[2023] KETAT 877 (KLR)

Butoyi Freight Forwarders and Ltd v Commissioner of Legal Services and Board Cordination Department (Tax Appeal 1083 of 2022) [2023] KETAT 877 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 877 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1083 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, BK Terer & W Ongeti, Members

December 20, 2023

Between

Butoyi Freight Forwarders And Ltd

Appellant

and

Commissioner of Legal Services and Board Cordination Department

Respondent

Judgment

Background 1. The Appellant is a private limited liability company duly incorporated under the Companies Act of the Laws of Kenya, as a logistics company in the business of clearing and forwarding.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is mandated with the responsibility of assessing, collecting and accounting for all the tax revenue as an agent of the Government of the Republic of Kenya, and is also mandated with the responsibility of the administration and enforcement of the statutes set out under the Schedule to the Act.

3. The Appellant was issued with VAT additional assessments for Kshs. 10,903,620. 00 based on variances noted by the Respondent between the Appellant’s income tax self-assessment and the VAT monthly returns, the Appellant having initially filed nil income tax returns for the years 2015 and 2016.

4. The Appellant then amended its Income tax returns on 7th November 2017 and 8th November 2017 declaring its sales in the IT2C returns.

5. The Respondent stated that the Appellant did not declare the corresponding sales in its VAT3 return and the same was brought to charge by the Respondent.

6. The Appellant objected to the assessment on the 18th March 2020 which was deemed by the Respondent as a late objection notice. The Respondent however allowed the Appellant to validate its objection application by providing specified documents.

7. The Respondent issued its objection decision on 29th August 2022 entirely rejecting the Objection notice application.

8. Dissatisfied with the Respondent‘s Objection decision, the Appellant filed this Appeal with the Tribunal.

The Appeal 9. The Appellant filed its Memorandum of Appeal on 29th September 2022 and set out the following grounds of Appeal;a.That the Respondent erred in law and fact by claiming that the Appellant made or hit a revenue target of Kshs. 32,998,883. 00 as the same is incorrect as quantified in the 2015/2016 Audit and sales analysis of the same period. The Appellant’s sales were actually Kshs. 176,720. 00 in 2015 and Kshs. 590,000. 00 in 2016 respectively.b.That the Appellant is a freight agent, and as such, the available income is from agency fees at all times; any other costs are borne by the client; hence all duties and taxes monies is not necessarily the Appellant’s despite passing through their current account. The Appellant holds the money in trust for clients so as to facilitate the smooth payments of duties, taxes, charges and deposits.c.That the Respondent erred in law and fact by tabulating the total bank credits for the said two-year period as sales /revenue and failing to account for deposits from the Directors on various occasions.d.That the Appellant availed a schedule of all works done with various client invoices and the same captures Customs entries done during the period in question.e.That the Respondent erred in law and fact in failing to give the optimum hearing to avail all the facts.f.That the Respondent erred in law and fact by failing to take into consideration the fact that the Appellant’s only source of revenue/income is net of all other bulk payments and client’s advances in terms of payments. Most of the Appellant’s clients usually bank directly to the Appellant’s account in lump sum to cater for all clearance disbursements that may arise then invoice them thereafter as per agreement.g.That the variances noted by the Respondent were attributed to an error from the Appellant‘s accountant who at the time was in the cadre of a clerical officer under Grade II, and was not in a position to offer and or produce correct fiscal outlay of the business.

The Appellant’s Case 10. The Appellant set out its case in the Statement of Facts filed on the 29th September, 2022 and the documents annexed thereto.

11. The Appellant stated that during the period in question 2015/2016, it never made or hit a revenue of Kshs. 32,998 ,883. 00 as claimed by the Respondent, and the same is well quantified in its 2015/2016 audit and a well-documented sales analysis of the same period, attached in its bundle of documents.

12. The Appellant further stated that its actual sales were actually Kshs. 176,720. 00 for the year 2015, and Kshs 590,000 for the year 2016.

13. It also stated that as a freight agent, its only available income is on agency fees at all times. Any other costs are borne by the client, hence all duties and tax monies despite passing through the Appellant‘s Bank of Africa current account, is not necessarily its money. It further stated that it only holds such money in trust so as to facilitate the smooth payment of duties, taxes, shipping charges, KPA and other container deposits.

14. The Appellant stated that the Respondent erroneously tabulated the total bank credits for the said two-year period as the Appellant’s sales/revenue which is a wrong position as it was not so. The Appellant annexed bank statements from Bank of Africa Bank, which statements for the period reflect the same position as worked out by the Respondent, save that the same does not take into account that the bankings also include deposits from the Directors on various occasions.

15. The Appellant stated that it availed a schedule of all jobs undertaken during the period, with various clients’ invoices, and capturing the customs entries processed during the period. The said schedule also details the jobs done and the agency fees due from the said jobs. The commensurate revenue arising therefrom as per the said schedules being Kshs. 176,720. 00 and Kshs. 590,000. 00 for the years 2015 and 2016, respectively.

16. The Appellant also stated that the Respondent did not take into consideration of the fact that the Appellant’s only source of revenue/income is net of all other bulk payments and clients’ advances in terms of payments, asserting that most of the clients it deals with always bank directly in its bank account at BOA, a lumpsum amount to cater for all their clearing disbursements that may arise then invoice them thereafter as the terms of their agreement.

17. The Appellant prayed that the Tribunal be obliged to consider its documentation annexed and filed in its bundle of documents to guide in the fair determination of the matter.

18. The Appellant also stated that the Respondent did not give it an optimum hearing for availing and presenting all the facts as they were in the matter.

19. The Appellant further stated that it was ready and willing to have the matter resolved within the dispute resolution arbitrated by the Tribunal.

20. It was a further statement of the Appellant that the additional tax assessment visited upon it a lot of pain to the extent of occasioning it to lose focus on other tax matters throughout the period in issue.

Appellant’s Prayers 21. By reason of the foregoing submissions, the Appellant prayed that the Respondent’s Objection decision be set aside, and its Appeal be allowed.

The Respondent’s Case 22. The Respondent has set out its case on its;a.Statement of Facts dated and filed on 28th October 2022 and the documents attached thereto; andb.Written submissions dated 17th May 2023 and filed on 18th May 2023.

23. The Respondent stated it issued the Appellant with VAT additional assessment on 8th October 2018 and 17th October 2018 based on variances it noted between the income tax self-assessment returns and the monthly VAT self-assessment returns. The Appellant had initially filed nil income tax returns for the year 2015 and the year 2016. The Appellant then amended its return on 7th November 2017, and 8th November 2017 declaring as per IT2C returns. The Appellant however did not declare its corresponding sales in its VAT3 returns and the Respondent brought the same to charge as per the assessment issued.

24. The Respondent further stated that the Appellant subsequently filed a late objection notice on 18th March 2020, notwithstanding which it allowed the Appellant to lodge out of time but advised the Appellant to validate its objection application with the following documents;i.Certified Bank statements for the years 2015 and 2016;ii.Sales ledgers for the years 2015 and 2016;iii.Audited accounts for the year 2016;iv.Purchases ledger for the years 2015 and 2016;v.Any agreements and contracts with respect to suppliers and clients;vi.Import documents for the years 2015 and 2016.

25. The Respondent stated that following the Appellant’s failure to provide the requested documents, it issued an objection decision on 29th August 2022 entirely rejecting the Appellant’s objection application.

26. The Respondent averred that the Appellant failed to provide documentation to support its grounds of objection as required under Section 51 (3) (c) of the Tax Procedures Act.

27. The Respondent further averred that the Appellant having failed to provide the documents as requested, the objection application dated 18th March 2020 was invalid as communicated vide the objection decision dated 29th August 2022.

28. The Respondent further stated that it did not err in law and fact by claiming that the Appellant made or hit an revenue target of Kshs. 32,998,883. 00. It reiterated that based on the available information it established that there were variances noted between what was declared in the Appellant’s income tax assessment and the monthly VAT return. The Appellant failed to declare the corresponding sales in its VAT returns and the same was brought to charge for Kshs. 10,903,620. 00.

29. The Respondent further stated that under the provisions of Section 31 (3) of the TPA, the Respondent is vested with powers to amend a taxpayer‘s assessment to the Respondent‘s judgement.

30. The Respondent stated that it relied on the information available after the Appellant failed to file its returns. It further stated that pursuant to the provisions of Section 29 of the TPA the Commissioner may, in the absence of tax returns by the taxpayer, exercise his or her best judgement based on the information available.

31. The Respondent averred that as regards the Appellant’s contention that it availed the requested documents, the same was an afterthought and it was improper for the Appellant to introduce new evidence at the appellate stage having denied the Respondent the opportunity to go through such documents before making the objection decision.

32. The Respondent further averred that the Appellant despite filing a late objection application, the Appellant vide a letter date 5th May 2020 was allowed to object out of time and advised to validate its application by availing the supporting documents. Further the Appellant was on 18th August 2022 requested to avail the documents but refused/neglected to do so. The allegation that the Appellant was denied a fair hearing therefore fails.

33. The Respondent also averred 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. To buttress this submission, the Respondent relied on the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se Kenya [2021] eKLR, where Mativo J. stated;“Placing the burden of proof on the taxpayer reflects the unique nature of the tax system. This is evident from the three-fold justifications for placing the burden on the taxpayer. These are: -a.The presumption of correctness;b.The Government’s need for revenues;c.The taxpayer ‘s possession of evidence.The taxpayer’s burden of proof comprises two parts, i.e. Establishing with evidence, the underlaying facts on which the law is to operate (and in this regard, the standard of proof to which each fact must be proved is relevant;

And that the operation of law when applied to those facts establishes that the assessment is excessive or erroneous.”

34. The Respondent further averred that the Appellant did not produce the relevant documents for the Respondent to consider before delivering his decision and as such new evidence (if at all) which the Respondent terms as an afterthought cannot be introduced at the instant stage.

35. The Respondent submitted that it is trite the Commissioner’s determinations of tax deficiencies are presumptively correct, and the presumption remains so until the taxpayer produces competent and relevant evidence to support its position.

36. It was the Respondent’s further submission 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. The Appellant cited the case of Kilburn vs. Bedford (H.M. Inspector of Taxes (3), where it was stated that:-“…as regards the extra tax imposed upon those figures, it was for the Appellant to show that there was some reason why on the agreed figures tax should not be paid.”

37. The Respondent also referred the Tribunal to the cases of Primarosa Flowers Ltd vs. Commissioner of Domestic Taxes (2019) eKLR, where the court stated as follows;-“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. When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

38. The Respondent also submitted that in the case of Mulherin vs. Respondent of Taxation (2013) FCAFC 115, the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence which demonstrates the taxable income on which the tax ought to be paid.

39. The Respondent submitted that it had demonstrated before the Tribunal what it considered in arriving at the assessment and subsequently the objection decision which it stated are within the law, and that the Respondent has explained in detail the reasons why it reached its findings.

Respondent’s Prayers 40. By reason of the foregoing, the Respondent prayed that its Objection decision dated 29th August 2022 be upheld and the Appellant‘s Appeal be dismissed with costs.

Issues For Determination 41. The Tribunal having carefully considered the pleadings and submissions made by the parties is of the considered view that the Appeal herein distils into the following issues for determination;a.Whether the Objection Decision of 29th August 2022 was validly issued.b.Whether the Respondent was justified in issuing the Objection Decision confirming its assessments against the Appellant.

Analysis And Determination a. Whether The Objection Decision Of 29Th August 2022 Was Validly Issued. 42. The dispute subject of this Appeal arose out of the additional VAT assessment issued against the Appellant by the Respondent on 8th October 2018 and 17th October 2018 based on variances the Respondent indicated it noted between the income tax self-assessments returns and the monthly VAT self-assessment returns.

43. It further averred that the Appellant amended its return on 7th November 2017 and 8th November 2017, but however the Appellant did not declare its corresponding sales in its VAT3 returns, thereby prompting the Respondent to bring the same to charge and issue the assessment.

44. The Appellant lodged its notice of objection and the Respondent allowed the late objection and wrote to the Appellant on 5th May 2020 requesting the Appellant to submit the following documents to validate its objection;i.Certified bank statements for the years 2015 and 2016;ii.Sales ledgers for the years 2015 and 2016;iii.Audited Accounts for the year 2016;iv.Purchase ledgers for the years 2015 and 2016;v.Any agreements and contacts with respect to suppliers and clients;vi.Import documents for the year 2015 and 2016.

45. The Respondent also averred that following the Appellant’s failure to submit the requested documents, it issued its objection decision on 29th August 2022.

46. Section 51 (11) of the Tax Procedures Act as was applicable as of the 5th May 2020, read as follows;“The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

47. In the instant case, the Respondent was statute bound to issue its Objection decision within sixty days of 5th May 2020, when it allowed the Appellant’s late Objection. The Objection decision of 29th August 2022 was issued 782 days late.

48. The Tribunal’s position is that the Objection decision made on 29th August 2022 was issued beyond the statutory timelines and therefore was not validly issued.

49. The Tribunal having held that the Respondent’s Objection decision was not validly issued, it follows that the Appellant’s Objection was allowed by operation of the law in accordance with Section 51 (11) of the TPA. Thus the Tribunal will not delve into the other issue that fell for its determination as the same has been rendered moot.

50. The upshot of the foregoing is that the Appellant’s Appeal is merited and consequently succeeds.

Final Decision 51. The Appellant’s Appeal having succeeded the Tribunal makes the following Orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 29th August 2022 be and is hereby set aside.c.The parties to meet their own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20th DAY OF December, 2023. ROBERT M. MUTUMA....................CHAIRPERSONELISHAH N. NJERU.........................MEMBERMUTISO MAKAU............................MEMBERBONIFACE K. TERER.....................MEMBERDR WALTER J. ONGETI................MEMBER