[2024] KETAT 1425 (KLR)

Bernsoft Interactive Limited v Commissioner of Domestic Taxes (Tax Appeal E506 of 2023) [2024] KETAT 1425 (KLR) (27 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1425 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E506 of 2023

CA Muga, Chair, BK Terer & EN Njeru, Members

September 27, 2024

Between

Bernsoft Interactive Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Backround 1. The Appellant is a private limited company incorporated under the Companies Act and a registered taxpayer whose principal business is content provision services i.e. arts and entertainment activities in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 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. Upon conducting a compliance audit on Appellant’s books of accounts for 2017, 2018, 2020,2021 and 2022 years of income, the Respondent issued the Appellant with a notice of intention to issue assessments on 2nd March 2023 and demanded the Appellant to avail explanations thereto within seven days.

4. On 13th April 2023 and 5th May 2023, the Respondent raised default income tax and VAT assessments totaling to Ksh 44,637,263. 40 for the 2017, 2018, 2020, 2021 and 2020 years of income.

5. The Appellant lodged its notice of objection on 4th June 2023 opposing the entire assessment which was acknowledged by the Respondent on even date vide the i-Tax platform.

6. On 9th June 2023, the Respondent in an electronic mail demanded that the Appellant justify their late objection and seek extension of time in accordance to Section 51(7) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).

7. The Respondent rendered its objection decision on 26th July 2023 confirming total assessment of Ksh 44,637,263. 40 in relation to income tax for 2017, 2018 and 2019 and Value Added Tax (VAT) for years 2017 to 2022 all of them in relation to the month of December.

8. Aggrieved by the Respondent’s objection decision, the Appellant filed its notice of appeal dated 23rd July 2023 on 23rd September, 2023 at the Tribunal.

The Appeal 9. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 23rd August 2023 and filed on 23rd September, 2023:i.That the Respondent erred in law and fact by wrongful deeming VAT withholding tax as sales and charging tax in violation of Section 3(1) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).ii.That the Respondent was in violation of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) First Schedule Section B on exempt services.iii.That the Respondent erred in law by ignoring Section 51(7)(2) and 51(11) of the TPA on validity of objection decision.iv.That the Respondent was in violation of Section 15(1) of the ITA.v.That the Respondent erred in law by wrongfully ignoring Section 29(1) of the TPA on the use of best judgement.vi.That the Respondent erred in fact by failing to acknowledge the reconciliations availed by the Appellant which clearly showed how sales were accounted for by the Appellant.

Appellant’s Case 10. The Appellant’s Statement of Facts were dated 23rd August 2023 and filed on 23rd September, 2023.

11. The Appellant averred that it filed its self-assessment returns for both VAT and Income Tax for the year 2017 to 2019 and disputed the Respondent’s assessment stating that it provided the sales ledger z-report and other supporting documents in their objection. The Appellant identified the following as its grounds of opposition to the Respondent’s assessment;i.Whether the Respondent can deem the entire VAT withholding tax as sales and charge tax.

12. The Appellant contended that all bank credits ought to be the turnover/ sales for the income tax which is defined by Section 3(1) of the ITA as “income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in, or was derived from Kenya.” And further that charging of tax should be as couched under Section 3(2) of the ITA which provides that; “(a) Gains of profits from- (i) a business, for whatever period of time carried on.” The Appellant further defined Value Added Tax as; “value added tax imposed under the VAT Act, 2013. ”

13. The Appellant stated that income tax and VAT should be entirely dependent. That despite explanations during meetings, the Respondent charged 30% on bank credits without determining gain which was excessive yet bank credits consisted of loans, personal deposits, customer deposits etc. that in the same meetings, the Appellant availed supporting documents which indicated that it dealt with both vatable and exempt services.

14. The Appellant insisted that the Respondent ought to consider costs from Appellant’s records for the 2017 and 2019 years of income as was held in the case of Digital Box Limited vs Commissioner of Investigation & Enforcement [TAT 115 OF 2017].

ii. Whether the Respondent was right to ignore documents presented. 15. The Appellant asserted that it availed the list of requested documents via electronic mail but the Respondent failed to acknowledge receiving them yet Section 76 of the TPA provides that;“76. Admissibility of documents produced electronicallyIn any proceedings under this Act, a statement contained in a document in electronic form shall be admissible as evidence of any fact stated in that document if the document is produced in the manner prescribed by this Act or any other tax law.”

16. The Appellant asserted that in demanding revenue, the Respondent should demonstrate sufficiently that a certain payment forms the basis of tax, and that further, taxes should be consistent with the law noting that taxes must have a legal basis. The Appellant sought reliance on the following authoritative cases: Republic v Commissioner of Income Tax ex parte SDV Transami (Kenya) Limited

Republic v Commissioner of Domestic Taxes Large Tax Payers Office Ex Parte Barclays Bank of Kenya Limited

17. The Appellant asserted that the Respondent’s objection decision demanding taxes for 2017 to 2019 had no basis in fact or law and that the entire assessment was arbitrary and unjust and ought to be set aside.

Appellant’s Prayers 18. The Appellant made the following prayers:a.The Tribunal allows the Appeal.b.The Tribunal annul Respondent’s confirmed assessment.c.The Tribunal awards costs of the Appeal to the Appellant.

The Respondent’s Case 19. The Respondent replied to the Appeal through its Statement of Facts dated 3rd November 2023 and filed on 6th November, 2023.

20. While reiterating its position as held in the objection decision, the Respondent stated that it conducted a compliance audit on the Appellant’s books of accounts for compliance status on various tax laws for the years 2017 to 2022 save for 2019 and established that the Appellant did not declare income earned from withheld VAT certificates. The Respondent averred that it established the Appellant as a non-filer upon grossing up withholding VAT certificates and comparing the income declarations in VAT and income returns because none of the services offered by the Appellant were exempt.

21. The Respondent asserted that upon approval of the Appellant’s late objection, it wrote to the Appellant on 14th June 2023, 10th July 2023, 13th July 2023 and 18th July 2023 requesting for supporting documents in support of its objection to discharge their burden of proof as required by Section 56(1) of the TPA but the Appellant failed to do so. That as a result, the Respondent made use of information obtained from its internal system and third-party information in the absence of sufficient documents from the Appellant. The Respondent justified this by relying on Section 24(2) of the TPA which provides as follows:“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 taxpayer’s tax liability using any information available to the Commissioner.”

22. The Respondent additionally asserted that the Appellant failed to counter the assessments as provided for under Section 51(3) of the TPA in relation to lodging of a valid objection noting that Section 23(1) of the TPA provides for maintenance of such documents and that this infraction of statute could not be allowed to benefit by the Appellant and this was what justified the Respondent’s application of Section 29 of the TPA since the Appellant failed to provide supporting documents at the review stage despite various electronic mail reminders.

23. The Respondent averred that the Appellant was neglectful of their duty as a taxpayer by failing to declare their income which allowed the Respondent to use his best judgement as provided for under Section 73(2)(b) of the ITA and as upheld in the case of Okiya Omtata Okoiti v the Hon Attorney General and the Kenya Revenue Authority where it was held as follows:“…it is for taxpayers to do their part in properly abiding by tax laws, so as not to arouse suspicion of the KRA which has the mandate to engage them on the accuracy of their tax compliance.”

24. That contrary to Section 59 of the TPA which requires the Appellant to provide records necessary to determine tax liability, the Respondent asserted that the Appellant failed to adduce sufficient supporting documents essential to ascertain their tax liability yet prior to issuance of the objection decision, the Respondent engaged the Appellant requesting for the documentation indicating the correctness of income. The Respondent stated that it issued the objection decision after 52 days from the Appellant’s objection date thus it complied with Section 51(11) of the TPA which provides as follows:“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 allowed.”

25. The Respondent held that it is trite that its determination of tax deficiencies were presumptively correct and remained so until the Appellant produces competent and relevant evidence to support their position and maintained that the Appellant’s averments in the Memorandum of Appeal and Statement of Facts were unfounded in law and not supported by evidence. Moreover, the Respondent asserted that the Appellant failed, refused and or neglected to provide all requisite documents to discharge its burden of proof that the assessments were incorrect.

Respondent’s Prayers 26. The Respondent made the following prayers to the Tribunal:i.That the Appeal be dismissed with costs for want of merit.ii.That the Tribunal finds and upholds the Respondent’s objection decision dated 26th July 2023 as proper in law.

Parties’ Written Submissions 27. The Appellant did not file its written submissions and therefore its case will be determined on the basis of its pleadings. On 17th of July, 2024 the Tribunal adopted the Respondent’s written submissions which were dated 25th April 2024 and filed on 2nd May, 2024.

28. The Respondent submitted on two issues as herein under;i.Whether the Appellant lodged a valid objection

29. The Respondent asserted that after issuing assessment orders on 13th April, 2023 and 5th May, 2023, the Appellant lodged its notice of objection on 4th June, 2024 which was outside the 30 days legal timeframe and even though extension of time was granted for the objection, the Appellant failed to precisely state the grounds of objection as provided for by Section 51(3) of the TPA.

30. The Respondent asserted that it made numerous electronic mails on 14th June 2023, 10th June 2023, 13th July 2023 and 18th July 2023 requesting supporting documents only for the Appellant to provide a summary of sales commission earned from Safaricom and content distribution agreement which were not sufficient to determine amount earned for the period under review and was contrary to the provisions of Section 51(3)(c) of the TPA.

31. The Respondent stated that in an electronic mail of 7th October 2023, it requested for the following to ascertain the correctness of Appellant’s income; Signed audited accounts.

Bank statements.

Sales ledgers.

Self-assessment returns for the entire period in review (VAT and Corporation Tax).

32. The Respondent asserted that apart from the fact the Appellant’s objection not meeting the threshold provided for under Section 51(3) of the TPA, the Appellant equally failed to discharge its burden of proof as couched under Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act , CAP 469A of the Laws of Kenya (hereinafter “TATA”). In buttressing this position, that the Appellant failed to prove the assessment as being excessive, the Respondent relied on the following authorities; Pearson vs Belcher CH.M Inspector of Taxes Tax Cases Volume 38.

Mulherin vs Respondent of Taxation [2013] FCAFC 115.

CA McCourtie LON/92/191.

33. It was the Respondent’s avowal that the Appellant’s notice of objection was invalid as it failed to demonstrate how the Respondent’s assessment was excessive or erroneous.

ii. Whether the assessments and subsequent objection decision made by the Respondent were proper in law. 34. The Respondent stated that the assessment order issued on 2nd March 2023 together with the objection decision of 26th July 2023 were valid and well-reasoned and it was the Appellant who failed to provide explanations or even supporting documents on why there was variance noted between income tax returns for the period under review. That as a result, the Respondent resorted to its best judgement based on information that was available to it as the Respondent’s decision was unchallenged and therefore proper as guided by the case of GreenroadKenya Limited vs Commissioner of Domestic Taxes [TAT 538 of 2021] where the Tribunal held as follows:“52. The Tribunal’s considered view is that the failure by the Appellant to avail the documents requested granted the Respondent the power to use its best judgement as provided for under Section 31(1) of the TPA which provides 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.53. in view of the foregoing, the Tribunal makes a finding that the Respondent’s assessment, and objection decision are proper in law.”

35. The Respondent averred that the Appellant failed to show how the assessment was excessive or incorrect, erroneous or invalid based on extraneous factors and relied on the Tribunal’s following holding in the case of Afya X-Ray Centre vs Commissioner of Domestic Taxes [TAT No. 70 of 2017]:“From the forgoing chain of events, it is our understanding that the Appellant failed in its duty in providing documents in order that a comprehensive analysis of its affairs is done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents....”

36. Further, the Respondent controverted the Appellant’s assertion that it provided documents in an electronic mail stating that the alleged electronic mail was neither attached in the Appellant’s pleadings nor the address sent to availed. The implication of which was that the Appellant never provided documents to the Respondent. Further that the summary of sales commissions earned from Safaricom and content distribution agreement provided by the Appellant was not sufficient to determine the income earned by the Appellant.

37. The Respondent disputed the Appellant’s assertion that it dealt with exempt services stating that the Appellant neither indicated the services it was providing nor under what paragraph of the first schedule the services fell to be considered exempt, the only alternative being that the services were vatable at 16% and thus payable.

38. The Respondent was categorical that the assessment was hinged on the letter of the law it was the Appellant who failed to adduce evidence in support of its assertions against the assessment at the objection stage.

Issues for Determination 39. The Tribunal having carefully considered the parties’ pleadings, documentation and Respondent’s submissions notes that the matter distils into the following two issues for its determination:i.Whether the Appellant discharged its burden of proof.ii.Whether the Respondent’s objection decision dated 26th July 2023 was justified.

Analysis and Determination 40. The Tribunal having established three issues for determination will proceed to analyze them as follows;i.Whether the Appellant discharged its burden of proof.

41. The Tribunal notes the Appellant’s claim that the Respondent brought to charge bank credits without determining gain which was excessive yet bank credits consisted of loans, personal deposits, customer deposits etc despite being availed supporting documents which indicated that the Appellant dealt with both vatable and exempt services. The Respondent countered this stating that the Appellant was neglectful of its duty as a taxpayer by failing to declare their income and failing to discharge their burden of proof by availing evidence to counter the assessments as issued.

42. The Tribunal further notes the Appellant’s contention that the Respondent ignored its objection and wrongfully applied best judgment while ignoring the reconciliations availed which clearly showed how sales were accounted for yet the Appellant had sent documents via electronic mail which the Respondent failed to acknowledge. This was controverted by the Respondent who stated that it sent electronic mails on 14th June 2023, 10th June 2023, 13th July 2023 and 18th July 2023 requesting for supporting documents only for the Appellant to provide a summary of sales commissions earned from Safaricom and content distribution agreement which were not sufficient to determine amount earned for the period under review.

43. The Tribunal notes the Appellant’s assertion that it availed the list of requested documents via electronic mail pursuant to section 76 of the TPA but the Respondent failed to acknowledge receiving them. This was however countered by the Respondent who stated that the alleged Appellant’s electronic mails were neither attached in the Appellant’s pleadings nor the address to which they were sent availed before the Tribunal.

44. The Tribunal notes the Appellant’s assertion that the Respondent ought to have sufficiently demonstrated the basis for taxation insisting that taxes must have a legal basis and that assessment should not be arbitrary or unjust. The Respondent opposed this position holding that its compliance audit for the 2017 to 2022 years of income had established that the Appellant was a non-filer who had through various electronic mails been requested to avail supporting documents but failed to do so.

45. The Respondent’s assertion that it established the Appellant as a non-filer and that the assessment information was obtained from Appellant’s internal system and third-party information was not challenged by the Appellant. The law has extended the odious duty of proof in tax matters upon the taxpayer who at all times is expected to prove the decisions of the Respondent as excessive or incorrect. Accordingly, the Tribunal associates with its following holding in the case of John Githua Njogu Vs. Commissioner Investigation and Enforcement [TAT Appeal No. 101 of 2018] :“…. where a taxpayer does not provide supporting documentation with regard to tax affairs; it gives the Respondent the power to make a judgement to the best of its knowledge with available information.”

46. It is therefore the holding of the Tribunal guided by Section 56 of the TPA and Section 30 of the TATA, that the Appellant in the instant Appeal failed to discharge its burden of proof.

ii. Whether the Respondent’s objection decision dated 26th July 2023 was justified. 47. The Tribunal having concluded that the Appellant herein failed to discharge its burden of proof, will not delve into the residual matter that fell for its determination as the same has been rendered moot.

Final Decision 48. The upshot of the foregoing is that the Appeal herein lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissedb.The Respondent’s objection decision dated 26th July 2023 be and is hereby upheld.c.Each party to bear its own costs.

49. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 27TH DAY OF SEPTEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER