[2023] KETAT 963 (KLR)

Daton Engineering Services Limited v Commissioner of Domestic Taxes (Tax Appeal 1246 of 2022) [2023] KETAT 963 (KLR) (Commercial and Tax) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 963 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 1246 of 2022

RM Mutuma, Chair, EN Njeru, BK Terer, M Makau & W Ongeti, Members

December 20, 2023

Between

Daton Engineering Services Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act and a registered taxpayer. Its main form of business is in civil & mechanical engineering works, construction works and projects.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya revenue Authority Act, 1995. 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 conducted a compliance check on the Appellant for the period 2017 to 2021 and noted variances in the Income tax returns and VAT returns compared to the withholding VAT certificates from Bamburi Cement Limited.

4. The Respondent consequently issued the Appellant with additional assessments on 6th June 2022 of Kshs. 11,715,564. 54 being principal tax.

5. The Appellant lodged an Objection on 6th July 2022 adducing documentation in support of its Objection.

6. The Respondent issued an Objection decision on 28th September 2022 fully rejecting the Objection application and confirming the additional assessment of Kshs. 15,444,083. 95 inclusive of penalties and interest.

7. Dissatisfied with the Objection decision, the Appellant filed the instant Appeal with the Tribunal.

The Appeal 8. The Appeal is premised on the following grounds as deduced from the Memorandum of Appeal dated 19th October, 2022 and filed on 24th October, 2022:-(a)The Appellant received debit adjustment vouchers on 6th June 2022 relating to VAT for the years 2017 to 2021 and Income tax for 2018 to 2020 disallowing in entirety all the Appellant’s basis for Objection.(b)The Appellant lodged Objections against the assessments on 6th July 2022. (c)The Appellant followed up on the Objection by providing the Respondent with copies of all suppliers’ invoices, copies of bank statements, copies of financial statements, sales ledgers and reconciliations to support the objection.(d)On 28th September 2022, the Respondent rejected the Objection in full, citing the taxpayer did not provide tax support records.(e)The Appellant was in the process of obtaining invoices in order to provide them to the Respondent when the decision was issued.(f)The Appellant has supplied and is willing to supply the Respondent with documents requested for purposes of review of the Objection.

The Appellant's Case 9. The Appellant’s case was premised on its Statement of Facts dated 19th October 2022 and filed on 24th October 2022 wherein it reiterated verbatim its averments in the Memorandum of Appeal. The Tribunal will therefore not repeat the same to avoid duplicity.

10. Seeing as the Appellant did not file its submissions with the Tribunal, the Tribunal will rely on the pleadings before it and the documents attached to determine the totality of the Appellant’s case.

The Appellant's Prayers 11. The Appellant prayed that the Tribunal finds for the Appellant’s case and order that: -(a)This Appeal be allowed and the Objection decision be set aside;(b)Such further orders as this Honourable Tribunal may deem just and expedient be issued.

The Respondent's Case 12. The Respondent’s case is premised on its;(a)Statement of Facts dated and filed on 23rd November 2022 together with the annexed documents thereto; and(b)Written submissions dated and filed on 6th June 2023.

13. The Respondent stated that it reviewed and considered the Appellant’s income for the period 2017 to 2021 and, after comparing the income declared in the tax returns for Income tax and VAT and the gross income from the withholding VAT certificates claimed in the Appellant’s monthly VAT returns, it noted that the Appellant had under-declared its income and the audited accounts, sales ledgers, and sales invoices submitted by the Appellant for the years under review were different from the income declared.

14. It averred that the Appellant was given sufficient time to provide the relevant documents which he failed to provide together with the detailed reconciliations explaining the difference in the derived income per the VAT withholding certificates and the declaration in the tax return which the Appellant failed to provide.

15. The Respondent relied on Sections 51 (3) (c), 58, and 59 of the Tax Procedures Act and Section 43 (1) of the VAT Act to reiterate that the Appellant failed to provide documentation to support its grounds for objection and in the absence of clear and detailed reconciliations to explain and support the variances in the income tax return and VAT return, the Respondent’s finding on the assessment is accurate and proper.

16. It further relied on Section 24 (2) of the Tax Procedures Act and averred that it is not bound by the Appellant’s returns, information or self-assessment. It added that it raised the assessment and Objection decision based on the explanations and documentary evidence adduced for review.

17. The Respondent stated that the Appellant is obligated to prove that a tax decision is incorrect per Section 56 (1) of the Tax Procedures Act and the Appellant did not furnish sufficient proof to defend its position and to rebut the assessment at the time of the Objection, equally failing to discharge the same burden before this Tribunal.

18. It contended that despite being given the opportunity to explain the variance, the Appellant was unable to explain the variance in the returns therefore the Respondent is entitled to collect the tax payable of Kshs. 15,444,083. 95 inclusive of penalties and interest.

19. In its submissions dated and filed before the Tribunal, the Respondent reiterated its averments in the Statement of Facts it adduced before the Tribunal on the background and sequence of events and submitted as follows.

20. The Respondent submitted that contrary to the Appellant’s allegations, the Respondent considered all the documents submitted by the Appellant at the assessment stage where it considered the Appellant’s filed tax returns, purchase ledgers excluding the ledgers for 2017 to 2021, financial statements, bank statements excluding statements for 2017 to 2021. It added that at the Objection stage, it considered documents provided by the Appellant including audited financial statements, ledgers, sales and purchase invoices, supplier’s confirmations and bank statements.

21. It asserted that the Appellant was given sufficient time to provide the relevant documents which it failed to provide together with the detailed reconciliations explaining the difference in the derived income per the VAT withholding certificates and the declaration in the tax return which the Appellant failed to provide.

22. It argued that the fact that the Appellant has failed to state or list the documents submitted that were not considered by the Respondent demonstrates that the allegation is unfounded.

23. It relied on the case of Speaker of National Assembly v Njenga Karume [2008] 1 KLR 425 to buttress its position that it was not possible to address the Appellant’s Objection on merits without the information requested since the Respondent could not merely rely on the Appellant’s word of mouth without proper explanation of the variance noted between the income tax and VAT and the corresponding Withholding certificates issued to the Appellant.

24. It cited the cases of Republic of Kenya v Kenya Revenue Authority Ex Parte Funam Construction Limited and Histoto Limited v The Commissioner of Domestic Taxes Nairobi Appeals No. 369 of 2019 to support its contention that sales declared for purposes of corporation/VAT should be equivalent to the sales declared in withholding certificates, and the Appellant has not appealed against the Respondent’s assessment on understated/under-declared VAT and Income sales as the Appellant has not given any plausible reason to justify the variances established from the sales declared in the VAT and Corporation tax returns, or adduced evidence proving the assessment was incorrect or excessive.

25. It further relied on the case of Jilao Company Limited v Commissioner of Domestic Taxes and submitted that the Appellant has not discharged its burden of proof therefore the VAT and income assessment of Kshs. 15,444,083. 95 should be upheld.

26. The Respondent relied on Section 29 (1) of the Tax Procedures Act and maintained that the Appellant has not been declaring all the income and VAT in its returns.

On whether the Appellant herein has dispensed with the burden of proof in this Appeal 27. The Respondent cited several cases and submitted that by its own admission, the Appellant conceded to the fact that it did not provide all the supporting documents and averred that it was in the process of providing the documents when the decision was issued adding that the Appellant failed to demonstrate that the said documents were delivered or forwarded to the Respondent for review. The cases cited were:(a)Digital box Limited v Commissioner of Domestic Taxes (TAT No. 115 of 2017).(b)Diversity Distributors Ltd v Commissioner of Domestic Taxes.(c)Mulherin v Commissioner of Taxation [2013] FCAFC 115.

28. It contended that it accorded the Appellant an opportunity to provide supporting documents as well as reconciliation to explain the variance but the Appellant failed to provide the information required neither has the Appellant provided any evidence of reconciliation in support of the alleged excessive assessment.

29. It relied on Section 56 (1) of the Tax Procedures Act, Section 30 of the Tax Appeals Tribunal Act, and the case of Boleyn International Ltd v Commissioner of Investigations and Enforcement TAT No. 55 of 2019 which relied on the decision in the case of Pierson v Belcher (H.M. Inspector of Taxes) (1956-1960) 38 TC 387 and submitted that the burden of proof lies on the Appellant to prove that the Respondent erred in rejecting the Objection, a burden the Appellant failed to discharge.

The Respondent’s prayers 30. The Respondent prayed for the Tribunal to find that:(a)The Respondent's Objection decision dated 28th September 2022 is proper and in conformity with the provisions of the law;(b)The Appeal be dismissed with costs.

Issue for Determination 31. After perusing the Memorandum of Appeal and parties' Statements of Facts, together with the Respondent’s submissions and documentation attached therewith, the Tribunal believes that the following is the main issue for determination:Whether the Respondent’s Objection Decision dated 28th September 2022 was proper in law.

Analysis and Findings 32. The Tribunal wishes to analyse the issue as hereinunder.

33. The Appellant averred that it followed up on its Objection by providing the Respondent with copies of all suppliers’ invoices, copies of bank statements, copies of financial statements, sales ledgers and reconciliations to support the objection which was rejected by the Respondent in full.

34. It averred that it was in the process of obtaining invoices when the decision was issued and that it has since supplied and is willing to supply the same.

35. The Respondent submitted that it considered all the documents submitted by the Appellant at the assessment and objection stage where it considered the Appellant’s filed tax returns, purchase ledgers excluding the ledgers for 2017 to 2021, financial statements, bank statements excluding statements for 2017 to 2021.

36. It added that the Appellant was given sufficient time to provide the relevant documents which it failed to provide including documents explaining the difference in the derived income per the VAT withholding certificates and the declaration in the tax return which the Appellant failed to provide.

37. It argued that the fact that the Appellant has failed to state or list the documents submitted that were not considered by the Respondent demonstrates that the allegation is unfounded.

38. Section 51 of the Tax Procedures Act requires the Appellant to provide all relevant documents to prove its case, the provision states as follows:-“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and(c)all the relevant documents relating to the objection have been submitted.” (Emphasis added)

39. The Respondent has provided the list of documents it required from the Appellant to make an informed decision which the Appellant failed to provide within the statutory timelines.

40. The tax laws are very clear on the timelines to be taken as well in case of a disputed tax assessment. The Appellant has not demonstrated why it did not have the documents required when they were requested or why it needed time to provide the same.

41. The Appellant argued that it now has in its possession the documents in support of its case, in determining whether to allow the evidence documents, the Tribunal is guided by the case of Commissioner of Income Tax v Total Kenya Limited [2021] eKLR where it was held as thus:-“In Tarmohamed & Another v Lakhani & Company [1958] EA 567, the Court of Appeal for Eastern Africa adopted the decision in Ladd v. Marshall [1954] WLR 1489 and stated: -Except in cases where the application for additional evidence is based on fraud or surprise: to justify the reception of fresh evidence or a new trial, three conditions must be fulfilled: first, it must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; secondly, the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; thirdly, the evidence must be such as is presumably to be believed, or in other words, it must be apparently credible, though it need not be incontrovertible.”

42. On this basis, the Tribunal finds that the Respondent has properly demonstrated that it not only requested for more information from the Appellant but that it took into account the information it was provided and made a determination based on its best judgment.

43. The Tribunal therefore finds that the Appellant has failed to discharge its burden of proving the assertions that the assessment orders were incorrect and the Respondent’s Objection decision of 28th September 2022 was proper and justified.

Final Decision 44. The upshot to the foregoing is that the Appeal is not meritorious and the Tribunal consequently makes the following Orders;-(a)The Appeal be and is hereby dismissed.(b)The Objection decision dated 28th September 2022 be and is hereby upheld.(c)Each party to bear its own costs.

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023ROBERT MUTUMA.........................CHAIRPERSONELISHAH N. NJERU................MEMBERBONIFACE K. TERER.............MEMBERMUTISO MAKAU...................MEMBERDR. WALTER ONGETI..........MEMBER