[2023] KETAT 943 (KLR)

Bensue Building Contractors Limited v Commissioner of Domestic Taxes (Appeal 1040 of 2022) [2023] KETAT 943 (KLR) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 943 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1040 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

November 24, 2023

Between

Bensue Building Contractors 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 construction.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under Subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. The Respondent stated that it noted variances between sales declared in the Appellant’s tax returns for the period 2020 and via a pre-assessment demand notice dated 22nd November 2021 it advised the Appellant to amend its VAT returns by declaring the amount of turnover variance of Kshs. 4,991,526. 00.

4. The Respondent averred that the Appellant failed to amend its VAT returns and that on 19th January 2022, the Respondent issued it with a VAT additional assessment of Kshs. 698,813. 64 exclusive of penalties and interest based on the established variance between the VAT returns and income tax returns for the year 2020.

5. The Appellant lodged a late objection application on 28th June 2022 disputing the entire assessment.

6. The Respondent on 8th July 2022, 19th July 2022 and 20th July 2022 requested the Appellant to provide it with specific documents and information for the Respondent to ascertain the Appellant’s objection grounds.

7. The Respondent issued its objection decision in a letter dated 23rd August 2022 confirming the assessments.

8. The Appellant, dissatisfied with the objection decision, filed its Notice of Appeal on 22nd September 2022.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 21st September 2022 and filed on 22nd September 2022 which raised the following grounds: -a.That the Respondent erred in law and fact by totally failing to take into account the fact that the Appellant paid and filed VAT returns for the period 1st December 2020 to 31st December 2020 therefore, demanding the Appellant to pay a principal sum of Kshs. 698,813. 64 is subjecting the Appellant to excessive and double taxation.b.That whereas the Respondent issued VAT assessments for a specific period between 1st December 2020 to 31st December 2020 vide assessment dated 19th January 2022, the objection decision is tantamount to compelling the Appellant to pay VAT for the entire financial year from January 2020 to December 2020 and without VAT assessment to that effect since the objection decision is anchored on income tax returns for the entire year of 2020. c.That instead of calculating the exact payable VAT for a specific period between 1st December 2020 to 31st December 2020 and issuing the objection decisions thereon, the Respondent detoured into calculating variances based on entire financial year of 2020 yet the assessments are for a specific period of between 1st December 2020 to 31st December 2020. d.That the Respondent erred in law by failing to rely on income generated between a specific assessment period between 1st December 2020 to 31st December 2020 which is the correct period under review as per the assessment dated 19th January 2022. e.That the Respondent erred in law and fact by relying on alleged variance of Kshs. 4,991,526. 00 which variance is derived from income tax returns for entire year of 2020 and which the Respondent used to determine VAT for one month from 1st December 2020 to 31st December 2020 without VAT assessment for the entire year of 2020. f.That without VAT assessment for the entire year 2020 (from January to December 2020), the Respondent had no powers to use data from other months to determine VAT for one month from 1st December 2020 to 31st December 2020 and doing so has rendered the Appellant unable to defend itself.g.That the Respondent merely lifted the figure of Kshs. 5,491,521. 00 from the Appellant’s bank statement and termed it as ‘total income as per 2020 income tax returns’ but failed to appreciate that not all incomes in the bank statement are vatable supplies.h.That the Respondent used a wrong approach to calculate payable VAT.i.That the Respondent ignored the documents in support of the notice of objection.j.That whereas the Appellant filed its VAT returns for the period 1st December 2020 to 31st December 2020, the Respondent failed to take into account the letter dated November 2020 wherein Triserve Ltd was responsible for filing VAT returns in execution of a contract dated 4th November 2020.

Appellant’s Case 10. The Appellant’s case is premised on its Statement of Facts dated 21st September 2022 and filed on 22nd September 2022 and the documents attached thereto.

11. The Appellant stated that the Respondent assessed its VAT for the period 1st December 2020 to 31st December 2020 through the assessment dated 19th January 2022, which the Appellant objected to online and the Respondent acknowledged receipt of the notice of objection.

12. The Appellant further stated that it provided all supporting documents that the Respondent needed, including certified banks statements and contract agreement in support of the notice of objection.

13. That despite the Appellant's objections, the Respondent confirmed the assessment vide its objection decision dated 23rd August 2022 seeking to recover a principal sum of Kshs. 698,813. 64.

14. The Appellant stated that from the Respondent’s objection decision, it was clear that the Respondent did not take into account the fact that the Appellant paid and filed VAT returns for the period 1st December 2020 to 31st December 2020. That demanding the Appellant to pay a principal sum of Kshs. 698,813. 63 was equivalent to subjecting it to excessive and double taxation. That the consequence of the Respondent’s action was that the objection decision is unlawful.

15. The Appellant averred that since it filed returns for the periods from 1st June 2020 to 31st December 2020, that the Respondent ought to have considered those returns before issuing the objection decision. The Appellant stated that the Respondent failed to discharge this duty, and that this omission rendered the objection decision invalid.

16. The Appellant argued that from the objection decision, the Respondent assessed the Appellant VAT based on what it called 'variances' by considering the 'total income filed as per 2020 returns'. It was the Appellant’s case that this mode of assessment was illegal and subjected the Appellant to double taxation because the assessment in question related to a specific period between 1st December 2020 and 31st December 2020, and not the entire year. That it was illegal that the Respondent relied on 'total income filed as per 2020 returns' to calculate VAT for the month of December 2020.

17. The Appellant stated that the 'total income filed as per 2020 returns' as used by the Respondent referred to income tax returns from January 2020 to December 2020. That this was income for 12 months, yet the VAT assessment in issue related to one month only. That it then follows that to obtain the accurate VAT figure for the period between 1st December 2020 and 31st December 2020, the Respondent ought to have relied on income from the month of December 2020 only and not the entire total income of the year 2020.

18. The Appellant submitted that if the assessment in issue related to a period from 1st January 2020 to 31st December 2020, then the Respondent would have been entitled to rely on variances arising from total income filed as per 2020 returns versus what the Appellant had declared.

19. The Appellant questioned why the Respondent relied on returns of a whole year despite the assessment relating to a specific period between 1st December 2020 and 31st December 2020. That relying on variances arising from total income filed as per 2020 returns to determine VAT assessment for a specific period between 1st December 2020 and 31st December 2020 was not only illogical and absurd, but that it also implied that the Appellant failed to file and declare VAT for all months in 2020.

20. The Appellant submitted that it paid VAT and filed VAT for the year 2020 and that the Respondent's demand for payment of any extra amounts in tax amounts was over taxation and double taxation.

21. The Appellant averred that the Respondent merely lifted the figure of Kshs. 5,491,521. 00 from the Appellant’s bank statement and termed it as total income as per 2020 income tax returns but failed to appreciate that not all incomes in the bank statement are vatable supplies.

22. The Appellant argued that this lifting of a figure does not take into account the fact that some amounts in the bank statements constitute capital and funds received from debtors. That as an example from the bank statement, on 31st August 2020, the Appellant’s director advanced Kshs. 40,000 to the Appellant. The Appellant contended that the Respondent’s reasoning that this amount is taxable because it appears in the bank statement was wrong.

23. The Appellant averred that the Respondent presumed, and inaccurately so, that all amounts in the bank statement are net incomes. That in deciding that there are variances in the income tax returns and VAT returns, the Respondent ignored invoices that the Appellant provided, which invoices captured the expenses that the Appellant incurred.

24. The Appellant stated that whereas it filed its VAT return for the period of December 2020, that the Respondent failed to consider the letter dated November 2020, which according to the Appellant, had demonstrated that Triserve Ltd was responsible for filing VAT returns in execution of the contract dated 4th November 2020.

25. The Appellant asserted that it forwarded all invoices to Triserve Ltd which was responsible for paying and filing VAT returns and withholding tax in compliance with the letter dated November 2020 and the contract dated 4th November 2020. That the Respondent had no business pursuing the Appellant on this issue because doing so will result to double taxation wherein the same tax is paid by the two taxpayers.

26. The Appellant submitted that it did all in its powers to comply with tax matters, and that it filed returns for the period between 1st December 2020 and 31st December 2020. That the Respondent ignored the returns filed for the period under review, ignored the documentary evidence availed and relied on data and information beyond a specific period of assessment which was between 1st December 2020 and 31st December 2020 as specified in the assessment dated 19th January 2022. That this overreach affected the Appellant in that the Respondent relied on data beyond the assessment period to the prejudice of the Appellant.

27. The Appellant submitted that had the Respondent considered the filed returns for the period between 1st December 2020 and 31st December 2020, the Respondent would have arrived at a different finding that the Appellant is tax compliant.

Appellant’s Prayers 28. The Appellant prays that the Tribunal: -a.Allows the 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.c.Awards the costs of this Appeal to the Appellant.

Respondent’s Case 29. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 21st October 2022 and the documents attached thereto; andb.Its Written Submissions dated 30th March 2023 and filed on 4th April 2023 and the documents attached thereto.

30. The Respondent stated that the Appellant was registered for Income tax company obligation on 23rd August 2018 and for Value Added Tax (VAT) obligation on 19th June 2020.

31. The Respondent stated that it noted variances between sales declared in the Appellant’s tax returns for the period 2020 and via a pre-assessment demand notice dated 22nd November 2021 it advised the Appellant to amend its VAT returns by declaring the amount of turnover variance of Kshs. 4,991,526. 00.

32. The Respondent averred that the Appellant failed to amend its VAT returns and that on 19th January 2022, the Respondent issued it with a VAT additional assessment of Kshs. 698,813. 64 exclusive of penalties and interest based on the established variance between the VAT returns and income tax returns for the year 2020.

33. The Respondent confirmed that the Appellant lodged a late objection application on 28th June 2022 disputing the entire assessment wherein the Appellant contended that the turnover variance was as a result of non-vatable income for the year 2020 and further that as per the construction contracts with its clients that it was to account for only labour-based income for the year 2020.

34. The Respondent stated that it wrote to the Appellant on 8th July 2022 and on 19th July 2022 requesting it to provide the below-listed information for the Respondent to ascertain the Appellant’s objection grounds:a.Reconciliation of the turnover as per income tax return and VAT returns for the year 2020 along with the supporting documents.b.Financial statements for the year 2020. c.Income and purchases schedules for the year 2020. d.Invoices/ any other relevant and supporting documents.e.Bank statements for the year 2020. f.Construction contracts.

35. The Respondent averred that despite the Appellant’s late objection and invalid applications, it via a decision dated 20th July 2022 gave the Appellant a chance to validate the objection application and requested the Appellant to avail the following documents not later than 27th July 2022:a.Reconciliation of the assessed turnover variances together with the supporting documents.b.Certified copies of the bank statement for the year 2020. c.Financial statements for the year 2020. d.Income and purchases schedules for the year 2020. e.Any other relevant and supporting documents/evidence in support of the objection grounds.

36. The Respondent stated that the Appellant did not provide any invoices for the Respondent to determine whether the items were vatable or not.

37. The Respondent further stated that building and construction services are vatable supplies and that the Appellant should have accounted for the same for purposes of VAT. That the contract provided by the Appellant, between it and Triserve Ltd had the following clause: -“1. 5.3. MC and client rep to sort out VAT/Withholding Tax issues relating to material purchases and labour invoices early to avoid future complications. All receipts of vatable expenses to be submitted by 15th of every month for purposes of returns.”

38. The Respondent also stated that no invoices, financial statements, sales ledgers, or purchases ledgers were provided for it to ascertain the Appellant’s objection grounds. That the bank statements provided for the year 2020 had no reconciliation of any inter-banking transactions, un-cleared effects, bounced cheques, and/or changes in equity and capital injection for example, either through loans, as the bankings were more than the returns filed.

39. That the Appellant having not provided all the required documents to the Respondent, the Respondent rejected the application on 23rd August 2022 and that this was a period of 46 days since the request for records was sent.

40. The Respondent stated that it refutes each and every allegation by the Appellant in the Memorandum of Appeal and Statement of Facts.

41. In response to the Appellant’s grounds in the Memorandum of Appeal, the Respondent averred that it denied that the Appellant paid and filed VAT returns for the period of 1st December 2020 to 31st December 2020 and averred that the only vatable sales declared by the Appellant for the year 2020 were to Nyandarua County Government only. That no other VAT was declared for the year 2020.

42. In response to grounds 2, 3, 4, 5 and 6 of the Appellant’s grounds of appeal, the Respondent averred that in the pre-assessment demand notice dated 22nd November 2021, that it was clear on the relevant tax period. That the notice stated, inter alia:“We have noted variances between sales declared in your VAT3 and Income tax returns for the period 2020. You are therefore advised to amend your VAT returns for the affected period and pay the correct taxes due as per the following preliminary computation…”

43. The Respondent further averred that having sent the pre-assessment demand and having informed the Appellant of the assessment period, that the Appellant was estopped from denying that which it was fully aware of.

44. In response to grounds 7 and 8 of the Appellant’s grounds of appeal, it was the Respondent’s statement that the assessment was done after the Respondent noted variances between the sales declared by the Appellant in its VAT returns and the income tax return for the period 2020.

45. The Respondent explained that despite requesting for documents as listed above, the Appellant failed to provide the same, thereby failing to prove that the items in issue were not vatable.

46. The Respondent reiterated that the material, labour-based income, building and construction services listed in the contract provided by the Appellant are all vatable supplies at the general rate. That the said items are not listed as either exempt or zero-rated supplies in the VAT Act and that the same ought to have been accounted for VAT purposes for the year 2020.

47. The Respondent stated that Section 31 of the Tax Procedures Act (TPA) empowers it to amend a taxpayer’s assessment using the Respondent’s best judgement. That the provision states that: -“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 of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(a)…(b)…(c)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.”

48. The Respondent argued that the Appellant failed to provide documentation to support its grounds for objection as required under Section 51 (3) (c) of the TPA which provides that: -“A notice of objection shall be treated as validly lodged by a taxpayer if... the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments... all the relevant documents relating to the objection have been submitted.”

49. The Respondent averred that the Appellant did not produce invoices, financial statements, sales ledgers, or purchases ledgers for the Respondent to consider before delivering its decision, and as such, new evidence (if at all) which the Respondent termed as an afterthought, cannot be introduced at the instant stage.

50. The Respondent asserted that it is trite that the Commissioner's determinations of tax deficiencies are presumptively correct, and that the presumption remains so until the taxpayer produces competent and relevant evidence to support its position. The Respondent thus concluded that the Appellant failed to meet the burden of proof contrary to Section 56 (1) of the TPA which provides that in any proceedings, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

51. The Respondent in its submissions summarised its issues for analysis as below: -a.Whether building and construction services are vatable supplies.b.Whether the additional assessments were properly raised.c.Whether the Appellant has discharged its burden of proving that the assessments were excessive.

On Whether Building And Construction Services Are Vatable Supplies 52. The Respondent submitted that building and construction services are vatable supplies and that the Appellant should have accounted for the same for purposes of VAT. The Respondent relied on the following definition of taxable supplies as per Section 2 of the VAT Act which provides that: -“"taxable supply" means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business;”

53. The Respondent further submitted that it was further guided by Section 43 of the VAT Act which requires any person making taxable supplies under the VAT Act to keep certain records.

On Whether The Additional Assessments Were Properly Raised And Whether The Appellant Has Discharged Its Burden Of Proving That The Assessments Were Excessive 54. The Respondent submitted that the assessments issued were in accordance with Section 29 (1) of the TPA and thus were in conformity with the law.

55. The Respondent further submitted that the Appellant did not avail any evidence to support its claim that the assessment was erroneous, and that as a result, the Respondent confirmed the assessments on 25th January 2022.

56. The Respondent contended that it was evident that the Appellant failed to discharge the duty placed upon it under Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act by relying on the decisions in the cases of Commissioner of Domestic Taxes v Golden Acre Limited [2021] eKLR and Sheria Sacco Limited v Commissioner of Domestic Taxes ML HC ITA No. 36B of 2017 [2019] eKLR where it was observed as follows: -“The SACCO did not meet that burdenIn the Australian case of Mulheim v Commissioner of Taxation [2013] FCAFC115 the Full Federal Court of Australia (PFC) ruled: -“A taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The PFC 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. That onus requires the taxpayer to positively prove his or her 'actual taxable income' and in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer.”

57. The Respondent submitted that for the notice of objection to be valid, the taxpayer has to precisely state the grounds of objection, has to pay all the taxes not in dispute and has to provide all the relevant documents in support of the objection as provided for in Section 51 (3) of the TPA which states that: -“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if–(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)In relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.(c)All the relevant documents relating to the objection have been submitted.”

58. That the above quoted Section 51 (3) of the TPA expressly enumerates the validity threshold for a notice of objection as being: statement of the grounds of objection, requisite amendments to correct the decision, reasons for amendments sought, payment of undisputed taxes and provision of all relevant supporting documents. That notably this Section employs a conjunctive term 'and' thus making it incumbent upon a taxpayer to check each box under Section 51 (3) (a) to (c) of the TPA accordingly, to successfully lodge a valid notice of objection.

59. It was the Respondent’s submission that upon its objection to the assessments, the Appellant failed to provide any documentation to support the objection leading to the confirmation of the assessment. The Respondent averred that the Appellant's claim that it had provided all the necessary documents and had supported its case is false as indicated in the Respondent's objection decision and various correspondences.

60. The Respondent referred to the case of TAT No. 55 of 2019, Boleyn International Limited versus Commissioner of Domestic Taxes, where the court quoted the case of Digital Box Limited versus Commissioner of Investigations and Enforcement (2020), where it was held that: -“...on 8th March 2018, the Appellant lodged an objection with the Respondent. However, the said objection did not reiterate the grounds of objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide the relevant documents in support of its alleged objection. Therefore, there was no conceivable way the Respondent would have considered the Appellant's objection as the same did not place itself within the parameters of section 51(3) of the Tax Procedures Act.”

61. The Respondent also relied on the holding in the case of TAT No. 70 of 2017, Afya X-ray Centre Limited versus Commissioner of Domestic Taxes where the court held that: -“From then foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its fairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent's finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent's assessment after all the Appellant by law bears the burden of proof...”

62. The Respondent asserted that there was clear proof in the Respondent's Statement of Facts that the Appellant failed to provide the necessary documents to support its objection and that due to the Appellant's failure to provide supporting documents, the Respondent relied on available information that it had and the Commissioner’s best judgement in making the assessment order and confirming the assessment in accordance with Section 31 of the TPA.

63. The Respondent averred that this Tribunal has in a number of cases maintained the position that, where the Appellant fails to provide the requisite documents, then the Commissioner is by all means justified in confirming the assessments earlier issued to the Appellant as was held in the case of Ngurumani Traders Limited versus Commissioner of Investigations and Enforcement, TAT No. 125 of 2017, where the Tribunal held at paragraph 40 of its judgment that: -“From the foregoing, the Appellant's failure to lodge a proper objection meant that the Respondent was at liberty to confirm the assessment. Measured against the provisions of section 51 (3) of the Act, the Appellant's conduct and manner of lodging the objection fell considerably short of the permissible statutory requirements under section 51(3) of the Tax Procedures Act, 2015. It would be fundamentally non-justifiable for this Tribunal to entertain this preliminary objection, taking into account the Appellant's flagrant non-compliance with the law on raising objections.”

64. That this was further reinforced in Digital Box Limited versus Commissioner of Investigations and Enforcement (2020) where the Tribunal held that: -“The question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56(1) of the Tax Procedures Act states that: "In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision in incorrect. "Section 30 of the Tax Appeals Tribunal Act similarly provides that: "In a proceeding before the Tribunal, the Appellant has the burden of proving-(a) Where an appeal relates to an assessment, that the Assessment is excessive; or (b) in any other case, that the Tax decision should not have been made or should have been made differently. "In this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment. Thus, according to the provisions of the Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant...The Tribunal is of the view that the Appellant did not discharge its burden of proof in showing that the Respondent used extraneous considerations and documents other than those prescribed by law. The averments, made by the Appellant did not amount to evidence.”

65. The Respondent submitted that it has demonstrated before this Tribunal what was considered in arriving at the assessment and subsequently the objection decision which are within the law. The Respondent added that it has explained in detail reasons why it assessed the Appellant and its findings and prayed that the Tribunal upholds the objection decision.

66. The Respondent reiterated that its assessment was hinged on the letter of the law. That it was upon the Appellant to provide evidence to support its assertions against the assessment at the objection stage.

Respondent’s Prayers 67. The Respondent prays that the Tribunal:a.Upholds the Respondent’s objection decision dated 23rd August 2022. b.Dismisses the Appeal with costs.

Issue For Determination 68. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:Whether the objection decision dated 23rd August 2022 is proper in law.

Analysis And Findings 69. Having identified the issue that falls for its determination, the Tribunal proceeds to analyse it as hereunder.

70. The Respondent stated that it noted variances between sales declared in the Appellant’s tax returns for the period 2020 and via a pre-assessment demand notice dated 22nd November 2021 it advised the Appellant to amend its VAT returns by declaring the amount of turnover variance of Kshs. 4,991,526. 00.

71. The Respondent averred that the Appellant failed to amend its VAT returns and that on 19th January 2022, the Respondent issued it with a VAT additional assessment of Kshs. 698,813. 64 exclusive of penalties and interest based on the established variance between the VAT returns and income tax returns for the year 2020.

72. The Appellant lodged a late objection application on 28th June 2022 disputing the entire assessment.

73. The Respondent on 8th July 2022, 19th July 2022 and 20th July 2022 requested the Appellant to provide it with specific documents and information for the Respondent to ascertain the Appellant’s objection grounds.

74. The Respondent issued its objection decision in a letter dated 23rd August 2022 confirming the assessments, which the Appellant appealed against on 22nd September 2022.

75. The Tribunal reviewed all the information and documents adduced by the Appellant and determined that alongside the Statement of Facts and submissions outlined above, the Appellant provided only the following documents in relation to the impugned objection decision:a.The Respondent’s assessment order dated 19th January 2022. b.The Appellant’s late objection dated 28th June 2022. c.The Appellant’s bank statements from 1st January 2020 to 31st December 2020. d.Contract between the Appellant (the contractor) and Triserve Limited (the Appellant’s client) dated 4th November 2020 with contract sum of Kshs. 36,500,000. 00 payable to the Appellant.e.The Respondent’s objection decision dated 23rd August 2022. f.The Appellant’s VAT return acknowledgment receipts for the tax periods 19th June 2020 to 30th June 2020, 1st July 2020 to 31st July 2020, 1st August 2020 to 31st August 2020, 1st September 2020 to 30th September 2020, 1st October 2020 to 31st October 2020, 1st November 2020 to 30th November 2020 and 1st December 2020 to 31st December 2020. g.The Appellant’s withholding VAT certificate dated 4th July 2020 for VAT of Kshs. 8,621. 00 withheld by the Appellant’s client, Nyandarua County Government.h.The Appellant’s VAT payment slip dated 8th August 2020 for payment of VAT of Kshs. 12,350. 00 for the period of July 2020. i.Purchase invoices for various periods from February 2020 to October 2020. j.Letter from the Appellant’s client, Triserve Ltd, dated November 2020 stating that: -“Ref: Bensue Building Contractors LtdThe above company has been contracted by Triserve Ltd. The contract sum is Kshs. 36,500,000. 00. Bensue Building Contractors Ltd will surrender all receipts of purchases to Triserve Ltd for filing returns (VAT) and 3% withholding tax will be done to labour cost.The contractor is expected to discharge his duties and roles as outlined in the main contract.”

76. The Respondent stated that in the pre-assessment demand notice and objection decision it based its additional VAT assessment for December 2020 on unexplained variances between the sales turnover in the Appellant’s income tax return and the turnover declarations in the 2020 VAT returns.

77. The Appellant submitted that the Respondent erred in law and fact by relying on alleged variance of Kshs. 4,991,526. 00 which variance was derived from income tax returns for entire year of 2020 and which the Respondent used to determine VAT for one month from 1st December 2020 to 31st December 2020.

78. The Appellant argued that the Respondent merely lifted the figure of Kshs. 5,491,521. 00 from the Appellant’s bank statement and termed it as ‘total income as per 2020 income tax returns’ but failed to appreciate that not all incomes in the bank statement are vatable supplies.

79. The Respondent stated that no invoices, financial statements, sales ledgers, or purchases ledgers were provided for it to ascertain the Appellant’s objection grounds. That the bank statements provided for the year 2020 had no reconciliation of any inter-banking transactions, un-cleared effects, bounced cheques and/or changes in equity and capital injection for example, either through loans, as the bankings were more than the returns filed.

80. The Tribunal noted that the total income that the Appellant declared in its income tax return for the year of income 2020 was Kshs. 5,491,521. 00 which was identical to the bank credits in its bank statements from 1st January 2020 to 31st December 2020. The Tribunal further observed that the Appellant only declared sales turnover of Kshs. 499,995. 00 for the tax periods in 2020 in its VAT returns, and that this resulted in a turnover variance of Kshs. 4,991,526. 00.

81. The Respondent stated that the Appellant failed to provide the necessary documents to support its objection and that due to the Appellant's failure to provide supporting documents, the Respondent relied on available information that it had and its best judgement in making the VAT assessment and confirming the assessment in accordance with Section 31 of the TPA.

82. The Tribunal’s review of the evidence presented by the Appellant showed that the Appellant failed to produce sales invoices and bank reconciliations to support the income it recognised in its 2020 income tax return and 2020 VAT returns to disprove the Respondent’s objection decision.

83. Section 43 of the VAT Act, 2013 envisions that a person carrying on a business must keep certain records and documents which should be provided to the Commissioner for inspection. Section 43 of the VAT Act, 2013 provides that: -“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial copies number order;(b)of all credit and debit notes issued, in chronological order;(c)…;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.”

84. The Tribunal finds that while the Appellant claimed that it kept records of its transactions, and claimed that on production of the transactional records for the Respondent’s inspection, that the Respondent disregarded these records and documents, the Appellant did not produce the relevant records and documents for the Tribunal’s review.

85. The Tribunal has previously held in TAT No. 469 of 2022 Five Forty Aviation Limited vs Commissioner of Domestic Taxes that: -“It is settled law on record keeping and provision of the same when requested by the Respondent where Section 43 of the VAT Act 2013 requires a taxpayer to keep transactional records for a period of five years…”

86. Further, it was the Tribunal’s observation that the Appellant failed to demonstrate with evidence that the turnover variance of Kshs. 4,991,526. 00 between turnover in its 2020 income tax return and its 2020 VAT returns related to goods or services that are not taxable under the VAT Act, 2013. Section 62 of VAT Act, 2013 places the burden of proving that any goods or services are exempt from payment of tax on the taxpayer. The Section provides as follows: -“In any civil proceedings under this Act, the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax.”

87. The Tribunal is of the considered view that the Appellant also failed to demonstrate with evidence the correctness of its VAT declarations during 2020.

88. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s additional assessment of VAT for the period of December 2020 was incorrect or excessive as required under Section 56 (1) of the TPA and Section 30 (a) of the Tax Appeals Tribunal Act.

89. As per the foregoing analysis, the Tribunal finds that the Respondent was justified in issuing the objection decision confirming the VAT assessment for December 2020.

Final Decision 90. The upshot of the foregoing is that the Tribunal finds that the Appeal is devoid of merit and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 23rd August 2022 be and is hereby upheld.c.Each party to bear its own costs.

91. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023. ....................GRACE MUKUHACHAIRPERSON....................DR. ERICK KOMOLOMEMBER....................JEPHTHAH NJAGIMEMBER....................TIMOTHY VIKIRUMEMBER....................GLORIA A. OGAGAMEMBER