[2023] KETAT 262 (KLR)

Calsif Enterprises Limited v Commissioner of Domestic Taxes (Appeal 257 of 2022) [2023] KETAT 262 (KLR) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 262 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 257 of 2022

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

May 26, 2023

Between

Calsif Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a body corporate registered under the Companies Act Cap. 486 and its main economic activity is resale of fuel.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) 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 assessments of income tax for the period January 2018 to December 2018 and January 2019 to December 2019 on 13th July 2021. It also issued VAT assessments for the periods December 2018 and December 2019 on the same date. The Appellant was therefore assessed for Value Added Tax of Kshs 2,218,752. 72 and Kshs 821,410. 85 for the months of December 2018 and December 2018 respectively. The Appellant was further assessed for Corporation tax of Kshs 10,256,815. 70 and Kshs 7,959,814. 06 for the years 2018 and 2019 respectively inclusive of interest.

4. The Appellant objected on 21st September 2021.

5. The Respondent on 14th October 2021 wrote to the Appellant requesting it to provide documentary evidence in support of its late objection application to which the Appellant responded citing sickness as the reason for the late objection.

6. The Respondent issued its objection decision on 10th February 2022 by allowing part of the amount objected to.

7. Following its dissatisfaction with the Respondent’s decision, the Appellant appealed by lodging a Notice of Appeal to the Tribunal filed on 11th March 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 6th March, 2022 and filed on 11th March, 2022:-i.That the Respondent erred in its decision to issue the Appellant with additional tax assessment in respect to income tax for 2018. ii.That the Respondent erred in its decision to issue the Appellant with additional tax assessment in respect to VAT for 2018. iii.That the Respondent erred in its decision to issue the Appellant with additional tax assessment in respect to income tax for 2019. iv.That the Respondent erred in its decision to issue the Appellant with additional tax assessment in respect to VAT for 2018.

Appellant’s Case 9. The Appellant’s case is premised on its Statement of Facts filed on 11th March 2022 together with the documents attached thereto.

10. That the Respondent did not consider the cost of business and the margins to arrive at the net taxable tax.

11. That the Respondent erroneously assessed tax on income tax for the period ended December 2018. That the income for the period from January 2018 to December 2018 was Kshs 139,807,600. 00 and that this included levies and VAT.

12. That having not filed the income tax return, the VAT returns were used to arrive at the income tax return. The Appellant averred that the income highlighted was not in agreement with the true position.

13. That in regard to revenues, prior to the period of September, the VAT was not chargeable. That based on an analysis attached by the Appellant, the bank statements were relied upon to arrive at VAT. That for the income tax assessment, the Appellant heavily relied upon the available documentation on the returns filed. That based on that, for the period of January 2018 to August 2018, the total incomes were derived from the bankings made since no VAT returns had been filed. That in addition, the above periods did not have VAT on petroleum products. That for the remainder of the periods from September 2018 to December 2018, the gross from the invoices issued was used for the purpose of turnover.

14. That in terms of revenue for the year ended 31st December 2018, the Appellant’s attachment shows VAT amounting to Kshs 2,088,730. 00, gross sales of Kshs 135,608,281. 00, levies amounting to Kshs 13,649,395. 00 and a total of Kshs 150,744,344. 00.

15. That, in regard to cost of sales, based on the Appellant’s analysis for purchases, for the periods from January 2018 to August 2018 was arrived at based on a margin of 0. 5% which translates to an average of Kshs 0. 50 per every Kshs I00. 00 of sales. That for the periods from September 2018 to December 2018, the invoices from the suppliers were relied upon.

16. That the Appellant’s purchase invoice summary for the year ended 31st December 2018 showed VAT amounting to Kshs 3,563,563. 00, a taxable amount of Kshs 144,455,141. 00, levies of Kshs 4,364,379. 00 and a total of Kshs 152,383,083. 05.

17. That to arrive at the turnovers for the year 2019, an analysis of the bank statements, invoices issued and VAT returns was made. That the highest of the three was relied upon to arrive at the correct revenues. That the analysis of invoices issued brought about the following VAT of Kshs 10,515,243. 00, a taxable amount of Kshs 132,398,729. 00, levies off Kshs 84,626,863. 00 and a total of Kshs 227,540,835. 00.

18. That in regards to cost of sales, and based on the Appellant’s analysis for purchases for the periods from January 2019 to December 2019, the invoices from the suppliers were relied upon. That the ratio of the levies on the sales was used to assess the same for purchases. That this resulted in a VAT due of Kshs 45,507. 29.

19. The Appellant further computed income taxes for 2018 and 2019 at Kshs 63,222. 75 and Kshs 99,016. 08, respectively.

Appellant’s Prayers 20. The Appellant made the following prayers:a.The formula of scaling down the sales for 2019 to arrive at 2018 be vacated and the analysis based on best judgement be used for income for 2018. That for the period of 2018 the sales be adjusted to:i.January 2018 to August 2018 Kshs 108,897,100. 00. ii.September 2018 to December 2018 VATable sales Kshs 26,711,181. 00. iii.Total sales for 2018 be Kshs 135,608,281. 00 net of levies and taxes.iv.The total levies for 2018 be Kshs 13,649,395. 00. v.Total turnover for income tax be Kshs, 149,257,676. 00. b.That the expenses as per the attached schedule be incorporated in the arriving of the tax thereof.c.The VAT due of Kshs 45,507. 29 be agreed as the correct position as per the VAT Control Account.d.That the income tax due of Kshs I62,238. 00 be agreed as the correct position.

The Respondent’s Case 21. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated 6th April 2022 and filed on 7th July 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 20th January 2023 together with the legal authorities filed therewith.

22. That the Appellant filed Nil income tax returns for the year 2018 despite having taxable sales.

23. That the Respondent was not furnished with documentation evidencing the nil tax returns and as such the Respondent had to come up with an assessment for income tax payable with its best judgement and the documentation presented before it.

24. That the Respondent in so doing relied on the provisions of Section 31 of the Tax Procedures Act 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 ... the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates."

25. That as such the Respondent, due to lack of sufficient records, scaled down the turnover of the year 2019 which was Kshs 134,123,598. 00 by 20% and rightly estimated 2018 sales at Kshs 111,769,665. 00 for income tax purposes.

26. The Respondent further avers that no document was provided to counteract this assessment and therefore the Respondent was correct in using its best judgement to charge income tax payable for the year 2018.

27. That the Appellant claims that it was charged VAT on fuel which was inaccurate as VAT was only chargeable on fuel from the month of September 2018.

28. The Respondent advances that it only carried out VAT tax assessment for the year 2018 for the period of December 2018 which was conducted after the introduction of Value Added Tax on petroleum products. That hence, the issue of retrospective application of the law is erroneous.

29. That the VAT assessment for December 2018 was estimated using vatable purchases that were claimed in November and December 2018. That further all levies and duties as per the Appellant's schedules were excluded from the assessed amounts.

30. That the Respondent carried out an assessment with regard to Section 31 of the Tax Procedures Act and used the sales invoices of the Appellant to calculate the income tax payable. That in doing this, the Respondent noted that there were significant variances between banking deposits and actual sales invoices for the year 2019.

31. That the Appellant accounted these variances to be that the same was because of direct deposits by customers to suppliers' accounts. That this would mean that the reliance on the bank deposits documentation would be inaccurate in estimating the Appellant's income.

32. The Respondent thereby re-emphasizes the provisions of Section 17 of the Tax Procedures Act which allows the Commissioner to carry out additional assessments with the documentation it has and use its best judgement to come up with tax payable, and therefore the Respondent rightly assessed the income tax payable based on the information that it had.

33. The Respondent holds that Value Added Tax for 2019 was arrived at by charging sales of Kshs 157,242,721. 00 being gross sales as per the invoices provided with a deduction of levies and duties.

34. The Respondent submits that the charged amount was inclusive of Value Added Tax but that after the deduction of output Value Added Tax and the exemption of levies and duties, Kshs 145,595,112. 00 is the correct amount chargeable for Value Added Tax for the year 2019.

35. That the Appellant in its prayers admits that VAT amounting to Kshs 45,507. 00 and income tax amounting to Kshs 162,238. 00 is agreed and payable. That the Appellant has however not paid the said amounts. That the Appeal is therefore not proper and should be struck out.

36. That Section 52(2) of the Tax Procedures Act provides as follows:“A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

37. That the Appellant does not dispute the fact that it traded in the period and had declared nil income but rather sought that the banking method was inaccurate. That the bank analysis could not be relied upon as an analysis of the bank deposits and actual sales invoices for 2019 showed a very significant variance. That further the Appellant had explained that the variance was due to direct deposits by customers to the suppliers’ accounts. That because of this explanation and the variance using bank deposits for 2018 turnover was found inaccurate and rejected.

38. That the Respondent therefore applied best judgement and the information in its possession in arriving at the turnover for the year 2018 as per Section 31 of the Tax Procedures Act.

39. That the Appellant did not contest the rate of scaling down for 2018 as being unreasonable but rather sought that the Respondent should apply the bank deposit method which itself had highlighted the inaccuracies emanating from it.

40. That it was the responsibility of the Appellant to maintain records including declare the correct income tax returns for the year to accurately ascertain the tax position.

41. That Section 23 of the TPA states 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; andc.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.”

42. That averments in pleadings are not evidence was appreciated in Francis Otile v Uganda Motors Kampala HCCS No 210 of 1989 where it was held that the court cannot be guided by pleading since pleadings are not evidence nor can they be a substitute therefore. That before that the then East African Court of Appeal held in Mohammed & another v Haidara (l972) E.A 166 that the contents of a plaint are only allegations, not evidence. That according to Edward Muriga Through Stanley Muriga v Nathaniel D. Schulter Civil Appeal No 23 of 1997, where a defendant does not adduce evidence the plaintiff's evidence is to be believed as allegations by the defence is not evidence. That in CMC Aviation Ltd. v Cruisair Ltd. (No 1) (1978) KLR 103; (1976-80) 1 KLR 835, Madan, J (as he then was) expressed himself as hereunder:“Pleadings contain the averments of the parties concerned. Until they are proved or disproved, or there is an 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. Evidence denotes the means by which an alleged matter of fact, the truth of which is submitted for investigation. Until their truth has been established or otherwise, they remain un-proven. Averments in no way satisfy, for example, the definition of "evidence" as 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.”

43. That no documents were provided to counteract the assessment and therefore the Respondent was correct in using its best judgement to charge income tax payable for the year 2018 as well as 2019.

44. That the Appellant under Section 56(1) of the TPA has the legal burden to support the averment, which it has failed to discharge. That the Section provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

45. That the Respondent relied on the following cases on burden of proof:i.Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKLR.ii.Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR.iii.Motex Knitwear Limited v Gopitex Knitwear Mills Limited Nairobi (Milimani) HCCC No 834 of 2002. iv.Trust Bank Limited v Paramount Universal Bank Limited & 2 others Nairobi (Milimani) HCCS No 1243 of 2001.

Respondent’s Prayers 46. The Respondent prayed that the Tribunal finds that:a.The Respondent’s decision of 10th February 2022 and tax demand was therefore properly issued as provided under law.b.Upholds the Respondent’s objection decision dated 21st January 2022. c.This Appeal be dismissed with costs to the Appellant as the same is without merit.

Issues For Determination 47. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises the following single issue for its determination:Whether the assessment is justified

Analysis And Determination 48. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

49. This dispute arose from the Respondent’s assessment of additional income tax and Value Added Tax for the years 2018 and 2019 on the basis that the Appellant declared nil income tax returns for the period and further underdeclared VAT.

50. On its part, the Appellant averred that the Respondent was not justified -in its assessment of the additional taxes as the incomes highlighted as the base for computation of these assessments was erroneous.

51. The Appellant further submitted re-computations for both income tax and VAT which were backed by schedules attached to its Memorandum of Appeal.

52. The Respondent on its part submitted that no documents were provided by the Appellant to counteract this assessment and therefore the Respondent was correct in using its best judgement to charge income tax and VAT payable for the years in dispute.

53. The Tribunal has reviewed in detail the documents provided by the parties and established that the assessment of income tax for 2018 by the Respondent was based on the Appellant’s turnover for 2019 with a scale down adjustment made of 20%.

54. The Tribunal has further established that the 2019 income tax assessment by the Respondent was computed based on sales invoices which resulted in variances between banking deposits and actual sales invoices for the period. The Respondent thereafter relied on its best judgement to come up with the computation.

55. The Tribunal noted that VAT for the year 2018 was estimated using Vatable purchases that were claimed in November and December 2018 while excluding all levies and duties as per the Appellant’s schedules.

56. Further, the Tribunal noted that 2019 VAT assessed was arrived at by the Respondent by charging sales of Kshs 157,242,721. 00 being the gross sales as per the invoices provided by the Appellant’s schedule while excluding levies and duties.

57. The Tribunal having reviewed the parties’ submissions in detail established that other than the computational schedules provided by the Appellant, no further documentary attachments were provided with the Appellant’s pleadings to support these computations.

58. The Tribunal states that provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act which provides as thus:-“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; orb.In any other case, that the tax decision should not have been made or should have been made differently.”

59. The Tribunal further relies on Section 56(1) of the Tax Procedures Act which states as follows in relation to general provisions relating to objections and appeals:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

60. Section 30 of the Tax Appeals Tribunal Act (TATA) places the burden of proof on the taxpayer to submit all the necessary documentation to support its case. This position was held by the Court in Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR where it was held that a party can only discharge its burden of proof upon adducing evidence. Merely making pleadings is not enough. The court stated that:“Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence, and it is not enough to plead particulars of negligence and make no attempt in one’s testimony in court to demonstrate by way of evidence how the accident occurred and how the 1st defendant was to blame for the said accident. It is trite law that he who alleges must prove and that burden does not shift to the adverse party even if the case proceeds by way of formal proof and or undefended.”

61. Further, in Metcash Trading Limited v Commissioner for the South African Revenue Service and another Case CCT 3/2000, Justice Kriegler held that:“But the burden of proving the Commissioner wrong then rests on the vendor under section 37. Because VAT is inherently a system of self-assessment based on a vendor’s own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor’s records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner’s precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

62. Additionally, the Tribunal found it appropriate to rely on the provisions of Section 107 of the Evidence Act which provides that:“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.”

63. It is trite law that the burden to prove that a tax assessment is erroneous lies on the Appellant and that the Appellant therefore should have adduced documentary evidence to support its averments in the instant case.

64. Further, Section 17(3) of the VAT Act, 2013 provides as follows regarding documentation that should be produced to support a claim for input tax:“The documentation for the purposes of subsection (2) shall be -(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under section 16(2); or(e)a debit note in the case of input tax deducted .”under section 16(5)

65. The Appellant, in the instant case, provided various schedules for VAT and income tax for the years 2018 and 2019 but did not attach any documentation to support these schedules. The Appellant in the circumstances failed to discharge its burden of proof and the tax assessment remains unchallenged.

Final Decision 66. In view of the foregoing, the Tribunal finds that the Appeal lacks merit and accordingly makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s review decision dated 21st January, 2022 be and is hereby upheld.c.Each Party to bear its own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY, 2023………………………ERIC N. WAFULACHAIRMAN…………………CYNTHIA MAYAKAMEMBER…………………GRACE MUKUHAMEMBER…………………ABRAHAM KIPROTICHMEMBER…………………JEPHTHAH NJAGIMEMBER