[2023] KETAT 972 (KLR)

Brasely Limited v Commissioner of Domestic Taxes (Appeal 406 of 2022) [2023] KETAT 972 (KLR) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 972 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 406 of 2022

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

September 15, 2023

Between

Brasely 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 that of operating and providing services in the ICT Sector.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority 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 Part I & II of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent having noticed a variance in the turnover between the Appellant’s income tax returns and VAT returns treated the variance as undeclared sales and charged undeclared Value Added Tax as due and payable. It issued the Appellant with a pre-assessment demand.

4. On 23rd December 2021, the Respondent proceeded to issue the Appellant with an additional assessment notice of Kshs. 1,734,117. 92 on VAT for the period January to December 2021.

5. The Appellant lodged an objection to the entire assessment online on 31st December 2021 and obtained an objection acknowledgment receipt on even date.

6. On 10th February 2022, the Respondent notified the Appellant via email that its objection application was invalidly lodged for want of reasons for objection, the amendments required and supporting documents. It required the Appellant to file supporting documents within 7 days failure to which the objection notice will be rejected and the assessments confirmed.

7. On 1st March 2022, the Respondent issued the Appellant with a notice of objection invalidation in which it informed the Appellant that it’s objection as lodged did not meet the requirements of Section 51(3) of the TPA. Consequently, the additional VAT assessment of Kshs. 1,734,117. 92 together with the penalties and interest remained due and payable.

8. The Appellant, being dissatisfied with the Respondent’s invalidation of its objection and the subsequent confirmation of the additional VAT assessments, lodged with the Tribunal a Notice of Appeal filed on 21st April 2022.

The Appeal 9. In its Memorandum of Appeal filed on 21st April 2022, the Appellant premised its Appeal on the following grounds: -(a)That it has provided all the necessary documents/records and proof that the additional tax confirmed is excessive, punitive and unreasonable as it has been determined by denying the taxpayer what the law has granted.(b)That the Respondent’s staff failed to give what is expressly granted by the law more specifically Income Tax Act Para 24(1) (f) and 24(2)(c).(c)That if the Respondent’s staff acted reasonably within the confinement of the timeline, this matter could have been amicably resolved.(d)That the Commissioner or any of its agents cannot take away what the law has given since there is no other persuasive reason why the claim cannot be granted. That it is against the law and natural justice to deny an investor and taxpayer what is expressly given in law.(e)That the apparent slow process or delay of the matter has continued to deny the taxpayer claim that is specifically given when certain conditions have been fulfilled as stipulated in the Tax Procedures Act.(f)That although the Commissioner has been provided with all the documents in support of the VAT declared and VAT claimed, the delay to approve the claim has left the taxpayer a lot of unanswered questions, which it hopes will be resolved by this Appeal.(g)That the Appellant is willing to pay any tax that is properly determined and has done so in the past, and more so tax that may arise from what the Appeal Tribunal may deduce is payable.

Appellant's Case 10. The Appellant’s case was premised on its Statement of Facts dated 14th April 2022 and filed on 21st April 2022.

11. The Appellant stated that the Respondent’s failure to take into account the documents in support of the VAT claimed as well as the delay to approve the claim has left it with a lot of unanswered questions.

12. The Appellant averred that the Respondent’s staff erred by failing to give what is expressly granted by the law more specifically Income Tax Act Para 24(1) (f) and 24(2)(c).

13. The Appellant averred that the Respondent erred by confirming the additional taxes which are excessive, punitive and unreasonable. That the taxes were based on estimated income which does not take into account expenses that have been wholly and exclusively incurred in order to generate the income.

14. The Appellant stated that the Respondent erred by basing the additional tax on variance of VAT declared in twelve months and income declared in the financial statement by the Appellant during the year under review of which the variance was as a result of commission earned by MPESA service which is exempted in the VAT Act.

15. The Appellant averred that the Respondent erred by failing to act within the timelines delaying the matter which has continued to deny the taxpayer claim that is specifically given when certain conditions have been fulfilled as stipulated in the Tax Procedures Act 2015.

16. The Appellant stated that being a regular taxpayer, it felt incriminated by the Respondent’s staff who subjected it to an irregular audit which did not follow the taxation charter nor the protocol expected and hence cannot be regarded as conclusive.

Appellant’s Prayers 17. The Appellant prays for orders that:a.The Respondent’s confirmed assessments per the objection decision be set aside;b.The Respondent be directed to amend the assessment in accordance with the actual income and the return filed.

Respondent's Case 18. The Respondent premised its case on the following documents before the Tribunal:-(a)Respondent’s Statement of Facts dated 11th June 2022 and filed on 14th November 2022. (b)The Respondent’s written submissions dated 23rd January 2023.

19. The Respondent stated that the dispute arose after it carried out a review of the Appellant’s declarations for the tax year beginning 1st January 2016 to December 2016 to ascertain the compliance of the Appellant to various tax laws.

20. That the review revealed a variance between the turnover declared in the income tax return as compared to the Value Added Tax returns declared by the Appellant.

21. The Respondent averred that it treated the variance as undeclared sales and charged undeclared VAT as due and payable.

22. That the Respondent issued the Appellant with a pre-assessment demand notice and encouraged the Appellant to amend its return.

23. That when the Appellant failed to respond, it proceeded to issue an additional assessment on VAT for Kshs. 1. 734,117. 92.

24. The Respondent submitted that the Appellant dissatisfied with the assessment lodged an objection on the 31st of December 2021 highlighting their grounds of objection that the assessment was based on VAT exempt services as the company dealt in money transfer services.

25. The Respondent averred that the Appellant’s objection was invalid on the fact that its content remained unsupported despite the Respondent writing to the Appellant on 10th February, 2022 listing the specific documents which were needed to enable it to consider the objection.

26. The Respondent stated that it is important to note that the applicable Tax Procedures Act is the 2021 version and not the 2022 version which came into force in June 2022. It quotes the Tax Procedures Act, 2021 at Section 51 (3) and (4) which provided that:“(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;(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 or has applied for an extension of time to pay the tax not in dispute under section 33(1); and(c)all the relevant documents relating to the objection have been submitted.(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

27. The Respondent stated that having received the Appellant’s objection, it wrote to the Appellant and requested it to provide documents to support the objection, which documents were never provided. The Respondent then informed the Appellant that it did not have a valid objection.

28. The Respondent stated that it is noteworthy that even at the Appeal, the Appellant had failed to attach documents to support either the objection or the Appeal.

29. The Respondent stated that the Appellant is merely inviting the Tribunal to make a ruling based on its averments.

30. The Respondent invoked Section 56 of the TPA which provides that:-“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.(2)An appeal to the High Court or to the Court of Appeal shall be on a question of law only.(3)In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.”

31. The Respondent stated that Section 56 of the TPA places the burden of proof in tax cases on the taxpayer. That the above Section is reinforced by Section 30 of the TAT Act which states that:-“In a proceeding before the Tribunal, the appellant has the burden of proving –(1)where an appeal relates to an assessment, that the assessment is excessive; or(2)in any other case, that the tax decision should not have been made or should have been made differently”

32. The Respondent noted that it was important to appreciate that the Appellant had the responsibility to maintain the documents it had failed to avail under Section 23 of the Tax Procedures Act where the law provides that:-“(1)A person shall –(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

33. The Respondent submitted that from the above, the law is clear in its requirement for taxpayers to retain information and it goes on to provide that the same is critical as it is used to readily ascertain the taxpayer’s tax liability.

34. To buttress its position, it cites that holding of the Court in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR wherein the Court stated that:“The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof.[9] The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy.The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency.[10] The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position.”

35. The Respondent submitted that if a party seeks to rely on a fact, such a party bears the burden of proving that fact. That in that regard, it quoted Section 107 (1) of the Evidence Act (Cap 80 laws of Kenya) which states as follows;-“Whoever desires any Court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

36. The Respondent further relied on Section 109 of the Evidence Act which provides as follows:-“The burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence, unless it is provided by any law that the proof of that fact shall lie on any particular person”

37. The Respondent also relied on the case of Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKLR where the Tribunal upheld the position that the taxpayer has the legal burden to show that an assessment is incorrect.

38. The Respondent asserted that this position has further been upheld by the Superior Court in Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR where it was stated that:“Under section 56(1) of the TPA, the Company bears the burden of demonstrating that Commissioner’s decision in reaching the assessments complained of was incorrect”.

39. The Respondent averred that the Appellant had the burden of proof to support its objection in the current Appeal but did not attempt at either stage to discharge the burden.

40. The Respondent also relied on the Court of Appeal decision in CMC Aviation Ltd v Kenya Airways Ltd (Cruisair Ltd ) [1978]eKLR where the Court faulted the reliance on averments as evidence in arriving at a decision when it stated as follows:“The pleadings contain the averments of the three parties concerned. Until they are proved, or disproved, or there is admission of them or any of them by the parties, they are not evidence and no decision could be founded upon them. Proof is the foundation of evidence. As stated in the definition of “evidence” in section 3 of the Evidence Act, evidence denotes the means by which an alleged matter of fact, the truth of which is submitted to investigation, is proved or disproved. Averments are matters the truth of which is submitted for investigation. Until their truth has been established or otherwise they remain unproven. Averments in no way satisfy, for example, the following definition of “evidence” in Cassell’s English Dictionary, p 394:Anything that makes clear or obvious; ground for knowledge, indication or testimony; that which makes truth evident, or renders evident to the mind that it is truth.The pleadings in a suit are not normally evidence. They may become evidence if they are expressly or impliedly admitted as then the admission itself is evidence. Evidence is usually given on oath. Averments are not made on oath. Averments depend upon evidence for proof of their contents.”

41. The Respondent submitted that the Appellant did not even attempt to support the Appeal with any documents; it merely made averments and failed to support the same. That the Court having found that a Tribunal cannot make a decision based on averments, the Appeal must fall at this point.

Respondents Prayers 42. The Respondent prays that the Tribunal finds that:(a)The Respondent’s decision of 1st March 2022 and tax demand was therefore properly issued as provided under law.(b)This Appeal be dismissed with costs as the same is without merit.

Issues for Determination 43. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions, determines that the issue that calls for its determination is:Whether the Respondent’s invalidation decision was justified.

Analysis and Dtermination 44. Having determined the issue that calls for its determination, the Tribunal proceeded to analyse it as hereunder.

45. The Appellant premised its Appeal on the merits of its objection and averred that it provided the necessary documents to enable the Respondent to review its assessment and complained of the Respondent’s delay in assessing its VAT claim.

46. The Respondent on the other hand anchored its submissions on the invalidity of the Appellant’s notice of objection notice stating that the Appellant did not provide documents supporting its objection leading to the invalidation decision of 1st March 2022.

47. To determine this dispute, the Tribunal needs to remind itself of the chronology of events in this dispute, which are as follows:-(a)Appellant lodged its objection on 31st December 2021. (b)The Respondent wrote an email requesting the Appellant for supporting documents on the 10th February 2022, the Appellant failed to provide the required documents.(c)The Respondent thereafter issued its objection invalidation on the 1st of March 2022. (d)This dispute arose on 1st March 2022 when the invalidation decision was issued.

48. An analysis of the material placed before the Tribunal shows that the Appellant failed to provide the required documents despite being afforded time beyond the Respondent’s seven day ultimatum. The Appellant cannot therefore complain of delay on the part of the Respondent in ascertaining its tax liability when it has failed to provide the documents to be relied upon to reach such a conclusion.

49. Section 23 of the TPA requires a taxpayer to maintain any document required under the law so as to enable its tax liability to be readily ascertained.

50. Furthermore, one would have expected the Appellant to present the said documents as part of its evidence before the Tribunal in of support its’ appeal as required by Section 56 of the Tax Procedures Act which provides that:-“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”It failed to do so.

51. By failing to provide the requested documents, the Appellant failed to discharge its burden of proof as held In Commissioner of Domestic Taxes v Structural International Kenya Ltd ITA E089 of 2020 (2021) KEHC 152 (KLR), where the High Court stated;“For the avoidance of doubt, the Tribunal is reminded that in matters where the supply of goods, be it for VAT purposes or Corporation Tax, the burden is always on the trader / taxpayer to show that, the documentation set out in the statute and in which he relies on arose out of a commercial transaction. Period. If additional documents, which would reasonably expected to be in his possession is requested for to verify the alleged transactions, he should produce the same to the Commissioner. That is what is expected of a keen and diligent trader.”

52. It is the Tribunals considered view that by failing to provide documents in support of its objection, the Appellants objection to the assessment remained mere statement without basis leaving the Respondent with no option but to invalidate its objection.

53. The Tribunal relies on its previous Judgment in the case of Boylen International Ltd vs Commissioner of Investigations and Enforcement, Nairobi TAT Appeal No. 55 of 2018, where it held:“... 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, 2015”

54. The Tribunal therefore finds that the Appellant did not discharge its burden of proof when it failed to adduce evidence to support its Appeal as required under Section 30 (b) of the Tax Appeals Tribunal Act which 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.”

Final Decision 55. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final Orders:-(a)The Appeal be and is hereby dismissed.(b)The Respondent’s Invalidation Decision dated 1st March 2022 be and is hereby upheld.(c)Each party to bear its own costs.

56. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023. GRACE MUKUHACHAIRPERSON........................................................GLORIA A. OGAGAMEMBER........................................................JEPHTHAH NJAGIMEMBER........................................................TIMOTHY VIKIRUMEMBER........................................................