[2022] KEHC 12965 (KLR)

Commissioner of Domestic Taxes v Gravity Trading Limited (Income Tax Appeal E072 of 2020) [2022] KEHC 12965 (KLR) (Commercial and Tax) (16 September 2022) (Judgment)

Neutral citation: [2022] KEHC 12965 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E072 of 2020

A Mabeya, J

September 16, 2022

Between

Commissioner of Domestic Taxes

Appellant

and

Gravity Trading Limited

Respondent

(Being an Appeal from the Judgment and decree of the Tax Appeals Tribunal at Nairobi on 24th July 2020 in Tax Appeal No. 189 of 2018)

Judgment

1. In or about 2018, the appellant assessed the respondent’s tax returns for the period between June 1, 2016 and November 2017. Upon conducting investigations, the appellant concluded that the respondent was a beneficiary of a “missing traders’ scheme whereby suppliers only manufactured invoices without actually delivering goods and sold invoices to the appellant.

2. Vide a letter dated 18/4/2018, the appellant demanded Kshs. 2,015,862/= for VAT and Kshs. 3,779,741/- for Corporation Tax. The respondent objected to the tax assessment vide its letter dated 20/5/2018. The appellant issued his objection decision on 23/7/2018 upholding the assessment.

3. Dissatisfied with that decision, the respondent appealed to the Tax Appeals Tribunal (Tribunal) which, vide judgment of 24//7/2020, allowed the same. The appellant was aggrieved thereby and appealed to this Court vide its memorandum of appeal 11/8/2020. He challenged the entire judgment of the Tribunal.

4. The appellant raised 7 grounds of appeal which can be summarized as follows; that the Tribunal erred in failing to appreciate the provisions of section 59 of the Tax Procedures Act (“the Act”); that the Tribunal relied on irrelevant facts in its decision including the respondent’s documents filed on 27/3/2020 without leave; that the Tribunal failed to consider the provisions of section 43 of the VATAct2013 which requires a taxpayer to keep transactional records for five years; the Tribunal erred in failing to find that there was VATloss; that the Tribunal ignored the evidence before it and that the Tribunal erred in shifting the burden of proof to the appellant contrary to section 30 of the Tax Appeals Tribunal.

5. In response to the appeal, the respondent filed its statement of facts dated 12/10/2020. It contended that it was not true that the ‘missing traders’ did not exist as they supplied items to the respondent, issued invoices delivery notes and received payments majority of which were done through direct bank transfers.

6. That the appellant did not proof that the respondent was a beneficiary of a fraudulent scheme. That the investigation report was not produced to proof fraud. That the law did not require the respondent to provide details of its suppliers as they were registered by the appellant as their agents for VAT purposes. That the right to claim VAT refund was not affected by fraud unless the respondent was aware of the fraud.

7. The parties filed their respective submissions which the Court has considered. The appellant submitted on two issues; whether the Tribunal erred in failing to appreciate that the dispute before it was based on section 59 of the Tax Procedure Act, and whether the Tribunal erred in failing to appreciate that there was an intended VAT loss because there was no exchange of goods or services in respect of which VAT input was claimed by the respondent.

8. On the first issue, the appellant submitted that though section 17 (5) of the VAT Act provided for a right to claim input tax, evidence was required in support of the claim. That upon requesting for information as provided by section 43 of the VAT Act, the respondent failed to avail records to the satisfaction of the appellant. That most of the traders that the respondent claimed input from were not registered persons in contravention of section 42 (2)(b) of the VAT Act.

9. That the respondent only availed business and tax invoice (ETR) receipts, but failed to deliver notes and stock records. That the respondent failed to demonstrate how the purchased goods were ordered, recorded and sold. That the suppliers did not exist and the respondent was a co-conspirator in the scheme to defraud the government of revenue.

10. On behalf of the respondent, it was submitted that the dispute was about interpretation and operation of the VAT Act. That the respondent based its assessment on fraudulent evasion of VAT hence had the duty to proof the fraud against the respondent. That having failed to proof fraud, the assessment could not stand.

11. That the respondent had conducted due diligence to verify the integrity of its suppliers by confirming that they had valid tax invoices, secured ETR receipts showing the name and pin of the supplier, conducted a successful PIN checker on I-tax, received the goods and made direct payment to the suppliers, and claimed input VAT.

12. That the allegations of fraud ought to have been particularized and proved. That the appellant failed to produce the investigation report on which it based his claim on.

13. This being a first appeal, this Court is enjoined to review and evaluate the evidence before the Tribunal and come to its own independent conclusions and finding. See Selle & Another vs. Associated Motor Boat Co. Ltd 7 Others (1968) EA 123.

14. As set out at the beginning of this judgment, the respondent’s case before the Tribunal was that it was entitled to VAT refund based on the documents it provided the appellant. On the other hand, the appellant contended that, the suppliers in respect of whom he declined VAT input never existed. They were ‘missing traders’. That when he requested for additional information to back the alleged commercial transactions between the respondent and the ‘missing traders’, the respondent failed to supply the same.

15. The dispute herein relates to the credits for VAT input which the respondent had claimed. Section 17 of theVAT Act provides for credit for input tax. Sub-section (3) thereof provides the documentation that is required for purposes of the credit on input tax.

16. The first two grounds was that, the Tribunal misapprehended the provisions of section 59 of the Act and section 43 of the VAT Act and erred in shifting the burden of proof against the appellant.

17. In paragraph 39 of the judgment, the Tribunal found that the respondent had adduced evidence to proof purchase. That the respondent provided records and delivery notes and thereby discharged its burden, which then shifted to the appellant. The tribunal also found that the appellant failed to provide the basis for rejecting the evidence provided by the respondent, hence failed to discharge his burden.

18. Section 17(3) of the VAT Act requires a tax payer to produce documentation to support his claim forVAT. In the present case, the respondent produced business and tax invoice receipts as well as delivery notes. As at that point, the respondent had discharged its evidentiary burden of proof which shifted to the appellant.

19. However, the appellant was not satisfied with the documents provided by the respondent. He requested for more information and/or documentation to support the subject transactions. This he did under the provisions of sections 59 of the Act and section 43 of the VAT Act. These sections empower the appellant to request for additional information to satisfy himself on the taxable income declared or matters tax.

20. InCommissioner ofDomestic Services v Galaxy Tools Limited [2021] eKLR, the court set out some of the additional documents that may be required. The court held: -“… Some of the documents to be kept by a tax payer and which should be availed to the appellant are, copies of invoices, copies of stock records, details of each supply of goods and services among others …”.

21. In the present case, the appellant requested for stock records and paper trail required to demonstrate how the purchased goods were ordered, recorded and sold. Those were reasonable documents having in mind that it was the respondent’s position that the subject transactions had taken place. Upon such request for additional information to support the subject transactions, the evidentiary burden of proof shifted back to the respondent to discharge.

22. At paragraph 45 of the judgment, the Tribunal acknowledged the appellant’s power to demand for additional information. However, it found that the appellant did not enjoy the luxury of continuous demand for documents which were not specifically named under section 17 of the VAT Act.

23. The position taken by the Tribunal was in error. Section 43 of the VAT Act 2013 requires a taxpayer to keep transactional records for a period of five years. It provides: -“Every registered person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.” (Emphasis supplied).

24. The effect of that provision is that, the tax payer has to keep all and every necessary document that proofs the transaction. That is the meaning of ‘a full and true written record of every transaction’.

25. In Malindi Judicial Review No 2 of 2016 Silver Chain Limited vs Commissioner of Income Tax and 3 others Eklr (2016), the court held: -“The above section elaborates the specific records to be kept under section 43 (2). Such records include tax invoices, credit and debit notes, purchase invoices, custom entries, receipts for customs duty tax among other documents.”

26. Section 30 of the Tax Appeals Tribunal Act 2013 and section 56 of the Tax Procedures Act imposes upon the tax payer the burden of proving that a tax assessment is excessive or a tax decision is incorrect.

27. As regards the issue of fraud by the ‘missing traders’, the Tribunal based its judgment on the fact that the appellant had not provided the investigation report that unearthed the alleged tax fraud. This issue was dealt with the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR where the court held: -“The Court makes these findings aware that the alleged investigation report was not produced in evidence. The Court is alive to the fact that, such investigations and the resultant reports are ordinarily confidential, they may relate to other entities and that if they are produced, they may be highly prejudicial not only to the tax authorities’ future investigations but also the entities named therein who may not be participating in the subject proceedings.What is of importance was that, the gist of what concerned the respondent was communicated to it and was availed to the Tribunal by way of the Statement of Facts. In such circumstances, it is the opinion of this Court that what is required is for the appellant to give full and sufficient details of the investigation and the outcomes as concerns the particular tax payer sufficient for the tax payer to respond to the allegations. That was done in this case.”

28. In the present case, the appellant set out his reasons for disallowing the respondent’s purchases. He did so in his pleadings and orally before the Tribunal. Having pleaded that he believed that those transactions never took place, it was for the respondent to disprove the narrative by producing not only the peremptory documents it did, but also the additional information requested that would have supported the subject transactions. This it failed to do.

29. In this regard, it was not necessary for the appellant to prove the existence of a charge of criminal offense to prove the existence of the ‘missing traders’ scheme.

30. In this regard, this Court finds that the Tribunal failed to give due regard to the spirit of section 59 of the Tax Procedures Act and section 43 of the VAT Act as to additional information and documents required to support commercial transactions for tax purposes. The Tribunal further failed to appreciate the burden of proof set out in section 30 of the Tax Appeals Tribunal Act and section 56 of the Tax Appeals Act. In effect, the Tribunal shifted the burden of proof to the appellant which was contrary to law.

31. The other ground was that the Tribunal erred in not appreciating that in the present case, there was loss of VAT. The South African case of Metcash Trading Limited -vs- Commissioner for the South African Revenue Service and Another CaseCCT 3/2000 emphasized the basis of the burden of proof upon the tax payer. The court held: -“But the burden of proving the Commissioner wrong then rests on the vendor under section 37. Because VAT is inherently a system of self-assessment based on a vendor's own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner and by like token such a finding would usually have entailed a rejection of the truth of the vendor's records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing aVAT vendor who is aggrieved by an assessment unless the Commissioner’s precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

32. In the present case, the appellant established that there was loss of VAT in the transactions as there was no prove of supply of goods. The respondent on the other hand failed to be a responsible business entity which is required by law to keep details of transactions for a period of five years.

33. Can the respondent now claim innocence? Can it disassociate itself from the tax fraud? The answer is no. The respondent had the chance to proof its innocence by providing all the necessary documents requested to demonstrate the legitimacy of the subject transactions. The tribunal erred in upholding the appeal.

34. In light of the above, it is this court’s finding that the appeal is merited and allows the same as prayed.It is so decreed.

DATED AND DELIVERED AT NAIROBI THIS 16TH DAY OF SEPTEMBER, 2022. A. MABEYA, FCIArbJUDGE