[2024] KETAT 869 (KLR)

Eagle Retread Limited v Commissioner of Domestic Taxes (Tax Appeal 85 of 2023) [2024] KETAT 869 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 869 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 85 of 2023

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

June 28, 2024

Between

Eagle Retread Limited

Appellant

and

Commissioner of Domestic Taxes

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 conducted tax investigations on the Appellant’s business affairs in respect of the period 2017 to 2021 intending to confirm the Appellant's tax compliance within the review period.

4. On 24th October 2022, the Respondent raised additional income tax assessments against the Appellant which the Appellant objected to vide a letter dated 12th November 2022 and on its i-Tax portal.

5. Through an electronic mail dated 15th November 2022, the Respondent informed that its objection was invalid and issued the Appellant with a confirmation assessment notice for additional income tax on 8th December, 2022.

6. Being dissatisfied with the Respondent’s confirmation assessment notice, the Appellant sought and was granted leave by the Tribunal to file its notice of appeal out of time through orders dated 27th January, 2023.

The Appeal 7. The Appellant’s Memorandum of Appeal was dated 19th January, 2023 and filed on 25th January, 2023 set out the following grounds of appeal:a.The Respondent erred in law in issuing corporate tax assessment for the years 2018, 2019 and 2020. b.The Respondent erred in law in blocking the system preventing the filing of the correct tax returns and accounts.c.A valid objection was lodged on 12th November 2022 objecting to the Respondent’s assessments. Despite the objection, the Respondent went ahead and confirmed the assessments on 8th December 2022 disregarding the fact that the Respondent had requested for filing of the returns and accounts.d.The Respondent erred in law in issuing the confirmation notice on 8th December 2022 disregarding the fact that the returns could not be filed as the system was blocked.e.The Respondent erred in law in disallowing the objection to the assessment notices without verifying the returns that the Appellant was blocked from filing.

The Appellant’s Case 8. The Appellant has set out its case in the statement of facts dated 19th January 2023 and filed on 25th January 2023.

9. The Appellant stated that the Respondent issued the corporate assessments for the years 2018, 2019 and 2020 on 24th October 2022.

10. The Appellant stated that a valid objection was issued and the objection acknowledgment dated 12th November 2022 was issued by the Respondent.

11. The Appellant averred that on filing the tax returns and accounts for the years 2018, 2019 and 2020, it noted that the Respondent had blocked the system preventing the Appellant from filing the correct tax returns and accounts showing the Appellant’s correct tax position for the said years.

12. That on 8th December 2022, the Respondent issued confirmation assessment notices for the years 2018, 2019 and 2020 disregarding the objections filed by the Appellant.

13. The Appellant posited that on 12th November 2022, the Appellant sent letters to the Respondent, but the Respondent did not respond to the letters and completely disregarded the Appellant’s issues.

14. The Appellant stated that no queries were raised as regards to the accounts for the years 2018, 2019 and 2020 hence the need to accept the tax accounts and returns as they are.

Appellant’s Prayers 15. The Appellant made the following prayers to the Tribunal:a.That the Tribunal considers the facts stated and orders the Respondent to withdraw the corporate tax assessments; andb.That the Tribunal allows the Appellant to file the tax returns for the years 2018, 2019 and 2020.

Respondent’s Case 16. The Respondent has set out its case in the Statement of Facts dated 22nd February 2023 and filed on even date wherein it restated the background of the case.

17. The Respondent’s Statement of Facts was based on the issue as to whether the appeal should be allowed.

18. The Respondent stated that section 24 of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”) allows a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information.

19. The Respondent stated that Section 77 of the Income Tax Act, CAP 470 of Kenya’s Laws (ITA) and Sections 29 and 31 of the TPA allows the Respondent to issue additional assessments where a taxpayer has been assessed of a lesser amount based on any additional available information and to the best of Respondent’s judgement.

20. The Respondent averred that there were variances between the income tax declared by the Appellant in its filed income tax returns and the VAT declared in the VAT returns for the tax period under review.

21. The Respondent averred that at the objection stage, the Appellant failed to provide the supporting documents despite having been requested to do so.

22. The Respondent averred that the Appellant failed to avail documentation as required under Sections 23, 58 and 59 of the TPA to enable the Respondent to ascertain the Appellant’s tax liability.

23. The Respondent averred that it is empowered under Sections 29 and 31 of the TPA to issue additional assessments based on available information and his best judgement.

24. The Respondent averred that the confirmation assessment notices dated 8th December 2022 are proper based on the information available to the Respondent.

Respondent’s Prayers 25. The Respondent prayed to the Tribunal for the following orders:a.That the confirmation assessment notices dated 8th December 2022 be upheld.b.That this appeal be dismissed with costs to the Respondent as the same is without merit.

Parties’ Submissions 26. The Appellant’s written submissions dated 24th July 2023 were filed on 27th July 2023. Whilst the Respondent’s written submissions dated 11th August 2023 were filed on 14th August 2023.

27. The Appellant stated that the Respondent issued system generated income tax company additional assessment order for the years 2018, 2019 and 2020 and issued a formal assessment covering Income Tax-Company via a letter dated 24th October 2022.

28. The Appellant submitted that it objected to the entire assessment via a letter dated 12th November 2022 and the Respondent confirmed the assessment by an objection decision via a letter dated 8th December 2022.

29. The Appellant submitted that the issues confirmed by the Respondent, and which are the subject of this appeal were that:a.The Appellant on filing the tax return and accounts for the three (3) years, it was noted that the Respondent had blocked the system preventing the filing of correct tax returns and accounts showing the correct tax position for the years.b.The Respondent erred in law in issuing confirmation notice and disregarding the fact that the returns could not be filed as the system was blocked.

30. The Appellant stated that the Respondent erred in law in giving the decision and not taking into consideration the explanation given by the Appellant for the filing of return that the Appellant had requested the Respondent that he was to file.

31. The Appellant submitted that the Respondent proceeded to issue assessments for the non-filing of the returns and accounts for the period when the Appellant had not filed.

32. The Appellant submitted that the Respondent disregarded the facts and explanations given and proceeded with reflecting the obligation and issued a confirmation of the assessment received.

33. The Appellant submitted that the Respondent did not give any feedback even after receiving all the documents, reconciliation and all the explanation given to him as per his request. The Appellant submitted that the Respondent’s actions resulted into unproportionate, unjust, unfair, and excessive punishment to Appellant.

34. The Appellant therefore prayed that the Tribunal considers the facts stated and to order the Respondent to accept the returns and accounts for the years 2018, 2019 and 2020 and withdraw all the issued assessments.

35. The Respondent raised a single issue for determination in its submissions which was:

Whether the Respondent’s confirmed assessment notices dated 8th December 2022 are proper in law. 36. The Respondent submitted that it is cognizant of the fact that the tax regime in Kenya is of self-assessment nature and the Appellant was under a duty to declare its income tax return as provided for in Section 52B (1) of the ITA. Section 52B (1) provides as follows:“Notwithstanding any other provisions of this Act-(a)Every individual chargeable to tax under this Act shall for any year of income commencing with the year of income 1992, furnish to the commissioner a return of income, including a self-assessment tax of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income; and(b)Every person, other than an individual chargeable to tax under the Act, shall for any accounting period commencing on or after 1st January 1992 furnish to the commissioner a return of income, including a self- assessment of his tax on such income, not later than the last day of the sixth month following the end of the year of income.”

37. Furthermore, section 28(1) of the TPA provides for self-assessment. Section 28(1) provides as follows:“A taxpayer who has submitted a self- assessment return in the prescribed form for a reporting period shall be treated as having made an assessment of the amount of tax payable (including nil amount) for the reporting period to which the returns relate being the amount set out in the return.”

38. The Respondent submitted that in spite of the fact that section 28(1) stipulates that a taxpayer self-assessment return shall be treated as an assessment of the amount of tax payable, the Commissioner is not bound by the said assessment as provided for in section 24(2) of the TPA. Section 24(2) provides as follows:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the commissioner.”

39. The Respondent averred that the additional income tax assessments were based on variances between the income tax declared by the Appellant in its filed income tax returns and the VAT declared in the VAT returns.

40. The Respondent averred that at the objection stage, the Appellant failed to avail the documents in support of the objection despite having been requested to avail the same vide an email dated 15th November 2022.

41. The Respondent submitted that the Appellant having failed to provide documentation in support of its objection, cannot then claim that it erred in confirming the additional income tax assessments.

42. The Respondent submitted that section 58 of the TPA grants it powers to inspect the records of the Appellant to ascertain the tax liability. Section 58 provides as follows:“(1)notwithstanding anything to the contrary in any written law, an authorized officer may inquire into the affairs of a person under any tax law, and shall at all times have full and free access to lands buildings, places to inspect all goods, equipment, devices and records, whether in the custody or control of a public officer or a body corporate or of any other person, and may make extracts from or copies of those records.(2)An officer acting under subsection (1) may require the owner or employee or a representative of the owner of the business, to give him all assistance and to answer all questions relating to the inquiry.”

43. The Respondent submitted that in Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR the High Court stated:“The Commissioner clearly explained that it based its decision the statement of accounts and returns the Company had filed. The Tribunal appreciated this fact when it concluded that it was the duty of the Company to provide all the documents and that the Commissioner was entitled to rely on the self-assessments and returns lodged by the Company in the absence of any other documents."

44. The Respondent averred that the Appellant failed to provide the documentation to dispute the tax liability and the Respondent applied its best judgement to determine the tax liability.

45. The Respondent relied on the case of Wilken Telecommunication Limitedvs Commissioner of Domestic Taxes TAT no. 195 of 2021 where this Tribunal pronounced itself on the issue of best judgment by quoting what was stated by Woolf J in Van Beckel v C&E QB Dec 1980 [1981] STC290 in paragraph 44 as follows:“... the very use of the word judgment' makes it clear that the commissioners are required to exercise powers in such a way that they make a value judgment on the material which is before them. Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due...what the words 'best of their judgment envisage, in my view, is that the Commissioner will fairly consider all material placed before them and on that material, come to a decision which is one which is reasonable and amount to tax which is due. As long as there is some material on which the commissioners act then they are not required to carry out investigations which may or may not result in further material being placed before them.”

46. The Respondent submitted that it is mandated under section 59 of the TPA to request for documents that relate to the tax liability of the Appellant. Section 59 provides as follows:“For the purpose of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the commissioner or an authorised officer may require any person, by notice in writing, to-(a)Produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)Furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice.”

47. The Respondent relied on the case of Zulma Traders Limited v Commissioner of Investigation & Enforcement [2018] wherein this Tribunal pronounced itself on section 59 of the TPA and the burden of proof in tax matters by quoting in paragraph 83 the South African case of Metcash Trading Limited vs Commissioner for the South African Revenue Service and Another which reaffirms the powers of the Respondent to request for the production of records and additional information and asserts that the burden of proof is on the Taxpayer by submitting all the necessary documentation to support their VAT refund claim.

48. The Respondent submitted that the onus was upon the Appellant to prove that the assessments were incorrect as provided in Section 56(1) of the TPA which places the burden of proof upon the Appellant in tax matters. Section 56(1) provides as follows:“In any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

49. The Respondent submitted that the Appellant contested the income tax additional assessments but failed to validate its objection by providing the documents requested by the Respondent.

50. The Respondent submitted that the case of Kenya Revenue Authority v. Maluki Kitili Mwendwa [2021] eKLR wherein (Mativo J as he then was) in paragraph 21 asserted to the issue of burden of proof in tax matters stating that:“the pertinent issue in this appeal as I see it the question of the taxpayer's burden of proof in tax cases. The party with the obligation of persuasion-what Wigmore termed the risk of non- persuasion-is said to bear the burden of proof. The effect of non-persuasion on a party with the burden of proof is that the particular issue at stake in the litigation will be decided against the party. Generally, the taxpayer has the burden of proof in any tax controversy. The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. This position enjoys statutory backing courtesy of section 56(1) of the TPA which provides that in any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. As if to underscore the import of the above provision, the legislature deployed the word "shall" in the said section meaning that the provision is couched in peremptory terms."

51. The Respondent relied on the case of Primarosa Flowers Ltd v. Commissioner of Domestic Taxes [2019] eKLR wherein (Makau J) pronounced himself on the issue of burden of proof in paragraph 23 as follows:“In Mulherin us Commissioner of Taxation (2013) FCAFC 115 the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied."

52. The Respondent also relied on the general rule of evidence that he who alleges must prove. Section 107 of the Evidence Act, CAP 80 of Kenya’s Laws (hereinafter “Evidence Act”) provides as follows:“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.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

53. The Respondent also relied on the Court of Appeal case of Mbuthia Macharia v. Annah Mutua Ndwiga & Another [2017] eKLR (Visram, Karanja, Koome. JJ. A) which held in paragraph 16 as follows:“the legal burden is discharged by way of evidence, with the opposing party having a corresponding duty to adduce evidence in rebuttal."

54. The Respondent submitted that from the aforementioned, it is clear that the Appellant has not discharged the burden of proof as stipulated in Section 56(1) of the TPA thus the Appeal herein is unmerited and should be dismissed with costs to the Respondent.

55. The Respondent finally submitted that the Respondent's confirmation assessment notices dated 8th December, 2022 are proper in law.

56. The Respondent therefore prayed that the income tax confirmation assessment notices dated 8th December, 2022 for the tax period years 2017 to 2019 be upheld and that this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues For Determination 57. Based on the pleadings and submissions filed by parties, the Tribunal has framed one issue for determination:Whether the Respondent’s invalidation decision communicated vide email on 15th November 2022 was justified.

Analysis And Findings 58. The Tribunal will proceed to analyse the single issue for determination that it has identified as outlined hereinunder:Whether the Respondent’s invalidation decision communicated vide email on 15th November 2022 was justified.

58. In the instance case, the Tribunal notes that the Respondent confirmed assessments for the year 2018 amounting to Kshs.5,576,267. 40, year 2019 amounting to Kshs.6,409,607. 70 and year 2020 amounting to Kshs.4,542,835. 25.

59. The Tribunal also notes that the Appellant disputed the confirmed assessments in stating that the Respondent did not consider its objection and the supporting documents provided to the Respondent. It is settled in law that the onus of proving the erroneousness of an additional assessment lies with the taxpayer and this burden may only move to the Respondent if the Appellant has made a prima facie case.

60. The Tribunal cites the High Court case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR. where Mativo J in which the issue of the party with whom or which the onus of proof lies was outlined and the doctrine in the Canadian Supreme Court case of Johnston v Minister of National Revenue where the court (1948) S.C.R. 486 was adopted. In the Canadian Case , the court held as follows:“The onus is on the taxpayer to "demolish the basic fact on which the taxation rested."

61. This Tribunal also confirmed this position on the burden of proof in TAT Appeal no. 55 of 2018 Boleyn International Ltd v. Commissioner of Investigations and Enforcement where it held as follows:“We find that the Appellant 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…”

62. The Tribunal, having perused the documents presented by the Appellant, notes that the Appellant’s objection only contains denials and no substantive reasons or grounds are given to challenge the assessments. The Appellant did not prove that the Respondent ignored the evidence and supporting documents it had already provided and that the Respondent did not exercise their best judgement in confirming the additional assessments.

63. The Tribunal observes that in each of the Appellant’s objections to the assessment orders for the years 2018, 2019 and 2020, the Appellant stated that its accountant had acted in malice by not concluding on its accounts on time.

64. The Tribunal has further noted the Appellants view that the assessed amounts were incorrect as there was loss brought forward from the previous years which had not been cleared. These averments were however, not supported by the Appellant by furnishing its correct books of accounts and returns to this Tribunal, which it alleged could not be uploaded at the objection stage.

65. The Tribunal has however sighted the Respondent’s electronic mail on 15th November 2022 to the Appellant. The following were stated in the electronic mail:“We have received your objection and noted that the same has not been validly been lodged, as it does not satisfy the requirements outlined under section 51(3) of the Tax Procedures Act (TPA) 2015 which states that:A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if a.The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb.In relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute, or has applied for an extension of time to pay the tax not in dispute under subsection 33(1)c.All the relevant documents relating to the objection have been submittedKindly state precisely the grounds of objection and avail supporting records to support the grounds of objection.Also avail supporting documents, which are not limited to:i.Certified bank statement(s)ii.Audited accountsiii.General ledgeriv.Expense ledgers and vouchers…”

66. The Tribunal has however, not sighted any subsequent electronic mail or letter by the Appellant confirming that they availed the said documents as requested by the Respondent. In support of its objection, the Appellant had the duty to provide all the documentation that would rebut the Respondent’s issued assessment.

67. The Tribunal notes that the Respondent has an obligation under section 31(1) of the TPA to exercise its best judgement in issuing an amended assessment where the Appellant has already filed its self-assessment.

68. The Tribunal relies on the findings in Family Signature Ltd v. The Commissioner of Investigations & Enforcement Nairobi TAT No. 25 of 2016 where the issue of whether the Respondent was justified in employing an alternative and indirect method of assessing the Appellant's estimated tax liability, was outlined. The Tribunal, in this matter, held as follows:“When the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high income margin."

69. Section 31(1) of the TPA provides as follows:“(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—………(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

70. The Tribunal is of the view that the Respondent is required to use all the information available to it in exercising its best judgement. In the instant case, the Respondent requested the Appellant to precisely state its grounds objection and to provide supporting documents but the Appellant did not heed to the same.

71. The Tribunal therefore finds that the invalidation of the objection communicated by the Respondent’s electronic mail of 15th November 2022 was justified and the Respondent exercised its best judgement in confirming the assessments as it relied on the available documents and therefore the confirmed assessments were proper in law.

Final Decision 72. For the reasons set out above, the Tribunal finds that this Appeal has no merit and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s confirmed assessment notices dated 8th December 2022 are proper in law and are hereby upheld.c.Each party to bear its own cost.

73. 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. SPENCERMEMBER MEMBERJUDGMENT APPEAL NO 85 OF 2023 EAGLE RETREAD LIMITED VS. COMMISSIONER OF DOMESTIC TAXES Page 13