[2023] KETAT 319 (KLR)

Blocks International Limited v Commissioner of Domestic Taxes (Appeal 469 of 2021) [2023] KETAT 319 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 319 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 469 of 2021

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

May 19, 2023

Between

Blocks International Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability Company and a registered taxpayer. The Appellant’s principal business activity is mining and supply of construction related materials such as building stones.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued a demand letter to the Appellant dated 13th August 2020 notifying the Appellant of the taxes due.

4. The Respondent issued VAT assessment for a total tax liability of Kshs. 18,273,428 for the imports covering the period July 2016 and corporate tax assessment for a total tax liability of Kshs. 2,999,426. 00 for the period of June 2015 to December 2015 both dated 8th September 2020.

5. The Respondent thereafter issued an immediate demand letter in reference to the tax assessments issued to the Appellant on 21st April 2021.

6. The Appellant objected against all of the assessments on iTax and was issued with objection acknowledgment receipts, respectively, on 22nd April 2021.

7. The parties thereafter engaged in various correspondences wherein the Respondent requested the Appellant to provide documents to support the claim.

8. The Respondent issued a decision dated 22nd June 2021 demanding VAT amounting to Kshs. 11,279,893. 92 and Income tax amounting to Kshs. 1,922,709. 30 for the period ending December 2015.

9. The Appellant being dissatisfied with the Respondent’s objection filed a Notice of Appeal on 1st July 2022.

The Appeal 10. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 3rd August 2021. a.That the Respondent erred in its assumption that the intended purpose of the purchased equipment was for resale. The said equipments were imported by the Appellant for use in the conduct of its business.b.That the Respondent erred in fact due to the assumption that the assets purchased were financed by undeclared sales. These are part of the Directors Capital injection into the company.c.That the facts in the documents delivered to Thika Station and annexed in the Appellant’s documents as Appendix I were not considered and the reason for that not given.d.That any detail of findings by the Respondent and the basis of its assessment was also not shared with the Appellant.

Appellant’s Case 11. The Appellant’s case is premised on its Statement of Facts dated and filed on 3rd August, 2021 and the written Submissions dated and filed on 24th May, 2021.

12. That the tax demanded by the Respondent was based on the assumption that the tractors and equipments imported were for resale.

13. That the Appellant provided evidence that the tractors and equipments exist as company assets to date.

14. That the Appellant’s returns and accounts were duly filed.

15. That the assets were purchased by Directors’ savings and disposal of assets as indicated in the Appellant’s Statement of Facts.

16. The Appellant raises the following issues in its submissions:

Whether the objection decision was valid 17. That the letter dated 22nd June by the Respondent which was the “objection decision” has no statement of fact for the decision contrary to Section 51(10) of the Tax Procedures Act (TPA). That Section 51(10) of the TPA lays down what the objection decision must contain. It states as follows:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

18. That therefore Section 51(10) of the TPA requires that an objection decision should contain the statement of findings on the material facts and the reasons for the decision. The Appellant ensured that it stated precisely the grounds of objection and forwarded all the relevant documents relating to the objection.

19. That the Appellant further submits that the Respondent erred in fact and in law by issuing an objection decision that failed to meet the mandatory requirements of Section 51(10) of the TPA since it failed to provide the Appellant with a statement of findings on the material facts and the reasons for the decision.

20. That the Appellant was left to its own devices to guess as to why the Respondent made its objection decision as it did since no grounds or documents were provided. In the case of Minazini Enterprises vs. Commissioner of Domestic Taxes (Tax Appeal Number 56 of 2016) the Tribunal stated that:“The objection decision issued by the Respondent on 4th April 2016 did not include a statement of facts and reason for the decision. The Respondent averments that the audit queries, audit findings and various correspondences as a substitute for a statement of facts or reasons for the decisions is not convincing and such the tribunal does not attach any weight to the reasons so advanced…”

21. That in Ideal Developers Limited vs. Commissioner of Domestic Taxes (Tax Appeal Number 90 of 2021) the Tribunal stated that:“…the Tribunal would like to stress the importance of due process, proper engagement and thorough documentation. Lack of this can either lead to shortage of, or delay in, justice. In light of the foregoing the Tribunal finds that the objection decision does not meet he validity threshold envisaged under the Tax Procedures Act and is therefore not valid.”

22. That while the Appellant appreciates the Respondent has powers to assess and demand payment of taxes due, it submits that statutory powers can only be exercised validly if they are exercised reasonably, rationally and properly and that no statute ever allows any public officer to exercise statutory power arbitrarily or capriciously, that this submission based on Republic vs. Commissioner of Cooperatives ex-parte Kirinyaga Tea Growers Co-operative Savings and Credit Society Ltd (1999) 1EA 245 (CAK) at page 249, which stated that:“It is now an accepted principle in this field that statutory powers and duty must be exercised and performed reasonably.”Whether the Respondent erred in law by failing to consider the documents before it

23. That a tax liability of Kshs. 1,922,709. 30 for income tax for the year ended 31st December 2015 and Kshs. 11,279,893. 92 for July 2016 was assessed by the Respondent’s office after declining the basis of the Appellant’s objection. That the Respondent demanded this tax on the assumption that the tractors that the Appellant’s Directors imported were for resale

24. That the tractors were not sold locally but were still in the possession of the Appellant’s director. Further, in the bundle of documents that the Appellant submitted to the Respondent, there was a detailed explanation as well as evidence that the tractors were registered to the Appellant’s director. That the documents provided evidence that the tractors and equipments exist as assets of the Appellant’s company.

25. That it is trite law that whoever alleges must prove. That the Evidence Act places the burden of proof of any fact on the person that wishes to rely on the same. That Section 107 of the Evidence Act provides as follows:(1)Whoever desires any court to give judgement as to any legal or liability dependent o the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

26. That in Martin v. Glyneed Distributors Ltd the court stated that:“that where a right of appeal is confined to questions of law only, an appellate court has loyalty to accept the findings of fact of the lower courts… unless it’s apparent that on the evidence no reasonable tribunal could have reached that conclusion which would be the same as holding the decision is bad law.”

27. That the Tribunal has jurisdiction to review the evidence that the Respondent has omitted. That this has been provided for by Section 26 of the Tax Appeals Tribunal Act (TATA) which provides that:“it gives the opportunity to make submissions concerning evidence; Inspect any document sin relation to the proceedings and make submissions.”

28. That the Tribunal indeed has jurisdiction to determine whether the conclusion originally reached upon that evidence should stand.

29. That in the case of Bundi Makube v. Joseph Onkoba Nyamuro, the court held that “…A Court of Appeal will not normally interfere with a finding by the trial court unless it is based on evidence, or on misinterpretation of evidence or the judge is shown demonstrably to have acted on wrong principles in reaching the findings he did.

30. That the Appellant has the burden to prove that the Respondent’s objection decision should have been made differently as provided for under Section 30 of the TATA which provides for burden of proof for appeals in the Tribunal, that in any other case that the tax decision should not have been made or should have been made differently. That in this case the Appellant implores the Tribunal to look at the evidence in our statement of facts that the tractors and equipments exist as company assets to date.

31. That this case is premised on the Respondent’s misunderstanding of the transaction and the facts on the ground. As it’s evidenced from the Appellant’s Statement of Facts, the Respondent is of the view that the Appellant imported the equipment and resold it locally. The Appellant submits that the equipment and tractors that were imported are owned by the Appellant’s director and the said director used his own savings and also disposed some of his assets so as to import the equipment, evidence of which is in the Appellant’s Statement of Facts.

32. That the Appellant reiterates that this allegation is incorrect and misleading to the Tribunal. The Appellant asserts that the equipment imported was for use by the business and its directors and are held in its books. The purchases made were registered under the Appellant’s name or under the company’s director. Also, proof of ownership was provided to the Commissioner but this was not considered in arriving at the objection decision by the Commissioner.

33. That in the case of Munyu Maina v. Hiram Gathiha Maina [2013] eKLR (Civil Appeal No. 239 of 2009) the Court held that:“Under Section 112 of the Evidence Act, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him.”

34. That in the Appeal before the Tribunal, it is the Respondent that fell within Section 112 of the Evidence Act and which had the duty to demonstrate that the tractors were sold. The Tribunal should therefore find and hold that the burden remains with the Respondent to prove its allegations with evidence.

35. That further, to show that the Respondent did not take into consideration the factors surrounding the transaction herein, the Appellant submits that the Respondent failed to identify the correct facts on the ground and the applicable law thereof leading to an erroneous assessment.

Appellant’s Prayers 36. The Appellant prays for orders that:a.The Appeal be allowed.

The Respondent’s Case 37. The Respondent’s case, and responses to the Appeal, laid out hereunder, is premised on the following filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 1st September 2021 together with the documents attached thereto.Whether the Respondent erred in law and fact in issuance and confirmation of the assessments

38. That in response to Grounds 1 and 2 of the Appellant’s Memorandum of Appeal, the Respondent reiterates that the assessments were made in line with the law and further states as hereinafter.

39. That during the assessment, the Respondent relied on the documentation adduced by the Appellant in arriving at its decision. That the documents relied on include purchases invoices, delivery notes, bank transfer remittance advice, supplier written confirmation, bank statements among other documents.

40. That upon reviewing the Appellant’s records and iTax returns, inconsistencies were notes.

41. That Section 51(3) of the TPA provides for valid objection as follows:(3)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; and(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.”

42. That the Respondent in exercise of its power raised additional VAT assessments from the original assessments filed by the Appellant to reflect the correct tax liability of the Appellant. That this is in compliance with Section 31of the TPA which provides that:“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 – (c) the taxpayer is liable for the correct amount of tax payable in respect of the reporting to which the original assessments relate.”

43. That the Respondent further states that in guidance with Section 73(2)(b) in which it gives power to the Commissioner under reasonable cause, the Commissioner may determine to his best judgement the amount of income of that person and assess him accordingly.

44. That the Respondent thus issued the objection decision in which he fully rejected the objections issued on the basis that the taxpayer did not provide enough evidence to support the objection.Whether the Respondent erred in law and fact by failing in undertaking it obligations as a public officer to accord all taxpayers fair administrative action in accordance with Article 47(1) and 47(2) of the Constitution

45. That in response to Grounds 3 and 4 of the Appellant’s Memorandum of Appeal, the Respondent refers the Tribunal to the background as summarised in its Statement of Facts to illustrate that indeed their action was in line with Article 47 and principle of Fair Administrative Action.

46. That Article 47(1) and (2) of the Constitution which have been relied upon by the Appellant states as follows:(1)Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.(2)If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.”

47. That the decision came after following the proper guidelines as stipulated by Section 59 of the TPA this withstanding the fact that the objection decision came late and it did not have any valid objection on record.

48. That the Respondent follows the guidelines given in the Fair Administrative Actions Act 2015 under Section 3, this is undertaken by the Respondent as he gives prior and adequate notice of the nature and reasons for the proposed administrative action.

49. That the Respondent gave the Appellant an opportunity to be heard and to make representations in that regard, That the Appellant was given several chances to explain why the input claims were to be allowed.

50. That the parties engaged on several occasions and exchanged correspondence that lead to some of the claims being allowed while those which were unexplained and unsupported were disallowed.

51. That the Respondent’s assessments and subsequent objection decision resulting to the dispute herein are in accordance with the law.

52. That the Respondent has not violated any rights of the Appellant. Further, allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded I law and not supported by evidence,

53. That the from the imports data received from the Respondent’s Customs office, it was established that the Appellant imported machinery worth Kshs. 47,335,465. 00 and Kshs. 19, 685,983. 00 for the year 2017 and 2018, respectively.

54. That an analysis of income tax returns filed in iTax that the Appellant had declared plant and machinery of Kshs. 10,300,000. 00 for the period 2016 to 2018 and Kshs. 1,020,000. 00 for the period 2019.

55. That further, in the liabilities section, the Appellant had liabilities under payables/ creditors for more than one year item of Kshs. 11,380,348. 00, Kshs. 10,633,253. 00 Kshs. 9,910,120. 00 and Kshs. 4,730,000. 00 for the years 2016, 2017, 2018 and 2019, respectively.

56. That the analysis of the above two issues on assets and liabilities revealed that he machinery imported was never recognised in the balance sheet and there were no loans to support the purchase of the equipments.

57. That the Respondent therefore treated funds used in the purchase of the imported machinery as undeclared sales. Further, that the undeclared sales was brought to charge for income tax and VAT.

58. That consequently the Appellant was duly notified of the assessments and furnished with the information relating to the amount assessed, penalty imposed, the interest accrued, the period the assessment refers to, the due date for the taxes and the manner in which the Appellant could object per Section 51(2) of the TPA.

59. That he Appellant subsequently objected to the assessments but did not avail the source of funds documents as requested to support its objection.

60. That as a result, the objection of the VAT and Income tax were rejected for lack of supporting documentation hence the current appeal.

61. That it is apparent that the Respondent granted the Appellant sufficient time to avail documents to support its objection.

62. That it is also evident that the Appellant had the duty to avail invoice which match the amounts claimed and having failed to do so the Respondent rightly disallowed the claims.

Respondent’s Prayers 63. The Respondent prayed that:a.The Honourable Tribunal finds that the Respondent’s decision of 30th April 2021 and tax demand was therefore properly issued as provided for under the provisions of the Value Added Tax Act 2013and Tax Procedures Act; andb.The appeal be dismissed with costs to the Respondent as the same is without merit.

Issues For Determination 64. The Tribunal upon due consideration of the pleadings, the written submissions of the parties and the evidence of the Respondent’s witness was of the considered view that the Appeal raises the following issue for its determination:Whether the Respondent erred by raising the tax assessments on the Appellant.

Analysis And DeterminationWhether the Respondent erred by raising the tax assessments on the Appellant.

65. This dispute arose from the Respondent’s assessment of Income tax and Vat on imports made by the Appellant on the basis that the Appellant made imports amounting to Kshs. 64,090,306. 00 for the period 2014 to 2017 for which no corresponding sales have been declared.

66. In this regard, the Respondent treated the funds used in the purchase of the imported machinery as undeclared sales and further brought the undeclared sales to charge for Income Tax and VAT.

67. The Appellant contends that the Respondent made the tax demand on the assumption that the tractors and equipment imported were for resale. It is the Appellant’s contention that the tractors and equipments still exist to date as company assets and have never been resold.

68. The Appellant further explains that the assets were purchased by directors’ savings and disposal of assets as indicated in its statement of facts as well as other documents that have been availed to this Tribunal.

69. The Respondent on its part argues that after reviewing various documents submitted by the Appellant, it noted inconsistencies. According to the Respondent, the income tax returns filed by the appellant in iTax established that the Appellant declared plant and machinery of Kshs. 10,300,000. 00 for the period 2016 to 2018 and only Kshs. 1,020,000. 00 for the period 2019.

70. Further, it claims that the disallowed assessments were improperly claimed and did not meet the threshold provided for under the TPA as the disallowed inputs were not supported by the required documents as envisaged under Section 29 of the TPA.

71. From an analysis of the two parties’ cases, and specifically the documentation attached by the Appellant to its submissions, the Tribunal has established that the imports by the Appellant were purchased by use of Directors’ funds.

72. Further, the Tribunal has established that the importation documents show the importer on record to be Blocks International Limited. These documents include the Import Declaration Form (IDF), invoices, Bills of lading, export certificate from country of origin, Duty payment receipts, National Transport and Safety Authority vehicle inspection invoices and payments, shipping line payments, delivery orders, certificates of conformity, import entries amongst others. However, it is clear that the funds transfers were done by the directors and hence payment for the tractors and equipment were made by the company directors.

73. The Tribunal relies on Section 2 of the East African Community Customs Management Act (EACCMA) which defines owner in respect of goods to include,“any person other than an officer acting in his or her official capacity being or holding himself or herself out to be the owner, importer, exporter, consignee, agent, or the person in possession of, or beneficially interested in, or having control of, or power of disposition over, the goods.”The Tribunal thus confirms that based on the Customs importation documentation provided, the owner of the goods in question is Blocks International Limited.

74. Further, a review by the Tribunal of the submissions by the Respondent establish that the assessment was raised on the basis that the Appellant made imports for which no corresponding sales were declared. The Respondent has, however, not adduced documentation or evidence to demonstrate how it arrived at this conclusion.

75. Specifically, in regard to the statements by the Respondent that the Appellant only declared plant and machinery worth Kshs. 10,300,000. 00 for 2016 to 2018 and Kshs. 1,020,000. 00 for the period 2019, the Respondent did not attach a copy of the said return for the Tribunal’s review.

76. Further, as to the statement by the Respondent that the Appellant had assets and liabilities that pointed towards the fact that machinery was imported but not recognised in the balance sheets and that there were no loans to support the purchase of the equipments; again, no documentation was submitted by the Respondent to support this claim.

77. Finally, in regard to the claim by the Respondent that the disallowed assessments were improperly claimed and did not met the threshold provided for under the TPA as the disallowed inputs were not supported by the required documents as envisaged under Section 29 of the TPA, the Respondent has not provided any documents to support the same.

78. The Tribunal finds it necessary to refer to the Evidence Act. Section 107 of the Evidence Act, Chapter 480 of the laws of Kenya provides as follows regarding burden of proof:-(1)Whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies with that person.”

Final Decision 79. On the basis of the foregoing analysis the Tribunal finds that the Appeal is merited and therefore succeeds. The Orders that commend themselves are as follows: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 22nd June 2021 be and is hereby set aside.c.Each Party to bear its own costs.It is so ordered.

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