[2024] KETAT 876 (KLR)

Dinesh Construction Limited v Commissioner Of Domestic Taxes (Appeal 356 of 2023) [2024] KETAT 876 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 876 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 356 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

June 28, 2024

Between

Dinesh Construction Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya under the Company’s Act Cap 486 Laws of Kenya whose principal activity is building and civil engineering contracts.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 and 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. Based on intelligence reports, the Respondent conducted a desk audit that culminated in preliminary findings to the Appellant on 30th June 2022 and subsequent meeting between the Respondent and Appellant’s tax agent on 4th August 2022 and 17th August 2022.

4. In a letter dated 30th August 2022 the Appellant was issued with a comprehensive tax audit preliminary assessment letter for 2016 to 2021 review period totaling Kshs. 1,137,582,759. 00 in relation to Corporation tax, Value Added Tax (VAT), PAYE and withholding tax. This was followed by a meeting between the Respondent and the Appellant’s director on 27th September 2022.

5. The Appellant opposed the findings in its letter dated 5th October 2022. Subsequently, on 14th December 2022, the Respondent issued a revised notice of assessment pursuant to Section 31(8) of the Tax Procedures Act CAP 469B of Kenya’s Laws (hereinafter “TPA”) confirming a revised assessment of Kshs. 773,054,888. 00 composed of corporation tax Kshs. 453,393,832. 00, Value Added Tax (VAT) of Kshs. 302,544,644. 00, PAYE of Kshs.17,004,471. 00 and withholding tax of Kshs. 111,941. 00.

6. In a letter dated 13th January 2023 and filed with the Respondent on 15th February 2023, the Appellant objected to the assessment in its entirety through enumerated grounds of objection.

7. The Respondent rendered its objection decision on 13th April 2023 confirming the total assessment of Kshs. 773,054,888. 00 in relation to Corporation tax, Value Added Tax (VAT), PAYE and withholding tax.

8. Aggrieved by the Respondent’s objection decision, the Appellant filed its notice of appeal dated 10th May 2023 on the same date at the Tribunal.

The Appeal 9. The Appeal was predicated upon the following grounds as laid-out in the Appellant’s Memorandum of Appeal dated 24th May 2023 and filed on even date:i.That the Respondent erred in law by subjecting the variances noted between the income as per the income tax return (IT2C) for the year 2020 and income as per withholding certificates in the same year since income was accounted for on accrual basis whereas withholding tax was on cash basis meaning the two could not match.ii.That the Respondent erred in law by subjecting the variance noted between the income tax returns for the years 2018 and 2019 compared with bank deposits for the same years yet some bank deposits did not represent income as some of the credit entries represented “contra entries”, loans and funds injected to the business by directors.iii.That the Respondent erred in law by disallowing purchases amounting to Kshs. 417,724,251. 00 and Kshs. 271,357,662. 00 for years 2016 and 2019 respectively yet Section 23 of the TPA provides that a taxpayer maintains tax records for a period on five (5) years only. Thus, the 2016 assessments lacked basis in law and could not be legally supported. Further, it was not practical for a company to earn the reported income of Kshs. 587,597,294. 00 for the year 2019 without incurring purchases which the Respondent disallowed amounting to Kshs. 271,357,662. 00 suggesting that the Appellant did not incur any expenses while generating the reported income.iv.That the Respondent erred in law by subjecting advance payments which never existed to tax and failed to provide the basis upon which the advance payments were arrived at. The notice of assessment failed to disclose the summary of advance payments which the Respondent alleged that the Appellant received from its customers and failed to declare them in the VAT and Income Tax returns.

Appellant’s Case 10. The Appellant stated as follows in its Statement of Facts dated 24th May 2023 and filed on even date:

11. The Appellant stated that its confirmed assessment amounted to Kshs. 773,054,888. 00 in relation corporation tax for years 2016 to 2019, VAT for years 2016 to 2020, PAYE for years 2017 to 2021; whereas withholding tax was for the year 2016 and 2021 review period.

12. The Appellant averred that after the assessments were confirmed, it provided the Respondent with workings and explanations on why the variance noted for the income as per the year 2020 withholding certificate as compared to the reported income in the IT2C returns was not supposed to be subjected to additional tax and attached the same in its pleadings.

13. The Appellant averred that the Respondent’s desperation for more taxes ended up punishing the Appellant because the Respondent disallowed genuine purchases amounting to Kshs. 417,724,251. 00 and Kshs. 271,357,662. 00 relating to the 2016 and 2019 years of income respectively, the implication of which was that the Respondent assumed the Appellant did not incur any expenses while generating income for the two years proof of which was provided through explanations, documentation, reconciliations and audited financial statements attached.

14. The Appellant further stated that the rejection by the Respondent of the expenses in the two years (2016 and 2019) resulted in false, unreasonable and unrealizable net profit amounts which were never realized by the Appellant during the years it had been in operations. In buffering this position, the Appellant stated that it furnished the Respondent with documents as pursuant to under Section 17(3) of the Value Added Tax Act, CAP 476 of Kenya’s Laws (hereinafter “VAT Act”) which provides as follows:“(3)The documentation for the purposes of subsection (2) shall be:i.Original invoice issued for the supply or a certified copy;ii.A customs entry duly certified by the proper officer and a receipt for the payment of tax;iii.A customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction; andiv.A credit note in the case of input tax deducted under section 16(2)”

15. The Appellant averred that the Respondent ignored its defence on variances between bank deposits and reported income for the years 2018 and 2019 despite being furnished with reconciliations. Further, that the Respondent's use of bank deposits, opening and closing debtors in determining income was an assumption that could not be relied on.

16. Additionally, the Appellant averred that all its revenues had been subjected to withholding tax, a fact that the Respondent being the custodian of all income tax withholding certificates could readily prove since any other deposits in Appellant’s bank accounts related to something else not income. Further, the Appellant contradicted the Respondent’s assertion of additional income not declared stating that it furnished the Respondent with income reconciliation statements for all certificates raised by architects and VAT returns filed with corresponding Z-reports which the Respondent relied on while conducting compliance check.

17. The Appellant contested the Respondent’s assertion of “missing traders” terming them as unverifiable and asserting that the Respondent’s claim of additional assessment for both VAT and income tax was due to disallowing purchases for suppliers with active KRA PINs granted by the Respondent. Moreover, the Appellant contradicted the Respondent’s action to disallow purchases which were claimed not to meet the validity threshold stating that some suppliers had lamped sales, others stopped filing VAT, others were under special table while others never filed income tax returns. The Appellant averred that it could not be punished by the Respondent’s failure to ensure compliance of such suppliers.

18. The Appellant stated that it was never provided with proof of workings on how the Respondent arrived at additional advance payments yet the Appellant’s projects were always financed by bank loans and has never relied on advance payments from clients.

19. The Appellant was categorical that it provided the Respondent with all evidence required yet the Respondent went ahead to confirm all the assessments.

Appellant’s Prayers 20. The Appellant made the following prayers to the Tribunal:a.Allows the Appeal with costs; andb.Sets aside the Respondent’s decision dated 13th April 2023 and any other orders the Tribunal may deem fit.

The Respondent’s Case 21. The Respondent replied to the Appeal through its Statement of Facts dated 22nd June 2023 and filed on 23rd June 2023:

22. The Respondent averred that based on intelligence reports that the Appellant was under declaring income, it audited the Appellant on various tax heads with for the following purposes:i.Establishing whether there was under declaration of income as a result of income tax and VAT3 turnover variances for the year 2018;ii.Ascertain the validity of purchases claimed; andiii.Checking whether withholding tax was properly operated.

23. The Respondent averred that in the course of audit it subjected records and documents submitted by the Appellant to thorough examination, test and analysis to ascertain Appellant’s tax compliance and whether they supported assertions made in the audited financial statements.

24. The Respondent stated that the preliminary desk audit established that the Appellant filed income tax returns for 2016 to 2021. That whereas income tax returns for 2017, 2018 and 2019 were filed on time, the 2016 income tax return was filed late on 15th December 2017 while those of years 2020 and 2021 were filed on 26th June 2022. Further, VAT and PAYE returns for 2016 to 2022 were filed on time but had been on VAT credit for 2016 and 2017 and began paying VAT from year 2018.

25. The Respondent stated that its preliminary audit findings were rendered based on available records after the Appellant became slow and unco-operative in submitting records even after several electronic mails and reminders.

26. With regard to income tax, the Respondent stated that it established the following findings:i.That a certificates analysis showed higher income for 2019 and 2020 than reported incomes. The income variance from certificates was explained by the Appellant as originating from inclusion of sub-contractors in the certificates.ii.That verification of income using banking method established that income for the years 2018 and 2019 had been understated. This was arrived at after sales declared had been adjusted for debtors and output VAT which was however contested by the Appellant who argued that the amounts included in the banking method were majorly bank transfers (contra accounts) and debtors, the Respondent stated that it was never provided with reconciliations for the same thus the unreconciled variance was subjected to income tax and VAT.iii.Similarly, even though the Appellant provided some explanations, a comparison of sales as per withholding tax certificates and reported income for years 2018, 2019 and 2020 yielded variances that were not sufficiently supported by the Appellant.iv.That in establishing net income, the Appellant deducted advance payments in regards to some projects but failed to provide supporting evidence even for the retention amount in relation to the ‘KASNEB’ project thus the Respondent subjected the same to income tax and VAT respectively.v.That a comparison of the Appellant’s ETR Z-reports to declared VAT3 returns established variances for the years 2018, 2019 and 2020 respectively.vi.That purchases were disallowed because some of the Appellant’s suppliers were non-compliant for tax purposes, others were found to be ‘missing traders’, others had no location or shared similar addresses on i-Tax. Further, for some supplies there was neither evidence of supply nor delivery while some suppliers were unreachable. In some cases, suppliers were paid substantial amounts in cash while cash payments were more than withdrawals which was not substantiated by the Appellant. There were variances also noted relating to debtors, creditors, salaries and wages that were not explained or supported.

27. With respect to VAT, the Respondent averred that its audit finding established the following:i.That the Appellant claimed input on saloon vehicles purchase contrary to Section 17 of the VAT Act, moreover, the Appellant requested for purchase costs, logbooks and details of vehicle usage but was not provided with this information yet the payroll indicated that no employee was charged vehicle benefit; as a result, the Respondent sought to charge car benefits pursuant to Section 5(2B) of the Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”)ii.The Appellant failed to deduct and remit withholding tax on professional and management fees as provided for under Section 35 of the ITA.

28. The Respondent averred that it rightfully subjected to tax variance between income tax return and income as per withholding certificates as a detailed summarized request was sent to the Appellant to provide invoices and certificates, instead the Appellant became derelict in providing reconciliations resorting to generic statements that it failed substantiate.

29. The Respondent claimed that accrual accounting posits that income from supplies was deemed to accrue in the year of income regardless of whether payments were made or not. That the instant case was no different and relied on the Tribunal’s decision in the case of HistotoLimited vs Commissioner of Domestic Taxes [TAT No. 369 of 2019] where the Appellant was found to have not substantiated claims and allegations in the grounds therein.

30. The Respondent averred that it rightfully subjected to tax variances noted between income tax returns and bank deposits since it excluded contra entries, loans and directors’ injections as well as non-revenue entries in arriving at the taxable income. Further, the Respondent stated that it afforded the Appellant several opportunities to explain the variances and provide documentation to no avail.

31. The Respondent was categorical that it rightfully disallowed purchases for years 2016 and 2019 as the Appellant failed to furnish it all relevant supporting information and documentation as provided for under Section 23, 51(3), 56(1) and 59(1) of the TPA, Section 17 and 43 of the VAT Act and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) yet the burden of proof was on the Appellant who had a duty to provide a proper trail of payments for alleged purchases.

32. The Respondent averred that the Appellant failed to adduce tangible evidence to dispel the Respondent’s findings yet some of suppliers had been flagged as ‘missing traders’ and were not eligible for input tax deduction. The Appellant also failed to produce witnesses to prove that they actually supplied goods.

33. The Respondent justified it’s right to tax advance payments since payments were derived from Appellant’s own records and the Appellant’s failure to demolish Respondent’s findings despite several requests to provide evidence as provided for under Section 56(1) of the TPA, Section 30 of TATA and Section 107 of the Evidence Act, CAP 80 of Kenya’s Laws (hereinafter “Evidence Act”).

34. The Respondent stated that the Appellant never objected to retention payments/income, vehicle benefits and professional and management fees thus these were undisputed taxes which ought to have been paid before appealing against the objection decision pursuant to Section 52 (1) of the TPA, therefore, the Respondent’s additional assessment as confirmed by objection decision was valid, correct and grounded in law.

Respondent’s Prayer 35. The Respondent made the following prayers to the Tribunal:i.That the Tribunal dismiss the instant Appeal with costs for want of merit.ii.That the Tribunal uphold additional assessments as confirmed in the objection decision as being in conformity with provisions of the law.

Parties’ Written Submissions 36. The Appellant’s written submissions dated 20th March 2024 were filed on 21st March 2024.

37. The Appellant submitted that it informed the Respondent of inaccuracies of debtors which could not be relied upon as stated in the audited accounts because part of the payments received related to debtors who had existed for a long time. Thus, the Respondent erred in subjecting to tax variances noted between income tax return (IT2C) and bank deposits.

38. Moreover, the Appellant submitted that the Respondent was in err by subjecting to tax variance noted between IT2C, VAT and Income tax withholding since withholding tax was deducted upon payment as opposed to accrual basis of accounting as demonstrated by the Appellant where an invoice declared in VAT returns in year 2017 was paid for in the year 2019. This made the test unreliable and invalid as VAT sales and IT2C could not match withholding tax deducted.

39. The Appellant averred that it received financing from the bank yet the Respondent subjected this to advance payment tax. That the Appellant was unaware of these alleged advance payments from alleged customers.

40. Further, the Appellant submitted that the Respondent’s action to disallow purchases resulted in abnormal gross profit for years 2016 and 2019 which has never been experienced in the market yet the Respondent failed to demonstrate how the Appellant earned income without incurring expenses. That the Respondent went beyond the threshold of five years when it sought to assess the year 2016.

41. The Appellant declared that it furnished the Respondent with all available information and documents during the audit exercise yet the Respondent proceeded to raise additional assessments whose implication has crippled the Appellant’s business with loss of stakeholders who became aware of the bloated tax liability. This was evident as the Appellant has not met its statutory obligations such as tax arrears since the year 2023 to date.

42. Moreover, the Appellant submitted that its co-director was under medication in India and was facing financial challenges paying its bank loans, suppliers, statutory deductions as it did not have an accountant to handle its accounting matters coupled with this, the Appellant lost computers which had data for several years besides its unrecoverable debt from customers amounting to Kshs 556,000,000. 00.

43. The Respondent’s written submissions dated 10th January 2024 were filed on 24th January 2024; The Respondent submitted on four issues as enumerated hereunder:

i. Whether the Tribunal has jurisdiction. 44. The Respondent submitted that the Tribunal lacks jurisdiction and that it therefore ought to down it’s tools in the instant Appeal as there was no valid notice of appeal and was fatally defective and incompetently lodged by the Appellant who failed to pay or object to retention payments for the ‘KASNEB’ project, vehicle benefit, withholding tax on professional and management fees pursuant to Section 52(2) of the TPA which provides that;“52. Appeal of appealable decision to the Tribunal(1)…(2).A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

45. The Respondent averred that it was the notice of appeal that invoked jurisdiction of a court or a judicial authority and cited the following cases to firm up this position: Nicholas Kiptoo Arap Korir Salat v Independent Electoral and Boundaries Commission & 7 Others [2014].

Commissioner of Domestic Taxes v Local Productions (Kenya) Limited [2020] eKLR .

PesalusSupplies Limited vs Commissioner Investigations & Enforcement [TAT No. 338 of 2021].

ii. Whether the Respondent erred in subjecting the variance noted between the income tax return (IT2C), the withholding certificates and the bank deposits. 46. The Respondent averred that for years 2018 and 2020, it grossed up withholding certificates and compared with reported income. A similar fashion was adopted for other years which resulted in variance that was then subjected to tax. Further, that contrary to Appellant’s allegations, the Respondent carefully considered Appellant’s explanations on variances as indicated in the objection decision and assessment letter and that it is indeed the Appellant who failed to provide evidence that would have discharged its burden as provided for by Section 56(1) of the TPA and Section 30 of TATA despite being afforded the opportunity to do so.

47. The Respondent stated that it also established variances between income tax returns and bank deposits for years 2018 and 2019 which were arrived at excluding contra entries, loans and director’s injection contrary to Appellant’s assertions that they had been included and that it was the Appellant who failed to avail a reconciliation of the variances noted by the Respondent.

48. The Respondent stated that Section 31 of the TPA does not dictate the method to be used in any given assessment and it was as a result of the Respondent’s chosen method that established the Appellant’s under declaration of income.

49. The Respondent cited the following authorities to buffer its position: HistotoLimited vs Commissioner of Domestic Taxes [TAT No. 369 of 2019].

Jilao Company Limited vs Commissioner of Domestic Taxes[TAT No 418 of 2018].

Digital BoxLimited vs Commissioner of Domestic Taxes [TAT No. 115 of 2017].

Kenya Revenue Authority v Man Diesel & Turbo SE, Kenya [2021] eKLR Nairobi High Court Income Tax Appeal No. E125 of 2020.

50. The Respondent submitted that the Appellant failed to adduce any plausible reason to justify variances established between income declared in corporation tax returns and withholding certificates or prove that the assessments therein were incorrect or excessive.

ii. Whether the Respondent erred in disallowing purchases for the years 2016 and 2019. 51. The Respondent averred that it disallowed Appellant’s purchases for the following reasons:a.Appellant’s suppliers had lumped sales, others stopped filing VAT return, others were in special table while others were non-filers for income tax obligations.b.Variance between Appellant’s purchases and suppliers’ sales some of whom were confirmed ‘missing traders’ with no location found or URLs yet they had been paid voluminous amounts.c.The Appellant failed to avail evidence of delivered supplies such as LPOs and delivery notes.

52. Thus, the Respondent submitted that it was justified in disallowing purchases since it was the Appellant who was derelict in providing competent and relevant evidence to demonstrate that it actually paid for the purchases. The Respondent relied on the case of Hyperteck Electrical ServicesLimited vs Commissioner of Investigations & Enforcement [TAT No. 13 of 2019] where the Tribunal held as follows:“86. The right to claim input VAT is premised on the assumption that the taxpayer paid VAT during the purchase of their supplies. Section 17(3)(a) of the VAT Act further provides that in order to claim input VAT, the relevant documents to be provided are the original tax invoice or a certified copy of the same.87. A reading of this Section shows that it is no just enough for the original tax invoice to be availed, the invoices must themselves relate to an actual supply or importation that was acquired by the trader to make the taxable supply. Indeed, the ‘missing trader fraudulent scheme’ that the Respondent has described would flourish on the basis that only an original tax invoice or ETR receipt if availed, is sufficient. Therefore, it is important to rely, not just on the invoice but a proper demonstration that the invoices actually relate to purchases of the goods and services that are applied in the production of the taxable supplies”

ii. Whether the Respondent erred in subjecting advance payments to tax. 53. The Respondent stated that some of the advance payments received for some projects was deducted by the Appellant to arrive at net income and were subjected to tax because the Appellant failed to provide demolishing evidence as to whether the said advance payments had been declared.

54. It was the Respondent’s assertion that the Appellant failed to discharge its burden of proof and buttressed its position by relying on the case of Commissioner of Domestic Taxes v Trical and Hard Limited (TAT No. E146 of 2020) [2022] KEHC 9927 (KLR) where the High Court held as follows:“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then its is found that the same is incompetent or irrelevant, then the burden continues to remain with the taxpayer.”

Issues For Determination 55. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that issues that call for its determination distils into three distinct issues as follows:a.Whether the Tribunal has jurisdiction to determine the instant Appeal.b.Whether the Respondent erred is assessing the Appellant beyond the five-year statutory period.c.Whether Respondent’s objection decision dated 13th April 2023 was justified

Analysis And Determination 56. Having identified three issues for determination, the Tribunal will proceed to analyse the same hereinunder:

a. Whether the Tribunal has jurisdiction to determine the instant Appeal. 57. The Tribunal notes that the Respondent in its submissions questioned the Tribunal’s jurisdiction to hear and determine the instant Appeal on the basis of procedural deficiencies; more specifically that the Appellant failed to lodge a valid notice of appeal and that the Appeal failed the test of Section 52(2) of the TPA as the Appellant neither cleared taxes not in dispute nor had it provided a payment plan before lodging the instant Appeal.

58. On its part, the Appellant lodged a notice of appeal at the Tribunal on 10th May 2023 and disputed additional advance payments stating that they were foreign to it and the workings for the same were never shared by the Respondent on how it arrived at the calculations whereas the alleged unsettled taxes relating to retention payments, vehicle benefits, professional and management fees were not contested by the Appellant.

59. The importance of jurisdiction in any dispute was as held by the Court of Appeal in Phoenix of E.A. Assurance Company Limited vs. S. M. Thiga t/a Newspaper Service [2019] eKLR where the court stated as follows:“...Jurisdiction is primordial in every suit. It has to be there when the suit is filed in the first place. If a suit is filed without jurisdiction, the only remedy is to withdraw it and file a compliant one in the court seized of jurisdiction. A suit filed devoid of jurisdiction is dead on arrival and cannot be remedied. Without jurisdiction, the Court cannot confer jurisdiction to itself.”

60. The Tribunal observes that Section 51(12) of the TPA as read together with Section 13(1)(b) of the TATA provides for the appeal process to be followed by the Appellant upon receipt of the Respondent’s objection decision. The two cited Sections provide as follows:“51. Objection to tax decision…(12).A person who is dissatisfied with the decision of the Commissioner under subsection (11) may appeal to the Tribunal within thirty days after being notified of the decision.13. Procedure for appeal(1)A notice of appeal to the Tribunal shall—(a)be in writing or through electronic means;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

61. The Tribunal notes that the Respondent’s objection decision was rendered on 13th April 2023 whereas the Appellant lodged its notice of appeal on 10th May 2023 which was 27 days after the Respondent’s objection decision. This means that the said Appeal was filed within the threshold of 30 days as couched in law. In validating the Appellant’s notice of appeal, the Tribunal reiterates its previous decision in Pevans East Africa v. Commissioner of Domestic Taxes [TAT No 304 of 2019] which was as follows:“being a court of first instance in matters of tax disputes and bearing in mind an appeal lies on matters of law only we would hesitate to shut out any material either party is of the view would corroborate their case.”

62. The other pending issue under the ambit of jurisdiction was whether the Appellant had failed to pay tax that was not in dispute. The Tribunal notes that Section 51(1) and (2) of the TPA provides as follows regarding tax not in dispute:“(1).A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.(2).A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing with the Commissioner within thirty days of being notified of the decision.”

63. The Tribunal notes that the law required the Appellant to directly concede any assessed tax in order for Section 52(2) of the TPA to apply. The Appellant in this Appeal did neither conceded to any tax liability in its notice of objection dated 13th January 2023 nor on all the pieces of evidence presented before the Tribunal. It is also clear to the Tribunal that the Respondent is clutching at straws in this claim as it has not referred the Tribunal to any document or evidence that the Appellant herein conceded to any assessed taxes before lodging the instant Appeal at the Tribunal.

64. From the foregoing that the Tribunal finds that it has jurisdiction to determine the instant Appeal.

b. Whether the Respondent erred in assessing the Appellant beyond the five-year statutory period. 65. The Tribunal notes that the Respondent’s assessment covered the 2016 to 2021 period of income and the same was contested by the Appellant who stated that the assessment went beyond the legal threshold of five years. The Tribunal observes that whereas Section 23 of the TPA mandates the Appellant a duty to keep records for a period of five years, Section 29(5) of the TPA as read together with Section 31(4) of the TPA provides as follows;“29(5)subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”“31(4)The Commissioner may amend and assessment-i.In the case of gross or wrongful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time;ii.In any other case, within five years of-iii.For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates.”

66. Further, the Tribunal notes that Section 43 (1) of VAT Act procedurally directs as follows:“…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.”

67. The Tribunal observes that a reading of the cited Sections imply that an assessment ought to cover the period beginning from assessment date backwards for a period of five years beyond which the Respondent has to demonstrate how and why the Appellant contradicted the cited sections. In this instance, the Tribunal notes that the Respondent confirmed its assessment of Kshs. 773,054,888. 00 on 14th December 2022. The assessment was thus legally allowable retrospectively up to and including 14th December 2017, that is; Five years.

68. The implication of which is that the Respondent was not legally entitled to assess Appellant for the period running from 13th December 2017 backwards and the whole of year 2016. The Tribunal seeks guidance in the case of Republic v Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR where it was held as follows:“for the proposition that the decision to tax must have a legal basis and that section 56(1) does not empower the appellant to make speculative assessments (citing Johnson v Scott(Inspector of Taxes)) nor was it the intention of the legislature to put the taxpayer in a position where he would be required to produce any documents that the tax-man requires.”

69. The Tribunal also notes that although the Respondent pleaded that the Appellant had engaged in fraud and hence its reason for assessing beyond the 5-year period. The Respondent’s allegations were neither particularized nor was the basis laid before it. Owing to the absence of this, the Tribunal is inclined to disagree that the Appellant was engaged in any fraudulent activity to justify an assessment of its tax affairs beyond the 5-year statutory time limit. The Tribunal held a similar view in the case of Suma Health Products (K) Limited V. Commissioner of Investigation and Enforcement [TAT No 1425 of 2022] where it was held as follows:“The Tribunal finds that since no evidence was tendered by the Respondent in relation to willful, neglect, evasion or fraud by the Appellant, the allegations of fraud or willful neglect have not been proved. The Respondent therefore erred in law and in fact by issuing assessments for the period outside the statutory timelines.”

70. The Tribunal finds that the Respondent as an implementer of legislative directions misdirected itself when it sought to assess the Appellant beyond the prescribed timelines of 5 years as provided for in law.

c. Whether Respondent’s objection decision dated 13th April 2023 was justified. 71. The Tribunal notes that the Respondent stated that it was never supplied with requested documentation to support the variances noted. This was countered by the Appellant who stated that it provided the Respondent with all evidence as requested. The Tribunal notes the Respondent’s averment that its audit established the Appellant as being fairly compliant with their tax filings and that the Respondent’s preliminary audit findings were rendered based on available records. The Tribunal notes that the Respondent’s avowal that it was provided with the following documents:i.Withholding certificates.ii.Invoices.iii.Bank statements.iv.Audited financial statements.v.Payables (creditors).vi.Receivables (Debtors).vii.Contracts and certificates.

72. The Tribunal was also afforded the same documents by the Appellant in its pleadings and has carefully studied them and it is on this basis that it reiterates the Court holding in the case of Miller v Minister of Pensions [1947] 2ALL ER 372 where it was held as follows:“The…{standard of proof} …is well settled. It must carry a reasonable degree of probability…if the evidence is such that the tribunal can say: ‘we think it more probable than not’ the burden is discharged, but, if the probabilities are equal, it is not.”

73. The Tribunal was not afforded the precise nature of documentation that was requested and not adduced by the Appellant. In this instance, the Tribunal reiterates its decision in Shreeji Enterprises (K)Limited vs Commissioner of Investigations & Enforcement, Tax Appeals No. 58 and 186 of 2019 where it was held as follows:“Although the current tax laws provide that the onus of proof lies with the Appellant to prove that tax was paid or that the Respondents assessment was wrong, it cannot have been the intention of the legislature to put the taxpayer in a position where he would be required to produce any document that the tax man may require. In demanding the production of documents which are not prescribed by legislation, the tax authority should be guided by reasonableness, the nature and circumstances of the trader otherwise it would, as it occasionally does, demand information which the trader cannot produce because he does not have. The Tribunal is of the view that the Tax Authority should, albeit sparingly, apply the Cohan Rule birthed in the case of Cohan vs Commissioner of International Revenue 39 F.2d2540,2US TaxCas.(CCH) P489,8A.F.TR(P-H)P10552(CCA2dcir. 1930) and accept reasonable explanations given by the taxpayer.”

74. On the face of it, the the Respondent was supplied with the documents that it requested and it should thus have been in a position to make the correct decision regarding the Appellant’s objection since documentation availed was what was contained in the Respondent’s enumerated list of documents.

75. The Tribunal notes that the Respondent stated that the Appellant never objected to retention payments/income, vehicle benefits (PAYE), Withholding tax on professional and management fees in its pleadings or submissions. On record, the Appellant’s pleadings attached herein indicated that the Appellant contested the additional advance payments stating that the Respondent failed to provide tax assessment figures or workings. Further, the Appellant contested the purported advance payments assessment asserting that its projects were always financed by bank loans and had never relied on advance payments from clients and that the same had been demonstrated in their bank analysis, reconciliations and audited financial statements. The Respondent did not rebut these assertions.

76. The Tribunal notes that the Appellant did not address the assessments regarding retention payments/income for the “KASNEB project”, vehicle benefit (PAYE), Withholding tax on professional and management fees assessments in its objection. The Tribunal finds that the same had been proved as due and payable but within the statutory limit period of between 14th December 2017 to 14th December 2022.

77. The Tribunal has also noted that the Appellant’s assessment for Withholding Tax was in respect of the 2016 to 2021 years of income. It is however notable that prior to 2016 Section 35(6) of the ITA allowed the Respondent to claim taxes from a taxpayer who fails to make a deduction as though the taxes were due and payable, this was amended by the Finance Act of 2016 which deleted Section 35(6) of the ITA. The implication of this was that the Respondent could no longer demand unwithheld taxes from the person who should have withheld the same. This position remained until the enactment of Finance Act, 2019 which came into force on 7th November 2019 when the previously deleted provisions of Section 35(6) of the ITA was reintroduced and reproduced as Section 39A under the TPA.

78. Consequently, The Tribunal holds that the Respondent could only collect Withholding Tax from the Appellant in respect of the periods after the Finance Act of 2019 came into force.

79. In addition to the above, the Tribunal further notes that the Respondent opted to use and apply banking analysis test to arrive at the Appellant’s tax liability despite the fact that it was provided with all the requested documents. The outcome of this action was that the Respondent disregarded the Appellant’s explanations, documentation, reconciliations and audited financial statements when it disallowed its purchases and expenses on the premise that the Appellant was trading with missing traders.

80. This Tribunal has previously held in Shreeji Enterprises (K)Limited vs Commissioner of Investigations & Enforcement, [TAT No. 58 and 186 of 2019] that a taxpayer ought not be held liable for the failures of other taxpayers in filing their returns or filing authentic documents because it is not the duty of the taxpayer to verify such documents and it is only the Respondent who has the statutory mandate and power to carry out such verification.

81. The Tribunal’s view is that it would be unfair to impose a tax liability on the Appellant on the basis that it was dealing with a ‘missing trader’ without providing evidence that the documents that it relied on to file its tax returns were obtained fraudulently. Further, it is critical for the Respondent to prove that the Appellant was involved in and or was aware of the fraud committed by the alleged ‘missing traders’.

82. The Tribunal is of the view that to hold otherwise would amount to converting a taxpayer into an investigator who should carry out investigations onto the source of the receipts and invoices that are issued by its suppliers. Such a scenario was not anticipated by tax statutes and it would also make the Kenyan tax system fall short of the basic canons of taxation namely, that a tax system should be simple, effective, equitable, certain, neutral and convenient.

83. A similar position was adopted by the Court regarding results of investigations that affect the person being investigated in the case of Anne Wanjiku Kahwai & Another vs. Kenya Revenue Authority & another [2019] eKLR, Mwongo J, where it was held as follows:“…the moment the investigator decides to utilize the investigative material or information in such a manner that a third party is likely to be affected by it, the investigator must bring such information to the notice of the third party. This is the essence of the constitutional requirement of fair administration. So that, in this case, the affected party was entitled to receive the appropriate and relevant critical information of the outcome from the investigation which formed the subject matter that would affect the Petitioners.”

84. The Respondent was thus not justified to deny the Appellant the right to rely on its lawful invoices and receipts proving expenditures on the basis that it was dealing with a ‘missing traders’.

85. Tribunal observes that the use and application of banking analysis to determine tax liability is only available to the Respondent in cases where a taxpayer has not provided the documents that it was requested to provide. Once a taxpayer provides all the relevant documents that are sufficient to prove its tax liability then the Respondent is enjoined to consider these documents in determining tax liability. This was the view of the Tribunal in the case of Moses Kiarie Kuria -Vs-Commissioner of Domestic Taxes [TAT No. 508 of 2021] where it was held as follows:“Where the Respondent has relied on Banking Analysis Method it is obliged to exercise best judgment to ensure that the taxpayer is liable for the correct amount of tax.”

86. Even after applying the banking method, the Tribunal notes that the Respondent did not verify whether the determined profit for the Appellant was consistent and similar to other businesses in the industry involved in the similar trade as was held in the case of Moses Kiarie Kuria -Vs-Commissioner of Domestic Taxes [TAT No. 508 of 2021] where the Tribunal stated as follows:“The Respondent solely relied on the Appellant’s bank statements to determine the income and that the documents provided were irrelevant in its own independent judgement. This would have therefore been an appropriate case for the Respondent to apply the industry’s profit margin to determine the Appellant’s profit.”

87. The Tribunal notes that the Appellant discharged its burden of proof when it supplied the Respondent with the relevant documents required to support its tax liability. The Respondent, could therefore not resort to Section 31 by applying its best judgement to determine the Appellant’s tax liability when the documents proving the Appellant’s tax liability as per its filed returns had been provided. The principles regarding what constitutes best judgement were clearly set out in the case of Van Boeckel v C&E QB [1981] STC 290; VAEC1420 where the court held as follows:“The Respondent is not required to do the work of the taxpayer; must perform its duties honestly and above board; must fairly consider all material put before it and based on that material make a decision that is reasonable and not arbitrary; must be in possession of some material upon which it can base its best judgement.”

88. The Tribunal finds that the Respondent failed to consider the evidence adduced by the Appellant to arrive at a fair tax decision. Further, the Tribunal holds that the Respondent’s allegation of missing trader must be dispelled as the Respondent did not show any discrepancies that it found in the documents provided to justify the use of banking analysis which was disguised as the Respondent’s best judgement. The Tribunal finds that the Respondent’s decision was arbitrary and ought not to stand.

89. Based on the preceding analysis the Tribunal finds that the Respondent did not exercise its powers fairly in this case as the Respondent’s confirmed assessment would result in it collecting more tax than that due from the Appellant. Thus, its decision to adopt an assessment method that was intended to ensure that the Appellant was disenfranchised and maximum tax liability was not justified as was held in the case of Republic -v- KRA (exparte J. Mohamed) Civil Application Number 312 of 2011 where the court held as follows:“Whereas this Court is not entitled to question the merits of the decision of the taxing authority, that authority must exercise its powers fairly and there ought to be a best exercise of such powers. A taxing Authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such an action be would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court intervening.”

90. The Tribunal finds no reason to depart from this position as it also pronounced itself when faced with a similar matter in the case of Afya X Ray CenterLimited v. Commissioner of Domestic Taxes (TAT Appeal No. 70 of 2017) where it stated as follows:“… the Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner. The Respondent in this case could have used industrial margins to determine the Appellant’s profits and subject that figure to the 30% and 16% taxes rather than a top line of 30% and 16% on the bank deposits…”

91. In view of the prior analysis, the Tribunal finds that the Respondent erred in its assessment of the Appellant’s tax liability and its objection decision dated 13th April 2023 is not justified.

Final Decision 92. The upshot of the foregoing is that the Appeal herein is partially succeeds and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed;b.The Respondent’s objection decision dated 13th April 2023 be and is hereby varied as follows:i.The assessment in respect of income tax for the period up to 13th December 2017 be and is hereby expunged.ii.The assessment in respect of VAT for the period up to 20th February 2018 be and is hereby expunged.iii.The confirmed assessments in respect of the following be and are hereby upheld:a.Retention income in respect of certificate No. 39 of 8th June 2020;b.Pay as You Earn (Vehicle Benefit); andc.Withholding Tax on Professional and management fees for the 2021 year of income.iv.Confirmed assessments for all other tax heads be and are hereby set aside.c.Each party to bear its own costs.

93. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 28TH DAY OF JUNE, 2024. CHRISTINE A. MUGACHAIRPERSON………………………. …………….……………..BONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBER………………………… ………………………….GEORGE KASHINDI OLOLCHIKE S. SPENCER MEMBER MEMBER