[2023] KETAT 557 (KLR)

Disney Land Gardens v Commissioner of Domestic Taxes (Tax Appeal 649 of 2022) [2023] KETAT 557 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 557 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 649 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

June 29, 2023

Between

Disney Land Gardens

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company and a registered taxpayer. The Appellant is engaged in business of accommodation and food based in Kirinyaga County.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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 Respondent served the Appellant with assessment orders via iTax on 2nd February 2022 and 17th February 2022 for VAT..

4. The Appellant vide a letter dated 20th March 2022, objected to the assessments. The Appellant further objected through iTax on 5th April 2022

5. The Respondent wrote to the Appellant via email on 12th April 2022 and 22nd April 2022 asking the Appellant to validate its objections.

6. The Respondent issued its objection decision vide a letter dated 4th May 2022.

7. The Appellant being dissatisfied with the Respondent’s decision filed this Appeal on 20th June 2022.

The Appeal 8. The Appeal as stated in the Memorandum of Appeal was premised on the following grounds:i.That the Respondent subjected capital contribution by shareholders to VAT contrary to the provisions of Section 5(1) of the VAT Act 2013. ii.That it previously informed the Respondent of a vandalism in its premises on 14th August 2019. iii.That the Respondent disallowed its input VAT for a period it was already registered.

Appellant’s Case 9. The Appellant’s case is premised on the Appellant’s Statement of Facts dated 20th June 2022 and filed on the same date together with the documents attached thereto.

10. The Appellant submitted that the Respondent carried out tax return review and issued its findings 21st February 2022

11. That the Respondent issued additional assessments on 17th and 22nd February 2022 through iTax. The Appellant averred that it did not get the additional assessment on time as the email on iTax was erroneous.

12. That the Appellant on 20th of March 2020 made objection to the Commissioner. That vide an email dated 22nd April 2022 the Respondent requested for ground for late objection together with the supporting documents.

13. The Appellant stated that on 4th May 2022, the Respondent replied to its objection informing it that the Respondent was upholding the assessments.

14. On 20th June 2022, the Appellant gave a notice of its intention to appeal to the Tribunal against the Commissioner's decision to uphold the assessments.

15. That on 20th June 2022, the Appellant filed its Memorandum of Appeal together with the Statement of Facts.

16. Regarding VAT, the Appellant stated that it noted that the commissioner subjected the capital contribution by the shareholders of Disneyland Limited to VAT. That it should be noted that the VAT Act makes it explicit that VAT is a tax charged on supply of goods or services in Kenya.

17. That supply as per the VAT Act definition is defined as “supply” means a supply of goods or services. That the provisions of 5(1) of the VAT Act 2013 duplicated here provides as follows;“A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on—(a)a taxable supply made by a registered person in Kenya;(b)the importation of taxable goods; and(c)a supply of imported taxable services.”

18. That it was important to note that contribution of capital does not amount to supply and hence should not be subjected to VAT.

19. The Appellant further submitted that it had in a previous letter to the Respondent indicated that there was a breaking that happened in its premises on 14th August 2019. That the matter was reported at Sagana Police Station Via OB number 18/15/8/2019.

20. That the Appellant lost some files, equipment and electronics. That the matter was being handled by the police and so far, no recoveries had been made.

21. The Appellant stated that it was very punitive to disallow its input tax claims of Kshs. 974,238. 00. The Appellant asked for the Commissioner's indulgence on the matter and vacate the assessment.

22. Regarding VAT claimed prior to the assessment, the Appellant stated that vide the letter dated 22nd Jan 2022, the Commissioner disallowed input VAT amounting to Kshs 227,174. 90. That all the invoices disallowed had a date within August 2018 when the Appellant was already VAT registered.

23. On income tax, the Appellant stated that being a hotel that was under construction between 2018 and 2020, the shareholders during the construction period contributed cash and capital goods towards the construction of the facility.

24. That this was what the Commissioner subjected to and declared as additional income. That from its tabulation in its letter dated 14th January 2022 the Appellant had indicated the total income as per the bank statements adjusted for bounced cheques entries and income from directors deposited through the bank to support construction of the facilities.

25. That this was not considered when raising the additional assessments. It requested for the same to be factored in.

26. That further an amount of Kshs. 44,551, I00. 00 in the directors account was subjected to income tax by the Commissioner. It averred that the Income Tax Act provides on what is subject to tax as provided in Section 3 of the Act which provides as follows;“Charge of tax(1)Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.(2)Subject to this Act, income upon which tax is chargeable under this Act is income in respect of—(a)gains or profits from—(i)any business, for whatever period of time carried on;(ii)any employment or services rendered;(iii)any right granted to any other person for use or occupation of property;”

27. That going by the above the Appellant did not carry out business that gave rise to any gain or profit that amounted to the Kshs. 44,551,l00. 00 in the year 2018. That the directors accounted for contributions in cash and in land provided by the shareholders to the company.

Appellant’s Prayers 28. The Appellant prayed for favourable consideration.

Respondent’s Case 29. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts filed on 14th July, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 1st February 2023 and filed on the same date.

30. The Respondent stated that the Appellant was selected by the Respondent for compliance check considering that the Appellant was on perpetual credit since commencement of its business.

31. That the Respondent detected undeclared income for the years of 2018 to 2020 after an in- depth return review analysis. It averred that on and about February 2022 additional assessments were issued by the Respondent on sales declaration due to undeclared income.

32. That the Appellant consequently objected to the assessments on the I-tax platform on 5th April 2022. That the objections were late considering that the assessments were issued on 2nd February 2022, 3rd February 2022 and 17th February 2022

33. That in the iTax objection application acknowledgment dated 5th April 2022, the Appellant attached a letter dated 20th March 2022 indicating that it had no reasons or evidence for the late objections.

34. The Respondent stated that through an email dated 12th April 2022, it informed the Appellant that the notice of objection was not validly lodged as it had been lodged out of time. That further, the Appellant had not provided any evidence to support the reason for lateness. It added that no response was received.

35. The Respondent stated that it followed up with calls to the Appellant on 22nd April 2022 through the listed telephone contact on iTax. That the Appellant received the call and affirmed that it was aware of the late objection and will respond as requested by close of business on 2nd April 2022.

36. The Respondent stated that further follow up was done vide emails to the Appellant on 22nd April 2022. That the Appellant was unresponsive to these emails and did not provide the required response i.e. reasons for late objection and evidence thereof.

37. That in this regard, the Appellant failed to demonstrate that it had a reasonable cause for lodging the objection late and that it did not inordinately delay in filing the objection. That the Respondent consequently rejected the late objection on 4th May 2022.

38. The Respondent was of the view that the issues for determination were;a.Whether the objection was validly lodged.b.Whether the Respondent erred in law and in fact by not considering information and explanation provided by the Appellant.

a)Whether The Objection Was Validly Lodged. 39. The Respondent stated that Section 51(7) of the Tax Procedures Act 2015 provides as follows“The Commissioner may allow an application for the extension of time to file a notice of objection if—(a)the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; and(b)the taxpayer did not unreasonably delay in lodging the notice of objection.”

40. The Respondent stated that it noted that the document uploaded in iTax in support of the Appellant’s late objection application did not give any reason for the late objection application.

41. That the Respondent noted that despite the Appellant’s averments that he could not get the additional assessment on time as the email on iTax was erroneous, it did not support the same with the necessary documentation at the objection stage.

42. That further, the Respondent noted that the reasons given do not satisfy the standard provided for under Section 51(7) of the Tax Procedures Act (TPA).

43. The Respondent stated that Section 51(3) of the TPA provides as follows:“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; and(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.(c)all relevant documents relating to the objection have been submitted.”

44. The Respondent stated that save for the statement of facts no other document was adduced in support of the late objection application lodged by the Appellant.

45. The Respondent averred that it notified the Appellant on the invalidity of the objection on 12th April 2022 and vide a call and email on 22nd April 2022 advised the Appellant to furnish it with all the necessary documents supporting its grounds of objection so as to validate its application.

46. The Respondent stated that the Appellant did not provide the documents and therefore failed to make its application valid, pursuant to Section 51 of the TPA.

47. That the Appellant’s notice of objection invalidation was invalid and this was what informed the objection invalidation dated 4th May 2022

b)Whether The Respondent Erred In Law And In Fact By Not Considering Information And Explanation Provided By The Appellant. 48. The Respondent stated that the Appellant’s claim that the Respondent erred in confirming the assessments without considering information and explanation provided by the Appellant was inaccurate.

49. The Respondent submitted that the assessments were confirmed after due consideration of the information and explanations provided by the Appellant, the findings of which were duly stated in the objection decision issued.

50. The Respondent relied on Section 31 of the TPA which empowers it to make assessments according to the information available to it and best judgement in ensuring that the Appellant was liable for the correct tax.

51. The Respondent stated that Section 59 of the TPA requires the Appellant to provide records to enable it determine its tax liability. The Respondent added that the Appellant was requested to provide certain documents severally but failed to avail records thus prompting the confirmation of the additional assessments.

52. That the burden of proof is on the Appellant to demonstrate that it has discharged a tax liability as provided for under Section 56 of the TPA and Section 30 of the TAT Act. The Respondent stated that this burden was never discharged as no documentary evidence was availed to the Respondent to allow expenses as alleged.

53. The Respondent stated that it considered all documents and information provided by the Appellant and acted to the best of its judgement in coming up with its decision.

54. The Respondent further noted that the assessment was based on the Appellant’s own self-assessment returns and the Appellant was given an opportunity to challenge the same through provision of documentation at the objection level.

Respondent’s Prayers 55. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s decision as proper and in conformity with the provisions of the law.b.Dismiss this Appeal with costs to the Respondent as the same is devoid of any merits.

Issues For Determination 56. The Tribunal upon due consideration of the pleadings, documents and the written submissions filed on the part of both parties was of the view that the only issue that crystalized for its determination was: -Whether the Respondent was justified in confirming the tax assessments on the Appellant.

Analysis And Determination 57. The Tribunal having appropriately ascertained the issue that fell for its determination shall proceed to make an analysis on the issue as hereafter.

58. The genesis of this dispute is the Respondent’s objection decision dated 4th May 2022 confirming VAT assessments amounting to Kshs. 10,181,183. 05.

59. The Tribunal noted that the Respondent on 4th May 2022 issued the Objection Decision following the Appellant’s earlier objection to the VAT assessments.

60. The Appellant averred that it noted that the Commissioner subjected the capital contribution by the shareholders of Disneyland Limited to VAT. That it should be noted that the VAT Act makes it explicit that VAT is a tax charged on supply of goods or services in Kenya.

61. The Appellant further stated that being a hotel that was under construction between 2018 and 2020, the shareholders during the construction period contributed cash and capital goods towards the construction of the facility.

62. The Respondent on its part stated that the Appellant’s claim that the Respondent erred in confirming the assessments without considering information and explanation provided by the Appellant was inaccurate.

63. The Respondent submitted that the assessments were confirmed after due consideration of the information and explanations provided by the Appellant the findings of which were duly stated in the objection decision issued.

64. The Tribunal perused the documents presented and noted that subsequent to the Appellant’s iTax objections dated 5th April 2022, the Respondent vide emails dated 12th April 2022 and 22nd April 2022 requested the Appellant to provide document in support of the late objections. There was no evidence of any response from the Appellant to these requests and further, the Appellant did not provide to the Tribunal any documents in support of its averments on capital contribution.

65. The Respondent had further averred that that it even followed up with calls to the Appellant on 22nd April 2022 through the listed telephone contact on iTax. That the Appellant received the call and affirmed that it was aware of the late objection and would respond as requested by close of business on 2nd April 2022. That the Appellant was unresponsive to these emails and did not provide the required response.

66. The Tribunal noted that although the Appellant had further averred that it had in a previous letter to the Respondent indicated that there was a breaking that happened in its premises on 14th August 2019 it did not provide any further details or any other documents that it kept that could support its transactions

67. Section 17(3) of the VAT Act provides as follows regarding documentation;“The documentation for the purposes of subsection (2) shall be—(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)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;(d)a credit note in the case of input tax deducted under section 16(2); or(e)a debit note in the case of input tax deducted under section 16(5).”

68. In addition, Section 43 of the VAT Act provides as follows regarding keeping of records;“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial number order;(b)copies of all credit and debit notes issued, in chronological order;(c)purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.”

69. The Tribunal further noted that the Appellant had provided none of the documents prescribed under Section 17 of the VAT Act that could support its averments for the benefit of the Tribunal. It was the Tribunal’s position that since the Appellant dealt with vatable goods/services it ought to have kept documents prescribed under Section 17 of the VAT Act and presented them in support of this Appeal in order for the Tribunal verify for purpose of making a determination regarding its averments.

70. The provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act which provides as thus:“In a proceeding before the Tribunal, the appellant has the burden of proving-Where an appeal relates to an assessment, that the assessment is excessive; orIn any other case, that the tax decision should not have been made or should have been made differently.”

71. Additionally, the Tribunal found it appropriate to rely on the provisions of Section 107 of the Evidence Act which provides that:“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

72. The court in Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR held that a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough., the court stated that:“Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence, and it is not enough to plead particulars of negligence and make no attempt in one’s testimony in court to demonstrate by way of evidence how the accident occurred and how the 1st defendant was to blame for the said accident. It is trite law that he who alleges must prove and that burden does not shift to the adverse party even if the case proceeds by way of formal proof and or undefended.”

73. Similarly, 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 that the Appellant’s at all times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The tribunal is guided by the provisions of Section 56(1) of the TPA, 2015 which states: “In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

74. Further the Tribunal finds the following paragraph from Pierson V Belder(H.M. Inspector of Taxes)(1956-1960) 38 TC 387 to be persuasive;“but the matter may be disposed of, I think even more shortly in this way: there is an assessment made by the additional Commissioner upon the Appellant; it is perfectly clearly settled by cases such as in the case of Norman V Golder 26 T.C, 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive or incorrect; and of course he has completely failed to do so. That is sufficient to dispose of the Appeal, which is accordingly dismissed with costs”

75. Consequently, the Tribunal finds that the Appellant failed to discharge the burden of proof placed upon it in demonstrating that the Respondent was not justified in confirming the assessments.

Final Decision 76. Based on the foregoing analysis the Tribunal determined that the Appeal is not merited and the Orders that accordingly recommend themselves are as follows:-i.The Appeal be and is hereby dismissed.ii.The objection decision dated 4th May, 2022 be and is hereby upheld.iii.Each party to bear its own costs.

77. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERABRAHAM KIPROTICH - MEMBERJEPHTHAH NJAGI - MEMBER