[2024] KETAT 272 (KLR)

Collindale Security Limited v Commissioner of Domestic Taxes (Tax Appeal 202 of 2023) [2024] KETAT 272 (KLR) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 272 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 202 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

February 23, 2024

Between

Collindale Security Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose business is provision of security services.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Respondent raised assessment orders online on 30th August 2022 and 1st September 2022 for VAT and Income tax. The Appellant objected on 22nd September 2022.

4. The Respondent issued the objection decision on 18th November 2022

5. Aggrieved by the objection decision, the Appellant filed a Notice of Appeal on 21st February, 2023.

The Appeal 6. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal filed on 7th March, 2023: -a.That the Respondent's decision made on 18th November 2022 is unwarranted and excessive.b.That the Respondent to consider the fact that not all bankings were sales and to consider the non-sales bankings such as in-house transfers and deposits, dishonoured cheques and other transactions not related to sales as per the supporting documents shared during the objection stage.c.That the Respondent to acknowledge the fact that the Appellant cooperated with it during the assessment period as necessary.d.That the objection decision made on 18th November 2022 be set aside.

Appellant’s Case 7. The Appellant’s case is premised on the following documents filed before the Tribunal:-a.The Appellant’s Statement of Facts filed on 7th March, 2023 together with the documents attached thereto.b.The Appellant’s written submissions filed on 6th November, 2023.

8. The Appellant stated that the Respondent raised additional assessments on VAT obligations and income tax amounting to Kshs 90,895,683. 31. That it objected to the assessments on 22nd September, 2022.

9. That the Respondent issued its objection decision on 18th September, 2022 disallowing the objections in its entirety amounting to Kshs. 90,895,683. 31.

10. That the Respondent's actions were misguided as it failed to take into consideration that not all bankings were sales despite the documentation and explanations provided.

11. That the Respondent did not consider non-banking deposits such as inter banking loan deposits, and contra entries.

12. That the variances established by the Commissioner were based on the assumption that the actual sales were as per the sales invoices.

Appellant’s Prayers. 13. The Appellant prayed that:a.The Respondent considers the non-sales banking as supported.b.The decision by the Commissioner for Domestic Taxes made on 18th November 2022 be set aside.

Respondent’s Case 14. The Respondent’s case is premised on the following documents:-a.The Respondent’s Statement of Facts dated 6th April, 2023 and filed on the same date.b.The Respondent’s written submissions dated 20th November 2023 and filed on 21st November, 2023.

15. Regarding VAT, the Respondent stated that it examined records such as Appellant's Value Added Tax (VAT) returns and bank statements.

16. That its analysis revealed variances between the sales declared for VAT and the income as per the bankings. That the variance was brought to charge.

17. On Income tax the Respondent submitted that it examined records such as Appellant's income tax returns and bank statements.

18. That its analysis revealed variances between the sales declared for Income tax and the income as per the bankings. That the variance was brought to charge.

19. The Respondent averred that it raised assessments on 22nd August due to variance between sales as per Withholding Value Added Tax (WHVAT) and sales as per bankings.

20. That the Appellant objected to the assessment. That the Respondent issued an objection decision on 18th November 2022.

21. The Respondent stated that the Appeal was incompetent as it was contrary to Section 13(1)(b) of the Tax Appeals Tribunal Act, 2013.

22. That the Respondent was guided by the information provided by the Appellant in arriving at the assessment. That Section 24(2) of the Tax Procedures Act provides that:-“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".

23. The Respondent averred that it is allowed to make additional assessments based on the available information to the best of his judgment pursuant to Section 31 of the Tax Procedures Act.

24. That the Appellant did not provide sufficient evidence/documentation to support its allegations as stated in the objection decision.

25. The Respondent posited that it was guided by Section 56(1) of the Tax Procedures Act which provides that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

26. It was the Respondent's further averment that it did nor err in law or fact as it carefully examined the information available to it before issuing the assessment.

Respondent’s Prayers 27. The Respondent prayed that the Tribunal: -a.Upholds the Respondent's decision as proper and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit

Issue For Determination 28. The Tribunal has considered the pleadings and documentation of both parties and is of the considered view that the only issue that calls for its determination is:-Whether the Respondent’s confirmed assessments were justified.

Analysis And Findings 29. Having identified the issue for determination, the Tribunal proceeds to analyse the same as hereunder.

30. The genesis of this dispute is the Respondent’s assessment for VAT and Corporation Tax based on variances established between the Appellant’s bankings and the returns.

31. It was the Respondent’s contention that its analysis revealed variances between the sales declared for VAT and the income as per the bankings. That the variances were brought to charge.

32. The Respondent averred that it raised assessments on 22nd August 22 due to variance between sales as per Withholding Value Added Tax (WHVAT) and sales as per bankings.

33. The Appellant on its part averred that the Respondent's actions were misguided as it failed to take into consideration that not all bankings were sales despite the documentation and explanations provided.

34. The Respondent’s determination of the Appellant’s taxable income for the years under review arose from the analysis of the Appellant’s bank account statements compared to the Appellant’s returns for Income tax and VAT.

35. The Tribunal notes that the Respondent resorted to the bank deposit analysis when the Appellant failed to provide the necessary documents and reconciliations or appropriate information for the proper ascertainment of its taxable income and its appropriate tax liability.

36. The Tribunal upon perusal of the Appellant’s pleadings notes that the Appellant had attached a summary of banking reconciliation for the years 2017, 2018 and 2019 indicating non sales bankings and what it indicated as contras. In addition, the Appellant attached its statement of accounts.

37. Nothing was placed before the Tribunal that can support these reconciliations provided by the Appellant.

38. The Tribunal further notes that in the objection decision, the Respondent had also raised certain specific issues regarding documentation and information it required from the Appellant when it stated in part as follows;“3. 1 Income Tax and VAT That you did not provide a payroll ledger, you instead just provided an excel list with a cumulative figure of salaries incurred per month. Nothing further was provided to support these amounts.

From the sales ledger provided, we noted that you reversed uncollectible invoices.

We note that these invoices related to security services that had already been offered but remained unpaid for.

You did not demonstrate whether these invoices had been declared at an earlier period.

Further, section 15(2)(a) of the Income Tax Act issues guidelines on the provision for bad debts for tax purposes as follows;

…

You did not demonstrate any steps undertaken to recover these debts.

Legal notice 37 of 2011 prescribes further conditions for a debt to be deemed uncollectible.

Other than the uncollectible invoices, you were not able to reconcile other items of bankings which you deemed as non-business income.

We note that the sales reconciliations availed sought to address the income charged for both VAT and income tax. You failed to provide a proper and adequately supported reconciliation.

Consequently, the assessment on both income tax and VAT is confirmed as issued.”

39. The Tribunal has observed that the Appellant did not address these specific issues raised in the objection decision in its Statement of Facts. The Appellant had only stated that the variances established by the Commissioner were based on the assumption that the actual sales were as per the sales invoices.

40. Given that the Appellant was assessed for Income tax and VAT it ought to have provided documents and information as provided in law to support its objection in order to rebut the Respondent’s use of the information obtained from its bank accounts. Additionally, it was upon the Appellant to provide the relevant documents in support of the entries in its bank statements and to fully explain the variances identified.

41. It is the Tribunal’s position that a taxpayer served with an assessment is enjoined to provide the necessary documents and information that suggest that such an assessment was erroneous, misplaced and not justifiable in the circumstances. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely place the burden of proof upon a taxpayer to discredit any tax assessment or decision.

42. Section 56(1) of the Tax Procedures Act reads as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

43. Further, Section 30 of the tax Appeals Act provides as follows with regard to burden of proof:-“In any proceeding before the Tribunal the Appellant has the burden of proving –where an appeal relates to an assessment, that the assessment is excessive; or in any other case, that the tax decision should not have been made or should have been made differently.”

44. The objection decision is an unequivocal as to the Appellant’s default in providing verifiable information that prompted the Respondent to charge to tax the variances in arriving at the tax assessment.

45. The Tribunal reiterates its position in the case of Boleyn International Ltd Vs Commissioner of Investigations and Enforcement, Nairobi TAT Appeal no.55 of 2018- where it held that:-“We find that the Appellant at all times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The tribunal is guided by the provisions of Section 56(1) of the TPA, 2015 which states: “In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

46. The Tribunal’s is further persuaded by the finding in Nicholson v Morris 51TC95 where it was held that:“Even supposing that I were myself to think that the amounts were wrong – and, as I have freely conceded, and as [Counsel for the Revenue] has freely conceded, they probably are wrong – what on earth could I or anybody else at this stage, in the total absence of evidence, substitute for them? The answer is that it is a complete and utter impossibility; and that is why, of course, the Taxes Management Act throws upon the taxpayer the onus of showing that the assessments are wrong. It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, “Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults.” That is not a duty on the Revenue. If it were, it would be a very onerous, very costly and very expensive operation, the costs of which would of course fall entirely on the taxpayers as a body. It is the duty of every individual taxpayer to make his own return and, if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean, and if he gives no evidence whatsoever he cannot be surprised if he is finally lumbered with more than he has in fact received. It is his own fault that he is so lumbered.”

47. Based on the analysis, provisions of the law and the case laws, the Tribunal finds that the confirmed assessments were justified.

Final Decision 48. 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 18th November 2022 be and is hereby upheld.c.Each party to bear its own costs.

49. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULA.............CHAIRMANCYNTHIA B. MAYAKA............... MEMBERDR. RODNEY O. OLUOCH............MEMBERABRAHAM K. KIPROTICH........... MEMBERTIMOTHY B. VIKIRU............... MEMBER