[2023] KETAT 497 (KLR)

Dong Peng Motor (K) v Commissioner of Domestic Taxes (Tax Appeal 795 of 2022) [2023] KETAT 497 (KLR) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 497 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 795 of 2022

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

October 19, 2023

Between

Dong Peng Motor (K)

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly registered under the Companies Act and is a registered taxpayer. Its principal business is importation and sale of spare parts and motor vehicles in the Republic of Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part I & II of the First Schedule to the Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. The Respondent subjected the Appellant to audit for analysis of returns filed, declarations made and taxes paid in its wholesale and retail business.

4. Subsequently, the Respondent raised additional VAT, income tax and PAYE assessments against the Appellant on its iTax platform.

5. The Appellant lodged a late objection application against the additional assessments on 26th May 2022.

6. The Respondent wrote to the Appellant on 14th July 2022 rejecting the Appellant’s late objection and demanding payment of additional VAT assessment of Kshs. 19,370,370. 00 together with accrued penalty and interests, and additional Corporation income tax and PAYE assessments of Kshs. 35,775,450. 00 together with accrued penalty and interests.

7. The Respondent issued a late objection rejection notice on 15th July 2022 through its iTax platform on the ground that the late objections were unsupported and accordingly confirmed its additional assessments.

8. Aggrieved by the Respondent’s decision, the Appellant lodged a Notice of Appeal filed on 4th August, 2022.

The Appeal 9. In its Memorandum of Appeal dated 29th July 2022 and filed on 4th August 2022, the Appellant premised its Appeal on the following grounds: -i.That the Commissioner erred in fact and in law in assessing the tax payable.ii.That the Commissioner erred in fact and in law in failing to consider the Appellant’s nature of business.iii.That the Commissioner erred in fact and in law in failing to consider authentic assessment of taxes for the Appellant.

The Appellant’s Case 10. The Appellant premised its case on its Statement of Facts dated 29th July 2022 and filed on 4th August 2022.

11. The Appellant averred that the Respondent did an assessment on its income tax PAYE returns for the months of November 2021, August 2020, June 2020, January 2020, July 2019, April 2019, February 2018 and August 2017, and issued additional assessment of Kshs. 16,576,622. 46.

12. The Appellant further averred that the Respondent did an assessment of income tax company returns for the year 2020, 2019, 2018 and 2017, and issued additional assessment of Kshs. 30,373,113. 81 after the Respondent struck off expenses from income statement for the years 2020, 2019, 2018 and 2017.

13. The Appellant further averred that the Respondent did an assessment of Appellant’s VAT returns for the months of December 2020, December 2019, August 2018, May 2017, December 2021, December 2018, and December 2017, and issued additional assessment of Kshs. 23,889,029. 71 after the Respondent increased sales and struck off purchases for the periods under review.

14. That the Appellant objected to the Respondent’s additional assessments and submitted relevant documents in support of its objection.

15. That the Respondent, vide a letter dated 14th July 2022 rejected the Appellant’s objection.

16. That the Respondent erred in the method and model used in arriving at the income tax company, PAYE, and VAT additional assessments.

17. The Appellant averred that the Respondent did not understand its industry, working models and contractual obligations.

18. That it is in the interest of fairness and justice that the Appeal herein be allowed.

Appellant’s Prayers 19. The Appellant prays to the Tribunal for the following Orders: -a.That the Appeal be allowed.b.That the Respondent’s additional assessments be vacated.c.Any other reliefs that the Tribunal deems fit.d.Costs.

The Respondent’s Case 20. The Respondent premised its case on the following documents before the Tribunal:a.The Respondent’s Statement of Facts dated 2nd September 2022 and filed on the same date.b.The Respondent’s Written Submissions dated 23rd March, 2023.

21. The Respondent averred that it issued the Appellant with audit notice on 1st November 2021 after the Appellant was selected for audit by the EON/SON audit office after analysis of the returns filed, declarations made and taxes paid in the wholesale and retail sector.

22. That the Appellant had under-declared sales for income tax purposes for the year 2020 by Kshs. 28,164,610. 00

23. That the Appellant’s vatable sales as per inputs claimed by customers is higher than the amount declared by the taxpayer in VAT 3 returns for the year 2017 to 2020, with variances of Kshs. 24,175,958 (2017), Kshs. 13,276,883 (2018), Kshs. 20,985,640 (2019) and Kshs. 28,164,610 (2020).

24. That the Appellant’s purchases indicated variances between VAT turnover and income tax turnover for the period 2017 to 2019 as follows: Kshs. 9,6838,739 (2017), Kshs. 68,844,458 (2018) and Kshs. 56,811,972 (2019).

25. That the Respondent requested the following documentation from the Appellant:-a.Audited Financial Statement.b.General Ledgers.c.Purchases Ledgers and Sample Invoices.d.Trial Balances.e.Company Bank Statements.f.Directors Bank Statements.g.Contracts Document Samples.h.Payroll Records and Summaries.i.Z-Reports and Cash Books.

26. That the Appellant provided partial documents as follows: Unsigned Audited Financial Statements, Customs Entries and Company Bank Statements.

27. That verification of income declared was done to ensure all incomes were declared through the help of Jaspersoft and Insight tools and bank statements availed.

28. That the Appellant appointed two (2) different tax agents during the audit process.

29. That the second tax agent amended the Appellant’s filed returns for VAT for several tax periods before attending the first meeting with the Respondent where he was cautioned by head of RAC not to amend any further returns and to submit records relied upon in the amendments already done.

30. That the said Appellant’s agent went further to file amended returns for the income tax obligation by reducing the taxpayer’s turnover to match with the turnover declared for VAT.

31. That the Appellant was issued with preliminary findings on 18th March 2022 with timelines of 25th March 2022 to respond to the said findings.

32. That the Appellant’s director, was contacted over the telephone on 24th March 2022 and she confirmed to have received preliminary findings and indicated that the tax agent was working on the response.

33. That the Appellant’s tax agent provided response to one part of the preliminary findings, being bank reconciliation, on 26th March 2022.

34. That the Appellant was given response to the bank reconciliation and granted time to 30th March 2022 to respond to the remaining items in the preliminary report but no response was received.

35. That with regard to Corporation tax, the Appellant provided the following partial documents being unsigned audited financial statement for the period 2017, 2018, 2019 and 2020; company bank statements and sample of custom entries.

36. That the Appellant despite being cautioned against amended returns went ahead to amend income tax returns on 9th March 2022.

37. That the amended returns indicated variances between sales as per inputs claimed by customers of Kshs. 14,612,958. 00 (2017); Kshs. 10,405,340. 00 (2018); Kshs. 16,839,827. 00 (2019) and Kshs. 16,185,469. 00 (2020).

38. That the Appellant did not avail any records to support the downward amendment of IT2C returns and therefore the original returns were reinstated and adjusted for any inconsistencies noted.

39. That a bank statement analysis indicated inconsistencies and variances as follows: Kshs. 68,722. 00 (2017); Kshs. (4,634,342. 00) (2018); Kshs. (591,406. 00) (2019); and Kshs. 59,429. 00 (2020).

40. That the unexplained variances in the bank statements and sales declared was subjected to both income tax and VAT where applicable.

41. That an analysis of purchases indicated the following variances between purchases claimed for income tax and purchases as per VAT returns of Kshs. 13,062,353. 00 (2017); Kshs. 6,472,015. 00 (2018); Kshs. 16,985,972. 00 (2019); and Kshs. 11,979,128. 00 (2020).

42. That the variances have not been properly explained or illustrated and have therefore been disallowed for income tax.

43. That the Respondent also examined expenses claimed in the income tax returns and noted inconsistencies.

44. That staff salaries and wages were compared to costs as claimed in the reported PAYE returns on iTax and variances noted as follows: Kshs. 1,560,000 (2017); Kshs. 1,560,000 (2018); Kshs. -400,000 (2019); and Kshs. -449,300 (2020).

45. That the variances have not been explained by the taxpayer and have therefore been disallowed for income tax purposes.

46. That Corporation income tax due was computed as follows: Kshs. 6,625,196. 00 (2017); Kshs. 3,196,346. 00 (2018); Kshs. 5,729,020 (2019); Kshs. 13,760,436. 00 (2020). That the total Corporation income tax due was therefore Kshs. 29,310,999. 00

47. That regarding VAT analysis, the tax agent amended several VAT returns to capture sales and purchases not declared.

48. That despite the amendments there was still a variance between sales declared in the amended return and purchases claimed by the Appellant’s customers of Kshs. 20,323,594. 00 (2017); Kshs. 10,405,340. 00 (2018); Kshs. 16,839,827. 00 (2019); Kshs. 16,185,469. 00 (2020) and Kshs. 27,161,507. 00 (2021).

49. That the taxpayer did not explain the variance which was accordingly subjected to VAT in accordance with Section 5 of the VAT Act 2013.

50. That the bank statements provided indicated a variance between expected sales derived from the bank statements and sales declared in the VAT 3 returns for the period 2020 and 2021, which has been utilized for computation of VAT.

51. That sales not declared for VAT as per banking reconciliation for 2020 was Kshs. 47, 356,988. 00 and for 2021 was Kshs. 23,783, 710. 00.

52. That variances were noted between sales declared for VAT and withholding certificates issued as follows: Kshs. -5,711,146. 00 (2017); Kshs. -3,057,081. 00 (2018); Kshs. 2,340,532. 00 (2019); Kshs. 506,928. 00 (2020); and Kshs. 4,675,514. 00 (2021).

53. That on verifying correctness of inputs claimed in VAT, variances were noted on some of the imports claimed by the taxpayer as compared to KRA customs data.

54. That salaries and wages expense as claimed in the income tax self-assessment returns compared to gross amounts as reported on PAYE returns on iTax revealed variances for 2017 and 2018.

55. That the taxpayer has not provided payroll statements for the period under review, and thus the variances have been disallowed for income tax.

56. That drawings of a personal nature of Kshs. 34,886,372. 00 were noted from the bank statements availed and were treated as benefits to the directors and subjected to PAYE.

57. That the drawings were not properly supported and therefore were subjected to PAYE as director’s benefits.

58. That the Respondent consequently issued the Appellant with an assessment order.

59. That the Appellant lodged late objection application on 26th May 2022 giving reasons for late objection.

60. That the Respondent reviewed the late objection application and reasons given, and rejected the Appellant’s late objection application on 15th July 2022.

Respondent’s Prayers 61. The Respondent prays to the Tribunal for the following orders: -a.That the Respondent’s decision together with the penalties and interest be found to be due and payable.b.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues For Determination 62. The Tribunal, having reviewed the Memorandum of Appeal, Statements of Facts filed by both parties, and the Respondent’s written submissions, identified the following issue for determination:Whether the Respondent’s Decision rejecting Appellant’s Late Objection Application was justified and lawful.

Analysis And Findings 63. Having established the issue for determination, the Tribunal will proceed to analyse it as hereunder.

64. The Tribunal notes that the primary dispute between the parties is whether the Respondent’s decision rejecting the Appellant’s application to file a late objection and if so, what remedies should the Tribunal proffer.

65. The Tribunal further notes that both the Appellant and the Respondent adduced similar documents confirming dates for late objection application and subsequent rejection decision by the Respondent.

66. In the instant case, both the Appellant and the Respondent submitted that the Appellant filed a late objection application on 26th May 2022.

67. The Respondent proceeded to reject the late objection application on 14th July 2022 citing lack of evidence and supporting materials to review the additional assessments.

68. The Respondent’s submissions and averments on record, which have not been substantively controverted by the Appellant are that the Appellant’s agents amended returns severally through the iTax platform but failed to submit any supporting documents.

69. The Tribunal is of the considered view that amendments to returns filed by a taxpayer would ordinarily need to be supported by documents.

70. The Tribunal further notes that the applicable law on late objection application is to be found in Sections 51 (6) and (7) of the TPA, which speak to extension of time to file late objection as follows: -“(6)A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection 7. The Commissioner shall consider and allow an application under subsection (6) if –a.the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of absence from Kenya, sickness, or other reasonable cause; andb.the taxpayer did not unreasonably delay in lodging the notice of objection.”

71. It need not be gainsaid that the above law places the obligation to make an application for late objection and provide reasons thereto on the Appellant. In essence, the burden of proof is on the Appellant and it shifts once sufficient documents and or evidence is provided.

72. Section 56 (1) of the Tax Procedures Act reinforces this obligation as follows: - “In any proceedings under this Part, the burden shall be on the tax payer to prove that a tax decision is incorrect’.

73. The Respondent submitted that it requested the Appellant to provide reasons and evidence for its late objection application, but this was repeatedly ignored by the Appellant’s agents.

74. The record filed before the Tribunal corroborates the Respondent’s submissions as there is no record filed by the Appellant showing that it provided the Respondent with documents and evidence sought to support the late objection application and review of additional assessments.

75. In this regard, the Tribunal reiterates its decisions in TAT No. 55 of 2018 Boleyn International Ltd vs Commissioner of Investigations and Enforcement, where the Tribunal held as follows:“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 Tax Procedures Act, 2015, which states: In any proceedings under this part, the burden shall be on the tax payer to prove that a tax decision is incorrect.”

76. Accordingly, the Tribunal holds that the Appellant has not sufficiently discharged its burden of proof that would have triggered the Respondent to allow its late objection application.

Final Decision 77. From the analysis above, the Tribunal proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Confirmation of Assessments dated 15th July 2022 be and are hereby upheld.c.Each party to bear its own costs.

78. It is so ordered.

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