[2024] KETAT 261 (KLR)

Barkutwo Investment Limited v Commissioner of Domestic Taxes (Appeal 1157 of 2022) [2024] KETAT 261 (KLR) (Civ) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 261 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 1157 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 8, 2024

Between

Barkutwo Investment Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a Company incorporated in Kenya under the Companies Act No. 17 of 2015 and a registered taxpayer within the Republic of Kenya whose principal activity is in construction industry.

2. The Respondent is a principal officer appointed under the Kenya Revenue Authority Act, Cap 469 laws of Kenya. Under Section 5 (1) of the Act, the Respondent 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 Respondent 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. On 17th December 2018 and on 24th September 2020, the Respondent proceeded to raise additional assessments on the Appellant in relation to Value Added tax and income tax through the i-Tax platform.

4. The Respondent conducted a return review on undeclared income of the Appellant for the years 2014-2019 and shared the findings with the Appellant vide a letter dated 22nd September 2020.

5. The Appellant lodged late objection applications to all the assessments as received on the i-Tax platform on the basis of the absence from Kenya of one of its Directors.

6. Through the i-Tax platform, the Respondent rejected the Appellant’s late objections on the basis that the Appellant did not avail records and accordingly issued a series of notices.

7. Dissatisfied with the Respondent’s Objection decision dated 25th March, 2021, the Appellant filed its Notice of Appeal dated 5th October 2022 on 11th October 2022 with leave of the Tribunal having been granted on 23rd September, 2022 in Miscellaneous Application No.185 of 2022.

The Appeal 8. The Appeal as contained in the Memorandum of Appeal dated 5th October 2022 and filed with the Tribunal on 11th October 2022 raised the following grounds of appeal:

On Value Added Taxi.The Respondent erred in law and in fact by arbitrarily increasing the sales figures in the Appellant’s VAT returns and erroneously assessing additional VAT.ii.The Respondent erred in law and in fact by disregarding VAT returns of the Appellant and all other explanations and documentation provided by the Appellant and proceeding to confirm the VAT assessment.iii.The Respondent erred in law and in facts by assessing additional VAT on the Appellant based on arbitrary and unreasonable estimates while disregarding the actual sales made and declared in the VAT returns filed by the Appellant.iv.The Respondent erred in law and in fact by disallowing the input VAT incurred and claimed by the Appellant in making of taxable supplies, thereby assessing additional VAT on the Appellant based on erroneously disallowed invoices.v.The Respondent erred in law and in fact by disregarding all the explanations and documentation provided by the Appellant and proceeding to disallow input VAT invoices.vi.The Respondent erred in law and in fact by imposing a penalty for tax shortfall on the Appellant while there was no shortfall whatsoever. On Income Taxvii.The Respondent erred in law and in fact by disregarding the actual turnover realized and reported by the Appellant and arbitrarily increased the Appellant’s turnover for the period under review and thereafter assessed additional taxes, penalties and interest.viii.The Respondent erred in law and in fact by disregarding all the documentation provided including the financial statements and tax returns, and proceeded to mistakenly confirm the income assessments.ix.The Respondent erred in law and in fact by disallowing salaries and wages expenses incurred by the Appellant during the period under review, thereby assessing additional taxes on account of the disallowed expenses.x.The Respondent erred in law and in fact by disregarding the express provision of Sections 15 and 16 of the Income Tax Act Cap 470 of the laws of Kenya (hereinafter ‘ITA’) which provide that all expenses incurred wholly and exclusively in the generation of income are tax deductable.

Appellant’s Prayers 9. The Appellant prayed that the Tribunal: -a.Allows this Appeal;b.Annuls the Respondent’s confirmed assessment based on the grounds above, as well as the information contained in the Statement of Facts attached; andc.Award costs of this Appeal to the Appellant.

The Appellant’s Case 10. The Appellant in its Statement of Facts dated 5th October 2022 and filed on 11h October 2022 stated as follows:

On Value Added Tax 11. The Appellant averred that it filed all its VAT returns and paid the VAT due for the period under assessment. However, the Respondent, without conducting an audit of the Appellant’s books amended the Appellant’s VAT return for the month under review by increasing the sales value and partly disallowing some of the input VAT incurred and claimed by the Appellant during that period.

12. The Appellant stated that it had claimed valid input VAT supported by valid tax invoices in compliance with the provisions of the VAT Act and the VAT Regulations in force at the time. The input tax claimed was fully supported by valid tax invoices and copies of the tax invoices as well as other supporting documentation provided to the Respondent during the objection stage

13. The Appellant submitted that it had correctly claimed the input as per the provisions of the VAT Act No. 35 of 2013 (hereinafter ‘VAT Act’) since all the invoices claimed are proper invoices containing all the mandatory features of valid tax invoices prescribed in law and having been claimed within six months from the date of issuance.

14. The Appellant further averred that it submitted to the Respondent all the invoices (with electronic tax receipts) as well as supporting documentation such as evidence of payment but the Respondent disregarded these explanations and documentation and proceeded to disallow the input VAT and confirmed the assessment.

15. The Appellant further posited that the explanations provided by the Respondent for the rejection of the input VAT were invalid and unreasonable and invited the Tribunal to review the invoices provided to confirm that they are proper invoices.

16. The Appellant additionally submitted that there would be no tax which would be lost on the part of the Respondent if the input VAT claimed by the Appellant was allowed.

17. The Appellant stated that the Respondent disregarded all the facts in the documents presented by the Appellant in its financial statements and source documents, and overstated the sales in the period and erroneously made additional assessment.

18. On the issue of the pecuniary burden on the Appellant, the Appellant averred that;i.Disallowing the input VAT and recovering the tax therefrom unfairly imposed a financial burden on its operations, adding that the VAT Act is well aligned with the tax canon of equity. The canon of equity is grounded on the basic premise that the collection of taxes should be equitable across taxpayers on different levels. In addition, taxpayers should bear no more tax than what other taxpayers in the same bracket bear as prescribed from time to time by legislature.ii.The charge on VAT heavily draws on impetus on the input-output principle, and if the formula is distorted, the taxpayer ought not to unfairly suffer a heavy pecuniary burden. VAT is a consumption tax whose burden should be borne by the final consumer of the supplies. This is the basis of the input-output principle which allows for the intermediaries in the supply chain to pass on the VAT burden to the final consumers. It would be prejudicial if the pecuniary burden was borne by the tax intermediaries in the chain of supply.

19. On the Actual invoices provided, the Appellant averred that;i.It was without a doubt that it incurred the input VAT and the Respondent did not have any evidence to the contrary. The actual invoices (with electronic tax receipts) supporting the expenses incurred by the Appellant were all furnished to the Respondent. This was sufficient reason to prove that the Appellant did indeed incur those expenses.ii.The invoices were a true reflection of the input VAT which it incurred as a cost and which ought to be offset against its output VAT.iii.On tax lost by the Respondent, it averred that it was imperative to note that there was no tax which had been lost on the part of the Respondent and that the effect of deduction of input VAT was to reduce its VAT cost burden to the extent of its value add in the supply chain. Therefore, without prejudice to the foregoing, even where the input tax deduction is time barred, it would be punitive and extremely mistaken to claim for tax from it where such tax would not have been due in the first place. The Appellant already paid the VAT for the months under assessment relating to its value addition in the supply chain as required by law.

Income Tax Assessment 20. The Appellant averred that it duly filed its returns and paid all taxes due during the period under review.

21. The Appellant submitted that the Respondent without any basis or justification adjusted the turnover of the Appellant upwards for the period under review and thereafter erroneously assessed additional taxes on the difference between the adjusted turnover and what the Appellant had declared.

22. The Appellant stated that the Respondent proceeded to disallow some of the expenses which had been incurred by the Appellant in the generation of the taxable income.

23. On failure by the Respondent to consider information and documents provided, the Appellant submitted that inspite of providing all the information, explanations and documentation, the Respondent went ahead to disregard the information, explanations and documents and confirmed the assessment which had been erroneously based on the adjusted gross turnover.

24. On non-deduction of expenses, the Appellant averred that:i.The Respondent failed to acknowledge the expenses incurred in the running of the business contrary to the provisions of the ITA which provides that all expenses incurred in the generation of income are tax allowable.ii.It was imperative to note that while it is impossible to run a business without incurring expenses, the Respondent did not allow any expenses claimed by it in its statement of income.

25. On the arbitrary adjustment of revenue, the Appellant averred that the Respondent arbitrarily and without any justification adjusted its revenue upwards, thereby assessing more income tax. This was inspite of being provided with all the necessary documentation including financial statements and other source documents which would provide a fair view of the Appellant’s transactions.

26. The Appellant did not file submissions as directed by the Tribunal.

The Respondent’s Case 27. In its Statements of Facts dated 16th November 2022 and filed on even date and written submissions dated 22nd March, 2022 and filed on even date, the Respondent submitted on two issues for determination and expounded on each of them as hereunder.a.Whether the additional assessments were justified?

28. The Respondent submitted that this case was hinged on the issue of lack of production of documents by the Appellant to ascertain its tax liability as required by law. That it issued the income tax assessment after noting the Appellant had under-declared its income. It averred that it issued the VAT assessments since the Appellant failed to declare its income for VAT purposes.

29. The Respondent further stated that the Appellant failed to provide any documentation during the objection review process to prove that the assessment was erroneous.

30. The Respondent contended that the decision to arrive at the assessments was justified and had basis in law since the Appellant failed to provide any documents in support of the cost of sales, further adding that it is not bound by the Appellant’s returns or self-assessment since it is empowered to vary the assessment using any available information in the Respondent’s possession as provided for under Section 24 (2) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) which states 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 tax payer’s tax liability using any information available to the commissioner.”

31. The Respondent asserted that Section 31 of the TPA, empowers it to make alterations or additions to original assessments from available information for a reporting period based on the its best judgement. This Section provides;“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment”) by making alterations or additions from the available information and to the best and to the best of the commissioner’s judgment to the original assessment of a tax payer for a reporting period to ensure that-a.In the case of a deficit carried forward, the Income Tax Act (Cap 470), the Tax Payer is assessed in respect of the correct amount of the deficit carried forward for the reporting period.b.In the case of an excess amount of input tax under the Value-Added Tax Act, 2013 (No 35 of 2013), the Tax Payer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.In any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

32. The Respondent relied on the case of ‘The Commissioner of Domestic Taxes v Altech Stream (EA) Limited [2021] eKLR in which the court stated that Section 31 (1) of the TPA allows the Respondent to make an assessment based on such information as may be available and to the best of its judgement.

33. The Respondent averred that the Appellant did not discharge its burden of proof under Section 56(1) of the TPA which places the onus of proof in tax objections on the taxpayer. The Section provides: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

34. The Respondent further relied on the case of Ushindi Exporters Limited vs Commissioner of Investigations and Enforcement (Tax Appeals Tribunal No 7 of 2015) in which the Tribunal held that: -“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal act states,a.Where an appeal related 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.”

b. Whether the Appellant’s application for extension of time to file a notice of objection was valid? 35. The Respondent submitted that the Appellant’s application for extension of time to file its objection was invalid.

36. The Respondent averred that Section 51 (1) of the TPA provides that a taxpayer who is dissatisfied by a tax decision is required to lodge an objection against that tax decision and that Section 51 (2) provides that such an objection be made within thirty day of being notified of that decision.

37. The Respondent stated that Section 51 (6) of the TPA provides that a taxpayer may apply to it in writing for an extension of time to lodge a notice of objection. The Respondent added that the Appellant despite stating that it lodged a late objection owing to its absence from Kenya did not provide any documentary evidence to support its ground as required under Section 51 (7) of the TPA which states as follows;“The Commissioner shall allow an application for the extension of time to file a notice of objection if the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause.”

38. The Respondent relied on the case of Tumaini Distributors Company (K)Limited v Commissioner of Domestic Taxes [2020] eKLR where the court held that:-“Under Section 51 aforesaid, a person who is dissatisfied with the decision of the commissioner on an assessment is entitled to lodge an objection within thirty days. Section 51 (6) and (7) provides for what happens when the objection is lodged late. The tax payer is entitled to apply for extension of time.”

39. The Respondent submitted that on 1st December 2018, it issued the Appellant with VAT assessment for the period 2017 and informed the Appellant. The Appellant lodged its objection against the VAT assessment on 8th November 2019 yet it ought to have objected on or before 1st January 2019. This is unreasonable delay that accrued to ten months from the date the assessment was issued and it fails to meet the requirement of Section 51 (7) (b) of the TPA.

40. The Respondent averred that what can be termed as unreasonable delay varies from the circumstances of each case and quoted the case of Jaber Mohsen Ali & Another v Priscillah Boit & Another E& L No. 2000 of 2012 [2014] eKLR in which the Court held that:“what is unreasonable delay is dependent on the surrounding circumstances of each case. Even one day after judgement could be unreasonable delay depending on the judgement of the court and any order given thereafter.”

Respondent’s Prayer’s 41. The Respondent prayed that this Tribunal:a.Upholds the Respondent’s decision dated 25th March 2021 as proper and in conformity with the law; andb.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Issues for Determination 42. Having gleaned through the submissions, pleadings and documents submitted by both parties, the Tribunal finds the singular issue that calls for its determination to be:-

Whether the rejection of the late notice of Objection was proper.** 43. The Tribunal will now proceed to analyse this single issue as hereinunder.

44. This dispute arose due to the Respondent’s assertions and submissions that the Appellant’s application for extension of time to file its objection was invalid since it was not within the thirty days allowed by law for a taxpayer to lodge an objection against a tax decision as provided for under Section 51 (2) of the TPA.

45. The Tribunal notes with concern, that the objection decision which is the subject of this Appeal was dated 25th March, 2021 and yet afterwards, the Respondent issued 7 notices dated 24th May, 2021 and one notice dated 11th August, 2021 through the I-Tax platform, as outlined in TABLE 3 and paragraph 6 of this Judgment. Notwithstanding that fact the Tribunal finds that the Appellant in its i-Tax platform, claimed that the reason for the late filing of the objection was ‘Absence from Kenya’ of one of the directors. The Respondent averred that the Appellant failed to produce documentary evidence to support its claim.

46. The Tribunal reiterates its findings in Kenya Cuttings v Commissioner of Domestic Taxes [Appeal No. 378 of 2021] where the Tribunal pronounced itself as follows in Paragraph 34 of its Judgement;“…The Tribunal therefore, finds no evidence adduced by the Appellant to extricate itself from the Respondent’s assertions regarding absence of a valid objection in line with Section 51(2) of the TPA………”

47. The Tribunal notes that Section 51(7) of the TPA empowers the Respondent to allow a taxpayer extension of time to file a late objection, provided that the taxpayer was prevented from lodging its objection within the period required under law due to absence from Kenya, sickness or any other reasonable cause and that there is no unreasonable delay. This Section of TPA provides as follows:“The Commissioner may allow an application for the extension of time to file a notice of objection if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and [emphasis ours](b)the taxpayer did not unreasonably delay in lodging the notice of objection.”

48. The Tribunal finds that the Appellant did not produce documentary evidence in support of its claim of absence from Kenya while making its application for late application to the Respondent. The Tribunal further finds that the Respondent’s late objection rejection notice was due to the Appellant’s failure to adduce evidence to support its claim that it filed the objection late due to the absence of one of its directors.

49. Consequently, the Tribunal finds that the Respondent’s rejection of the late notice was proper.

Final Decision 50. The Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s decision dated 25th March, 2021 rejecting a late notice of objection be and is hereby upheld.c.Each party to bear its own costs.

51. It’s so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI MOHAMED A. DIRIYEMEMBER MEMBERSPENCER S. OLOLCHIKEMEMBER