[2024] KETAT 429 (KLR)

Doshi Enterprises Limited v Commissioner of Investigation and Enforcement (Tax Appeal 1316 of 2022) [2024] KETAT 429 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 429 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1316 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 22, 2024

Between

Doshi Enterprises Limited

Appellant

and

Commissioner of Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya whose principal activity involves manufacturing and providing steel, electrical, water, hardware and telecommunication solutions.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 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 Parts I and 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 commenced investigations against the Appellant’s declared income for the period April 2015 to March 2020.

4. From the investigations, the Respondent issued the Appellant with a notice of assessment on 28th June 2022 demanding Corporation tax of Kshs. 59,120,592. 00 and Value Added Tax (VAT) of Kshs. 28,600,371. 00.

5. The assessment was based on the analysis of credits and deposits as per the Appellant’s bank statements, the sales declared by the Appellant in the review period against the purchases declared by the Appellant’s customers, and the unrealized foreign exchange losses not disallowed by the Appellant within the review period.

6. The Appellant objected to the assessment vide an objection letter dated 26th July 2022.

7. The Respondent vacated and confirmed some of its assessments in response to the Appellant’s objection vide an objection decision dated 23rd September 2022.

8. The Appellant, being dissatisfied with the Respondent’s objection decision dated 23rd September 2022 confirming the Corporate tax and VAT assessments all amounting to Kshs. 87,720,963. 00 exclusive of penalties and interest filed a Notice of Appeal dated and filed on 21st October 2022.

The Appeal 9. The Appeal is premised on the following grounds as contained in the Appellant’s Memorandum of Appeal dated and filed on 4th November 2022:a.The Respondent erred in law and fact by deeming some amounts received into the Appellant’s bank accounts as revenue chargeable to tax while in actual sense these amounts were not revenue in nature.b.The Respondent erred in law and fact by disallowing foreign exchange losses of Kshs. 103,609,832. 00 earned during the normal course of business operations where the Appellant receives and makes payments in foreign currencies.c.As a result, the Respondent erroneously confirmed corporate income tax assessment of Kshs. 59,120,592. 00 and VAT assessment of Kshs. 28,600,371. 00

The Appellant’s Case 10. The Appellant’s case is set out in its Statement of Facts dated and filed on 4th November 2022.

11. The Appellant stated that the Respondent conducted tax investigations on the Appellant’s operations for the period April 2015 to March 2020 resulting in corporate tax and VAT assessments of Kshs. 132,488,749. 00 Corporate income tax being Kshs. 59,120,592. 00 and VAT being Kshs, 28,600,371. 00.

12. That the assessments were based on bank analysis where the Respondent analysed the credits and deposits on the Appellant’s bank statements stating that it noted a variance between the expected sales and the sales declared by the Appellant in its audited financial statements and VAT returns of Kshs. 330,955,255. 00 and 286,246,468. 00, respectively.

13. The Appellant stated that the assessments were also based on purchases claimed by the Appellant where the Respondent compared the sales declared by the Appellant in the assessed period against the purchases declared by the Appellant’s customers in their VAT returns and brought to tax purported undisclosed sales of Kshs. 482,253,885. 00.

14. That the assessments were also based on unrealized foreign exchange losses where the Respondent charged to tax unrealized foreign exchange losses of Kshs. 103,609,832. 00 which were not disallowed by the Appellant in the review period.

15. The Appellant objected to the assessments. In response to the objection, the Respondent vacated and confirmed some of its assessments vide its objection decision. In the said objection decision, the Respondent demanded taxes amounting to Kshs. 87,720,963. 00.

16. The Appellant’ Appeal against the objection decision is premised as follows on the aspect of income tax:

For 2016 year of income: 17. On the aspect of bank reconciliations, the Appellant stated that the Respondent erred in deeming the bank credits of Kshs. 38,141,902. 00 in year 2016 as expected sales as per the bank reconciliations performed. The Appellant averred that the bank credits also included funds received from the Appellant’s related parties in relation to the transfer of all the Appellant’s manufacturing and resale business activity to the related party, Doshi Hardware on credit payment terms at Kshs. 65,887,500. 00.

18. The Appellant further asserted that the bank credits also emanated from interbank transfers between the Appellant’s bank and other banks and that the Respondent’s allegation that the Appellant failed to provide sufficient evidence to support debt repayment of Kshs. 65,887,500. 00 in year 2016 in relation to the said transfer was erroneous. In addition, the Appellant averred that the bank credits emanated from interbank transfers between the Appellant’s bank accounts at Barclays bank and NIC bank amounting to Kshs. 7,962,750. 00.

19. In relation to intercompany transfers, the Appellant averred that the Respondent’s allegation that the Appellant did not provide sufficient evidence to support the debt repayment highlighted above is erroneous. The Appellant averred that the transfer of business was supported by invoices raised by the Appellant to its related third party, Doshi Hardware.

20. That the Appellant provided proof of the sale by sharing the audited financial statements accompanied by relevant tax computation for the year 2015 showing corresponding disposal of assets to Doshi Hardware.

21. Further, that the Appellant provided an extract of the cash book that reflects the cash received by the Appellant in lieu of the debt owed by Doshi Hardware to its Nairobi division.

22. The Appellant stated that it affirmed the above position by providing the bank advice received from NIC bank showing the loan advanced by the bank to Doshi Hardware. Additionally, the Appellant provided bank advices showing the loan amount leaving Doshi Hardware’s accounts to the Appellant’s Barclays Bank account. The Appellant averred that it was erroneous for the Respondent to deem the foregoing intercompany and interbank transfers as sales and charge tax to the said amounts yet the Appellant sufficiently proved the same did not result from sales made to customers.

For 2017 year of income: 23. The Appellant averred that the Respondent erred in deeming the bank credits of Kshs.14,148,073. 00 in the year 2017 as expected sales as per the bank reconciliations performed.

24. The Appellant averred that the bank credits also include receipt of funds from the sale of dollars to its related party, Doshi Hardware. While some credits arose from interbank transfers from and to bank accounts held by the Appellant, reversed amounts and refunds were received by the Appellant from Kenya Revenue Authority in the year 2017.

25. On the sale of dollars, the Appellant averred that the Respondent erred in computing the deemed expected sales as per the bank reconciliations by not adjusting the funds received from the sale of dollars to Doshi Hardware. The Appellant averred that in 2017, it received Kshs. 2,500,000. 00 from Doshi Hardware in exchange of the dollars held at the Appellant’s Barclays Bank dollar account.

26. The Appellant averred that it subsequently submitted the relevant bank statements showing the above transaction. On interbank transfers, the Appellant averred that the Respondent erred in not adjusting for interbank transfers from and to the bank accounts held by the Appellant of Kshs. 2,000,000. 00.

27. The Appellant affirmed that in 2017, interbank transfers between the accounts held by the Appellant at Barclays Bank Kenya and NIC amounted to Kshs. 22,784,781. 00. The Respondent erred by only adjusting for Kshs. 20,784,781. 00 in arriving at the expected sales as per the banking analysis.

28. On the aspect of reversed transactions, the Appellant stated that the Respondent erred by not adjusting for reversed transactions of Kshs. 6,601,518. 00 in analysing the expected sales as per the bank reconciliations. The Appellant averred that the above amount arose from payments received from one of the Appellant’s customers, Regional Logistics paid by cheque deposited at Barclays Bank.

29. The Appellant averred that at the point of posting, the receipt was posted as a receipt to NIC necessitating a reversal of the posting to Barclays Bank. The Appellant also declared these amounts in its gross sales while accounting for the tax payable in the given transaction period. Thus, the inclusion of the reversed payment/receipt into the deemed undeclared sales amounts to double taxation.

30. On the issue of refunds from KRA, the Appellant asserted that in the financial year (FY) 2017, it received Kshs. 5,671,196. 00 from KRA relating to overpaid taxes. This was not part of trading income. The Respondent therefore erred in adjusting this amount for the year 2016 instead of 2017 yet the amount was received on 10th August 2016. The Appellant confirmed that the financial year 2017 included the period 1st April 2016 to 31st March 2017.

For the 2018 year of income: 31. The Appellant asserted that the Respondent erred in deeming the interbank credits of Kshs. 32,024,924. 00 in the year 2018 as expected sales as per the bank reconciliations performed. The Appellant averred that the bank credits also include interbank transfers of Kshs. 32,606,680. 00 and refunds from suppliers of Kshs. 1,281,456. 00.

32. In relation to interbank transfers, the Appellant averred that the Respondent’s allegations that the Appellant failed to provide sufficient evidence to support credits asserted to be interbank transfers between the Appellant’s Barclays Bank account and NIC Bank in the year 2018 is inaccurate. The Appellant also asserted that these transfers were sufficiently supported by bank advice showing the credits received and the contra debit entries.

33. In relation to refunds from suppliers, the Appellant averred that in 2018, credits of Kshs. 1,281,456. 00 emanated from cheques that did not go through or refunds from the Appellant’s suppliers. The Appellant also provided the bank statements indicating the transfer of money from one account and mapped the receipt to the corresponding account.

34. The Respondent did not consider these interbank transfers and refunds from suppliers while adjusting the bank credits in 2018 to arrive at the expected sales.

For the 2019 year of income: 35. The Appellant averred that the Respondent erred in deeming bank credits of Kshs. 65,843,662. 00 in the year 2019 as expected sales as per the bank reconciliations performed. The Appellant submitted that the bank credits include refunds from directors, interbank transfers, intercompany transfers upon closure of Doshi PVC and Doshi Steel bank accounts, loans received from Manav Foundation and reversal of wrong posting.

36. On the issue of refund from directors, the Appellant averred that the Respondent erred in not adjusting for cash received by the Appellant with respect to refunds from its directors and deeming the amount as undeclared sales. The Appellant issues credit cards to directors for use while carrying out business activities, in the event the director uses their credit cards on personal expenditure, such amounts must be repaid to the Appellant lest is deemed as salary advance recoverable from the director’s emoluments. The Appellant supported these refunds by providing the relevant ledgers and the bank statements where need be.

37. On interbank transfers, the Appellant averred that the Respondent’s allegation that the Appellant failed to provide sufficient evidence to support credits asserted to be interbank transfers between the Appellant’s bank accounts at Barclays Bank and NIC Bank amounting to Kshs. 46,000,000. 00 is grossly inaccurate.

38. The Appellant averred that the interbank transfers were supported by bank advice showing the credits received and corresponding contra debit entries showing amounts leaving the NIC bank account. On intercompany transfers upon closure of Doshi PVC and Doshi Steel bank accounts, the Appellant averred that the Respondent erred in alleging that the Appellant did not provide sufficient evidence to support the transfer of the cash transferred from the closed accounts.

39. The Appellant averred that the transfers arose following the sale of the manufacturing business line to Doshi Hardware and does not amount to sales from business activities and provided bank statements to support the same.

40. On loan received from Manav Foundation, the Appellant assertted that in 2019, credits of Kshs. 5,000,000. 00 were deemed as undeclared revenue, however, these amounts emanated from loans advanced to the Appellant from Manav Foundation on May and June 2018. The Appellant averred that the Respondent erred in assessing tax on the same instead of adjusting accordingly. The Appellant submitted loan disbursement cheques in support and also submitted the loan agreement.

41. On the issue of reversal of wrong posting, the Appellant averred that the Respondent’s allegations that the Appellant did not demonstrate that Kshs. 71,085,200. 00 related to an amount mis posted is inaccurate.

42. The Appellant averred that it received US $ 71,000. 00 from Doshi Hardware and used the wrong conversion rates when recognizing the cash in its books in Kenya shillings, leading to a recognition of a credit amounting to Kshs. 71,085,200. 00 instead of 7,185,200. 00, being a clerical error. The Appellant reversed this error by passing a contra entry and recognized the true amount received.

43. The inclusion of the reversed payment/receipt into the deemed undeclared sales amounted to double taxation. The Appellant supported its assertion by providing the detailed general ledger.

For the 2020 year of income: 44. The Appellant averred that the Respondent erred in deeming bank credits of Kshs. 46,910,078. 00 in the year 2020 as expected sales as per the bank reconciliations performed.

45. The Appellant averred that the Respondent erred in using the incorrect figure in adjusting for the closing debtors while analysing the bank credits. The Respondent inaccurately adjusted for the closing debtors in the year 2020 by adjusting for closing debtors of Kshs. 160,113,465. 00 yet in 2020, the net trade receivables recognized amounted to Kshs. 11,691,277. 00.

46. The correct position in the year 2020 in the bank reconciliations should be Kshs. 101,512,110. 00

On the aspect of foreign exchange losses: 47. The Appellant submitted that the Respondent erred in law and fact by disallowing realized foreign exchange losses of Kshs. 103,609,832. 00 earned during the normal course of business operations where the Appellant received and made payments in foreign currencies.

48. The Appellant asserted that Section 15 of the Income Tax Act, CAP 470 of Kenya’s laws (hereinafter ‘ITA’) states that expenditure wholly and exclusively incurred in the production of income is an allowable expenditure for Corporation tax purposes. The realized foreign exchange losses earned between 2016 and 2020 arose from debtors, creditors, loans received and cash and bank balances held by the Appellant.

49. The Appellant affirmed this position by providing a breakdown of the foreign exchange losses earned in the said period. The Appellant disallowed the unrealized foreign exchange losses in the respective years of income and allowed them in the following year of income once they were realized in accordance with Section 4A of the ITA

On VAT: 50. The Appellant took note that the VAT assessments raised by the Respondent originated from the revenue deemed as undeclared from the banking analysis addressed by the Appellant in its grounds of appeal on the aspect of income tax. Therefore, the Appellant having addressed all the sales deemed as undeclared, the VAT assessments are null and void.

The Appellant’s Prayers 51. The Appellant thus prayed that the Respondent’s objection decision confirming Corporate tax of Kshs. 59,120,592. 00 and VAT of Kshs. 28,600,371. 00 exclusive of penalties and interest be set aside and the appeal be allowed. The Appellant also had the following additional prayers:a.Costs of the appeal to the Appellant.b.Any other remedies this Tribunal may deem just and reasonable.

Respondent’s Case 52. The Respondent filed a Statement of Facts dated 3rd December 2022 and filed on 5th December 2022 in which it averred as hereunder.

53. The Respondent stated that it investigated the Appellant following receipt of intelligence that the Appellant had underdeclared income in the period 2016 to 2020.

54. That the Respondent in its investigations considered several documents including; copies of bank statements, copies of financial statements, copies of invoices, copies of ledgers and cheques.

55. The Respondent noted that the Appellant had not been filing Corporation tax and VAT returns consistently and averred that it carried out banking analysis and compared the computed income from this analysis to declared income hence establishing undeclared income in both income tax and VAT returns.

56. The Respondent established that unrealized exchange losses were expected, the Respondent disallowed both the realized and unrealized exchange losses. The taxes established from the investigations amounted to Corporation tax totaling to Kshs. 91,296,040. 00 and VAT amounting to Kshs. 41,192,709. 00

57. Despite the Appellant’s assertion that the exchange losses were incurred wholly and exclusively in the production of income, the Appellant did not support this claim with evidence.

58. In the absence of evidence, the Respondent’s assertion that no adjustments for the disallowed exchange losses is justified. The Respondent averred that it recognized the model of operation previously maintained by the Appellant where the Appellant ran three divisions; Doshi Enterprises Limited (DEL) PVC Nairobi, Doshi Enterprises Limited Steel Nairobi and Doshi Enterprises Limited Mombasa.

59. The Respondent noted that DEL Mombasa manufactured all steel building material and sold to DEL Steel Nairobi and Doshi Hardware. Further, Doshi PVC would manufacture PVC and sell at its Nairobi outlet and partly to DEL Steel Nairobi and other hardware in Kenya.

60. The Respondent averred that in lieu of the complexity of the said model, the management of the Appellant made a commercial decision of transferring all the manufacturing business activity and resale activities to Doshi Hardware who would then manufacture for itself and sell all items manufactured. Thus, any amount of stock held were transferred on credit terms payment to Doshi Hardware. It is based on this that the Appellant asserted that Doshi Enterprises Limited received cash from Doshi Hardware amounting to Kshs. 65,887,500. 00

61. The Respondent averred that save for the cashbook extract and nominal ledger, no other evidence was provided to support the debt repayment.Thus, the Respondent’s position that the Appellant did not substantiate its assertions that the credits relate to intercompany debt repayment to warrant an adjustment in the bank reconciliations.

62. The Respondent asserted that the Appellant pointed out that some clients inherited by Doshi Hardware continued making payment to DEL bank accounts as opposed to Doshi Hardware bank account. The Appellant provided invoices raised by Doshi Hardware and corresponding bank statements showing outflow of monies received by DEL to Doshi Hardware to support the above assertion.

63. That the Respondent averred that any transaction that was supported was allowed by the Respondent. The Appellant indicated that upon closure of the sale of the manufacturing business line to Doshi Hardware, DEL closed its bank accounts held by Doshi PVC Nairobi and transferred all cash contained in those accounts to DEL’s Mombasa account.

64. The Appellant did not provide support for the interdivisional transfers of Kshs. 1,788,780. 00 in the Appellant's bank reconciliations for the year 2019 hence no adjustments made in the year. On the issue of sale of dollars to the Appellant’s related party, Doshi Hardware, despite the Appellant's assertion that some of the funds received were from the sale of dollar to Doshi Hardware, no evidence was provided to support the claim.

65. The Respondent asserted that, in the absence of evidence, no adjustments were made for the alleged sale of dollars.

66. The Respondent averred that unless where the Respondent agrees, the allegations by the Appellant are unfounded in law and not supported by evidence. The Respondent stated that the burden is on the Appellant to prove that a tax decision is incorrect which the Appellant failed to discharge.

Respondent’s Prayers 67. The Respondent prayed that the Tribunal would find that its objection decision was correctly issued and the Appellant’s tax liability of Kshs. 87,720,963. 00 is thus due and payable.

Parties Submissions 68. The Appellant identified three issues for determination in its written submissions dated and filed on the 7th June 2023 and proceeded to analyse them as follows:-i.Whether the Respondent erred in law and in fact by deeming some amounts received into the Appellant’s bank accounts as revenue and assessing corporation tax for Kshs.59,120,592 while in actual sense the amounts were not revenue in nature.

69. The Appellant submitted that for the 2016 year of income, the bank credits included funds received from its related party, Doshi Hardware, in relation to the transfer of all manufacturing business activity and resale activities to Doshi Hardware on credit payment terms of Kshs. 65,887,500. 00.

70. The Appellant submitted that the bank credits also emanated from interbank transfers between the Appellant’s bank accounts held at Barclays Bank and NIC Bank amounting to Kshs. 7,962,750. 00. The Appellant further submitted that in relation to the intercompany transfer, it provided the invoices raised to Doshi Hardware.

71. The Appellant submitted that it also provided proof of the sale of the manufacturing business by sharing the audited financial statements with the relevant tax computation showing the corresponding disposal of the assets for the year of income 2015. The Appellant submitted that any amounts owed by Doshi Hardware to the Appellant are recorded in the nominal accounts after the sale had occurred.

72. The Appellant provided an extract of the cash book reflecting the cash received by the Appellant in lieu of the debt owed by Doshi Hardware. The Appellant submitted that it provided the bank advice received from NIC which shows a loan advanced to Doshi Hardware of USD 350,000 by NIC in order to partly pay the Appellant for the transfer. On interbank transfers between the Appellant’s banks, the Appellant submitted that the transfer from NIC Bank into Barclays Bank were sufficiently supported by bank advices showing the credits received.

73. In regard to the 2017 year of income, the Appellant submitted that the Respondent erred in deeming the bank credits of Kshs. 14,148,073. 00 in the year 2017 as expected sales as per the bank reconciliations. The Appellant submitted that some credits also emanated from interbank transfers from bank accounts held by the Appellant not adjusted, reversed amounts and refunds received by the Appellant from KRA. The Appellant submitted that in 2017, it received Kshs. 2,500,000. 00 from Doshi Hardware in exchange for dollars held at the Appellant’s Barclays Bank account.

75. The Appellant provided the Respondent with the relevant bank statements showing the debit of USD 25,000. 00 from Barclays Bank account and receipt of Kshs. 2,500,000. 00 into the NIC account.

76. On interbank transfers in 2017, the Appellant submitted that the Respondent erred in not adjusting for interbank transfers of Kshs. 2,000,000. 00 from the bank credits in the Appellant’s bank accounts. The Appellant provided the respective bank statements indicating the transfer of money from one account and mapped with the receipt to the corresponding account.

77. On reversed transactions, the Appellant submitted the Respondent erred in not adjusting reversed transactions of Kshs. 6,601,518. 00 in analysing the expected sales. The Appellant submitted that this amount arose from payments received from one of the Appellant’s customers paid using cheque deposited at Barclays Bank. At the point of posting, the receipt of cash was however posted as a receipt to NIC Bank.

78. The Appellant submitted that the inclusion of the reversed payments into the deemed undeclared sales amounts to double taxation. The Appellant provided Barclays Bank and NIC Bank ledgers confirming the mis posting. On refunds from KRA, the Appellant submitted that in FY 2017, it received Kshs. 5,671,196. 00 from KRA relating to overpaid taxes.

79. The Respondent wrongly adjusted for this amount in the year 2016 instead of 2017 yet the amount was received in August 2016 yet the Appellant’s financial year 2017 includes 1st April 2016 to 31st March 2017. The Appellant attached bank statements showing the amount received from KRA.

80. In respect to the 2018 year of income, the Appellant submitted that the Respondent erred in deeming bank credits of Kshs. 32,024,924 in year 2018 as expected sales. The Appellant submitted that the bank credits also included interbank transfers of Kshs. 32,606,080. 00 and refunds from suppliers of Kshs. 1,281,456. 00 which were not sales. The Appellant supported the above using bank advices showing the credits received and the corresponding contra debit entries.

81. On refunds from suppliers, the Appellant submitted that in 2018 the credits of Kshs. 1,281,456. 00 emanated from cheques that did not go through or refunds from the Appellant’s suppliers. The Appellant provided bank statements indicating the transfers. The Appellant submitted that the Respondent erred in deeming the bank credits of Kshs. 65,843,662. 00 in the year 2019 as expected sales.

82. The Appellant submitted that the 2019 bank credits also included refund from directors, interbank transfers, intercompany transfers upon closure of Doshi PVC and Doshi Steel bank accounts, loans received from Manav Foundation and reversal of wrong posting. The Appellant supported the refunds from directors by providing individual ledger accounts for the directors and salary advances.

83. The interbank transfers were supported by bank advices. On intercompany transfers upon closure of Doshi PVC and Doshi Steel bank accounts was supported by bank statements showing the transfers. The loan received from Manav Foundation was supported by the loan disbursement cheques from Manav to the Appellant, the Appellant also provided the loan agreement.

84. On reversal of wrong posting, the Appellant supported its position by providing the detailed general ledger detailing the transactions and corresponding bank statements. For the 2020 year of income, the Appellant submitted that the Respondent erred in deeming the bank credits of Kshs. 46,910,078. 00 in the year 2020 as expected sales.

85. The Respondent used the wrong figure in adjusting for the closing debtors for the year 2020 while analysing the bank credits.ii.Whether the Respondent erred in law and in fact by disallowing foreign exchange losses of Kshs. 103,609,832 earned during the normal course of business thereby resulting in corporation tax liability of Kshs. 28,600,371.

86. The Appellant submitted that section 15 of the ITA provides that expenditure wholly and exclusively incurred in the production of income is an allowable expenditure for corporation tax purposes.

87. The Appellant submitted that the realized foreign exchange losses earned in the period 2016 to 2020 arose from debtors, creditors, and loans received, cash at bank and bank balances held by the Appellant.

88. The Appellant submitted that in support of its assertion, it provided a breakdown of the foreign exchange losses earned in the said period and allowed for corporation tax purposes.

89. Further, the Appellant disallowed the unrealized foreign exchange losses in the respective years of income and allowed them in the following year of income once they were realized, in accordance with Section 4A of the ITA.

90. The Respondent upon default in filing its written submissions at the just opportunity the Tribunal directed the Respondent to specifically file and serve its submissions by the 27th June, 2023. The Respondent upon subsequent default in the filing of the written submissions, the Tribunal was on the 19th July, 2023 prompted to direct that the Respondent was to proceed on the basis of its pleadings as filed. This position was confirmed on the 27th September, 2023 when the matter came up for hearing.

Issues For Determination 91. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that a singular issue calls for its determination as follows;Whether the objection decision was lawful

Analysis And Findings 92. The Tribunal having ascertained the issue calling for its determination proceeds to analyze the same as hereunder.

93. In conducting its investigations on the Appellant for the years 2016 to 2020, the Respondent indicated that it relied on banking analysis which it carried out.

94. The Respondent stated that the analysis compared the computed income against the income declared by the Appellant, and it is through this method that the Respondent concluded that there was some undeclared income by the Appellant.

95. The Respondent’s reliance was therefore primarily on bank statements and considered other documents provided such as financial statements, copies of invoices, copies of ledgers and copies of cheques.

96. The total amount assessed and demanded being Kshs. 132,488,749. 00 which included both VAT and Corporation tax. The Appellant objected and in the objection decision the Respondent confirmed the principal tax liability of the Appellant at Kshs. 87,720,963. 00. This reduction was based on the documents provided by the Appellant accompanying its objection which the Respondent states that it exercised the best judgement based on the documents to arrive at its objection decision.

96. Section 51(3) of the TPA stipulates the threshold of a valid notice of objection and 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;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

97. The court in Rongai Tiles & Sanitary Wares Limited v Commissioner of Domestic Taxes (Tax Appeal E011 of 2020) [2023] KEHC 18546 (KLR) clarified the meaning of a valid objection where it held that:“From the provision above, an objection is validly lodged if it precisely states the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments, the undisputed taxes have been paid and all relevant documents in relation to the Objection have been presented. The use of the words “shall” and “and” connote the mandatory and conjunctive nature of the aforementioned requirements, meaning that a tax payer must satisfy all of them for an objection to be deemed as validly lodged.”

98. It is therefore mandatory that all conditions are met for an objection to be termed as validly lodged. It is also important to note that the documents provided should be relevant to the assessment in question. In the same breath, the same court in Rongai Tiles (supra) stated that there is recourse where a valid objection has not been lodged, citing Section 51(4) of the Tax Procedures Act (as it then read), where the onus is clearly placed on the Respondent to determine if an objection is valid and what it should do if the objection is found to be invalid. The Court stated as thus:-“What then happens when an objection is deemed as not having been validly lodged? The answer is expressly provided for by section 51(4) of the TPA which,at the time, provided that, “Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.” Once again, the use of the word “shall” demonstrates that the provision is couched in mandatory terms.” (Emphasis added)

99. Further Section 51 (4A) of the ITA provides that:-“Despite subsection (3), where a taxpayer fails to provide the information required under subsection (4) or fails to provide the information within the specified period, the Commissioner may make an objection decision within sixty days after the date on which the notice of objection was lodged.”

100. The Tribunal notes that from the records provided, the Respondent did not request for further documents from the Appellant after receipt of the notice of objection, in order for the Appellant to validly lodge its objection.

101. In the same breath, recordkeeping and ensuring that an objection meets the conditions set out in the law is very important in supporting an objection to an assessment by the Appellant.

102. On recordkeeping, Section 23 of the TPA provides that:“(1)A person shall—a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andc.subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

103. The documents presented by the Appellant to the Respondent ought to be the documents that the Appellant feels that are relevant to support its objection or to demonstrate that the assessment given by the Respondent was wrong or excessive.

104. Further, where the tax liability under assessment falls within the ambit of Income Tax, the ITA under Section 54A provides that:“(1)A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deed, contracts and vouchers which in the opinion of the Commissioner, are adequate.2. For purposes of this section, the carrying on business includes any activity giving rise to income other than employment income.3. Any person who contravenes the provisions of sub-section (1) shall be liable to such penalty not exceeding twenty thousand shillings as the Commissioner may deem fit.”

105. Similar provision is in the Value Added Tax Act. It is the burden of the taxpayer to prove that a tax decision is incorrect pursuant to Section 56(1) of TPA. The same provision is to be found in Section 30 of the Tax Appeals Tribunal Act, No. 40 of 2013 (TAT) which provides 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.”

106. Whether the taxpayer has provided sufficient evidence to meet the threshold of proof required to discharge its burden must of course depend on the nature of the subject or transaction and the circumstances of the case bearing in mind the aforesaid duty placed on the taxpayer to keep records.

107. Further, the court in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR in arriving at its determination clarified on how the issue of burden of proof applies in tax cases, the court held that:“Burden of Proof” at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a Tax payer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner’s position. This is the basic principle. However, there are some situations where this responsibility or“onus” is reversed. The onus may also shift based on the stage of the proceedings and the actions taken by the parties……Also, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada [19] that the onus is met when a Taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face.” To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.” (Emphasis added)

108. From the facts of the case, the Appellant contended that it received cash from its related party, Doshi Hardware amounting to Kshs. 65,887,500. 00 in year 2016.

109. In its objection, the Appellant provided a cashbook extract and nominal ledger to support this assertion which the Respondent deemed to be inadequate evidence to substantiate the contention.

110. The Respondent did not however ask for other documents from the Appellant before considering these documents as inadequate in its objection decision. Further, the Respondent’s objection decision does not explain why these documents were not sufficient enough to support the Appellant’s case.

111. The Tribunal notes that the Appellant has also presented before this Tribunal evidence to demonstrate the loan by NIC Bank to Doshi Hardware, including bank advice showing the loan amount leaving Doshi Hardware’s accounts and reaching the Appellant’s Barclays Bank account.

112. In the Tribunal’s view, provision of these documents was sufficient proof to support the Appellant’s contention that the bank credit of Kshs. 65,887,500. 00 in year 2016 was a debt repayment by its related entity Doshi Hardware.

113. It is also the Appellant’s contention that in the years 2016 and 2020, there were inter-account transfers between the Appellant's bank accounts held at Barclays Bank of Kenya and NIC Bank amounting to Kshs. 7,962,750. 00 and Kshs. 46,000,000. 00 respectively. To support that these were not sales, the Appellant provided a schedule of the inter-account transfers and Barclays bank statements indicating the credited amounts which were deemed to be insufficient evidence by the Respondent. The Respondent has however not alluded to the extent of the inadequacy of the supporting documents provided by the Appellant to support the inter-account transfers.

114. The Appellant’s business also underwent some operational changes where the Appellant transferred all its manufacturing business and resale business to Doshi Hardware, however, some clients continued making payments to the Appellant’s bank account instead of Doshi Hardware’s account. To support these erroneous transactions, the Appellant provided invoices and corresponding bank statements showing the cash outflow.

115. The Appellant also submitted that between 2016 and 2020 there were several inter-account transfers between the Appellant’s bank accounts at Barclays Bank and NIC Bank. The Appellant provided a schedule demonstrating these transfers and Barclays Bank statements indicating the credited amounts. The Respondent however found the evidence as insufficient as the Appellant failed to provide to contra debit entries.

116. The Respondent, however, did not demonstrate the insufficiency of the documents provided by the Appellant to support its assertion as the Respondent’s argument seems to have been based on assumptions. In 2017, the Appellant also submitted that there were inter-account transfers between its bank accounts and provided bank statements with contra debits and credits in support.

117. On tax refund received from the Respondent, the Appellant supported its assertion with bank statements. On the aspect of sale of dollars, the Appellant averred that in 2017, it received Kshs. 2,500,000. 00 from Doshi Hardware in exchange of the dollars held at the Appellant’s Barclays Bank dollar account. The Appellant supported the sale of dollars using bank statements showing debits from its Barclays Bank dollar account and receipt into its NIC Bank account. The Tribunal notes that this was sufficient evidence to support the sale of dollars by the Appellant. From the above facts, the Appellant therefore provided prima facie evidence to support its objection and it was left to the Respondent to rebut the same.

118. The Tribunal notes that following the case of Kenya Revenue Authority v Man Diesel (supra) cited above, the Respondent was requiredits their position. The Respondent did not provide evidence to clearly support its position as to why reliance was primarily placed on bank statements and to show how the other documents provided by the Appellant were not relevant enough or rather, why the documents had low probative value.

119. On the issue of necessary documents, the Court in Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2022] KEHC 52 clarified that the records to be produced and kept under Section 54A of the Income Tax Act are ordinary business records, the court stated that:“As I stated earlier, under section 54A of the ITA, the taxpayer has a duty to maintain records to support its transactions. These records are those expected in the ordinary course of business.”

120. The documents the Appellant provided were documents that it uses in the ordinary course of business and it was necessary for the Respondent to consider all the documents provided to it by the Appellant other than arriving at its decision based on the bank statements only.

121. Further, the Tribunal notes that no request for any additional and/or specific documents which the Respondent states that the Appellant did not provide was made by the Respondent, such request was necessary for the Appellant to be given a chance to validate its objection by providing the requisite documents as alleged by the Respondent.

122. Asking for further documents where an objection is deemed not to be validly lodged ensures that the Appellant is accorded a fair administrative process as required by Article 47 of the Constitution in all aspects.

123. The Respondent ought to have written to the Appellant calling for records where it noted they were missing, specifically the bank statements or other supporting documents.

124. By dint of the above analysis, the Tribunal finds that the Appellant discharged its burden of proof and the tax assessment and by extension, the objection decision issued by the Respondent were therefore not lawfully done.

Final Decision 125. In light of the foregoing analysis, the Tribunal finds the Appeal herein is merited and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated the 23rd September, 2022 be and is hereby set aside.c.Each party to bear its own costs.

126. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA - MEMBERGEORGE KASHINDI - MEMBERMOHAMMED A. DIRIYE - MEMBERSPENCER S. OLOLCHIKE - MEMBER