[2022] KEHC 16028 (KLR)

Commissioner of Domestic Taxes v Karshah Ltd (Income Tax Appeal E154 of 2021) [2022] KEHC 16028 (KLR) (Commercial and Tax) (2 December 2022) (Judgment)

Neutral citation: [2022] KEHC 16028 (KLR)

Republic of Kenya

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

Commercial and Tax

Income Tax Appeal E154 of 2021

A Mabeya, J

December 2, 2022

Between

Commissioner of Domestic Taxes

Appellant

and

Karshah Ltd

Respondent

Judgment

1. On April 18, 2018, the appellant issued a tax demand notice to the respondent of Kshs 3,971,493. 27 for input VAT and Kshs 2,590,104. 31 as corporation tax. The respondent objected to the assessment on May 14, 2018 whereby the appellant gave his objection decision on June 26, 2018 which confirmed the VAT of Kshs 1,381,388. 96.

2. Aggrieved by the objection decision, the respondent lodged an appeal at the Tax Appeals Tribunal (“the tribunal”). On October 30, 2020, the tribunal delivered its judgment in favor of the respondent. The appellant has filed this appeal against that judgment setting out eight grounds of appeal which can be summarized into two as follows: -a.That the tribunal erred in shifting the burden of proof to the appellant and failing to appreciate that section 17 of the Value Added Tax (“the Act”) could not be read in isolation.b.That the tribunal erred in holding that the respondent had availed all the required documents

3. In response to the appeal, the respondent filed a statement of facts dated January 25, 2021. It contended that the appellant did not prove that the respondent was involved in fraudulent dealings and that the Tax Procedures Act did not mandate the respondent to provide a list of suppliers listed by the respondent. That the appellant being the custodian of the iTax, VAT and ETR could not go round and require the respondent to produce a missing trader. Further, that the law did not require the respondent to inquire whether a supplier had a valid pin or not.

4. The appeal was canvassed by way of written submissions which I have considered.

5. The appellant submitted that the tribunal extended the appellants duty beyond what was prescribed under section 51(9) of the Tax Procedures Act (“TPA”). That it erred in finding that the burden of proof was on the appellant to prove that there was actual supply of goods. It was submitted that the tribunal failed to apply the provisions of section 43 of the Act which requires the respondent to keep records of transactions for of 5 years. That it only considered the provisions of section 17 of the Act while ignoring the provisions that were relevant with regard to documentation.

6. On its part, the respondent submitted that the appellant failed to produce evidence to support the allegation that the respondent was involved in fraudulent evasion of VAT. It was the respondent’s submissions that the appellant failed to present an investigation report to show that the respondent was a participant or beneficiary of the fraud. It was submitted that the respondent had submitted all the invoices for the purchases and proof of payments for the supplies.

7. The court has considered the entire record. One the first ground, the appellant faults the tribunal for shifting the burden of proof to him. The appellant’s contention is that the burden of proof lies with the respondent in line with section 56(2) of the TPA and section 30 of the Tax Appeals Tribunal Act, 2013 (“TAT”) to prove that there was no tax due or that the assessment was erroneous.

8. Section 56 of the TPAprovides: -“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is wrong”.

9. On the other hand, section 30 of theTAT provides: -“In a proceeding before the tribunal, the appellant has the burden of proving where an appeal relates to an assessment, that the assessment is excessive.”

10. In view of the above provisions, the taxpayer is under the obligation to demonstrate that a decision of the Commissioner on tax assessment was wrong. From the record, the tribunal observed that even though the law places the burden on the respondent to prove that tax was indeed paid and the appellant’s assessment was wrong, the documents required should be those prescribed by law. The tribunal further noted that it was not enough for the appellant to state that the documents produced were fictitious but there ought to be evidence to demonstrate that the invoices produced were fictitious.

11. In the present case, VAT input tax is governed by section 17 of the VAT Act which however, cannot be read in isolation from the other provisions of the Act.

12. Section 43 of theVATAct, 2013 provides: -“(1)A 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.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial number order;(b)copies of all credit and debit notes issued, in chronological order;(c)purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorized officer for inspection and shall give the officer every facility necessary to inspect the records.…”

13. Further, section 59 (1) of the TPAalso requires a tax payer to produce records when required to do so by the Commissioner. It provides: -“(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 authorized 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;…”

14. In view of the foregoing, the respondent was obligated by the law to produce the documents required in the support of its VAT claim. In Commissioner of Domestic Taxes v Structural International Kenya Ltd [2021], the court held: -“For the avoidance of doubt, the tribunal is reminded that in matters where the issue is supply of goods, be it for VAT purposes or corporation tax, the burden is always on the trader/tax payer to show that, the documentation set out in the statute and in which he relies on arose out of a commercial transaction. Period. If additional documents, which would be reasonably expected to be in his possession is requested for to verify the alleged transactions, he should produce the same to the commissioner. That is what is expected of a keen and diligent trader.”

15. In the present case, the appellant accused the respondent of participating in the missing trader scheme. It was the appellants case that no supplies were actually made and the tax invoices produced were from companies that were notorious for tax evasion.

16. The question however, is whether the respondent discharged its burden. In order to establish whether the respondent had discharged its burden of proof then the court needs to examine the documents that were relied on by the parties before the tribunal.

17. The first letter written by the appellant is a request for underpaid tax. In that letter, he listed three suppliers whose supply was questionable. The respondent filed an objection and attached documents to the disallowed purchases which included copies of the invoices issued for each purchase, copies of delivery notes and copies of payment vouchers.

18. The commissioner responded with an objection decision stating that there was no supply of the taxable goods. I note that there was no additional document that was requested by the appellant and the documents prescribed under section 17(3) of the VATAct were availed by the respondent. It is also noteworthy to state that the authenticity and reliability of the documents produced were not questioned by the Commissioner.

19. In Commissioner of Domestic Taxes v One Stop Trading Limited (Income Tax Appeal E098 of 2020 [2021], the court observed: -“Once the tax payer produces to the appellant the requested information and documentation, the tax payer then can be said to have discharged his burden and the evidentiary burden then shifts to the appellant to support his assessment. The basis for this is because, a tax payer is required to be a keen trader who should keep his documentation for all commercial transactions that he undertakes for tax purposes.”

20. Similarly inRepublic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR), the court held: -“The most significant justification for placing the burden of proof on the tax payer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability. It is simply fair to place the burden of persuasion on the taxpayer, given that he knows the facts relating to his liability, because the commissioner must rely on circumstantial evidence, most of it coming from the taxpayer and the taxpayer's records. The taxpayer must present a minimum amount of information necessary to support his position. This safety valve seems to place the burden of production on the taxpayer without relieving the Commissioner of the overall burden of proof. The tax payers’ evidence must meet this minimum threshold. A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.”

21. In the present case, it is clear that the respondent produced all the documents that were requested of it. It further availed a cashbook ledger which gave evidence of the payments made in cash. There was no further documentation or information that was requested that was reasonably expected to be within its knowledge that it failed to avail to the appellant. Having done so, its evidentiary burden shifted to the appellant. The appellant having done nothing, the evidentiary burden rested with him. It was for him to disapprove the evidence of the respondent. This he failed to.

22. That being the case, I agree with the tribunal that the respondent had discharged its burden.

23. In the upshot, I find no basis to disturb the judgment of the tribunal and hereby upholds it. The appeal lacks merit and is dismissed with costs to the respondent.It is so decreed.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF DECEMBER, 2022. A. MABEYA, FCIArbJUDGE