[2024] KETAT 328 (KLR)

Baus Optical Company Ltd v Commissioner for Investigations & Enforcement (Appeal 1563 of 2022) [2024] KETAT 328 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 328 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1563 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

February 23, 2024

Between

Baus Optical Company Ltd

Appellant

and

The Commissioner for Investigations & Enforcement

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, it is principally involved in the retailing and dispensing of optical products 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 issue in dispute in this Appeal arose when the Respondent investigated the Appellant’s affairs to establish the following:a.Whether the Appellant had declared all taxable income earned for the period under review.b.Whether Appellant accounted for all taxes due for the period under review.c.Whether the Appellant and the directors deliberately committed an offence that warrants prosecution under the prevailing tax laws.d.To assess, demand and collect taxes established from the investigations.

4. The Respondent shared its findings vide a letter dated 28th September 2021 and the Appellant responded thereto on the 25th November 2021.

5. The Respondent issued its assessment vide a letter dated 18th August 2022.

6. The Appellant objected to this assessment vide its letter dated 6th September 2022.

7. The Respondent subsequently issued its objection decision confirming the assessment through a letter dated 8th November 2022.

8. The Appellant being dissatisfied with the Respondent’s objection decision lodged its Notice of Appeal on 7th December 2022.

The Appeal 9. The Appellant filed its Memorandum of Appeal dated 20th December 2022 and filed on 21st December 2021 where it set out the following grounds of Appeal:-a.On Income tax, that:-i.The Respondent erred in law and fact by disregarding the actual turnover realized and reported by the Appellant in its financial statements and tax returns and arbitrarily increased the Appellant's turnover for the period under review and therefore assessed additional taxes, penalties and interest.ii.The Respondent erred in law and in fact by disregarding all the reconciliations, explanations and documentation provided by the Appellant including the financial statements and tax returns, and proceeded to confirm the erroneous income tax assessments.iii.The Respondent erred in law and in fact by purporting to base its assessments on both the bank deposit analysis of the Appellant and the "forensic data" which resulted in duplicity of revenue computation as the revenue derived from transactions contained in the so-called "forensic data" is still the same revenue received in the Appellant’s bank accounts and declared in the Appellant’s financial statements and returns.iv.The Respondent erred in law and in fact by disallowing expenses incurred by the Appellant in the production of the taxable income during the period under review, thereby assessing additional taxes on account of the disallowed expenses.v.The Respondent erred in law and in fact by disregarding the express provisions of Sections 15 and 16 of the Income Tax Act which provide that all expenses incurred wholly and exclusively in the generation of income are tax deductible.vi.The Respondent erred in law and in facts by purporting to charge income tax on all the banking deposits without allowing for the necessary adjustments for non-revenue items such as inter-account and inter-bank transfers, reversals and contra entries and inter-company transfers.vii.The Respondent erred in law and in facts by purporting to add back cash sales from purported "forensic data" in the determination of the taxable income while all cash sales are received through M-pesa and banked before expending.b.On Value Added Tax, that:i.The Respondent erred in law and in fact by purporting to base its assessments on both the bank deposit analysis of the Appellant and the "forensic data" which in duplicity of revenue computation as the information and transactions contained in the so-called "forensic data" are still the same transactions recorded in the bank statements and other financial statements of the Appellant.ii.The Respondent erred in law and in fact by purporting to charge VAT on all the banking deposits without allowing for the necessary adjustments for non-revenue items such as inter-account and inter-bank transfers, reversals and contra entries and inter-company transfers.iii.The Respondent erred in law and in fact by charging VAT on Ophthalmological services, which are exempt for VAT purposes in line with Paragraph 4 Part 2 of the First Schedule to the VAT Act.iv.The Respondent erred in law and in fact by arbitrarily increasing the revenue figures in the Appellant’s VAT returns and erroneously assessing additional VAT.v.The Respondent erred in law and in fact by disregarding the VAT returns filed by the Appellant and all explanations and documentation provided by the Appellant in support of its objection and proceeding to confirm the VAT assessments.vi.The Respondent erred in law and facts by assessing additional VAT on the Appellant based on arbitrary and unreasonable estimates while disregarding the actual sales and purchases made and declared in the VAT returns filed by the Appellant.vii.The Respondent erred in law and in fact by disallowing the input VAT incurred and claimed by the Appellant in making taxable supplies, thereby assessing additional VAT on the Appellant based on erroneously disallowed invoices.viii.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.

Appellant’s Case 10. The Appellant has grounded its Appeal on its Statement of Facts dated 20th December 2022 and filed on 21st December 2021 and written submissions dated 21st August 2023 and filed on 1st September 2023.

11. The Appellant provided a synopsis leading to this dispute as follows in its effort at challenging the validity of the objection decision:a.It was served with investigation findings by the Respondent on 28th September 2021. b.It was served with VAT and income tax assessments through Assessment Orders on 18th August 2022. c.It filed its objection to the assessments on 6th September 2022. d.It was issued with an objection decision on 8th November 2022.

12. The Appellant averred that the Respondent erroneously applied bank analysis and ‘forensic data’ to assess additional taxes on the difference between the adjusted turnover and what the Appellant had declared.

13. That the overriding nature of the two sets of data used in the determination of the taxable income resulted in duplicity and also raised questions on the validity of the tax assessments in question because the “forensic data” was based on the Appellant’s bank deposits and unreconciled draft sales reports from the Appellant’s branches.

14. The Appellant posited that the unreconciled data from its sales clerks that it referred to as “forensic data” contained cancelled orders that had previously been booked as sales and to which the Respondent did not make any adjustments.

15. The Appellant further posited that the Respondent did not share its report on the chain of custody to determine the validity of its information considering that the computers had passed through many hands from the time they left the Appellant's offices without being signed off. That there was also no Audit Certificate accompanying the "forensic data" contrary to the provisions of Section 54 of the Income Tax Act, CAP 470.

16. The Appellant averred that it operated three current bank accounts at NCBA, ABSA and Equity Bank where it carried out several interbank transfers to ensure cash flow management.

17. The Appellant averred that the Respondent charged tax on refunds and reversals received in its bank account as a result of unpaid cheques or incomplete transactions. That these reversals neither constituted a gain nor a profit from a business venture to be subjected to tax.

18. The Appellant averred that it kept proper books of accounts and reconciliations, which it relied on in filing its income tax returns. That it also provided all the documents, explanations and information that was requested by the Respondent who nevertheless proceeded to arbitrarily and erroneously confirm the assessment in total disregard of the information provided. It relied on the case of Wisdom of the High Court in Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] eKLR to urge this point.

19. That the assessment by the Respondent was unfair and arbitrary. It relied on Silver Chain Ltd –vs- Commissioner Income Tax & 3 Others [2016] eKLR to stress this point

20. It was also its position that the Respondent had erroneously charged VAT on exempt services like ophthalmological services which are listed under Part II, Paragraph 4 of the VAT Act under the title “Medical, veterinary, dental, ambulance and nursing services.”

21. That a big portion of its services falls under the exempt supply list but this was flagrantly disregarded by the Respondent even though it provided relevant documents to support this fact of exemption. It supported its position with the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021]eKLR to prove that it had discharged its burden of proof when it provided sufficient documents to prove its case and that the burden of proof had now shifted to the Respondent.

22. The Appellant stated that it kept all records of its tax issues as required under Section 23 of the TPA and it shared these documents with the Respondent but the documents were disregarded and an excessive, unfair, arbitrary and erroneous assessment issued contrary to the dicta in the case of Keroche Industries Limited V Kenya Revenue Authority & 5 Others [2007] eKLR.

Appellant’s Prayer 23. The Appellant prayed that the Tribunal:-a.Allows this Appeal;b.Annuls the Respondent’s confirmed assessment andc.Awards costs of this Appeal to the Appellant.

Respondent’s Case 24. The Respondent responded to this Appeal vide its Statement of Facts filed and dated on 23rd January 2023 and its written submissions filed and dated 31st July 2023.

25. The Respondent averred that it had requested the following documents from the Appellant:-a.Appellant's data available on iTax.b.Request for customs data.c.Writing to 3rd parties i.e. banks and company registrar for information on company registration data and return

26. It further averred that it shared its investigation findings with the Appellant on 28th September 2022 and it received a response thereto on 25th November 2021 whereupon it requested the Appellant to provide the following documents;i.Evidence of interbank transfers from Equity and NCBA Bank to ABSA.ii.Evidence of payments made from ABSA bank.iii.Evidence of payments made from ABSA bank.iv.Schedule of Trade Debtors.v.Schedule of cost of sales not claimed.vi.Schedule of expenses not claimed.

27. That the Appellant provided the following documents vide a letter dated 28th January 2022:i.Schedule of seven transactions amounting to KES. 3,114,286 showing transactions from NCBA to ABSA.ii.Sample copies of cheques showing various expenses paid vide ABSA Bank.iii.A schedule of cost of sales not claimed.iv.A schedule of expenses not claimed.

28. That the Appellant further provided the following documents vide a letter dated 25th February 2022:i.Copies of their invitation to tender about Ministry of Defence.ii.Interbank transfers from NCBA to ABSA Bank amounting to Kshs. 389,688,248.

29. The Appellant asserted that it considered the Appellant’s response and the supporting documentation whereupon it:i.Adjusted the tax liability under income tax head.ii.Allowed sales to the Ministry of Defence from VAT as the same were VAT exempt.

30. That it proceeded to raise assessments dated 18th August, 2022 on iTax which the Appellant objected to vide its notice of objection dated 6th September 2022 and received on 12th September 2022. That it thereafter informed the Appellant of its failure to provide documents in support of its objection application as required by law on 20th September 2022.

31. That having failed to provide the documents required to support its objection, the Respondent confirmed the assessment on 8th November 2022.

32. The Respondent averred that the Appellant had not discharged its burden of proof under Section 56(1) of the TPA for failure to keep records and also to provide supporting documents under Sections 23 and 24 of the ITA and hence the reason why it confirmed the assessment. It supported this position with the case Nairobi TAT Appeal No. 55 of 2018-Boleyn International Limited vs. Commissioner of Investigations and Enforcement.

Respondent’s Prayers 33. Based on the foregoing averments the Respondent's prayer to the Tribunal were for orders that:i.The Appeal be dismissed with costs.ii.The assessment be upheld.

Issues for Determination 34. The Tribunal having considered the pleadings filed and the evidence tendered, is of the view that the Appeal herein crystallizes into the following issues for determination:a.Whether the Respondent’s Objection decision was valid.b.Whether the Respondent’s aassessment was justified.

Analysis and Findings a. Whether the Respondent’s Objection Decision was valid. 35. The genesis of this dispute was the Respondent's decision dated 8th November 2022.

36. The Appellant contended that it filed its objection on 6th September 2022 and was issued with an objection decision on 8th November 2022.

37. The Respondent on its part stated that it raised assessments dated 18th August, 2022 on iTax which the Appellant objected to vide its notice of objection dated 6th September 2022 and received on 12th September 2022. That it thereafter informed the Appellant of its failure to provide documents in support of its objection application as required by law on 20th November 2022.

38. Section 51(11) of the Tax Procedures Act provides as follows regarding timelines under which an objection decision ought to be issued:-“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed. (Emphasis added)."

39. The parties are in agreement that the Appellant’s objection was lodged on 6th September 2022 and the objection decision was issued on 20th November 2022. The point of diversion arises when the Respondent averred that it received the said objection on 12th September 2022 and therefore the last date when it was required to issue the objection decision was on or before 11th November 2022. That its objection decision was thus issued within the prescribed timelines.

40. Having alleged that it received the Appellant’s objection on the 12th September 2022, the Respondent was obliged to provide evidence that it indeed received the said objection on 12th September 2022. This would have been done by providing a stamped copy of the received objection or the email with which the said objection was acknowledged. None of this was provided.

41. The Appellant has thus sufficiently proved that it issued its objection on the 6th of September 2022and it even shared a copy of the said notice of objection with the Tribunal. The Respondent was thus enjoined to issue its objection on or before the 5th of November 2022. This objection decision was therefore late by about 3 days.

42. The Tribunal is guided by the case of Republic v Kenya Revenue Authority Ex Parte Mkopa Kenya Limited [2018] eKLR where Justice Odunga stated that:“Accordingly, the respondent was required to make a decision in respect thereof within sixty (60) days under section 51(11) of the said Act. As the respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed.”

43. The same position was re-stated in the latter case of Rongai Tiles & Sanitary Wares Limited v Commissioner of Domestic Taxes (Tax Appeal E011 of 2020) [2023] KEHC 18546 (KLR) (Commercial and Tax) (16 June 2023) (Judgment) where Majanja stated as thus:-“The Commissioner’s delay in delivering the Objection Decision within sixty days of receiving the objection meant that the objection was allowed by operation of law. Failure to render the Objection Decision in time was fatal and the Commissioner could not demand any taxes therein.”

44. The Tribunal associates itself with the views of the High Court in the foregoing decisions and concludes that the objection by the Appellant was allowed by operation of the law within the meaning of Section 51(11) of the TPA.

45. Having entered the above finding, the second issue that fell for determination namely: Whether the Respondent’s assessment was justified, has been rendered moot.

Final Decision 46. Given the foregoing analysis, the Tribunal finds the Appeal to be merited and accordingly proceeds to make the following orders:a.The Appeal be and is hereby allowed.b.The Respondent's objection decision issued on September 10, 2021, be and is hereby set aside.c.Each party is to bear its own costs.

47. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER