[2024] KETAT 1667 (KLR)

Chromawave Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal E018 of 2024) [2024] KETAT 1667 (KLR) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1667 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E018 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

November 21, 2024

Between

Chromawave Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated pursuant to the Companies Act, CAP 486 of the Laws of Kenya and deals in construction of roads.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 Part 1 and 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. The Respondent issued the Appellant with an additional assessment order dated 23rd December 2022 in respect to income tax for the year 2021 seeking to recover principal amount of Kshs 806,167. 80. The Appellant being aggrieved with the additional assessment lodged a late objection on 12th October 2023.

4. The Respondent on 4th December 2023 issued its objection decision rejecting the objection and hence confirming the assessment. The Appellant being aggrieved by the decision, lodged this Appeal vide notice of appeal dated 4th January 2024 and filed on 8th January 2024.

The Appeal 5. The Appellant lodged the Memorandum of Appeal dated 4th January 2024 and filed on 8th January 2024 predicated on the following grounds of Appeal:a.That the Respondent erred in law by disregarding expenses incurred wholly and exclusively in the production of taxable income contrary to Section 15 of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”); andb.That the Respondent erred in issuing erroneous, irrational and unreasonable assessments given the circumstances.

Appellant’s Case 6. The Appeal is supported by Statement of Facts dated on 4th December and filed on 8th January 2024. The Appellant’s written submissions dated on 3rd September 2024 and filed on 4th September 2024 were adopted by the Tribunal during the hearing on 11th September, 2024.

7. The Appellant stated that the Respondent arrived at the additional expenses after return review based on withholding data set.

8. The Appellant’s case is that whereas the Respondent alleges that upon review of the Appellants records, it noted possible under declaration of sales since there was a variance between what was declared by the Appellant in its accounts and what was reflected as expected sales as per the withheld data.

9. That Appellant asserted that the Respondent alleged that it notified it of the variances but the Appellant never responded.

10. The Appellant stated that vide Objection Application Notices dated 12th October 2023 it made a disclosure to the Respondent of the fact that the email address used by the Respondent was not operational.

11. The Appellant maintained that it never received any information concerning the variances as it would have made the necessary arrangement to rectify and /or provide information.

12. The Appellant stated that despite this disclosure to the Respondent it opted not to involve the Appellant and proceeded to confirm the additional assessment.

13. The Appellant challenged the decision of the Respondent in issuing the additional assessment and disregarding expenses incurred wholly and exclusively in the production of taxable income as that would imply that there were no purchases made by the Appellant in furtherance of its taxable business.

14. The Appellant submitted that during the period of August-December 2022 the Appellant had formally written to the Respondent complaining that it was not getting correspondences from the Respondent due to use of the electronic mail address chromawaveenterprisesltd@yahoo.com and that stalemate was resolved and the Appellant henceforth started using gitawa2006@yahoo.com.

15. Further, the Appellant submitted that it did in fact provide documentation which it felt was sufficient support of the objection but the Respondent however, disregarded the documentation and proceeded to disallow the objection and confirm the additional assessment.

16. The Appellant also submitted that the Respondent in disregard of documentary evidence in support of the objection and the reasonable deductions provided for under Section 15 of the ITA still proceeded to confirm the additional assessment without any alterations which is tantamount to claiming that there was no expenditure wholly and exclusively incurred in the production of the income of Kshs 2,687,226. 00 which would be an absurdity.

17. The Appellant submitted that the Respondent is not entitled to claim the assessed amounts. It cited the case of Keroche Industries Limited v Kenya Revenue Authority & 5 others [2007 eKLR to support the position that what matters is whether the amount is lawfully due and whether the law allows its recovery.

18. The Appellant submitted that the Respondent wrongly assumed that because there is a variance between what was declared and what was retrieved from Withholding VAT then the entire amount of Kshs 2,687,226. 00 is owed to it and as such should be tax wholly. It submitted that this perception amounts to an assessment that is excessive. It submitted that the Respondent taxed Kshs 2,687,226. 00 without considering the expenses incurred and that there therefore, the Respondent’s decision is wrong.

19. The Appellant relied on the case of Kenya Revenue Authority v Man Diesel & Turbo Se Kenya [2021] eKLR to submit that in auditing a taxpayer the Commissioner is required to properly consider the documentation provided and to understand the information. It is not sufficient for the Commissioner to merely request information and then disregard it and to issue an assessment as it sees fit.

20. The Appellant submitted that the Appellant may or may not be liable for Company Income Tax (CIT) based on the Respondent's Additional assessment, however the Appellant submitted that it was certain that if at all any tax is due from the Appellant it is not the amount of Kshs. 806,168. 00 principal taxes as this amount is excessive.

21. Finally, The Appellant also submitted that although the Appellant applied for Alternative Dispute Resolution (hereinafter “ADR) upon filing the instant Appeal, that forum was not availed to it due to bad faith on the part of the Respondent and that not once was a meeting scheduled by the Respondent's ADR department despite various follows ups.

Appellant’s Prayers 22. The Appellant prayed for the following orders against the Respondent:a.That this Appeal be allowed.b.That the Respondent's objection decision dated 23rd December, 2023 be set aside; andc.That the Tribunal be pleased to refers this matter to the Respondent for reconsideration in accordance with any directions or recommendations.

Respondent’s Case 23. The Respondent’s case is premised on its Statement of Facts dated and filed on 26th January 2024. The Respondent filed its written submissions dated 8th August 2024 on even date.

24. It was the Respondent case that the Appellant was selected for a return review covering the year of income ending 2021 based on withholding data set. This was after the Respondent noted possible under declaration of sales by the Appellant since there was a variance between what was declared in Appellant’s accounts vis a vis expected sales as per the withheld data.

25. The Respondent stated that it notified the Appellant of the variances via i-Tax but that however, the Appellant did not amend its returns and declare the correct sales. Subsequently, on 23rd December 2022 the Respondent issued the Appellant with an additional assessment order with respect to Income Tax for the year 2021. The Appellant being aggrieved with the additional assessment lodged a late objection on 12th October 2023. The Respondent alleged that it informed the Appellant that the notice of objection had been lodged out of time vide an electronic mail dated 18th October 2023.

26. The Respondent stated that it requested the Appellant to provide documents in support of its objection vide an electronic mail dated 9th November 2023 and a reminder sent on 10th November 2023. Consequently, the Respondent on 4th December 2023 issued its objection decision rejecting the objection and hence confirming the assessment which motivated the Appellant to lodge this Appeal.

27. The Respondent averred that the assessment was raised properly and that it used the available information to analyse the Appellant's returns. The Respondent maintained that it issued the assessment based on the undeclared income from withholding data set which revealed a variance between the sales declared and expected sales. It averred that it brought to charge the variance as undeclared sales in the Appellant's account.

28. The Respondent relied on Section 51 (3) of the Tax Procedure Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) which requires a taxpayer to provide all the relevant documents relating to the objection to be submitted for a notice of objection to be treated as validly lodged. The Respondent also averred that vide electronic mails dated 9th November 2023 and 10th November 2023 it requested the Appellant to produce all the documents in support of its objection however, the Appellant failed to provide the same.

29. The Respondent relied on Section 52 of the IT) and Section 28 of the TPA both of which state that the Kenyan tax system is a self-assessment system where a taxpayer assesses himself or herself and makes payments to it, it however, argued that the law still empowers it to interrogate the taxpayer's operations and returns on income to ensure the taxpayer has stated the correct tax position and liability.

30. It was the Respondent’s case that upon noting variances and gaps, it invited the Appellant for an elaborate engagement whereby documents, records and other information were requested from the Appellant for purposes of verifying the self-assessments.

31. The Respondent stated that the Appellant did not provide the requested documents and therefore the Respondent used its best judgement to raise the respective assessment and demanded the taxes therein as per Section 31 of the TPA. The Respondent also stated that Section 24 (2) the TPA allows the Respondent to assess taxpayer's liability using any information available.

32. The Respondent stated that the determination of the tax liability depends on submission of necessary records by the Appellant since under Section 56 of TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”), the Appellant bears the burden of demonstrating that it has discharged its tax liability. The Respondent stated that the Appellant failed to discharge its tax liability.

33. The Respondent submitted that the assessments raised were in accordance to the law and the Appellant failed to cure the gaps in its notice of objection even though the Respondent brought those shortcomings to the attention of the Appellant. The Respondent relied Section 31 of the TPA to avow that it used its best judgment to make a determination based on the information that was available to it. It also relied on the case of Digital Box Limited v Commissioner of Domestic Taxes [Tat Appeal No. 115 of 2011 to submit that it is required to exercise its powers in such a way that it makes value judgment on the material which is before the Respondent.

34. The Respondent relied on Section 56(1) of the TPA and Section 30 of TATA to argue that the Appellant failed to discharge its burden of proof. Further, the Respondent relied on the case of Kenya Revenue Authority v Man Diesel& Turbo Se, Kenya [2021] eKLR, Miao Yiv Commissioner of Investigations & Enforcement TAT no 441 of 2019 and PZ Cussons East Africa Limited v Kenya Revenue Authority [2013] eKLR, to emphasize the fact that the Appellant herein has a duty to discharge the burden of proof.

35. In light of the forgoing, the Respondent submitted that it did not err in assessing the tax payable as it considered all the documents produced.

Respondent’s prayers 36. The Respondent prayed that the Tribunal would issue the following Orders:a.That the Appeal be dismissed with costs to it;b.That the assessments and resultant interest and penalties as issued be upheld; andc.That the Tribunal be pleased to uphold the objection decision dated 4th December 2023 as issued.

Issues for Determination 37. The Tribunal having considered the parties’ pleadings documentation adduced as evidence and written submissions puts forth the following single issue for determination:Whether the Respondent’s objection decision dated 4th December 2023 was justified.

Analysis and Findings 38. The Tribunal will proceed to analyse the issues as hereinunder:Whether the Respondent’s objection decision dated 4th December 2023 was justified.

39. The Tribunal notes the Appellant’s submission that the Respondent issued additional assessments but disregarded expenses it had incurred wholly and exclusively in the production of its taxable income. The Appellant further submitted that whereas it supplied the Respondent with documentation which it felt was sufficient support of the objection, the Respondent disregarded the documents and proceeded to disallow the objection and confirmed the additional assessment. The Respondent opposed these assertions and maintained that the Appellant failed to avail documents to support its case despite issuing written reminders.

40. The Tribunal notes that the Appellant did not file supporting document to support this Appeal neither did the Appellant file its notice of objection for the Tribunal to peruse and examine.

41. Section 13(2) (b) of the TATA requires an Appellant to file its statement of facts. The statement of facts should support or expound the contents of the memorandum of appeal. The statement of facts should explain why and how the Respondent’s decision is incorrect. This is well captured under Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 (hereinafter “the Rules”) which explains further how a taxpayer is supposed to deal with statement of facts and documentary evidence when lodging an Appeal before this Tribunal. Rule 5 of the Rules, provides as hereunder:‘‘(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal[emphasis ours](2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’(emphasis is ours).”

42. Having examined the Appellant’s pleadings the Tribunal finds that the Appellant failed to comply with Rule 5 of the Rules by failing to provide evidence to support the appeal. As such, the Tribunal does not have documentation to review peruse and examine to determine whether the Respondent erred in its handling of the notice of objection. The purpose of rule 5 of the Rules is to assist the tax payer to discharge the burden of proof. Burden of proof is discharged by tabling supporting evidence. Section 56(1) of the TPA provides as follows:‘‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’Further, Section 30 of TATA provides 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.’’

43. The Tribunal relies on the following holding of the High Court in the case of Darwine Wholesalers Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) :“Under section 59 of the TPA and section 43 of the VAT Act the Commissioner is expressly empowered to ask for additional information to ascertain the tax chargeable. This legal position is in consonance with section 107 and 112 of the Evidence in that the balance of proof lies with the party with the knowledge of facts. Further section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the TPA imposes the burden of proof on the tax payer to prove that an assessment was wrong or that it was excessive.”

44. The Tribunal is of the view that the Appellant failed to discharge its burden of proof under Section 56(1) of the TPA and Section 30 of the TATA. In view fo the foregoing the Tribunal finds that Respondent’s objection decision dated 4th December 2023 was justified.

Final Decision 45. The upshot to the foregoing is that the Appeal lacks merit and the Tribunal consequently makes the following Orders:a.The Appeal be and is hereby dismissed.b.The objection decision dated 4th December 2023 be and are hereby upheld; andc.Each party to bear its own cost.

46. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER