[2023] KETAT 983 (KLR)

Chebut Tea Factory v Commissioner of Domestic Taxes (Tax Appeal 1273 of 2022) [2023] KETAT 983 (KLR) (Commercial and Tax) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 983 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 1273 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, E Ng'ang'a, RO Oluoch, AK Kiprotich & B Gitari, Members

September 15, 2023

Between

Chebut Tea Factory

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act 2015, its principal business is to collect and process green tea.

2. That the Respondent a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all tax revenue.

3. The Appellant formed Kaptumo Tea Factory Ltd (KTFL) in 2006 to off-load the processing of green tea at Chebut, improve efficiency in collecting and processing growers and continued operating as a fully -fledged tea factory. The Respondent analysed the Appellant’s and Kaptumo’s declarations and found that there was a transfer of business as a going concern in view of the change in assets from 2019/2020 to 2020/2021.

4. The notice of assessment was issued on 21st June 2022 and the Appellant objected to the assessment on 22nd July 2022. The objection decision was issued on 16th September 2022, confirming the assessment raised by the Respondent.

5. The Appellant hereby appeals against the whole of the Respondent's confirmation notice dated 16th September 2022.

The Appeal 6. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 28th October 2022:-i.That there was no transfer of assets from Chebut Tea Factory Ltd to Kaptumo Tea Factory Ltd as alleged by the Respondent.ii.That in the Respondent’s letter of 20th April 2022, it intended to charge the Appellant both Capital Gains Tax (CGT) and VAT but in final analysis dropped CGT and only charged VAT an indication of uncertainty on chargeability.iii.That the Respondent’s only basis to alleged transfer is analysis of tax returns filed by both the Appellant and KTFL, a position that was erroneous and which was subsequently corrected by amending the said returns to reflect the non-transfer position.iv.That incorporation of KTFL in 2020 by itself did not mean transfer of any assets and really it did not.v.That KTFL 2021 tax returns to the Respondent, the Appellant used draft accounts instead of audited accounts and that is where the problem started.vi.That the Respondent erred in law and in fact by making a wrong assumption that assets were transferred of Kshs. 5,956,546. 00 for Plant and machinery and Kshs 8,000,068. 00 for motor vehicles were transferred from Chebut Tea Factory Ltd to Kaptumo Tea Factory Ltd.

Appellant’s Case 7. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts filed on 28th October 2022. b.The Appellant’s written submissions dated and filed on 21st March 2023 together with the authorities attached thereto.

8. That the Appellant formed Kaptumo Tea Factory Ltd (KTFL) in 2006 to off-load the processing of green tea at Chebut, improve efficiency in collecting and processing growers and continued operating as such as fully- fledged tea factory.

9. That KTFL was incorporated on 8th September 2020 with the chairman and vice-chairman of the Appellant as directors and secretary, respectively, and the Appellant as director/shareholder of 2 ordinary shares.

10. That at the date of the incorporation of KTFL, other than two shares of Kshs. 20 in equity value, no other asset(s) or liabilities were/was transferred to it by the Appellant.

11. That during the audit for 2021 the accountant for the Appellant indicated, by error that the Appellant had transferred part of its assets to KTFL.

12. That 2021 original audited reports indicated that there were assets transfer but this mistake was later rectified through revised audited financial statements

13. That 2021 tax returns were filed to Kenya Revenue Authority for both the Appellant and KTFL.

14. That 2021 tax returns were corrected with correct audit report.

15. That the errors in the financial statement were corrected in good faith, immediately the errors were detected.

16. That the Respondent did not do basic due diligence to confirm if the assets were actually and in fact transferred to KTFL as alleged.

17. That KTFL was incorporated as a subsidiary of the Appellant but the related party relationship is only portrayed by two ordinary shares the Appellant bought in KTFL at Kshs. 20 and the chairman and vice chairman of the Appellant taking position of director and secretary respectively.

18. That at the date of incorporation of KTFL, there were no transactions between the Appellant and KTFL.

19. The Respondent only basis to allege transfer of assets is analysis of tax returns filed by both Appellant and KTFL, a position that was erroneous and which was subsequently corrected by amending the said returns to reflect the non-transfer position.

20. That it is true that in 2006 when KTFL was formed, without being incorporated, part of the Appellant’s business was transferred to it but no assets at all, at the time , and even at incorporation in 2020.

21. That the Respondent- other than making a wrong assumption that assets were transferred used net cost of the net book value of Kshs, 5,956,546. 00 for plant and machinery and Kshs. 8,000,068. 00 for motor vehicles while the said assets had been fully depreciated having been acquired in 2010 and with eight (8) and four (4) years full depreciation period respectively.

22. That incorporation of KTFL in 2020 by itself did not mean transfer of any asset(s) and really it did not.

23. That KTFL filed 2021 tax returns to the Respondent using draft accounts instead of audited accounts and that is where the problem started.

24. That the Respondent was selective in computing tax on the alleged transfer and only assumed that plant and machinery and motor vehicle were transferred while other assets such as building, land, furniture and fittings and computer and accessories were not affected.

25. That in the Respondent’s letter dated 20th April 2022, it intended to charge the Appellant both Capital Gains Tax (CGT) and VAT but in final analysis dropped CGT and only charged VAT an indication of uncertainty and chargeability.

Appellant’s Prayers 26. That the Appellant prays for orders that this Tribunal sets aside the confirmation and directs the Respondent to amend the assessment to nil.

Respondent’s Case 27. That the Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 25th November, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 19th April, 2023 together with the legal authorities filed therewith.

28. That the Respondent issued the Appellant with a notice to conduct an audit on 22nd March 2022.

29. That the Respondent’s scope of verification was limited to a transaction between the Appellant and Kaptumo Tea Factory Limited (herein referred to as KTFL)

30. The Respondent’s reviewed the balance sheet as per the income tax returns filed by the Appellant and established movement in non-current assets depicting transfer of assets to KTFL in the financial year ending 30th June 2020 as analysed below:PARTICULARS CHEBUT MOVEMENT

2020 2021 CHEBUT KAPTUMO

FIXED NCA 580,497,612 319,788,925 260,708,687 247557. 013

Land & Building 655,571,435 383,930,039 271,641,396 306,752,119

Plant & Machinery 441,701,988 259,970,603 181,731,385 193,183,352

Motor Vehicles 155,981,645 85,294,269 70,687,376 67,316,197

Furniture & Fixtures 24,365,409 19,143,203 5,222,206 26,461,286

Other Assets 46,308,265 29,462,709 16,845,556 4,271,448

Intangible Assets 49,743,618 18,032,747 31,710,871

Accumulated Depreciation/Amortisation 793,174,748 476,044,645 317,130,103 350,427,389

31. That this movement of assets indicated transfer of business as a going concern in form of transfer of assets and therefore the Respondent subsequently charged VAT on some assets transferred to KTFL as shown below:Particulars Amount VAT @ 16%

Plant & Machinery 193,183,352 30,909,336

Motor Vehicles 67,316,197 10,770,592

Total 260,499,549 41,679,928

32. That the notice of assessment was issued on 21st June 2022 and the Appellant objected on 22nd July 2022.

33. That the objection decision was issued on 16th September 2022, confirming the assessment raised by the Respondent.

34. That the Respondent reiterates its position as stated in the objection decision communicated to the Appellant and responds to the Memorandum of Appeal and Statement of Facts. The Respondent averred that the Appellant ‘s income tax return for the year ending 30th June 2020 showed a reduction in the net current assets upon the incorporation of the related entity KTFL.

35. That KTFL had filed returns indicating ownership of assets; the assets value was the same as the reduction in value of those of the Appellant.

36. That the Appellant did not clearly elaborate the essence and the nature of the transaction between them and KTFL. The Appellant also failed to satisfactorily demonstrate to the Respondent how the assets deployed or costs incurred by KTFL in the generation of the sales declared in their annual returns.

37. That Section 24 (2) of the Tax Procedure Act on submission of tax returns states:“(2)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.”

38. That subsequently, the Respondent is not bound by the tax returns filed by the Appellant. The Respondent raised the VAT assessment based on the information availed by the Appellant and after review to the best of its judgment.

39. That it is the Respondent’s position that the Appellant failed to effectively demonstrate or corroborate its allegation that there was no transfer of assets between the Appellant and KTFL.

40. That the Respondent averred that the letter dated 20th April 2022 is not a notice of assessment but rather an intention to look into the tax affairs of the Appellant.

41. That upon further review of records and facts presented, the Respondent arrived at a decision to charge VAT and thus there was no uncertainty as to what tax was charged.

42. That further the Respondent could only rely on the figures stated in the income tax returns as the Appellant did not corroborate the valuation figures of the assets charged to be adopted for the determination of Capital Gains Tax.

43. That the Respondent averred that the Appellant has stated that the income tax returns of KTFL had been filed using draft financial statements and that they came as a proposal only at the objection stage. The Appellant had therefore used the figures stated in the income tax returns at the time the Respondent issued the notice to consider the audit.

44. That Section 31 of the Tax Procedure Act on amendments of assessments states:-“(2)a taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4) (b) (i), to make an amendment to the taxpayer’s self -assessment.”

45. That the Respondent therefore used the figures stated in the income tax returns filed to raise the assessments.

46. That it is the Respondent’s position, the Appellant failed to apply to the Respondent for amendment of the assessments that it filed using the draft financial statements when it became aware that it were incorrect and were to be amended.

47. That consequently, the Respondent cannot be faulted on relying on the figures filed by the Appellant in its tax returns to raise additional assessment when the Appellant failed to amend its assessment.

48. That the Respondent averred that KTFL had been set -up prior to being commissioned in 2006 to offload the processing of green tea delivered daily by small-scale farmers with an aim to increase the processing capacity of the Appellant.

49. That the Appellant’s board had resolved to incorporate KTFL as a fully owned subsidiary in the year 2010, however incorporation did not happen until September 2020.

50. That as explained above the Appellant’s net current assets had reduced by a proportionable value equal to the value of assets of the newly incorporated subsidiary. The Appellant did not clearly elaborate the essence and the nature of the transaction between them and KTFL.

51. That the Appellant also failed to satisfactorily demonstrate to Respondent the assets deployed or costs incurred by KTFL in the generation of the sales declared in its annual returns. This indicated transfer of business as a going concern in the form of transfer of assets.

52. That in failing to satisfactorily demonstrate and elaborate the nature of the transaction between the Appellant and KTFL, the Appellant failed to exercise its statutory burden of proof as required under Section 56 (1) of the Tax Procedures Act to disprove the assessment raised by the Respondent.

Respondent’s Prayers 53. That the Respondent prays that this Honourable Tribunal do find:a.That the Respondent’s confirmed assessment of Kshs. 49,599,114 be upheld.b.That this Appeal be hereby dismissed with costs to the Respondent as the same is without merit.

Issue for Determination 54. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there is one issue that calls for its determination being:-Whether the Respondent erred in the computation and confirming the assessment on the basis of transfer of business as a going concern.

Analysis and Findings 54. The Tribunal having determined the issue falling for its determination proceeded to analyse it as hereunder.

55. The Appellant averred that Kaptumo Tea Factory (KTFL) started operations as a satellite factory of Chebut Tea Factory Ltd (CTFL) in 2010 and operated as a branch. It was incorporated as a limited liability company in September 2020. The chair of CTFL and his deputy were directors and shareholders in KTFL in trust for CTFL. In 2021, the tax return was filled using draft accounts which had erroneously indicated that the assets had allegedly been transferred. When a financial audit was done for CTFL and KTFL, it was evident that no assets were transferred as alleged.

56. The Appellant further averred in an Affidavit that no assets were transferred and confirmed by CTFL and KTFL managers. The audited financial statements also confirmed the same.

57. The Appellant contended that no assets were actually transferred from CTFL to KTFL. KTFL was given autonomy in September 2020 after incorporation, but this did not translate into asset transfer from CTFL to KTFL.

58. The Respondent maintained that there was a transfer of assets by the Appellant to Kaptumo Tea Factory. To support this assertion the Respondent relied on the balance sheet as per the income tax returns.

59. The Appellant on the other hand contended that no assets were actually transferred and that when KTFL was incorporated in 2020 it became autonomous in terms of tea processing. The explanation provided is that the problem in the filing of Kaptumo 2021 tax returns based on draft and unaudited accounts and the same was corrected by amending the 2021 itax returns from the one showing asset transfer to one showing the correct position as per the audit report.

60. The Appellant had provided letters dated 27th April 2022 and 17th May, 2022 indicating that Kaptumo started operations as a satellite factory under Chebut Tea Factory in the year 2010. The Certificate of incorporation indicates that the Company was registered on 8th September, 2020.

61. The Respondent argued that whereas Kaptumo Factory’s amended financial statements indicated that it did not own any assets, the Respondent asserted that without the assets that Kaptumo previously used in its operations under the Appellant there would be no income generation to be reported. In the Respondent’s view this was an indication of transfer of business as a going concern.

62. The Respondent further argued that according to the Tax Amendment Act 2020 which became effective on 25th April 2020, transfer of business as a going concern was deleted from the First Schedule, Paragraph 94 of the VATAct and hence became vatable at a standard rate.

63. The Appellant averred that there was no transfer from CTFL to KTFL at all. That the position was that an error had been made where a draft un-audited financial statement had been used to file 2021 tax returns showing transfer of assets at note 12 of those financial statements. That when the audit was done the entries under that note were corrected to read that KTFL had no assets.

64. The Respondent averred that there was a contention by the Appellant that there was an error in the books, however there was no application for amendment before the Respondent’s inquiry into the two companies. That secondly this gave the impression that records of Chebut and Kaptumo tea Factories could not be relied upon for purposes of ascertaining correct taxes as provided for in Section 23 of the Tax Procedure Act, 2015.

65. The Appellant contended that after KTFL was incorporated it became autonomous in terms of collecting and processing green tea within Kaptumo area. That the Appellant was concerned that the Respondent had interpreted this as “transfer of assets”. The Appellant argued that KTFL was free to conduct its tea business from the date of its incorporation. That it took its share of business which CTFL had initially done. That the decrease in business at CTFL was the business which KTFL took over and that both KTFL and CTFL had reported their performance to the Respondent and had paid their requisite taxes.

66. The Respondent argued that the Appellant was meant to demonstrate that the Responded erred in arriving at the tax position. The Respondent made reference to Section 56 (1) of the Tax Procedures Act which provides as follows;“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

67. The crux of this dispute was whether there was a transfer of assets from Chebut Tea Factory to Kaptumo Tea Factory Ltd. The Respondent relied on the statement of accounts provided by the Appellant to assert this claims and bring the income arising thereof to charge.

68. Both parties are in agreement that the said statement of account was indeed filed, however the Appellant asserts that the said accounts were draft financial statements which were later amended to reflect the non-transfer position.

69. The logical sequence arising from this defence is that the Appellant should have gone into the Respondent's system to amend its filings. This was never done. Meaning that the only document available to the Respondent to ascertain the tax liability of the Appellant were the draft financial statements which had been lodged by the Appellant.

70. On the face of it therefore, the Respondent was justified in making an objection decision based on documents and or draft financial statement presented to.

71. Put another way, the burden of proof in this Appeal lay with Appellant as is enunciated in Section 30 of the TATAct which states as follows.“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.”

72. The Appellant was required to present evidence before the Tribunal to show that this transfer did not take place. An affidavit by the auditor who prepared the said draft accounts without a concurrent proof that the said draft accounts have indeed been amended and filed is not sufficient. It instead amounts to mere allegations under oath without provision of proof of such allegations.

73. This position finds favour in the decision in Alfred Kioko Muteti vs. Timothy Miheso &another [2015] eKLR where 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.”

74. Based on the foregoing analysis, the Tribunal hereby finds that the Respondent was justified in its computation and confirmation of the assessment on the basis of transfer of business as a going concern.

Final decision 75. In view of the foregoing analysis, the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissedb.That the Objection decision dated 16th September 2022 is hereby upheld.c.Each Party to bear its own cost.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER 2023ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBEREUNICE N’GANG’A - MEMBERDR RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER