[2023] KETAT 315 (KLR)

Batoka Pharmacy Limited v Commissioner of Domestic Taxes (Appeal 154 of 2022) [2023] KETAT 315 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 315 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 154 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

May 19, 2023

Between

Batoka Pharmacy Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya. The Appellant is based in Nairobi and its principal activity is supply of pharmaceutical products.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority, Act No. 2 of 1995, and the Kenya Revenue Authority is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the Act.

3. The Respondent conducted tax investigations into the business affairs of the Appellant for the tax period 2015 to 2017 upon receiving intelligence reports that the Appellant was awarded a tender to supply medicine by the Nairobi County Government but was not paying taxes.

4. On 18th October 2018, the Respondent raised additional income tax assessments for the years 2015, 2016 and 2017.

5. The Respondent vide a letter dated 22nd October 2018 further issued a demand notice for additional income tax assessments amounting to Kshs. 28,451,748. 00.

6. The Appellant raised an objection to the additional income tax assessments on 20th March 2020.

7. The Respondent invalidated the objections raised vide a letter dated 21st October 2021.

8. Aggrieved by the decision to invalidate its objections, the Appellant filed a Notice of Appeal dated 8th February 2022.

The Appeal 9. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 7th February 2022 and filed on 16th February 2022:-a.That the Commissioner erred in law in issuing the estimated assessments vide documents KRA201814565122, KRA201814564194 and KRA202004029163. b.That the Commissioner erred in law by issuing assessments without due regard to the available records and documents.c.That the Commissioner erred in law in disregarding the available audited accounts and issuing estimated assessments.d.That the Tribunal is therefore requested to allow the Appellant go through Alternative Dispute Resolution (ADR) mechanism.e.That the Commissioner should temporarily lift the Agency Notices issued until the ADR process is completed.

Appellant’s Case 10. The Appellant’s case is premised on the Appellant’s Statement of Facts dated 6th February 2023 and filed on 10th February 2023 together with the documents attached thereto.

11. The Appellant averred that the Commissioner erred in law by issuing the assessments disregarding all the available documents and records as required under Sections 23, 58 and 59 of the Tax procedures Act.

12. That all the documents for the disallowed expenses are available and have been submitted to the Commissioner for review.

13. That the investigating teams did not take into account all the available documents and the explanations given by the Appellant physically and through various correspondences.

14. That the Respondent erred by estimating the business gross margins disregarding the actual facts and documents provided.

16. That the Respondent erred by estimating incomes for year 2015 yet there was no income generated during the year.

17. That the Respondent’s claim in his issues for determination that the Appellant failed to declare income earned for the tax period 2015, 2016 and 2017 despite having made taxable supplies is contradictory because the additional assessments were based on IT1 returns and sales declared in the audited Accounts.

Appellant’s Prayers. 18. The Appellant prays that:a.The objection decision dated 21st October, 2021 of Kshs. 24,305,053. 00 being income tax for the years 2015, 2016 and 2017 be put aside and a review of the actual position reached.b.This Appeal be granted.

Respondent’s Case 19. The Respondent’s case is premised on the following documents:-a.The Respondent’s Statement of Facts dated and filed on 14th March 2022. b.The Respondent’s written submissions dated 23rd November 2022 and filed on 24th November 2022.

20. The Respondent averred that Section 24 of the Tax Procedures Act, 2015 allows a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information.

21. That Section 77 of the Income Tax Act and Sections 29 and 31 of the Tax Procedures Act, 2015 allow the Respondent to issue additional assessments where a taxpayer has been assessed of a lesser amount based on any additional available information and to the best of his judgement.

22. The Respondent averred that the Appellant failed to declare income earned for 2015, 2016 and 2017 despite having made taxable supplies to Nairobi County Government.

23. The Respondent averred that additional tax assessments were based on the analysis of the Appellant's IT1 returns, the sales declared in the audited accounts, sales per the Appellant's invoices and sales per the invoices from Nairobi County Government.

24. The Respondent averred that the Appellant failed to avail documentation as required under Sections 23, 58 and 59 of the Tax Procedures Act to enable the Respondent ascertain its tax liability.

25. That at the objection stage, the Appellant failed to avail documentation in support of its objection.

26. That the Respondent is empowered under Section 31 of the Tax Procedures Act, 2015 to amend filed returns and issue additional assessments based on available information and his best judgement.

27. The Respondent averred that the objection decision dated the 21st October, 2021 is proper based on the information available to the Commissioner and was issued within the statutory timelines.

28. The Respondent submitted that there are two issues for determination by the Tribunal as follows:-a.Whether the objection invalidation notice dated 21st October, 2021 is proper in law?b.Whether the Appeal herein is merited?

29. The Respondent proceeded to submit on the two issues as stated as hereunder.

a). Whether the objection invalidation letter dated 21st October, 2021 is proper in law? 30. The Respondent submitted that the additional income tax assessments for years 2015 to 2017 were based on the variance between the sales declared in the IT1 returns, the sales declared in the audited accounts, sales as per the Appellant's invoices and sales per the invoices from Nairobi County Government.

31. That the Respondent is empowered under Section 31 of the Tax Procedures Act, 2015 to amend the filed returns based on additional information and best judgement.

32. The Respondent relied on the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se. Kenya [2021] eKLR where the court held that:-“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."

33. That the Tribunal in Althaus Services Limited v Commissioner of Domestic Taxes TAT No. 704 of 2021 affirmed the Respondent's powers to issue additional tax assessments as follows:“that the right of the Respondent to amend an original assessment granted by Section 31(1) of the TPA cannot be denied to it. However, by the same token, the Appellant is granted the right of objection to an amended assessment under Section 51 of the TPA. The Tribunal notes that the Appellant has exercised this right in the instant appeal.”

34. The Respondent submitted that at the objection stage the Appellant failed to provide any documentation to support its objection contrary to Section 51 (3) of the Tax Procedures Act, 2015.

35. The Respondent further submitted that in the absence of any documentation in support of the objection the Respondent invalidated the Appellant's objection in line with Section 51 (4) of the Tax Procedures Act, 2015.

b. Whether the Appeal herein is merited. 36. The Respondent submitted that under Section 56(1) of the Tax Procedures Act, 2015 the burden of proof is upon the Appellant to prove that the Respondent's invalidation notice dated 21st October, 2021 was incorrect.

37. That in the Australian case of Mulheim v Commissioner of taxation (2013) FCAFC 115 the Federal Court of Australia affirmed the critical need for supporting evidence in tax disputes and emphasized that taxpayers must satisfy the burden of proof to successfully challenge income tax assessments. The FFC held that:-“it is not enough for a taxpayer to simply demonstrate that the assessment issued by the Commissioner is incorrect. Rather, the onus is on the taxpayer in proving that an assessment issued by the Commissioner is excessive can only be discharged by the taxpayer by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied- must show that the amount of money for which tax is levied the assessment exceeds the actual substantive liability of the taxpayer.”

38. The Respondent submitted that the Appellant herein had the duty to prove the error in the Respondent's invalidation notice dated 21st October, 2021.

39. The Appellant relied on Tax Appeals Tribunal No. 38 of 2021 Mechai International vs Commissioner of Domestic Taxes where the Tribunal held as follows:-“as is the case with all tax law, enjoin the tax payer to maintain records of his/hers/its business affairs. In our humble view, this obligation on the tax payer is tied to and must be viewed through the taxpayer's obligation of proofing that the Commissioner's assessment is wrong, incorrect or excessive. As such, the only way of dispensing with the legal burden of proof on the Appellant under Section 56 (1) of the TPA 2015 is through production of evidentiary record to proof that the Commissioner erred in his assessment. This burden is particularly heightened when a request is made by the Commissioner for documents in support of an objection notice.”

40. The Respondent submitted that the Appellant has failed to provide any evidence to prove the incorrectness of the Respondent's invalidation notice dated 21st October, 2021 and has only made unsubstantiated allegations.

41. That in Tax Appeals Tribunal No. 139 of 2020 Dyer & Dyer Limited v Commissioner of Domestic Taxes, the Tribunal held that:-“the Appellant woefully failed in adducing a scintilla of evidence demonstrating that the Commissioner erred in raising the additional assessment in dispute. All the Appellant has are perceived notions and imputations of incorrectness of the assessment. This appreciably points to an underwhelming dispensation of the burden placed upon the Appellant in Section 56 (1) of the TPA 2015".

Respondent’s Prayers. 42. The Respondent’s prayers are:-a.That the objection decision dated 21st October, 2021 confirming the assessment of Kshs. 24,305,053 being income tax for the years 2015, 2016 and 2017 be upheld.b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issue for Determination 43. The Tribunal has carefully studied the pleadings and documentation of both parties and is of the respectful view that the only issue that calls for its determination is as follows:-Whether the Respondent erred in fact and in law by issuing the objection invalidation letter dated 21st October 2021.

Analysis and Findings. 44. Having identified the issue for determination, the Tribunal proceeded to deal with the issue as hereunder:-

45. The Appellant submitted that the Respondent issued assessments disregarding all the available documents and records.

46. That the documents for the disallowed expenses are available and have been submitted to the Respondent for review.

47. That the investigating teams did not take into account all the available documents and the explanations given by the Appellant physically and through various correspondences.

48. On the other hand, the Respondent submitted that at the objection stage, the Appellant failed to provide any documentation to support its objection contrary to Section 51 (3) of the Tax Procedures Act, 2015.

49. The Respondent further submitted that in the absence of any documentation in support of the objection, it invalidated the Appellant's objection in line with Section 51 (4) of the Tax Procedures Act, 2015.

50. The Tribunal notes that Section 56(1) of the Tax Procedures Act places the burden of proof on the taxpayer. The Section reads as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

51. Further, 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.”

52. The Tribunal has dealt with a similar matter where in Tax Appeal Number 353 of 2018 Rumish Limited vs. Commissioner of Domestic Taxes at paragraph 51, the Tribunal stated a 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. The same position was held by the court in Metcash Trading Limited-vs Commissioner for the South African Revenue Service and Another Case CCT 3/2000, where it was held that:.‘But the burden of proving the Commissioner wrong then rests on the vendor under section 37. Because VAT is inherently a system of self­ assessment based on a vendor's own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor's records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner's precipitating credibility finding can be shown to be wrong, the consequential assessment must stand’ "

53. Further, in TAT 101 of 2016 Bemarc Limited vs. Commissioner Domestic Taxes, the Tribunal also held that:“24. The Appellant in its Statement of Facts at paragraph 14 claims that it provided records for the Commissioner's examination. Again, no evidence of this was availed before the Tribunal. In fact, we find it interest telling that for an individual facing a hefty assessment of Kshs. 31,489,319. 89, the Appellant does not substantively dispute the specific tax issues raised in the additional assessment or the objection decision. This, coupled with the burden placed on the taxpayer by the provision of Section 56 (1) of the Tax Procedures Act, 2015 only serves to buttress our position that the Appellant failed in its responsibility to provide its records and documents for examination by the Respondent”.

54. The Appellant came to the Tribunal and tendered no documents to support its case. The Tribunal finds that the Appellant did not provide proof that it provided at the objection stage documents for the Respondent to appropriately determine it tax liability neither has it provided any proof that the Respondent had no basis to invalidate its notice of objection.

55. Based on the aforementioned provisions of the law and the case laws, the Tribunal finds that the Respondent’s decision to invalidate the Appellant’s objection was proper in law.

56. Consequently, the Tribunal finds that the Respondent did not err in fact and in law by issuing the objection invalidation letter dated 21st October 2021.

Final Decision 57. The upshot of the foregoing is that the Appeal is without merit and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s invalidation decision dated 21st October 2021 be and is hereby upheld.c.Each party to bear its own costs.

58. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. …………………………………………………………………………………………ERIC N. WAFULACHAIRMAN……………………………CYNTHIA B. MAYAKAMEMBER……………………………GRACE MUKUHAMEMBER………………………JEPHTHAH NJAGIMEMBER……………………………ABRAHAM K. KIPROTICHMEMBER