[2023] KETAT 508 (KLR)

Dianga v Commissioner of Domestic Taxes (Tax Appeal 534 of 2022) [2023] KETAT 508 (KLR) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 508 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 534 of 2022

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, E Komolo & T Vikiru, Members

October 19, 2023

Between

Sakina Tomy Dianga

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Kenyan citizen whose income is derived from commercial rental income.

2. The Respondent is an officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant earns rental income from a property situated in Kisumu Municipality/Block 8/320.

4. With effect from 1st July 2014, the Appellant entered into an agreement to lease the property to Equity Bank Limited (tenant) for a lease period of ten (10) years.

5. At the time the Appellant leased the property to Equity Bank Limited, the Appellant was not registered for VAT.

6. On 15th February 2016, the Respondent compulsorily registered the Appellant for VAT obligation due to withholding VAT deducted and paid by the tenant (Equity Bank Limited).

7. On 10th February 2022 the Respondent raised an income tax additional assessment of Kshs 2,403,620. 00 for the year of income 2020 and VAT additional assessment of Kshs. 1,473,197. 75 for the February 2020.

8. The Appellant objected to the above assessment on 26th February 2022.

9. The Respondent issued an objection decision on 51h April 2022 but the iTax confirmation notices were issued on 27th April 2022.

10. Aggrieved by the decision of the Respondent, the Appellant filed a Notice of Appeal dated 3rd May 2022.

The Appeal 11. The Appeal is premised on the following grounds stated in the Memorandum of Appeal filed on 25th May 2022: -a.The Respondent had previously issued similar assessments and vacated those assessments based on the objection reasons provided by the Appellant.b.The Appellant’s only source of income is rental income received from Equity Bank as per the rental agreement and bank statements.c.In February 2020 the Respondent alleged that the Appellant received an income of Kshs. 9,380,500. 00 from Equity Bank Limited.d.The additional income of Kshs. 9,380,500. 00 relates to prior years' income.e.The Appellant did not earn the assessed income of Kshs. 9,380,500. 00 in February 2020 but instead had earned it and declared the same in her prior years' income tax returns.

Appellant’s Case 12. The Appellant’s case is premised on the following documents: -a.The Appellants Statement of Facts filed on 25th May 2022 and the documents attached thereto.b.The Appellant’s Written Submissions dated 27th January 2023 and filed on 30th January 2023.

13. The Appellant averred that she earns rental income from the property situated in Kisumu Municipality/Block 8/320.

14. That with effect from 1st July 2014, she entered into an agreement to lease the property to Equity Bank Limited (tenant) for a lease period of ten (10) years.

15. That at the time the Appellant leased the property to Equity bank limited, the Appellant had not been registered for VAT. That the rent receivable as per the lease agreement was exclusive of VAT.

16. That on 15th February 2016, the Respondent compulsorily registered the Appellant for VAT obligation due to withholding VAT tax deducted and paid by the tenant (Equity Bank Limited).

17. That on 10th February 2022 the Respondent raised income tax and VAT additional assessments on iTax as follows:a.Income tax of Kshs. 2,403,602. 00 for the year of income 2020 via assessment number KRA202201936985. b.VAT of Kshs. 1,473,197. 00 for February 2020 via assessment number KRA202201937063.

18. That the following were the reasons given by the Respondent for the additional assessments:-a.Income tax - under declared 2020 sales of Kshs. 9,614,407. 00 giving rise to additional income tax of Kshs. 2,403,602. 00. b.VAT- disallowed input VAT of Kshs. 1,473,197 incurred against purchases of Kshs. 9,207,485. 00 incurred on structural maintenance of the building

19. The Appellant averred that she objected to the above assessments on 26th February 2022 and received the objection acknowledgement on iTax.

20. That the Respondent issued an objection decision dated 51h April 2022 and confirmed the assessments on iTax on 27th April 2022. That the reasons given for the full rejection were disallowed purchases and under declared income.

21. That withholding VAT, is deducted by the tenant at the time of paying the landlord the rent that is due.

22. The Appellant submitted that the following should be the issues of determination in this matter:-a.Whether the Appellant had met the rental income threshold required to be registered for VATb.Whether the Appellant was entitled to pay the assessed income tax.

23. The Appellant submitted that Section 34(1) of the VAT Act provides that:-“A person who is in the cause of a business has made taxable supplies or expect to make taxable supplies, the value of which is five million shillings or more in any period of 12 months or is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months shall be liable for registration under this Act and shall, within 30 days of becoming so liable, apply to the Commissioner for registration in the prescribed form.”

24. The Appellant submitted that her only source of income was rent from her premises known as Kisumu/Municipality/Block 8/ 320 which the Equity Bank was paying her Kshs. 355,000. 00 per month. That this is equivalent to Kshs. 4,260,000. 00. That this is less than the required threshold of Kshs. 5,000,000. 00 for VAT registration.

25. That in the case of Norman vs Golder 26 TC 293 it was held that the onus is upon the Appellant to show that the assessment upon him is excessive and incorrect; and in this case, the Appellant had shown by giving attachment of his evidence of bank details, withholding taxes in both income and VAT ledger and the rent Agreement.

26. That the Appellant had clearly indicated that at the time she was leasing the property to Equity Bank limited, the Appellant had not been registered for VAThence the rent receivable from Equity Bank Limited was exclusive of VAT.

27. The Appellant submitted that on or about 15th February 2016 the Respondent compulsorily registered her for VAT obligation due to withholding VAT deducted and paid by the tenant and went further to impose the arrears for the VAT and for that reason the alleged VAT arrears were not supposed to be charged.

28. That the Appellant was compulsorily registered for VAT obligation due to withholding VAT paid by the tenant yet she did not meet the registration threshold as per Section 34(1) of the VAT Act 2O13. That this is a breach of law as the Appellant ought to have been notified first of the application so that she register voluntarily or rather a formal letter drawn to her concerning the registration since she has a right to information as per the Constitution of Kenya 2010.

29. The Appellant submitted that she had proved her case on a balance of probability that she has never failed to account for the income as a law-abiding citizen as evidenced by the bank statements.

30. The Appellant submitted that in the case of Boleyn International Ltd Vs Commissioner of investigations and Enforcement, Nairobi TAT Appeal No. 55 of 2018 the Tribunal held that:-“We find the Appellant at all times bore the burden of proving that the Respondent's decision and investigations were wrong. The Tribunal is guided by the provisions of section 56(1) of the Tax Procedures Act, 2015 which states that in any proceedings under this part, the burden shall be on the tax payer to prove that a tax decision is incorrect.”

31. The Appellant submitted that she proved that the tax decision was incorrect. That therefore she is not privy to the two additional taxes as indicated by the Respondent.

32. That evidently, the law is now well settled that in setting aside the additional assessments, the Tribunal must consider not only the reasons why the objection was rejected or the Appellant not meeting the threshold but the subject matter of the case.

Appellant’s Prayers 33. The Appellant prayed that the Tribunal:-SUBPARA a.Vacates the additional assessments.

Respondent’s Case 34. The Respondent’s case was premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 24th June 2022 and filed on the same date.b.The Respondent’s written submissions dated 28th February 2023 and filed on 12th April 2023.

35. In response to the grounds of appeal, on which the Appellant claimed that the Respondent had previously issued similar assessments and vacated the assessments based on the objection facts provided by the Appellant, the Respondent averred that it is at liberty to amend the assessment by making alterations or additions from the available information pursuant to Section 31(1) of the Tax Procedures Act 2015 (TPA) which states:-“the Commissioner may amend an assessment (referred to in this section as the "original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that...”

36. The Respondent further stated that if a person does not hold the necessary documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.

37. That this is pursuant to Section 17 (2) of the VAT Act which states:-“If, at the time when a deduction for input tax would otherwise be allowable under subsection (1) the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.”

38. That on the third, fourth and fifth grounds of Appeal, the Respondent averred that the notice of objection was not validly lodged by the taxpayer. That the Appellant did not provide any supporting documentation to support the inputs claimed hence fell short of the statutory provisions.

39. That for a notice of objection to be valid, the notice must be in conformity with Section 51 (3) of the TPA which states:“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; andb.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.”1. The Respondent submitted that the Appellant did not provide any evidence contrary to the basis of the Respondent’s assessment.2. The Respondent submitted that the following should be the issues to be determined by the Tribunal: -a.Whether the Respondent’s objection decision was in conformity with the provisions of the law.b.Whether the Respondent is compelled to allow VAT input claimed by the Appellant.

42. The Respondent submitted that it issued its objection decision dated 5th April 2022 based on the information provided by the Appellant in her objection.

43. The Respondent submitted that it was fully within its rights when it amended the Appellant’s assessment by making alterations based on the available information. That the Appellant claimed input VAT which led the Respondent to issue an additional assessment on the Appellant, requiring her to pay tax.

44. That the Appellant had an opportunity to support her objection by providing evidence to show how the said income was received, but the Appellant only made mere allegations that she did not receive the said income.

45. The Respondent further submitted that Section 34 of the VAT Act requires persons making taxable supplies, the value of which is five million shillings or more in any period of twelve months to register for VAT. That the Section provides as follows: -“Application for registration1. A person who in the course of a businessa.has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months"

46. That Section 34(6) of the VAT Act empowers the Commissioner to register a person eligible to apply for registration if they have not done so. That Section provides that:-“If the Commissioner is satisfied that a person eligible to apply for registration has not done so within the time limit specified in subsection (1), the Commissioner shall register the person"

47. That the Respondent, on 15th February 2016, invoked its powers given under Section 34 (6) of the VAT Act and registered the Appellant for VAT obligation.

48. The Respondent relied on the decision in Commissioner Investigations and Enforcement v Sangyug Enterprises(K) Limited (Income Tax Appeal Eo56 of 2020) [2022] KEHC 59 (KLR) (Commercial and Tax) (4 February 2022) (Judgment), where the court dismissed an appeal against the Commissioner’s decision to disallow input VAT claimed because the taxpayer failed to produce documents required to claim input tax. The Court held: -“From the said provision, it is upon a tax payer to have in his/its possession the proper documentation and produce the same to the tax authorities when called upon. In this case, it was upon the respondent to produce the documentation to support its claim for VAT.............. As I have found, the Respondent failed to provide all the documents which the Commissioner requested to prove that it purchased or received goods from the named companies it purported to make the purchases from. In the absence of this evidence, the Commissioner was entitled to conclude that the claim for input VAT was fictitious or fraudulent."

49. The Respondent further submitted that the Appellant merely objected to the assessment by sending a letter dated 26th February 2022 stating its reasons for the objection.

50. That for an objection notice to be valid, it must conform with Section 51 (3) of the TPA.

51. The Respondent further submitted that the law places the burden of proof on the Appellant to show that the Commissioner issued a wrong assessment.

52. That Section 51 (3) of the TPA also gives the Appellant an opportunity to provide documentation supporting her objection.

53. The Respondent also relied on the holding in Kenya Revenue Authority v Man Diesel &Turbo Se, Kenya [2021] eKLR where the court held: -“30. Section 56 of the TPA in peremptory terms places the burden of proof in tax cases on the tax payer. The above section is reinforced by section 30 of the TAT Act which provides: - 30. Burden of proof

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; orb.in any other case, that the tax decision should not have been made or should have been made differently30. The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non- persuasion) is said to bear the burden of proof. The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect."

54. The Respondent submitted that the Appellant did not adequately discharge its burden of proof of showing that the Respondent’s assessments were wrong.

Respondent’s prayers. 55. The Respondent prayed that: -a.The Tribunal finds that the Commissioner’s decision dated 5th April 2022 was proper and in conformity with the provisions of the law.b.The Tribunal upholds the Respondent’s assessment.c.The Appellant be directed to pay the income tax and VAT payable in the assessments issued by the Respondent; andd.The Appeal be dismissed with costs.

Issue For Determination. 56. After perusing the pleadings and documentation produced before it, the Tribunal was of the view that the issue that calls for its determination was:-Whether the Appellant discharged its burden of proof that the Respondent’s assessments of income tax and VAT was wrong.

Analysis And Findings. 57. Having identified the issue that calls for its determination, the Tribunal proceeded to analyse it as hereunder.

58. The origin of this dispute is the income tax and VAT assessments raised by the Respondent on 10th February as follows:-a.Income tax of Kshs. 2,403,602. 00 for the year of income 2020 via assessment number KRA202201936985. b.VAT of Kshs. 1,473,197. 00 for February 2020 via assessment number KRA202201937063

59. The following were the reasons given by the Respondent for the additional assessments:-a.Income tax - under declared 2020 sales of Kshs. 9,614,407. 00 giving rise to additional income tax of Kshs. 2,403,602. 00. b.VAT- disallowed input VAT of Kshs. 1,473,197. 00 incurred against purchases of Kshs. 9,207,485. 00 incurred on structural maintenance of the building

60. The Appellant objected to the assessments on 2611' February 2022 and received the objection acknowledgement on iTax.

61. The Respondent confirmed the assessments on 27th April 2022 and issued an objection decision on 5th April 2022.

62. The Appellant submitted that her only source of income was rent from her premises known as Kisumu/Municipality/Block 8/ 320 rented by Equity Bank at Kshs. 355,000. 00 per month. This is equivalent to Kshs. 4,260,000. 00.

63. The Appellant submitted that this amount is less than the required threshold of Kshs. five million for registration under the VAT tax obligation.

64. The Appellant submitted that on or about 15th February 2016, the Respondent compulsorily registered her for VAT obligation due to withholding VAT deducted and paid by the tenant and went further to impose the arrears for the VAT and for that reason the alleged VAT arrears were not supposed to be charged.

65. The Appellant submitted that she was compulsorily registered for VAT obligation due to withholding VAT paid by the tenant yet she did not meet the registration threshold as per Section 34(1) of the VAT Act 2013.

66. The Appellant submitted that she did not earn Kshs. 9,614,407. 00 in the year 2020 as assessed by the Respondent and that the same was earned in the previous years which had since been declared and paid for.

67. On the other hand, the Respondent averred that the Appellant claimed that the Respondent had previously issued similar assessments and vacated the assessments based on the reasons for objection provided by the Appellant.

68. In the Memorandum of Appeal, the Appellant stated that;-“The Respondent had previously issued similar assessments and vacated them based on the objection facts provided by the Respondent.”

69. The Appellant did not tender any evidence to the Tribunal to show when that earlier assessment was made, the objection she filed to the Respondent then and the evidence that the assessment was actually vacated by the Respondent after the objection.

70. In response to this averment, the Respondent submitted that it was at liberty to amend the assessments by making alterations or additions from the available information pursuant to Section 31(1) of the TPA.

71. The Respondent further submitted that if a person does not hold the necessary documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.

72. The Respondent submitted that the notice of objection was not validly lodged by the taxpayer. The Appellant did not provide any supporting documentation to support the inputs claimed hence fell short of the statutory provisions.

73. From the pleadings filed at the Tribunal, this looked like a simple and straight forward matter because the Appellant alleged that the only source of her income was rent paid by Equity Bank. She claimed to be in possession of a lease agreement and bank statements to support the allegations that the amount she received during the period under assessment was below the VAT registration threshold of five million shillings in twelve months.

74. The Tribunal notes that the Appellant did not provide a copy of the lease agreement or the bank statements to show exactly how much she received as rental for the period under assessment.

75. Section 23 of the TPA requires a taxpayer to maintain any document required under the law so as to enable its tax liability to be readily ascertained.

76. The Tribunal notes that while the Appellant made averments in regard to the Appeal, she did not provide documents to support the averments. The Appellant made averments and failed to support them by providing supporting documents.

77. The Tribunal notes that Section 56 (1) of the TPA provides that: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

78. This Section places the burden of proof in tax cases on the taxpayer. The Section is reinforced by Section 30 of the TAT Act which states 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; orb.in any other case, that the tax decision should not have been made or should have been made differently”

79. The Tribunal relied on the holding of the Court in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR wherein the Court stated that:“The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof.[9] The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy.The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency.[10] The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position.”

80. The Tribunal also relied on the holding in Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR where the Court held that:“Under section 56(1) of the TPA, the Company bears the burden of demonstrating that Commissioner’s decision in reaching the assessments complained of was incorrect”.

81. The Tribunal finds that the Appellant did not discharge her burden of proof that the Respondent’s assessments of income tax and VAT were wrong.

Final Decision 82. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 5th April, 2022 be and is hereby upheld.c.Each party to bear its own costs.

83. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF OCTOBER, 2023. GRACE MUKUHA - CHAIRPERSONGLORIA A. OGAGA - MEMBERJEPHTHAH NJAGI - MEMBERDR. ERICK KOMOLO - MEMBERTIMOTHY VIKIRU - MEMBER