[2024] KETAT 356 (KLR)

Centurion Engineers & Builders Ltd v Commissioner of Domestic Taxes (Tax Appeal 963 of 2022) [2024] KETAT 356 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 356 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 963 of 2022

RM Mutuma, Chair, M Makau, B Gitari & AM Diriye, Members

February 23, 2024

Between

Centurion Engineers & Builders Ltd

Appellant

and

The Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant’s is a limited liability company duly registered under the companies Act and its primary business activity is in the construction and building industry.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the 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 carried out a review of the Appellant’s tax returns from 2016 to 2021 leading to issuance of notice of assessment dated 19th January 2022. The Applicant lodged a notice of objection dated 17th February 2022 against the entire assessment.

4. The Respondent consequently issued its objection decision dated 2nd August 2022. Being dissatisfied by the decision, the Appellant filed its Notice of Appeal on 23rd August 2022.

THE APPEAL 5. The Memorandum of Appeal dated 6th September 2022 raises the following grounds:-i.That the Respondent erred in law and fact in disallowing the income that was supported in the objection.ii.The Respondent erred in both law and fact in disallowing the expenses that were supported.iii.The Respondent erred both in law and fact by finding that the Appellant objection was unproved.iv.The Respondent erred both in law and in fact applying the wrong principles in its finding thereby arriving at a decision that was fundamentally flawed.v.Some disallowed transactions are beyond the taxpayer's burden of proof and only the Commissioner can seek clarification from third parties.vi.The support documents on the various expenses and incomes were disregarded hence unsubstantiated tax liability.vii.The Objection decision reached by the Respondent was before providing sufficient opportunity to the Appellant to provide more documentation or clarifications on the disallowed transactions.viii.Subject to the foregoing, it is the Appellant’s prayer that the Honorable Tribunal allows the matter to be heard by the Alternative Dispute Resolution (ADR).

THE APPELLANT’S CASE 6. The Appellant’s case is premised on the:-a.Statement of Facts filed on 6th September 2022 together with the documents annexed thereto.b.Written submissions dated and filed 13th March 2023;

7. The Appellant disputed Value Added Tax which was assessed at Kshs. 98,310,595. 00 inclusive of penalties and interests and Corporation tax assessed at Kshs. 161,771,833. 00 inclusive of penalties and interests.

8. The Appellant argued that the assessment has numerous estimations and lacks enough details of findings to enable the taxpayer comprehend and act accordingly. The Appellant also argued that it provided various supporting documents on various expenses and incomes but the Respondent disregarded them, hence unsubstantiated tax liability.

9. The Appellant stated that some disallowed transactions are beyond the tax payer burden of proof and only the Respondent can seek clarification from the third parties.

10. Whereas the Appellant acknowledged that the Respondent partially adjusted the decision on VAT from Kshs. 158,169,226. 00 to Kshs. 98,310,595. 00; and partially adjusted the Corporation tax from Kshs. 316,694,044. 00 to Kshs. 161,771,833. 00, the Appellant argued that the Respondent ought to have allowed the entire objection.

11. The Appellant also argued that the Respondent did not have basis of charging any Corporation tax and VAT as contained in the objection decision.

Appellant’s Prayers 12. The Appellant therefore prayed that this Honourable Tribunal be pleased to allow the Appeal as prayed in the Memorandum of Appeal.

THE RESPONDENT’S CASE 13. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 5th October 2022 together with the documents attached thereto; andb.Written submissions dated and filed on 13th March 2023;

14. The Respondent stated that it conducted a return review for the years 2016 to 2021 on the basis that the Appellant had under declared income on all the projects executed by the Appellant for the period under review. The Respondent then disallowed part of the costs under Sections 15 and 16 of the Income Tax Act.

15. The Respondent averredthat the Appellant failed to provide all the documents in support of the objection hence the Respondent issued objection decision based on the information provided. Therefore, the Appellant argued that the Appellant failed to discharge the burden of proof under Section 56 (1) of the Tax Procedures Act.

16. The Respondent argued that it identified incidences where the Appellant adopted cash basis of accounting, hence in most cases the Appellant would raise an invoice based on the predetermined expected payment which made it impossible to match any invoice to a particular certificate. The Respondent also stated that there was a lot of inconsistencies when it came to valuation certificate computations, where at some point different retention rates were used from one certificate to the other and that the Appellant was not able to produce most of the valuation certificates.

17. The Respondent averred that it identified inconsistencies in the returns filed by suppliers and the invoices claimed by the Appellant and this indicated a variance as per the VAT returns and Income tax returns filed. In addition, the Respondent stated that the Appellant did not provide explanation on the variances.

18. In response to grounds 1, 2 and 3 of the Memorandum of Appeal the Respondent averred that it disallowed the direct purchase amount in the Appellant’s Income tax return and instead relied on the invoice value as used in the determination of VAT payable as the true direct purchase cost.

19. The Respondent averred that the Appellant failed to provide the documents requested in support of the objection hence the input VAT was disallowed. According to the Respondent, Section 17 (1) and (2) of the Value Added Tax Act empowers the Respondent to disallow input VAT where the necessary documents are not provided.

20. The Respondent relied on the case of Metcash Trading Limited vs. Respondent for the South Africa Revenue Services and another case CCT 3/2000 to argue that the burden of proving that the Respondent was wrong, rests on the Appellant.

21. The Respondent asserted that it requested the Appellant to validate its objection and make the amendments required to correct the assessments and reason thereof but the Appellant declined. The Respondent argued that Section 31 of the Tax Procedure Act empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the best judgment. Therefore, the Respondent argued that it should not be faulted for relying on the provided information.

22. The Respondent also stated that whereas Section 59 (1) of the Tax Procedure Act empowers the Respondent to seek and obtain information in relation to tax matters, the Appellant failed to provide the required documentations.

Respondent’s Prayers 23. The Respondent prayed that this Honourable Tribunal finds that:a.The Respondent was justified in disallowing the expenses that were not supported.b.The objection decision be upheld.c.The Appellant be found liable to pay the tax due.d.This Appeal be dismissed with costs to the Respondent as the same is without merit.

ISSUES FOR DETERMINATION 24. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth the following issues for determination:a.Whether part of the assessments are statutory time barred; andb.Whether the Appellant provided documents in support of its case.

ANALYSIS AND FINDINGS 25. The Tribunal wishes to analyse the issues as hereunder.a.Whether part of the assessments are statutory time barred;

26. The Tribunal is examining this issue suo moto for the sake of justice and to ensure fidelity to the law.

27. The Respondent issued assessments from 2016 to 2021 vide assessment dated 19th January 2022. The question then is whether part of the assessments are statutory time barred. Determining this issue is relevant because the Respondent has submitted that the Appellant did not avail sufficient documents to warrant vacation of the entire assessments. However, the Respondent did not specify documents that the Appellant ought to have provided and most importantly, documents for a particular period. Was the Appellant supposed to provide documents for any period even where a statute provides for express limit?

28. Section 23 (1) (c) of the Tax Procedures Act on record-keeping provides as follows:‘‘(1) A person shall—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.’’

29. In addition, Section 29 (5) of the Tax Procedures Act provides: -‘‘Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’While Section 29 (6) provides that; -‘‘Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.’’

30. Apart from the above, Section 31 (4) (a) of the Tax Procedure Act provides as follows: -‘‘The Respondent may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time.’’

31. The Respondent raised assessments for the year 2016 on 19th January 2022. The 2016 assessments are beyond five-year rule whether under Section 29 or under Section 31 of the Tax Procedures Act.

32. The inference of Section 29(6) and/or Section 31 (4) (a) of the Tax Procedures Act require the Respondent to show the reason(s) where it seeks to recover taxes beyond the five-year rule, as was the case of Gitere Kahura Investments Limited vs. Respondent of Domestic Taxes Tat No.16 of 2019-Judgement [2021] eKLR this Tribunal observed that the Respondent has the burden of proof pursuant to Sections 107 and 108 of the Evidence Act to prove that the Appellant is in breach of Section 29 (6) of the Tax Procedures Act. The Tribunal noted that taxes that were for 2012-2013 being demanded in 2018 without the Respondent demonstrating gross or wilful neglect, evasion or fraudulent activities concerning taxes as provided for under Section 29 (6) of the Act were time barred and ought to be expunged pursuant to Section 29 (5) of the TPA.

33. In this Appeal, the Respondent has not provided evidence be it under Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act to justify assessment of 2016 taxes beyond the five-year rule.

34. In the absence of a substantiated reason from the Respondent to justify an additional assessment of taxes beyond statutory five years, the Tribunal finds and holds that tax assessments period for the year 2016 are statutory time barred and ought to be expunged from the assessments.b.Whether the Appellant provided documents in support of its case.

35. The Appellant in support of its case submitted that it provided documents in support of its case but the Respondent disregarded the documents. On the other hand, the Respondent maintained that the Appellant did not provide all the documents in support of the objection hence the Respondent consequently issued the objection decision based on the information provided.

36. The Respondent maintained that the Appellant did not avail sufficient evidence to address issues raised hence the said assessment was confirmed. The Respondent relied on Section 51(4) of the Tax Procedures Act to infer that the notice of objection was invalid due to lack of documents.

37. The Section 51 (4) that the Respondent relied on provides as follows: -‘‘Where the Respondent has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Respondent shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.’’

38. Whereas the said provisions require the Respondent to notify the taxpayer of the invalidity of the notice of objection, the Respondent has not filed such a notice in evidence to demonstrate to the Tribunal that the Appellant refused to act upon the notice leading to confirmation of the assessment.

39. The Tribunal has examined the documents that the Appellant filed in support of the Appeal. The documents include the Objection dated 17th February, 2022; a schedule of declared invoices as per project showing various particulars including work done; a list of unsupported suppliers for 2017; case sale receipts; copies of ETR; and a number of invoices.

40. The Respondent argued by stating that the Appellant failed to provide the documents requested in support of its objection hence the input VAT was disallowed. The Tribunal notes that the Respondent has not disclosed the list of documents that it had requested for and which the Appellant failed to provide.

41. Further the Respondent, in Statement of Facts or in submissions, has not attempted to impeach or discredit the documents as filed by the Appellant. As such, this Tribunal is unable to establish which documents in particular the Appellant failed to provide.

42. The Respondent in its submissions alluded to the concept of missing trader in matters VAT. The Respondent submitted that in the fraud dubbed The Missing Trader VAT Fraud Scheme businesses, are business registered for VAT and obtain fictitious invoices. The invoices are introduced into their business purchase-records with the sole purpose of illegally reducing the rightful VAT payments. The fictitious invoices are invoices generated to depict a business transaction whereas there is no actual supply or movement of goods and services. In short, there is no commercial transaction or value.

43. The Respondent submitted that it had carried out an iTax analysis of the suppliers that the Appellant had purportedly bought supplies from. The investigations revealed that they only existed on paper with the sole purpose of milling bogus invoices to sell to various companies at a commission. However, the Respondent did not pinpoint the bogus invoices be it in paragraph 3. 3 of its notice of objection, Statement of Facts or in the written submissions.

44. Whereas missing trader in matters VAT cannot be wished away, the Respondent has failed to identify the alleged suppliers and the bogus invoices within the Appellant’s bundle of documentary evidence.

45. In Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR the Court observed that:“The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Respondent's assessments or determinations of deficiency. The Respondent'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. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.

46. In SAJ Ceramics Limited vs. Respondent of Domestic Taxes Appeal No. 465 Of 2021, this Tribunal observed as follows:“The Tribunal examined the Appellant’s bundle and found that the Appellant had furnished tax invoices in the prescribed format as prima facie evidence of purchase and went further to furnish banking slips. The Appellant further produced evidence showing the tax it withheld when paying the suppliers. The Appellant also identified one transaction which had been duplicated and for which it had issued a credit note. The Respondent’s silence on this evidence was as loud as its contention that the Appellant had failed to produce sufficient evidence. It would have been helpful if the Respondent had devoted some time to prove that the evidence provided by the Appellant was incorrect.’’

47. In the instant case, the Tribunal observes that the Appellant herein provided documents in support of its objection and similarly in this Appeal, whose sufficiency the Respondent has not impeached by failing to provide a succinct list of documents it required from the Appellant. The Tribunal has also noted that the Respondent has not shown that is complied with the provision of Section 51 (4) of the TPA that require it to write to the Appellant within 14 days to validate the Notice of Objection. Under the circumstance, the Tribunal finds that the Appellant discharged its burden of proof under Section 56 (1) of the Tax Procedures Act.

FINAL DECISION 48. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal is meritorious and consequently makes the following orders; -a.The Appeal is hereby allowed;b.The Respondent’s Objection decision dated 2nd August 2022 is hereby set aside; andc.Each party to bear its own costs.

49. It is so ordered.

DATED and DELIVERED at NAIROBI this 23rd Day of February, 2024ROBERT M. MUTUMACHAIRMANELISHAH N. NJERU MUTISO MAKAUMEMBER MEMBERBERNADETTE M. GITARI MOHAMED A. DIRIYEMEMBER MEMBERJUDGMENT - APPEAL NO.963 OF 2022 CENTURION ENGINEERS & BUILDERS LIMITED VS COMMISSIONER OF DOMESTIC TAXES PAGE 13