[2023] KEHC 25486 (KLR)

Commissioner of Investigations and Enforcement v Eldoret Grains Limited (Income Tax Appeal E009 of 2020) [2023] KEHC 25486 (KLR) (Commercial and Tax) (20 November 2023) (Judgment)

Neutral citation: [2023] KEHC 25486 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Income Tax Appeal E009 of 2020

A Mabeya, J

November 20, 2023

Between

Commissioner of Investigations and Enforcement

Appellant

and

Eldoret Grains Limited

Respondent

(Appeal against the Judgment of the Tax Appeals Tribunals dated 18th December 2019 in Tax Appeal No. 87 of 2017)

Judgment

1. In 2011, acting on information received from the respondent’s former employee, Mr. Ibrahim Ratemo Magonga (Mr. Magonga), the appellant investigated the respondent’s affairs. The appellant found that from 2006 to 2010, Kshs. 420,585,828/- had been deposited into Mr. Magonga’s two accounts at Kenya Commercial Bank. The deposits were not recorded as sales in the respondent’s books.

2. Kshs. 11,000,000/- was transferred to the respondent’s Managing Director, Mr. Swaleh Ahmed Taib. The respondent’s operations manager, Mr. Mohamed Bajoh was a joint signatory to Mr. Magonga’s account. Two sales representatives deposed that they deposited cash into Mr. Magonga’s account on the respondent’s instructions. Mr. Magonga withdrew the money and either handed over the cash to Mr. Mohammed Bajoh or deposited cash into Mr. Taib’s account.

3. The appellant issued assessment totaling Kshs. 567,920,538/- additional tax for the period 2005 to 2010. On 9/8/2012, the respondent objected to the assessment. The appellant confirmed its assessment on 12/10/2012. The respondent filed an appeal before the now defunct Income Tax Local Committee seeking to set aside the confirmation of assessment. The Local Committee dismissed the appeal.

4. Dissatisfied with the Committee’s decision, the respondent instituted Judicial Review No. 238 of 2013. The Court quashed the Committee’s decision and remitted the matter for fresh hearing before the Tax Appeal Tribunal (“the Tribunal”).

5. The respondent’s main contention in the appeal before the Tribunal was that the appellant treated bankings under the bank account of an employee to be the income of the company yet the company had nothing to do with the account as the mandate of operating the account was with the account holder.

6. Relying on Awal Limited v Commissioner of Investigations and Enforcement (TAT Appeal No. 158 of 2015), the Tribunal found that the appellant did not have a basis for taxing the respondent on the basis of bankings held in an account of a third party and that it is only the owner of the account who could prove whether the funds deposited in his account was taxable or not.

7. Aggrieved, the appellant appealed to this Court vide a memorandum of appeal dated 14/2/2020, on the following grounds: -“a)That the Honourable Tribunal erred in law and fact in failing to consider the evidence tendered by the Appellant;b)That the Honourable Tribunal misapplied the law and facts and therefore arrived at the wrong decision;c)That the Honourable Tribunal erred in law and fact in failing to consider the nexus established by the Appellant to show that the funds, though not in the accounts of the Respondent, belonged to the Respondent;d)That the Honourable Tribunal erred in fact in failing to consider the sworn testimony of witnesses showing that indeed the Respondent's funds were deposited in a third-party account;e)That the Honourable Tribunal erred in fact and law in failing to consider the evidence of the Appellant on the tax evasion scheme of the Respondent;f)That the Honourable Tribunal erred in law and fact by holding that the Appellant's assessment was erroneous, unprocedural or unsubstantiated as against the Respondent.”

8. The appeal was canvassed by way of written submissions with oral highlights. In his written submissions dated 23/2/2023, the appellant asserted that although this appeal raises a question of fact, this Court has the jurisdiction to hear this matter.

9. The appellant relied on section 56(2) of the Tax Procedures Act and the case of Oceanfreight (E.A) Limited v Commissioner Of Domestic Taxes [2018] eKLR to argue that issues of fact may turn out to give rise to a question of law. Further, on Mercy Kirito Mutegi v Beatrice Nkatha Nyaga & 2 Others [2013] eKLR, that a conclusion although based on primary factual evidence that is erroneous becomes a point of law.

10. The appellant faulted the Tribunal for making contradictory findings. Initially, at para. 17 of the impugned judgment, the Tribunal acknowledged that the appellant had provided evidence that deposits into Mr. Magonga's account were made by the respondent's employees and customers. However, at para. 24, the Tribunal concluded that if the funds in the account were from the respondent's sale proceeds, there should have been a corresponding transfer of funds from that account to the respondent.

11. The appellant argued that it defied logic for the employee, Ibrahim Ratemo Magonga, earning a salary of Kshs. 17,000/- to be engaged in multi-million shillings' businesses with such huge bankings in full knowledge of the respondent's managing director and the operations manager and still remain in employment. This assertion of the respondent was also not supported by any form of evidence.

12. The appellant contended that the respondent attempted to cover up the tax evasion by seeking to initiate civil proceedings (Eldoret CMCC No. 793 of 2010) against the informer Ibrahim Ratemo Magonga. That the dispute was for only Kshs. 654,590/- which did not make sense since as per the letters obtained from some of its customers in 2009, the respondent had received confirmation that in October 2009, Kshs. 1,641,175/-, Kshs. 1,564,000/- and Kshs. 5,133,580/- was paid to Mr. Magonga by Pwani Supermarket; Asai Silver Wholesalers and Chemelil Wholesalers & Distributors. The respondent failed to sue for these amounts in 2010, when Eldoret CMCC No. 793 of 2010 was filed. The letters confirmed that the respondent’s sale proceeds were being banked in Mr. Magonga’s account with the respondent’s director’s full knowledge.

13. The appellant also blamed the Tribunal for failure to consider and analyze the evidence placed before it which established a nexus between Mr. Magonga’s account and the respondent and for failure to consider that the respondent’s assertions were not supported by any evidence.

14. That Tribunal failed to make a finding on the law on section 23 (1) of the Income Tax Act to the effect that the Commissioner could direct adjustments with respect to tax as considered appropriate to counteract the avoidance or reduction of liability to tax which could otherwise be effected by the transaction.

15. The appellant argued that the Tribunal disregarded the direct evidence from the participants in the tax evasion scheme by the respondent that was not rebutted by the respondent as required.

16. The appellant also argued that the Tribunal’s finding was not supported by any law or evidence. He relied on G. Deacon & Sons v Commissioner of Inland Revenue & G. Deacon & Sons v Roper (H. M. Inspector of Taxes) on the acceptance of the use of circumstantial evidence when direct evidence may be lacking or inconclusive in determining the understatement of profits.

17. He further relied on Kenya Revenue Authority v Man Diesel & Turbo se Kenya [2021] eKLR, for the proposition that a taxpayer is required to disprove an assessment by the Commissioner and on Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] eKLR, on the proposition that the burden can shift back to the taxpayerwhen the competence, relevance, and veracity of its evidence is challenged.

18. In opposing the appeal, the respondent filed its statement of facts dated 30/9/2022 and written submissions dated 20/3/2023. It submitted that the appellant failed to establish the nexus between it and the funds in Mr. Magonga’s account. The respondent’s main contention was that there was no legal basis for the appellant to charge income tax from money in a third party’s account. It relied on section 3 of the Income Tax Act to assert that income tax is charged on the income earner and not on third parties. The respondent also asserted that under section 23 of the Income Tax Act, the Commissioner can only adjust tax liability where there is a link and a benefit to be obtained by the taxpayer, which was not established in this case.

19. Although the appellant showed transfer of money from Mr. Magonga’s account to the managing director’s account, there was no evidence to show that any of the funds were transferred to the respondent or for its use. The respondent argued that there was no evidence that there were any instructions or consent given to Mr. Magonga to open the account or to Mr. Bajoh to act as a signatory. The respondent maintained that once it was discovered that Mr. Magonga was diverting funds, a suit was instituted.

20. The respondent faulted the appellant for issuance of the tax demand of Kshs. 567,920,538/- solely based on the assessment of the personal accounts of Mr. Magonga and not due to any unpaid taxes by the respondent. The respondent also faulted the appellant for applying the banking analysis test for its assessments on the third party’s account. It relied on the Digital Box Limited v Commissioner of Investigations & Enforcement (Appeal No. 15 of 2017) to argue that the appellant’s assessments ought to have been reasonable and based on evidence.

21. That the appellant did not provide any explanation of how, if at all, he determined the extent of the respondent's tax liability related to the funds held in the account Magonga. That he had failed to demonstrate the criteria he used to determine which deposits were made for the benefit of the respondent and which deposits belonged to the account holder.

22. On the contention of contradictory findings, the respondent contended that the use of the word 'demonstrate' by the Tribunal was only meant to summarize the facts as presented and should not be taken as a confirmation of the appellant's evidence.

23. From the grounds of appeal, there is only one issue for determination, whether the appellant established a nexus between the respondent and the funds in Mr. Magonga’s accounts.

24. Under section 56(2) of the Tax Procedures Act, the jurisdiction of this Court to hear and determine tax appeals is limited to questions of law. The facts of a matter are only relevant to an appellate court in understanding the background and context and to satisfy the Court that the conclusions arrived at by the trial court was based on the evidence on record.

25. In John Munuve Mati v Returning Officer Mwingi North Constituency, Independent Electoral & Boundaries Commission & Paul Musyimi Nzengu [2018] eKLR, the Court of Appeal held that: -“... appeals to this Court in election petitions are confined to matters of law only, the interpretation or construction of the Constitution, statute or regulations made thereunder or their application to the sets of facts established by the trial Court. As far as facts are concerned, our engagement with them is limited to background and context and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law that is the province of the trial court.”

26. Put differently, on appeal, issues of fact may give rise to questions of law if the conclusions made by the trial court are erroneous. In Kenya Revenue Authority v Maluki Kitili Mwendwa (Civil Appeal No. ITA E078 of 2020) [2021] eKLR, Mativo J, as he then was, aptly stated: -“It is trite that an appeal court is bound by the trial court’s findings of credibility, unless they were found to be affected by a material misdirection or to be clearly wrong. The appeal court will only reverse these findings where it is convinced that the findings are wrong …”

27. It was the appellant’s contention that the Tribunal did not apply the correct burden of proof. The general rule is that, in any proceeding, it is the tax payer to prove that the tax decision is incorrect or assessment is excessive.

28. Section 56(1) of the Tax Procedures Act provides that: -“In any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

29. And section 30 of the Tax Appeals Tribunal Act, provides that: -“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.”

30. There are instances where the burden of proof shifts in the course of the proceedings. See Kenya Revenue Authority v Man Diesel & Turbo se Kenya [2021] eKLR. There are also instances where the burden of proof is reversed such as where the assumptions made by the taxman are exclusive and peculiarly within its knowledge.

31. In Kenya Revenue Authority v Maluki Kitili Mwendwa [supra], the Court observed that: -“Regarding the presumption of correctness, 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 payer’s evidence must meet this minimum threshold.…However, where the assumptions made by the Revenue Authority are exclusive and peculiarly within its knowledge, a corrective measure must be applied to the typical onus of proof. If the taxpayer has no knowledge with respect to the assumptions made by the Revenue Authority, it would be unfair to require the taxpayer to disprove them. This was the holding in Canada v Anchor Pointe Energy Ltd.[27] However, decided cases are in agreement that the burden of establishing the facts justifying the assessment of the penalty is on the Revenue Authority.”

32. In the present case, the evidence presented by the appellant included sworn statements by the respondent’s three former employees including the informant, Mr. Magonga, who were all involved in the alleged tax evasion. They all stated that they were instructed by the respondent’s director to deposit sale proceeds in cash into Mr. Magonga's account. The appellant also produced a letter from KCB Bank confirming that, Mr. Bajoh, the respondent’s Managing Director, was a signatory to Mr. Magonga's account. It also produced banking summaries and bank statements of Mr. Magonga's account as well as that of Mr. Taib's. These showed withdrawals by Mr. Magonga and Mr. Bajoh and deposits into Mr. Taib's account.

33. The statements by Mr. Magonga and his colleagues being that the monies belonged to the respondent and not Magonga’s it called upon the respondent to answer those allegations positively to disprove them.

34. In response, the respondent filed affidavits sworn by its directors, Mr. Bajoh and Mr. Taib. The gist of the respondent’s case was that Mr. Magonga had been terminated from employment as a sales representative after it was discovered that he was misappropriating company funds. The respondent initiated legal proceedings in Eldoret CMCC No. 793 of 2010 for theft of Kshs. 654,590/-.

35. On his part, Mr. Bajoh stated that Mr. Magonga requested him to be a signatory to his account in order to assist him with his transport business while he travels. That assertion juxtaposed with the massive amounts deposited in Mr. Magonga’s account flies on their face. They do not add up. Why would a whole Managing Director be a signatory in a lowly placed employee of the company? It is illogical.

36. The view the Court takes is that the evidence of the appellant was not sufficiently displaced. The respondent’s Managing Director is an agent of the respondent, why would he be involved in withdrawing large sums of money from am the respondent’s employee? That employee was earning a partly sum of Kshs. 17,000/- per month. It is illogical that he could at the same time be having a transport business raking hundreds of millions of money per month.

37. The suit that was brought against Mr. Magonga, in the view of this Court, was an afterthought.

38. The Tribunal found that if the funds in Mr. Magonga’s accounts were the respondent’s sale proceeds, there ought to have been corresponding transfers of funds from the accounts to the respondent; that the appellant did not investigate why Mr. Bajoh was a signatory to that account and that no submissions were made as to whether he was a signatory in his official or personal capacity.

39. Having in mind that the burden of proof lied with the respondent, once the appellant an account had been opened in the name of its employee and its employees were depositing funds thereto, and its principal officer, its CEO, the Managing Director was involved in an that account, the burden of proof shifted to the respondent to prove otherwise. Its principal officer could not be operating an account with one of its lowly paid employees then argue that that officer was not acting on its behalf.

40. In my view. Mr Magonga’s evidence was never displaced by the respondent and the Tribunal erred in shifting the burden to the appellant to prove that the funds in Mr. Magonga’s account were not those of the respondent. Further, the Tribunal failed to consider that the suit filed against Mr. Magonga in Eldoret was an afterthought meant to cover the respondent’s tax evasion tactics. Why didn’t the respondent sue or have its other employees who deposited its monies in Mr. Magonga’s acoount charged?

41. The fact that there was no corresponding transfer of funds from the respondent’s CEO to the respondent is not enough to prove that the said monies did not belong to the respondent. It was for the respondent to prove through its agent and CEO why large sums were being withdrawn from the respondent’s employee to his account. The Court takes judicial notice that a Managing Director is a very senior officer of a company and holds a lot of power over the rest of the employees of a company. In this regard, I am satisfied that the conclusions of the Tribunal were not correct and were not supported by the law.

42. In conclusion, I find that the appeal is meritorious and I allow the same with costs.It is so decreed.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF NOVEMBER, 2023. A. MABEYA, FCI ArbJUDGE