[2024] KETAT 260 (KLR)

Casa Security Limited v Commissioner of Legal Services & Board Co-ordination (Appeal 49 of 2023) [2024] KETAT 260 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 260 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 49 of 2023

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 8, 2024

Between

Casa Security Limited

Appellant

and

Commissioner of Legal Services & Board Co-ordination

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act and with tax obligations. The Appellant provides well-tailored security solutions and quality integrated security services to both corporate and individual clients.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995, CAP 469 of the 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 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 Parts 1 & 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. In a letter dated 9th September 2022 and on the i-Tax platform, the Respondent issued the Appellant an assessment notice of Kshs. 81,211,076. 00 in relation to income tax and Value Added Tax (VAT) for 2016 to 2021 audit period.

4. In a letter dated 11th October 2022, the Appellant through its legal representatives objected to the entire assessment as issued.

5. Consequently, on 5th December 2022, the Respondent issued its objection decision upholding and confirming income tax and VAT totaling Kshs. 110,886,915. 65 in principal tax, interest and penalties.

6. Aggrieved by the Respondent’s objection decision, the Appellant filed its Notice of Appeal at the Tribunal on 4th January 2023.

THE APPEAL 7. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 17th January 2023 and filed on 19th January 2023;Value Added Tax (VAT)i.That the Respondent erred in law and in fact by arbitrarily increasing the sales figures in the Appellant’s VAT returns and erroneously assessing additional VAT.ii.That the Respondent erred in law and in fact by assessing VAT on deposits on the Appellant’s bank statements while disregarding the reconciliations for non-revenue items such as related party transfers, interbank transfers, customer deposits and loans forming part of these deposits.iii.That the Respondent erred in law and in facts by disregarding the financial statements and returns filed by the Appellant and all other explanations and documentation provided by the Appellant and proceeding to confirm the VAT assessments.iv.That the Respondent erred in law and in fact by assessing additional VAT on the Appellant based on arbitrary and unreasonable estimates while disregarding the actual sales made and declared in the VAT returns filed by the Appellant.v.That the Respondent erred in law and in fact by failing to the deposits in the bank statements with the revenue declared in the financial statements, thereby erroneously assessing additional taxesIncome Taxvi.That the Respondent erred in law and in fact by disregarding the actual turnover realized and reported by the Appellant and arbitrarily increased the Appellant’s turnover for the period under review and thereafter assessed additional taxes, penalties and interest.vii.That the Respondent erred in law and in fact by assessing tax on the Appellant based on unreconciled bank deposits while disregarding the actual income earned and declared by the Appellant during the period under review.viii.That the Respondent erred in law and in fact by failing to consider the reconciling items highlighted by the Appellant in its objection.ix.That the Respondent erred in law and in fact by disallowing salary and wages expenses incurred by the Appellant in the period under review and charging income tax on the disallowed portion of salaries and wages.x.That the Respondent erred in law and in fact by disregarding all the documentation provided including the financial statements and tax returns, and proceeding to mistakenly confirm the income assessments.xi.That the Respondent erred in law and in fact by disallowing all the expenses incurred by the Appellant during the period under review, thereby assessing additional taxes on account of the disallowed expenses.xii.That the Respondent erred in law and in fact by disregarding the expenses provisions of Sections 15 and 16 of the Income Tax Act (hereinafter ‘ITA’) which provide that all expenses incurred wholly and exclusively in the generation of income are tax deductible.

APPELLANT’S CASE 8. The Appellant stated as follows in its Statement of Facts dated 17th January 2023 and filed on 19th January 2023;

9. The Appellant averred that during the period under review, it had one main client, Safaricom limited, which generated 95% of its revenue. That the contract was for the Appellant to provide a specified number of guards throughout the contract period with additional guards on a needs-basis.

10. It was the Appellant’s assertion that 99% of its guards did not meet the minimum taxable income while more than 50% were employed on temporary basis(casuals).

11. The Appellant averred that the Respondent, without carrying out an audit, used the bank deposits to derive sales which were then compared to the Appellant’s declared income the variance ensuing was then subjected to income tax and VAT without adjusting mandatory non-revenue items.

12. The Appellant asserted that it filed and paid all its income tax and VAT due for the period under review yet the Respondent, without conducting an audit or justification, adjusted sales upwards to match bank deposits and compared the same to the Appellant’s declared returns which was then charged income tax and VAT.

13. The Appellant averred that it provided proper reconciliations and supporting documents, a fact that was acknowledged by the Respondent in its objection decision yet the Respondent proceeded to confirm assessment of income tax and VAT. The Appellant stated that the same had been attached in its pleadings herein.

14. The Appellant averred that the Respondent included in its derived sales a transfer amount of Kshs. 30,000,000. 00 which had been reversed from the Appellant’s Stanchart Bank account. Additionally, the Appellant claimed that several transactions relating to deposits and loans from its directors and related party (Rock and Rolla Wines and Spirit) which were not income had been erroneously subjected to tax.

15. It was the Appellant’s contention that the Respondent had ignored explanations and documents provided in relation to customers’ refundable security deposits and proceeded to confirm tax assessments on these deposits as if they were income. Furthermore, it was the Appellant’s assertion that during the period under review, there were many interbank transfers in its three bank accounts which the Respondent erroneously treated as income for tax purposes.

16. The Appellant averred that during the period, there were several salary reversals especially where employees had given wrong bank accounts yet the Respondent included these reversals in the computation of additional assessments. The Appellant also claimed that the Respondent failed to acknowledge and allow salary and wages expenses yet they were the main costs to the Appellant.

17. Moreover, the Appellant stated that during the period under review, it had employed many temporary employees (casuals) with no formal contracts, given the nature of the security industry and most were paid in cash or through the bank as the main contract provided for supply of guards on a needs basis and for short periods of time in specific areas where Safaricom masts were located which necessitated the Appellant to identify and hire casuals locally for short periods of time.

18. The Appellant asserted that it was impossible to run a business without incurring expenses and that contrary to Sections 15 and 16 of the ITA, the Respondent ignored the above expenses and added them back in tax computation yet they were tax deductible as they had been wholly and exclusively incurred in the generation of taxable income.

19. The Appellant claimed that inspite of providing all information, explanations and documentation, the Respondent in total disregard proceeded to confirm the assessments which had been erroneously based on adjusted sales.

Appellant’s Prayers 20. The Appellant’s prayers to the Tribunal were that first, the Tribunal allows the Appeal with costs and second that the Tribunal annuls the Respondent’s confirmed assessment.

THE RESPONDENT’S CASE 21. The Respondent replied to the Appeal through its Statement of Facts dated 17th February 2023 and filed on even date.

22. The Respondent averred that the Appellant was selected for audit due to under declaration of income for purposes of income tax and VAT as well as due to overstatement of salaries and wages claimed in the income tax returns.

23. The Respondent asserted that income tax assessment was in respect of variances established between income tax self-assessment declarations and derived sales as per bank credits analysis for 2018 and 2019. In a similar fashion, assessment was done for variances between salaries and wages claimed as expense in income tax company returns and bank transfers made from the main bank account into salary accounts for 2017 and 2018; whereas VAT was assessed in respect to variances derived from sales as per bank credits and sales declarations as per VAT returns for 2018 and 2019. That as a result of the tax review, the Respondent demanded Ksh 81,211,076. 00 in principal tax, interest and penalties in relation to income tax and VAT.

24. The Respondent contested the Appellant’s assertion and grounds 1,4,5,6 and 7 as laid out in the Memorandum of Appeal by stating that it failed to consider interbank transfers, related party and directors transfers by asserting that it allowed one reversal transaction of Kshs. 30,000,000. 00 which was the only transaction the Appellant was able to demonstrate and support fully.

25. The Respondent disputed the Appellant’s assertions as stated in grounds 2 and 8 claiming that the Appellant was unable to support its explanation and reconciliations hence the reason for their rejection.

26. The Respondent cast doubt that the Appellant incurred salary expense because it failed to demonstrate the same by providing requested documents. Additionally, the Respondent disputed the Appellant’s grounds 3 and 10 by stating that it reviewed and considered all documents provided before the objection decision and that the said grounds of Appeal were misleading.

27. The Respondent relied on the following statutes to buffer its position;a.Section 5 of the VAT Act, No. 35 of 2013;b.Section 31 of the Tax Procedure Act, No. 29 of 2015;c.Section 59 of the Tax Procedure Act, No. 29 of 2015; andd.Article 47 of the Constitution of Kenya ,2010

Respondent’s Prayers 28. The Respondent prayed first that the Tribunal affirms the Respondent’s objection decision dated 5th December 2022 as proper in law and secondly that the Tribunal finds the short-levied taxes of Kshs. 110,886,915. 65 and resultant penalties and interest due and payable.

PARTIES WRITTEN SUBMISSIONS 29. The Appellant’s written submissions dated 12th June 2023 were filed on 4th July 2023. The Appellant submitted on 3 issues as stated hereunder;a.Whether the Respondent erred in basing the income tax assessments on the variances between the income tax self-assessment declarations and the derived sales per bank credits.

30. The Appellant averred that while Section 30 of Tax Appeal Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’) and Section 56 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) place the burden of proof upon it, the same shifted to the Respondent once the Appellant discharged it as it did by providing documents reconciling the variances alleged by the Respondent. Specifically, it provided documents in support of intercompany transfers, customer advances and deposits, external loans, salaries and wages. The Appellant asserted that it had produced unchallenged and uncontradicted evidence to prove its case and had thus discharged its burden, in buffering its position, the Appellant relied on the following cases:a.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLRb.George v Federal Commissioner of Taxation, (1952) HCA 21

31. The Appellant was insistent that the Respondent despite being aptly equipped and mandated to collect and assess taxes was committing an illegality by imposing unfair, excessive and unjust taxes to a committed and diligent taxpayer inspite of the various acts of good faith to solve the dispute amicably. The Appellant cited the case of Kilburn v Bedford (H.M. Inspector of Taxes) 1955 Chancery Division,36, p262 where it was held 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.”b.Whether the Respondent erred in assessing the VAT in respect to the variances between the derived sales per the bank credits and sales declarations as per the VAT returns for the years 2018 and 2019.

32. The Appellant declared that in accordance to Sections 108 and 109 of the Evidence Act, CAP 80 of Kenya’s Laws (hereinafter ‘Evidence Act’), it had discharged its burden of proof on the erroneous assessment. Further, that it had paid adherence to Section 23 of the TPA and Section 43 of the VAT Act No. 35 of 2013 (hereinafter ‘VAT Act’) by keeping all records in the course of business and produced them during the audit period. That this was equally acknowledged by the Respondent who failed to reconcile the accounts yet still demanded the erroneous tax assessment. The Appellant quoted the case of Republic v Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR where the court held that:-“for the proposition that the decision to tax must have a legal basis and that section 56(1) does not empower the appellant to make speculative assessments (citing Johnson v Scott(Inspector of Taxes)) nor was it the intention of the legislature to put the taxpayer in a position where he would be required to produce any documents that the taxman requires.”

33. The Appellant invited the Tribunal to objectively analyze the documents attached to establish that the Appellant dutifully produced all records as required. The Appellant urged the Tribunal to acknowledge and act on the glaring errors made by the Respondent who not only disregarded the Appellant’s supporting documentation but made excessive assessment to the detriment of the Appellant.b.Whether the Respondent erroneously assessed the Appellant of an outstanding tax liability amounting to Kshs. 110,886,915. 65.

34. The Appellant asserted that the assessment was erroneous, unlawful, unfair and unjust and ought not to see the light of day. It was the Appellant’s proclamation that the Respondent was aggressively clutching straws to swell the public treasury in attempt to meet or exceed financial targets with the Appellant falling prey to the unfortunate situation. The Appellant was obdurate that the Respondent appeared to go to all extents in collecting taxes regardless as to whether the amount was due. The Appellant cited the case of Miller v Minister of Pensions [1947] 2ALL ER 372 that;“The…{standard of proof}…is well settled. It must carry a reasonable degree of probability…if the evidence is such that the tribunal can say: ‘we think it more probable than not’ the burden is discharged, but, if the probabilities are equal, it is not.”

35. To buttress its position further, the Appellant quoted the case of Keroche Industries Limited v Kenya Revenue Authority & 5 Others [2007] eKLR where it was held that;“It is no good answer for the taxman- to proclaim that Ksh 1Billion is intended to swell the public treasury because due to the application of the above principles that money is not lawfully due…Applying the same reasoning, to the matter before this court, it does not matter that the respondents say and think they are owed over a billion Kenya shillings-what matters is whether the amount is lawfully due and whether the law allows its recovery? It is not a question of impression or perception of what is owed, instead it is what if anything, is owed under the relevant law and whether its assessment and recovery is permitted by the applicable law. If rightly due, the huge amount notwithstanding the court must uphold the right of recovery regardless of its consequence to the applicant and if not due under the law it must not hesitate to disallow it and must disallow it to among other things to uphold both the law and the integrity of the rule of law.”

36. The Respondent’s written submissions dated 26th June 2023 were filed on even date where the Respondent submitted on two issues as follows;a.Whether the Respondent erred in finding that the Appellant failed to provide sufficient proof to rebut the assessments issued by the Respondent.

37. The Respondent submitted that whereas it was very clear in requesting for specific documents as quoted in its objection decision, the Appellant failed to provide all the requested documents. That contrary to the Appellant’s assertions, the Respondent accepted the reversal from Stanchart Bank account based on reconciliations on taxable revenue it provided and did not adduce sufficient documentation on interbank transfers.

38. It was the Respondent’s contention that the Appellant did not provide evidence on related party transfers and that the contract with Safaricom did not have a clause on advance payment. The Respondent was obstinate that the Appellant did not provide director’s ledger, schedules of transfers and evidence of director deposit as requested as well as schedules of casual payments, salaries and wages paid in cash.

39. The Respondent submitted that the assessments for income tax and VAT were correctly issued and cited Section 56(1) of the TPA as placing the onus of proof in tax obligations on the taxpayer who in the particular case failed to avail evidence in support of a contrary assessment.

40. The Respondent cited the following cases in buffering its position regarding the Appellant’s burden of proof:a.Kenya Revenue Authority vs Man Diesel & Turbo Se, Kenya[2021]eKLRb.Wiliam O’Dwyer and Sloan O’Dwyer v Commissioner of Internal Revenue, 266 F.2d 575 [4th Circuit US Court of Appeals]c.AGovindarajulu Mudaliar v Commissioner of Income Tax AIR 1959 SC 248, 1958 34 ITR 807 SC [India Supreme Court]d.Commissioner of Income Tax v Desi Prasad Vishwanath Prasad 1969 72 ITR 194 SC [India Supreme Court]e.Kale Khan Mohammad Hanif v Commissioner of Income Tax 1963 50 ITR 1 SC [India Supreme Court]f.Mulherin vs Commissioner of Taxation [2013] FCAFC 115 the Federal Court of Australia

41. To buttress this position, the Respondent quoted Section 107 and Section 115 of the Evidence Act in asserting that the Appellant failed to provide relevant documents in support of its assertions.b.Whether the Respondent issued the assessments to the best of its judgement.

42. The Respondent averred that it considered all the documents provided by the Appellant to support its objection and that the documents failed to provide sufficient grounds for a contrary opinion. The Respondent stated that Section 29(1) of the TPA mandate it to make tax assessments which were made within the best judgement of the Respondent pursuant to Section 31(1) of the TPA.

43. The Respondent relied on the Tribunal’s decision in the case of Digital Box Limited vs Commissioner of Investigations and Enforcement [TAT Appeal No. 115 of 2017] where it was held that;“The Tax Procedures Act in granting the Respondent powers to assess taxpayers does not specify the methods that may be used instead, the law provides that the best judgement must be exercised.”

44. It was the Respondent’s assertion that it did not use any other documentation outside what the Appellant had provided and did not exercise its judgement dishonestly, vindictively and capriciously but as envisioned under the law and in line with the evidence and material availed by the Appellant.

ISSUES FOR DETERMINATION 45. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that a singular issue calls for its determination as follows;

Whether the Respondent’s objection decision was justified.ANALYSIS AND DETERMINATION 46. The Respondent claimed that the Appellant was selected for audit because of income under declaration and overestimation of salaries and wages for tax purposes. The Appellant rebuffed these assertions by stating that it had declared, filed and paid all its income tax and VAT due for the period under review.

47. The Respondent stated that its audit established variances in sales/turnover and salaries and wages as declared by the Appellant. The Appellant contested the direct banking method adopted by the Respondent in deriving sales/turnover while at the same time provided explanations and documentation in support of its declared salaries and wages. The Respondent acknowledged one reversal transaction of Kshs. 30,000,000. 00 as the only transaction the Appellant was able to demonstrate and support fully.

48. Whereas the Appellant asserted that it provided proper reconciliations, the Respondent insisted that the Appellant was unable to properly support its reconciliations and explanation. The Tribunal takes note of the contents of 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.”

49. On one hand, the Appellant insisted that 99% of its guards did not meet the minimum taxable income while more than 50% were employed on temporary basis. On the other hand, the Respondent asserted that the Appellant failed to demonstrate how it incurred salary expenses by adducing requested documents. The Tribunal observes that Section 31 (1) of the TPA grants the Respondent powers to amend an assessment by making alterations or additions from available information and to the best judgement.

50. The Appellant averred that the Respondent included loans advanced by directors to the Appellant in its assessments. The Tribunal notes that the Appellant’s averments remain unsubstantiated with documentary evidence in form of signed contractual terms for such facilities, worth noting is that even in the attached bank statements, the Appellant failed to point out which funds were loans advanced to it by its directors. The Tribunal relies on the case of Trust Bank Limited vs Paramount Universal Bank Limited and 2 others (2009) eKLR where the court stated as follows;“…It is trite where a party fails to call evidence in support of its case that party fails to substantiate its pleadings.”

51. The Appellant in its pleadings and attached bank statements pointed out salary reversals that the Respondent had included in tax assessment computations, allegations that were uncontroverted by the Respondent who failed to proof why such amounts were included in tax liability demands. Without proof, the Respondent’s assessment was without basis in law as the burden of proving any willful neglect or fraud was upon the Respondent. The Tribunal reiterates the Courts holding in the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where Justice Majanja stated as thus: -“I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.”

52. Further, the Tribunal relies on the case of Janet Kaphiphae Ouma & another vs Marie Stopes International (Kenya) HCC No. 68 of 2001 where it was held that;“..In this matter, apart from filing its statement of defense, the defendant did not adduce any evidence in support of assertions made therein. The evidence of the witness remains and the 1st plaintiff remains uncontroverted and the statement in defense therefore remains mere allegations….Section 107 & 108 of the Evidence Act are clear that he who asserts or pleads must support by way of evidence.”

53. It was the Respondent’s assertion that it reviewed and considered all documents provided before issuing its objection decision. The Tribunal notes that the Appellant in its pleadings provided financial statements, documentation and explanations in support of its reconciliations and interbank transfers. Similarly, the Appellant adduced before the Tribunal scheduled bank statements in support of salaries and wages paid to its guards. The Tribunal notes that both Section 30 of the TAT and Section 56 (1) of the TPA place the burden of proof in tax disputes upon the taxpayer who has to demonstrate why a tax assessment is excessive or incorrect.

54. The Tribunal notes that the Respondent did not justify why it included in the tax computations the refundable customer deposits and external loans that had been advanced to the Appellant. It is trite law that a business should be allowed to deduct from its realized income expenses incurred wholly and exclusively in generation of that income; the meaning of this cardinal principle is found in law under Section 16 & 17 of the VAT Act. The Tribunal relies on the case of Silverchain Limited vs Commissioner of Income Tax & 3others (2016) eKLR where the court stated that;“…The task of collecting taxes should not lead to discouraging tax payers from carrying on with their business. If the taxpayers’ close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid there will be no funds to run government operations. This calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as opposed to being unilateral. There must be fairness in the process of tax assessment.”

55. Obtaining from the preceding analysis is that the Tribunal is convinced that the Respondent’s objection decision was partially justified. The ends of justice will be appropriately met by remitting the tax assessment back to the Respondent to issue a decision that takes into consideration refundable deposits and loan expenses.

Final Decision 56. The upshot of the foregoing is that the Appeal partially succeeds and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 5th December, 2022 be and is hereby set aside.c.The Respondent is at liberty to review the Appellant’s objection and issue an appropriate objection decision within Sixty (60) day of the date of delivery of this Judgment.d.Each party to bear its own costs.

57. It is so ordered.

DATED and DELIVERED at NAIROBI on this 8th day of March, 2024ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI MOHAMED A. DIRIYEMEMBER MEMBERSPENCER S. OLOLCHIKEMEMBERJUDGMENT APPEAL NO. 49 of 2023 CASA SECURITY LIMITED VS. COMMISSIONER OF LEGAL SERVICES & BOARD COORDINATION Page 20