016, 2017 and 2018, and that on 18th June 2021, the Respondent issued additional assessments to the Appellant.

25. The Respondent asserted that on 18th February 2022, it issued an objection decision, partially accepting the Appellant’s objection to the Corporation income tax assessments for the year 2016 and confirming Corporation income tax assessments for the years 2017 and 2018.

26. The Respondent affirmed that it made the below findings, which formed the basis of revised assessments in the objection decision: -a.That the Appellant provided amended audited accounts for the financial year 2016 and declared the established turnover as per VAT returns. That the Appellant also claimed additional expenses amounting to Kshs. 1,418,608. 00, and only Kshs. 101,720 of the expenses relating to employment costs were supported. That the assessment for the year 2016 was amended to factor in supported expenses giving rise to an amended assessment of Kshs. 680,543. 00. b.That the Appellant provided amended audited accounts for the financial year 2017 and declared the established turnover as per VAT returns, and did not claim any additional expenses. That the Appellant arrived at a tax computation of Kshs. 244,919. 40 which was the same as the assessment.c.That the Appellant disputed the variance of Kshs. 11,889,136 for the year 2018 and stated that its previous accountant erroneously entered exempt sales of Kshs. 12,170,951. 00 in the VAT 3 form when filing the December 2018 VAT return.d.That regarding December 2018 VAT return assessment, the Appellant’s VAT returns for previous and subsequent periods do not show that the Appellant conducted any business relating to exempt sales and that it is the Respondent’s position that the Appellant’s business of occupational safety does not fall under exempt supplies provided in the First Schedule to the VAT Act. That in any case, the Appellant had the opportunity to amend the December 2018 VAT assessment at the pre-assessment stage instead of waiting until the Respondent had raised additional assessment then contesting om the ground of error.

27. The Respondent specified that the objection decision was limited to the documents provided and conclusions drawn from them.

28. The Respondent stated that the allegations of the Appellant as laid out in the Memorandum of Appeal and Statement of Facts, unless where in agreement by the Respondent, are unfounded in law and not supported by evidence.

29. The Respondent cited Section 28 of the Tax Procedures Act, 2015 (TPA) which provides that:“(1)A taxpayer who has submitted a self-assessment return in the prescribed form for a reporting period shall be treated as having made an assessment of the amount of tax payable (including a nil amount) for the reporting period to which the return relates being the amount set out in the return.”

30. The Respondent submitted that the law demands the Appellant to conduct a self-assessment of its tax obligations, then proceed to make tax declarations based on that assessment.

31. The Respondent averred that in Income Tax Appeal No. E088 of 2020 Commissioner of Domestic Services v Galaxy Tools [2021] eKLR dated and delivered on 5th July 2021, the High Court stated that: -“1. This country operates under a self-assessment tax regime. Under this regime, the tax payer assesses self and declares what he considers to be taxable income on which he then pays tax to the authorities. For this reason, the tax laws are coached in a manner that gives the tax authorities wide powers and discretion in ascertaining ex-post facto, what taxable income is.

32. In reliance on the above case, the Respondent argued that the Appellant conducted its assessment and filed its returns and due to this, the information declared is presumed by law to be the objective analysis of its tax liability. The Respondent further submitted that because it is not in possession of the information the Appellant relied on when filing the returns, it is impossible to know which entries are accurate and which are erroneous and averred that the Appellant’s ground that it erred in relying on the returns to raise the additional assessments lacks merit.

33. The Respondent submitted that it noticed gaps when analyzing the Appellant’s tax returns, which necessitated an audit on the Appellant’s transactions to establish its tax compliance status, and asserted that as the party with the information, the Appellant bears the burden of explaining the variance in the returns by producing proper documentations.

34. The Respondent relied on Income Tax Appeal No. E125 of 2020 Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, 17th August 2021, to buttress its argument that the Appellant bears the burden of proof, where the High Court stated as follows:“33. The other important issue to bear in mind is that under our system of self-reporting of tax liability, the taxpayer initially decides the extent and amount of his/her statutory obligation to pay tax. The taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case…”

35. The Respondent submitted that according to Section 24(2) and Section 31(1) of the TPA, the Respondent is not required to apply the presumption of correctness to any taxpayer’s returns. That on this basis, the Respondent issued assessment orders from information derived from an audit of the Appellant’s tax returns.

36. The Respondent reiterated that if the Appellant’s returns have errors, the Appellant was at liberty to apply to the Respondent for amendments as provided in Section 31(2) of the TPA, and maintained that because the Appellant did not apply for amendment of their self-assessment, the Respondent was justified in auditing the Appellant and issuing the assessment.

37. The Respondent further relied on Section 56(1) of the TPA and Civil Appeal No. ITA E078 of 2020 Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR, 12th August 2021 to buttress the issue of discharge of the burden of proof by a taxpayer in establishing affirmatively the correctness of the amount of taxable income.

38. The Respondent argued that the provisions of Section 23(1)(b) of the TPA and Section 54A of the Income Tax Act obligate a taxpayer to ensure any and all tax documents required for scrutiny be readily available for the Respondent, and that since the documents were not readily available, the Respondent was right in rejecting the objection.

39. The Respondent submitted that the explanation by the Appellant that the documents are with the estate of the Appellant’s deceased director is devoid of merit. The Respondent submitted that the estate of the director and the company are two different entities under law, and that though the director was in possession of the documents, the ownership of the documents and the statutory duty to maintain the documents never transferred from the Appellant to the estate of the deceased director.

40. The Respondent submitted that the Appellant did not exercise its burden of proof to show that it conducted any business relating to exempt sales, as required under Section 62 of the VAT Act, 2013 and that the Appellant’s business of occupational safety does not fall under exempt supplies provided in the First Schedule to the VAT Act, 2013.

41. In response to the Appellant’s claim that it provided explanations to support its objection that the Respondent failed to take into account, the Respondent submitted that adjustments to additional assessments can only be made through the provision of evidence, and that the Appellant bore the burden to produce the necessary documents in support of the objection but failed to do so. In failing to discharge the burden of proof, the Respondent stated that the Appellant cannot fault the Respondent is issuing the objection decision with the revised principal tax to Kshs. 4,507,026. 80.

The Respondent’s Prayers 42. The Respondent prayed that the Tribunal:a.Dismisses the Appeal with costs.b.Upholds the additional assessments of Kshs. 4,507,026. 80.

Issues For Determination 43. Upon perusing the pleadings and documentation produced before it, together with the submissions, the Tribunal is of the opinion that the issue for determination is:Whether the Objection Decision dated 18th February 2022 is proper in law.

Analysis And Findings 44. Having determined the issue falling for determination, the Tribunal proceeded to deal with the same as hereunder.

45. The Respondent conducted a return review of the Appellant’s VAT and Corporation income tax returns for the years 2016, 2017 and 2018 resulting in Corporation income tax additional assessments of Kshs. 4,537,542. 60, which the Appellant objected to and Respondent issued its objection decision revising the additional assessment to Kshs. 4,507,025. 80.

Year of Income 2016 46. The Appellant filed with the Respondent restated audited accounts for the year 2016 during the objection review, wherein the Appellant corroborated the Respondent’s finding that the undeclared income was Kshs. 2,370,196. 00.

47. In those restated audited accounts, the Appellant introduced additional expenses of Kshs. 1,418,608. 00. The Respondent allowed only Kshs. 101,720. 00 of these expenses, as the Respondent was satisfied that they were deductible and supported. The Respondent determined that the additional taxable income for the year 2016 was the undeclared income less the supported additional expenses, resulting in additional taxable income of Kshs. 2,268,476. 00. The Respondent confirmed Kshs. 680,543. 00 as the corporation income tax additional assessment for the year 2016.

48. The matter in dispute for the year 2016 is the ascertainment of taxable income and the resultant additional assessment for the year. Section 15 of the ITA, subject to Section 16 of the ITA guides taxpayers on the deductible expenses in ascertainment of taxable income. The Respondent disallowed expenditure of Kshs. 1,316,888. 00 on the basis that the expenses were not supported.

49. The Tribunal reviewed the explanations and all the documents provided by the Appellant. Relevant to the expenditure transactions for year 2016, the Appellant provided only bank statements from one bank account for the year 2016 and subsequent years. The Tribunal’s review of the bank statements determined that the withdrawals from the bank account were merely cash withdrawals with no trace of payment to payees for expenses related to the business of the Appellant.

50. Section 54A (1) of the ITA which states: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. While the Appellant claimed that it kept these records and documents, the Appellant did not produce the records and documents for the Tribunal’s discovery.

51. In addition, the Appellant did not prove to the Tribunal that it wholly and exclusively incurred the expenditure claimed in the year 2016 in the production of its business income as required under Section 15, subject to Section 16 of the ITA.

52. The Appellant did not adduce any other source documents to support its claim of additional expenses to reduce its taxable income for the year 2016.

Year of Income 2017 53. The Appellant filed with the Respondent restated audited accounts for the year 2017 during the objection review, wherein the Appellant corroborated the Respondent’s finding that the undeclared income was Kshs. 816,398. 00.

54. The Respondent determined that the additional taxable income for the year 2017 was equal to the undeclared income, resulting in additional taxable income of Kshs. 816,398. 00. The Respondent confirmed Kshs. 244,919. 40 as the Corporation income tax additional assessment for the year 2017.

55. The Appellant did not produce any explanations, records and documents for the Tribunal’s discovery to support the disputed 2017 assessment.

Year of Income 2018 56. The Respondent determined that the additional taxable income for the year 2018 was the undeclared income of Kshs. 11,889,136. 00 and the amount declared as previous year losses adjusted of Kshs. 49,412. 00, resulting in additional taxable income of Kshs. 11,938,548. 00. The Respondent confirmed Kshs. 3,581,564. 40 as the Corporation income tax additional assessment for the year 2018.

57. The Appellant objected to the VAT classification of the amount of Kshs. 12,170,951. 00 declared in the Appellant’s December 2018 VAT return under VAT exempted sales which attributed to a significant proportion of the variance in income cited above. The Appellant stated that all the Appellant’s sales are vatable (sic) at the general rate, and that they have never dealt with exempt supplies. The Respondent confirmed the Appellant’s understanding that the Appellant’s business of occupational safety does not fall under exempt supplies provided in the First Schedule to the VAT Act, 2013.

58. The matter in dispute for the year 2018 is the amount of Kshs. 12,170,951. 00 declared in the Appellant’s December 2018 VAT return under VAT exempted sales which contributed significantly to the computed undeclared income, and the resultant additional assessment for the year.

59. The Tribunal reviewed the Appellant’s explanations and all the documents provided on the disputed additional assessment for 2018 and delineated the explanations provided in two parts:a.The Appellant’s claim that the Kshs. 12,170,951. 00 VAT exempt sales in the December 2018 VAT return exaggerated the 2018 income more than what it earned as per the withholding tax certificates.b.The Appellant’s claim that the additional tax charged by the Respondent for 2018 was unrealistic and that its client, BPCCL, has never awarded it big tenders.

The Appellant’s claim that the Kshs. 12,170,951. 00 VAT exempt sales in the December 2018 VAT return exaggerated the 2018 income more than what it earned as per the withholding tax certificates. 60. Kenyan Income tax and VAT laws have withholding tax regimes. Section 35 of the ITA enlists the types of payments for business expenses incurred by a payer from which the payer to a resident or non-resident person is required to deduct income tax at the appropriate withholding tax rates, and remit the tax to the Commissioner. Section 42A of the TPA empowers the Commissioner to appoint VAT withholding agents to withhold two per cent of the taxable value on purchasing taxable supplies at the time of paying for the supplies and remit the same directly to the Commissioner.

61. The obligation to withhold a portion of an eligible payment and remit the withholding tax to the Commissioner is on the persons required to withhold tax or persons specifically appointed to withhold tax. As a result, the nature of the nature of withholding tax is that it is third-party reporting to the Commissioner of payments made by users of goods or services.

62. The reliability of withholding tax certificates as a primary source of revenue data is disputable because:a.Withholding tax certificates are a result of third-party reporting, which may have errors.b.Only a section of persons liable to withhold tax may fully comply with the requirement.c.In cases where the Commissioner’s appointment of a withholding tax agent is required to initiate the withholding of tax, only the appointed suppliers to a business would deduct tax.d.A taxpayer can earn income from persons not liable to withhold tax and remit the tax to the Commissioner, for instance, where a payment to a taxpayer is not eligible for deduction of withholding tax or where taxpayer earns income outside Kenya.

63. Clearly apparent, withholding tax certificates on their own are incapable of being a reliable source of primary income data of a taxpayer as they cannot validate the completeness and accuracy of income data of the taxpayer. By its own admission, the Appellant confirmed that one of its major clients, BPCCL, had acknowledged to have made an error in two withholding tax declarations.

64. For these reasons, the Tribunal finds that the Appellant’s claim that the sales declared as exempt sales in the December 2018 VAT return are exaggerated on account of the amount being more than income data derived from withholding tax data, is devoid of merit.

The Appellant’s claim that the additional tax charged by the Respondent for 2018 was unrealistic and that their client, BPCCL, has never awarded the Appellant big tenders. 65. Relevant to the income transactions for year 2018, the Appellant provided only bank statements from one bank account for the year 2018 and subsequent years. The Tribunal’s review of the bank statements determined that some of the deposits into the bank account were from other parties besides, BPCCL, and that the deposits into the bank account were significantly less than the income reported by the Appellant in its 2018 Corporation income tax return. Further, the Appellant failed to produce bank statement reconciliations for all the bank accounts owned, matching deposits with sales income that it recognized in 2018. The Appellant did not adduce any other source documents to support its claim that the undeclared income in 2018 determined by the Respondent’s review was exaggerated.

66. Section 54A of the ITA envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. While the Appellant claimed that it kept these records and documents, the Appellant did not produce the records and documents for the Tribunal’s discovery to support the disputed 2018 assessment.

67. The Tribunal notes that Section 30 of the Tax Appeals Tribunal Act provides as follows: -“In any proceeding before the Tribunal the Appellant has the burden of proving-a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

68. The Tribunal has dealt with a similar matter where in Tax Appeal Number 353 of 2018 Rumish Limited vs Commissioner of Domestic Taxes, 23rd July 2021 at paragraph 51, the Tribunal stated as follows: -“Additionally, Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case...”

69. In the case of Tax Appeal No. 55 of 2018, Boleyn International Limited v Commissioner of Investigations & Enforcement, 17th December 2019 where, the Appellant failed to provide documents, the Tribunal held that there was no conceivable way the Respondent would have considered the objection as the same did not place itself within the parameters of Section 51(3) of the Tax Procedures Act, 2015.

70. The Tribunal has further cited the case of Tax Appeal No. 3 of 2020, Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR, 22nd June 2020 where the court stated that:“The Commissioner clearly explained that it based its decision, the statement of accounts and returns the Company had filed. The Tribunal appreciated this fact when it concluded that it was the duty of the Company to provide all the documents and that the Commissioner was entitled to rely on the self-assessments and returns lodged by the Company in the absence of any other documents.”

71. Based on the aforementioned provisions of the law and the case laws, the Tribunal finds the Appellant has not discharged its burden of proof to show that the Respondent erred in confirming the corporation income tax additional assessments of the years 2016, 2017 and 2018.

72. Consequently, the Tribunal finds that the Respondent did not err in fact and in law in confirming the Corporation income tax assessments in the impugned objection decision.

Final Decision 73. In view of the foregoing analysis, the Tribunal finds that the Appeal has no merit and the Tribunal accordingly makes the following Orders: -a.The Appeal be and is hereby dismissed;b.The Respondent’s objection decision dated 18th February 2022 be and is hereby upheld.c.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ROBERT M. MUTUMA............CHAIRPERSONRODNEY O. OLUOCH........MEMBERELISHAH N. NJERU............MEMBER