[2023] KETAT 929 (KLR)

C.M Construction (E.A.) Limited v Commissioner of Investigation and Enforcement (Tax Appeal 1064 of 2022) [2023] KETAT 929 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 929 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1064 of 2022

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

December 20, 2023

Between

C.M Construction (E.A.) Limited

Appellant

and

Commissioner of Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability Company incorporated in Kenya whose principal business activity is construction of both commercial and residential buildings.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 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 Part 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. The Respondent issued a notice of assessment to the Appellant on 6th September, 2020 and upon completion of the audit, issued an assessment to the Appellant on 26th May, 2021 where it found that the Appellant owed a total additional tax of Kshs. 416,677,019. 00. The amount included Kshs. 311,941,172. 00 in respect of Income tax and Kshs. 104,735,847. 00 in relation to Value Added Tax (hereinafter ‘VAT’).

4. On 19th October, 2021 the Appellant objected to the assessment and in the process informed the Respondent that it was in court, the amount that the Appellant had claimed through its payment certificates was disputed as its clients had claimed to have overpaid it. The Appellant promised to pay taxes based on the figures to be awarded by the courts.

5. On 5th May, 2022, the Appellant wrote a further objection letter to the Respondent objecting to the assessment in respect of the period 2015-2019. The Respondent, having reviewed the documents provided by the Appellant issued its objection decision on 29th August, 2022 and revised the assessment to Kshs. 173,526,582. 00, in respect of Income tax and VAT which amounts were inclusive of penalties and interest.

6. Aggrieved by the objection decision, the Appellant filed its Notice of Appeal on 21st September, 2022.

The Appeal 7. The Appeal as contained in the Memorandum of Appeal dated 26th September, 2022 and filed on 27th September, 2022 is premised on the following grounds:i.The Respondent erred in law and in fact through its Objection decision in failing to reconcile its accounts and credit the sum of Kshs. 14, 479,134/­ being income tax withheld by HFDI and paid by the said HFDI on behalf of the Appellant despite the Appellant providing proof of the payment.ii.The Respondent erred in law and fact in finding/concluding that the Appellant declared less turnover in 2015 and further erred by working backwards to find a higher turnover thereby leading to the erroneous conclusion that the Appellant understated the turnover by a sum of Kshs. 78,689,293. 00. iii.The Respondent erred in law and fact through its objection decision that the Appellant failed to declare a sum of Kshs. 21,551,724. 00 being retention income due to the Appellant yet the final accounts that would have contained the retention income have never been prepared or agreed for the reasons that the Client disputed both the work done and the final accounts and the matter was referred to arbitration and the courts and is pending determination.iv.The Respondent erred in law and fact through its Objection decision that the Appellant failed to declare payment certificates amounting to the sum of Kshs. 47,413,793. 00 yet its client disputed the payment certificates for the said sum and the matter was referred to the courts and is pending determination.

The Appellant’s Case 8. The Appellant has set out its case in the Statement of Facts dated 26th September, 2022 filed on 27th September, 2022.

9. The Appellant stated that sometime in 2020, the Respondent served it with a notice dated 6th September, 2020 requesting it to undertake an audit on its business operations. That it engaged with the Respondent in various correspondence and discussions during the course of the tax audit.

10. That the Respondent served it with a notice of assessment on 26th May, 2021 after which a finding was made relating to its alleged failure to declare and pay certain taxes. It objected to this assessment and the taxes were reviewed downwards as correspondence and discussions progressed.

11. That following its objection dated 19th October, 2021 the assessment was reviewed downwards and it still objects to the additional tax rendered by the Respondent’s objection decision dated 29th August, 2022 and its objection against the additional taxes was as analysed below:

a. Section 42 Credit (Kshs. 14,479,134. 00): 12. That it was aggrieved by the objection decision because the amount of Kshs. 14,479,134. 00 was retained by Housing Finance Development Investment Limited (hereinafter ‘HFDI’) as withholding tax on income and HFDI made a mistake and paid tax into its own Personal Identification Number (hereinafter ‘PIN’) instead of the Appellant’s PIN.

13. That the Respondent failed to reconcile the accounts and credit it for said sum inspite of it providing evidence that the same was paid by HFDI on its behalf. The failure by the Respondent to take this evidence into account prejudiced it by making it pay the same amount twice.

b. Withholding tax variance (Kshs. 78,689,293. 00): 14. The Appellant indicated that in 2015 it had a turnover of Kshs. 1,030,365,473. 83 being the total sum of invoices issued in 2015. In 2015 the Withholding tax it declared was Kshs.33,271,642. 68, The Respondent having assumed, erroneously that the Appellant declared less turnover in 2015 worked backwards to arrive at a variance of Kshs. 78,689,293. 00.

15. That accordingly, the correct position is that the Appellant declared the correct turnover in 2015 and the variance is brought about by debtors who paid the Withholding tax on accrual basis and other debtors who did not pay altogether but the Appellant paid the same at the end of the financial year.

c. Retention Income (Kshs. 21,551,724. 00) 16. The Appellant was aggrieved with the objection decision on the grounds that Kshs. 21,551,724. 00 was retention income for the Junction Apartments Project. The sum was however, not due as the final accounts had not been prepared since the client disputed the work done by the Appellant and the matter was under arbitration and the courts for determination in Hcomm Misc. Civil Application No. E030 Of 2021. According to it the amount of Kshs. 21,551,724. 00 constitutes a bad debt as it has taken more than 3 years and there was no indication whether it will ever receive the amount as income.

d. Non-declared Certificates (Kshs. 47,413,793. 00) 17. The Appellant was aggrieved with the objection decision on the ground that Kshs. 47,413,793. 00 also relates to the Junction Apartments project. It did not declare the certificates because the client disputed its work and the matter was submitted for arbitration and was in court for determination. Accordingly, the amount was a bad debt as it had taken more than 3 years to be determined and there was no indication on whether it would ever receive the amount as income.

(e) Non-declared Certificates (Kshs. 87,624,193. 00) 18. The Appellant was aggrieved with the objection decision on the ground that Kshs. 87,624,193. 00 relates to the Hijaz Development project in which two certificates were issued. The first being one for Kshs. 103,766,220. 69 and the 2nd being for Kshs. 43,103,448. 28. The difference in undeclared certificates was therefore Kshs. 66,072,468. 00 and not Kshs. Kshs. 87,624,193. 00. It did not declare the amount of Kshs. 66,072,468. 00 because the client disputed its work and the matter was submitted for arbitration and was in court for determination in HCCCOM/E855 OF 2021. Accordingly, the amount was a bad debt as it had taken more than 3 years to be determined and there was no indication on whether it would ever receive the amount as income.

19. Based on the foregoing the Appellant was aggrieved by the Respondent’s objection decision demanding an additional amount of tax of Kshs. 173,526,582. 00 and prayed that the Tribunal would set it aside.

Respondent’s Case 20. The Respondent’s case was as set out in its Statement of Facts dated 24th October, 2022 and filed on 25th October, 2022.

21. That the Respondent stated that it conducted a tax review on the affairs of the Appellant covering the years between 2015 and 2019 and that during the period under review, the Appellant had undertaken many projects including with a number of companies including Housing Finance Development and Investment; Junction Apartment Limited; Hijaz Development and 88 estates.

22. That the Appellant did not declare retention income from the Junction Project, certificate no. 9 -Junction project and certificate no. 1&2-Hijaz project. It therefore assessed both incomes for VAT and income tax.

23. That the Appellant claimed withholding tax credit of Kshs. 33,271,643. 00 in the 2015 year of income. The grossed-up amount of Kshs. 33,271,643. 00 was Kshs. 1,109,057,767. 00 but the Appellant declared Kshs. 1,030,365,474. 00. The difference of Kshs. 78,692,293. 00 was deemed undeclared income and brought to charge for income tax and VAT.

24. That purchases claimed by the Appellant were disallowed for lack of supporting documents, invoices and proof of payment. The Appellant claimed a figure amounting to Kshs. 14M under Credit under Special arrangement. During the review, it emerged that there was no foreign tax paid and hence this amount was disallowed.

25. It issued an assessment amounting to Kshs. 416,677,019. 00 on 22nd September 2021 which the Appellant objected on 19th October 2021.

26. On 17th December, 2021, it invalidated the objection and requested the Appellant to validate its objection by providing audited accounts and a trial balance for the period under review. The Appellant responded through a letter dated 17th January, 2022 [and received 18th January 2022] but did not attach documents explaining the issues raised and explaining the directors were outside the Country. The last documents were provided by the Appellant on 26th August 2022. It issued an objection decision on 29th August 2022 confirming the assessment of Kshs. 173,562,582. 00 and allowing purchases where documents were produced.

27. It identified three issues for determination in response to the Appellant’s grounds of Appeal which are outlined as follows:

a.WHether The Respondent Was Right In Law And In Fact In Its Objection Decision By Not Considering Income Tax Withheld And Paid By Hfdi. 28. That the Appellant had claimed credit under the programme ‘Credit under Special arrangement’. During the review, it emerged that there was no foreign tax paid and hence this amount was disallowed. The Appellant alleged that HFDI withheld income tax using a different PIN which it termed as erroneous. A tax obligation is attached to a PIN. The Appellant can only claim what was withheld using its PIN.

29. The Respondent stated that if it allowed the Appellant to use the income withheld by HFDI using a different PIN there would have been loss of revenue. The amount withheld would be utilized twice. Further, the Appellant claimed the alleged HFDI withheld income tax as tax credits under Section 42 of the Income Tax Act No. 470 of Kenyan Laws of (hereinafter ‘ITA’) which provides as follows:“Computation of credits under special arrangements(l)This section shall have effect where, under a special arrangement, foreign tax payable in respect of income derived by a person resident in Kenya is to be allowed as a credit against tax chargeable in respect of that income.”

30. The Appellant did not have any foreign credit and the income withheld by HFDI was not what was envisioned by the provision. The claimed credit was correctly disallowed for non-compliance to the law and it correctly disallowed credits claimed as foreign credits while no such credits existed.

b. Whether The Respondent Correctly Determined The 2015 Turnover Tax. 31. That it was not bound by the tax returns of the Appellant and that it may assess the Appellant’s tax liability using any information available to it as provided by 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.”

32. The Respondent stated that the Appellant failed to reconcile the variance between the grossed-up amounts from the withholding certificates with what it declared for the 2015 year of income. Using its best judgement, it raised the assessment by considering the variances. The Appellant did not provide documents to support the variances.

33. That according to it, it was the duty of the Appellant to provide documents whenever required by the Respondent. Pursuant to Section 23(1) (a) of the TPA the Appellant was required to keep documents or records in such a manner that its tax liability could readily be ascertained. Without production of documents it was empowered to use alternative means to determine the taxes due.

C.Whether The Respondent Correctly Assessed Retention Income. 34. That Section 12 of the Value Added Tax Act No. 35 of 2013 (hereinafter ‘VAT Act’) provides that:“Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of-a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;”

35. That accordingly, it is of the view that where certificates had been issued for projects, the services had been performed thereby satisfying the requirements of Section 12 of the VAT Act. Whether payments had been received or were disputed is of no consequence as the law clearly defines time of supply. It therefore, correctly confirmed the assessments of the retention income and undeclared certificates because the transactions had not been vacated.

36. That disputes in payments or related matters after supplies have been made and income generated does not mean the supplies are not vatable nor the income exempt from income tax. The burden is on the Appellant to prove that the decision of the Respondent was wrong. That Section 56(1) of the TPA provides that:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

37. The Respondent therefore prayed that its decision dated 29th August, 2022 be upheld and that the Appeal be dismissed with costs for lack of merit.

Submissions By The Parties 38. The submissions of the Appellant dated and filed on 22nd February, 2023 and those of the Respondent dated 28th February, 2023 and filed on 2nd March, 2023 were adopted during the hearing on 27th September, 2023.

The Appellant Submitted As Follows In Its Written Submissions: 39. That the matter was referred to the Alternative Dispute Resolution (hereinafter ‘ADR’) through the Respondent’s offices and the process culminated in a partial consent dated 18th November, 2022. According to it, the consent resolved grounds (i) and (ii) of the Memorandum of Appeal (hereinafter ‘MOA’). The parties failed to reach an agreement on the grounds of appeal numbers (iii); (iv) and (v) and the same were referred to the Tribunal for determination.

40. Ground of Appeal No. (iii) related to Retention Income of Kshs. 21,551,724. 00, ground of Appeal No (iv) related to undeclared certificates amounting to Kshs. 47. 413,793. 00 and ground of Appeal No. (v) which also relates to undeclared certificates amounting to Kshs.87,624, 193. 00.

41. Its argument had been that the amounts earned by the certificates were not chargeable to VAT and Income tax for the reason that the same were disputed by its clients and the issues were submitted to arbitration and the courts and the same were still pending determination. The Respondent did not dispute the fact that the matters had been referred to arbitration and the courts but nevertheless issued its objection decision dated 29th August 2022 having found that the retention income and the two non-declared certificates were chargeable to both VAT and Income tax.

42. It had stated in ground of appeal No. (iii) that the developer/client disputed both the work done and the final accounts and the matter was referred to arbitration and the courts for determination. It had provided evidence of the court proceedings and the same were not challenged by the Respondent.

43. It had also stated in grounds of Appeal No. s (iv) and (v) that the two non-declared certificates were disputed by the clients and the matters were referred to court. It further argued that it did not declare the retention income and the two payment certificates for the reason that the same were challenged by the client and the dispute was referred to court.

44. It was alive to the provisions of Section 12(3)(b) of the VAT Act which provided that “the time of supply" for purposes of VAT is the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity".

45. The Respondent relied on this provision and charged the retention income and the two payment certificates to VAT. In doing this, the Respondent assumed that Section 12 of the VAT Act is cast in stone and disregarded the fact that the payments that would have led to the VAT being paid were challenged by the client and referred to court.

46. It expressed its doubt that Section 12 of the VAT Act was applicable notwithstanding that the very certificate issued by the architect had been challenged in court and a decision was still pending. That would be absurd and would have led to undesirable consequences.

47. That it was not dealing with a simple scenario where payment had not been made but a scenario where the client has challenged the work done and the payment certificates issued. For example, if it was compelled to pay the VAT and the courts set the certificates aside, this would be an unnecessary burden on it. Its view was that the more reasonable and equitable approach would be to await the outcome of the arbitration and the court process.

48. The Respondent was jumping the gun as Section 12 of the VAT Act does not provide that the VAT is payable whether or not the payment certificate has been challenged in court. The court has jurisdiction to determine the issue referred to it and the rule of law dictates that it awaits the outcome of the court.

49. Section 3(i) of the Income Tax Act Cap 470 of the laws of Kenya (hereinafter ‘ITA) provides as follows:“tax known as Income Tax shall be charged for each year of income upon all the income of a person.”

50. Section 3(2) of the ITA lists the types of income upon which tax is charged and the same include gains or profits, dividends or interest, pensions or annuity and so on. Whist the ITA defines income by giving examples, Black's Law Dictionary, 7th Edition defines income as follows: -“lncome -The money or other form of payment that one receives, usually periodically, from employment, business investment, royalties, gifts and the like.”

51. Section 3(2)(a)(i) of the ITA provides income to include;''income includes gains or profits from any business, for whatever period of time carried on".

52. The Respondent charged the retention income and the two non-declared payment certificates to Income tax. This was erroneous in its view as the funds had never been received by the Appellant and were the subject of litigation in court. The same did not constitute income within the definition of the term income and are in its humble submission not chargeable to Income Tax. According to it a crucial ingredient to the definition income was that it must be received. The retention income and the value of the two payment certificates had never been received by it.

53. Accordingly, it wondered, whether an employee could be made to pay PAYE on salary that he had not received? Or whether a shareholder could be made to pay tax on dividends that it had not received? If the answer to the above was in the negative, then it could not be made to pay tax on income it has not received.

54. Section 4 of the ITA defines income for the purposes of a business as "gains or profit from such business”. Further, the Respondent had not shown that the sum comprised in the retention income and the payment certificates were gains or profit for which income tax should be charged.

55. It therefore urged the Tribunal to consider its submissions and allow its Appeal.

The Respondent Submitted As Follows In Its Written Submissions: 56. It conducted a tax review on the affairs of the Appellant covering the years between 2015 and 2019 and that during the period under review, the Appellant had undertaken many projects including with a number of companies namely; Housing Finance Development and Investment; Junction Apartment Limited; Hijaz Development and 88 estates.

57. The Appellant did not declare retention income from the Junction Project, certificate no. 9 -Junction project and certificate no. 1&2-Hijaz project. It therefore assessed both incomes for VAT and income tax.

58. The Appellant claimed withholding tax credit of Kshs. 33,271,643. 00 in the 2015 year of income. The grossed-up amount of the Kshs. 33,271,643. 00 was Kshs. 1,109,057,767. 00 but the Appellant declared Kshs. 1,030,365,474. 00. The difference of Kshs. 78,692,293. 00 was deemed undeclared income and brought to charge for income tax and VAT.

59. Purchases claimed by the Appellant were disallowed for lack of supporting documents, invoices and proof of payment. The Appellant claimed a figure amounting to Kshs. 14M under Credit under Special arrangement. During the review, it emerged that there was no foreign tax paid and hence this amount was disallowed.

60. It issued an assessment amounting to Kshs, 416,677,019. 00 on 22nd September 2021 which the Appellant objected on 19th October 2021.

61. On 17th December, 2021, it invalidated the objection and requested the Appellant to validate its objection by providing audited accounts and a trial balance for the period under review. The Appellant responded through a letter dated 17th January, 2022 [and received 18th January 2022] but did not attach documents explaining the issues raised and explaining the directors were outside the Country. The last documents were provided by the Appellant on 26th August 2022. It issued an objection decision on 29th August 2022 confirming the assessment of Kshs. 173,562,582. 00 and allowing purchases where documents were produced.

62. It identified three issues for determination in response to the Appellant’s grounds of Appeal which are outlined as follows:

a. Whether The Respondent Was Right In Law And In Fact In Its Objection Decision By Not Considering Income Tax Withheld And Paid By Hfdi. 63. The Appellant had claimed credit under the programme ‘Credit under Special arrangement’. During the review, it emerged that it never paid foreign tax and hence this amount was disallowed. The Appellant alleged that HFDI withheld income tax using a different PIN which it termed as erroneous. A tax obligation is attached to a PIN. The Appellant could only claim what was withheld using its PIN.

64. If it allowed the Appellant to use the income withheld by HFDI using a different PIN there would have been loss of revenue. The amount withheld would have been utilized twice. Further, the Appellant claimed the alleged HFDI withheld income tax as tax credits under Section 42 of ITA which provides as follows:“Computation of credits under special arrangements(l)This section shall have effect where, under a special arrangement, foreign tax payable in respect of income derived by a person resident in Kenya is to be allowed as a credit against tax chargeable in respect of that income.”

65. The Appellant did not have any foreign credit and the income withheld by HFDI was not what was envisioned by the provision. The claimed credit was correctly disallowed for non-compliance to the law and it correctly disallowed credits claimed as foreign credits while no such credits existed.

b.Whether The Respondent Correctly Determined The 2015 Turnover Tax. 66. It was not bound by the tax returns of the Appellant. It may assess the Appellant’s tax liability using any information available to it as provided by 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’

67. The Appellant failed to reconcile the variance between the grossed-up amounts from the withholding certificates with what it declared for the 2015 year of income. Using its best judgment, the Respondent raised the assessment by considering the variances. The Appellant did not provide documents to support the variances.

68. According to it, it was the duty of the Appellant to provide documents whenever required by the Commissioner. Pursuant to Section 23(1) (a) of the TPA the Appellant was required to keep documents or records in such a manner that its tax liability could readily be ascertained. Without production of documents it was empowered to use alternative means to determine the taxes due.

c. Whether The Respondent Correctly Assessed Retention Income. 69. Section 12 of the Value Added Tax Act No. 35 of 2013 provides that:“Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of-a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;”

70. Accordingly, it was of the view that where certificates had been issued for projects, the services had been performed thereby satisfying the requirements of Section 12 of the VAT Act. Whether payments had been received or were disputed was of no consequence as the law clearly defines time of supply. It therefore, correctly confirmed the assessments of the retention income and undeclared certificates because the transactions had not been vacated.

71. Disputes in payments or related matters after supplies had been made and income generated did not mean the supplies were not vatable nor the income exempt from income tax. The burden was on the Appellant to prove that the decision of the Respondent was wrong. Section 56(1) of the TPA provides that:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

Issues For Determination 72. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions finds that there is a single issue that calls for its determination as follows:Whether the additional tax assessment in respect of Income tax and VAT was lawful and justified.

Analysis And Findings 73. The Tribunal notes that the Respondent carried out a review of the Appellant’s books covering the period between 2015 and 2019 and found that the Appellant had undertaken several projects in line with its principal business activity.

74. The Tribunal further notes that after the review, the Respondent raised an assessment on 22nd September, 2021 in which it raised the additional taxes amounting to Kshs. 416,677,019. 00 and for which it requested documentation in respect of certain items. The Appellant provided evidence thus enabling the Respondent to reduce the additional tax payable in respect to Corporate tax and VAT to Kshs. 173,562,582. 00 inclusive of penalties and interest.

75. The Tribunal has noted that the Respondent, in its pleadings, averred that its reason for reducing the assessment was that the Appellant provided adequate documentation to support the reduction. However, according to the Respondent, there were three (3) items namely; non-declaration of retention income by the Appellant, its failure to declare retention income, failure to declare certificates for two of its projects, income turnover vis-a-vis withholding tax turnover and credits under special arrangements which remained in contention.

76. Pursuant to Section 59 (1) of TPA, the Respondent is empowered to seek any information in relation to the ascertainment of the correct tax liability of an Appellant. This Section states as follows:-“59. Production of records(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to—(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

77. The Appellant was aggrieved by the persistence of the Respondent in identifying these items, especially that regarding the failure to declare retention income (Ksh 21,551,724. 00) and the non- declared certificates (Ksh 47,413,793. 00 & Kshs. 87,624,193. 00) since it had written off the income in view of the fact that the income was disputed in both cases in arbitration or in court. The Tribunal observed that according to the Appellant, the retention income and undeclared certificates ought to have been treated as bad debts.

78. The view of the Tribunal is that all the Appellant ought to have proved was that the decision of the Respondent was incorrect. It could have done this by explaining the circumstances under which it had claimed credit under Section 42 of ITA in respect of the amount of Kshs.14,479,134. 00. Second, it could have provided adequate documentation to explain how the variance of Kshs. 78,869,293. 00 came about.

79. The further view of the Tribunal is that when it came to the issue of the non-declared certificates, the provisions of Section 12 of the VAT Act are applicable regarding the definition of the time of supply. This Section stipulates as follows:“Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of-a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;”

80. Accordingly, the Tribunal agrees with the Respondent that once certificates are issued and services have been performed, it would mean that the income has been earned. The receipt of payment is not a determinant on when income is earned, therefore these receipts ought to have been declared.

81. The Tribunal further notes that although the Appellant provided some documentation at the Appeal stage, including but not limited to:a.Financial statements in respect of 2016;b.Various invoicesc.Court pleadingsd.VAT returnse.Payment depositsf.Schedule of withholding tax and turnover in respect of 2016 year of income. ,The documents were insufficient in discharging its burden of proof pursuant to Section 56 (1) of TPA and Section 30 of the Tax Appeals Tribunal Act (hereinafter ‘TAT’).

82. The Appellant has the burden of proving the incorrectness of a tax decision. More particularly, Section 56 (1) of TPA provides as follows:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

83. In Mbuthia Macharia vs. Annah Mutua Ndwiga & Another Civil Appeal No. 297 of 2015 [2017] eKLR, the Court of Appeal when dealing with the issue of burden of proof observed as follows:“The legal burden is discharged by way of evidence, with the opposing party having a corresponding duty of adducing evidence in rebuttal. This constitutes evidential burden. Therefore, while both the legal and evidential burdens initially rested upon the Appellant, the evidential burden may shift in the course of trial, depending on the evidence adduced. As the weight of evidence given by either side during the trial varies, so will the evidential burden shift to the party who would fail without further evidence”.

84. In the instant case, the Appellant failed to discharge the burden of proving that the tax decision was incorrect by failing to produce documents to support its objection to the Respondent’s decision. The Tribunal finds that the Appellant did not support, with sufficient documents, its claim under Section 42 of the ITA [ Section 42 credits]. It provided the court pleadings in respect of the non-declared certificates and retention income. It is the Tribunal’s finding that since the Appellant was issued with certificates it earned the income, that was chargeable to tax.

85. In view of the foregoing, the Tribunal holds that the additional tax assessment in respect of Income tax and VAT was lawful and justified.

Final Decision 86. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 29th August,2022 be and is hereby upheld.c.Each party to bear its own costs.

87. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULA...............CHAIRMANDELILAH K. NGALA.................................MEMBERCHRISTINE A. MUGA..............................MEMBERGEORGE KASHINDI................................MEMBERMOHAMMED A DIRIYE..........................MEMBERSPENCER S. OLOLCHIKE........................MEMBER