[2024] KETAT 10 (KLR)

Elgon Tea and Coffee Limited v Commissioner of Domestic Taxes (Appeal 1264 of 2022) [2024] KETAT 10 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 10 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1264 of 2022

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

January 26, 2024

Between

Elgon Tea and Coffee Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability Company incorporated in Kenya whose principal business activity is tea processing for export.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of Kenya laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant was issued with a pre-assessment notice on 28th January, 2022 in respect of the periods 2015 -2020 in which it was requested to provide reconciliations and explanations in 14 days. Since the Appellant did not provide all the requisite documentation, the Respondent issued a notice of assessment on 20th June, 2022 through which the additional adjustments and taxes were calculated as Kshs. 444,943,190. 00.

4. The Respondent issued raised the additional assessments on I-Tax on various dates as follows:-Assessment Number Period Assessment date Objection date Amount in Kshs.

KRA202202724876 2015 28. 04. 2022 16. 07. 2022 129,635,716. 00

KRA202207047074 2016 17. 05. 2022 16. 07. 2022 2,915,972. 00

KRA202208993983 2017 07. 06. 2022 16. 07. 2022 35,299,480. 00

KRA202210853166 2018 21. 06. 2022 16. 07. 2022 262,152,041. 00

KRA202210853317 2019 21. 06. 2022 16. 07. 2022 14,939,981. 00

5. The Appellant had carried forward a total loss of Kshs. 542,899,033. 00 over the review period. The adjustments of Kshs. 444,943,190. 00 were applied to the loss leading to a loss carried forward in the last year of review (2019) of Kshs. 92,486,107. 00.

6. The Appellant made late objections in respect of the years 2015 and 2016 but the same were allowed by the Respondent through its letter dated 29th July, 2022. The Respondent proceeded to render its objection decision was issued on 12th September, 2022.

7. The Appellant, being aggrieved by the review decision of the Respondent, filed its Notice of Appeal on 12th October, 2022.

The Appeal 8. The Appeal as contained in the Memorandum of Appeal dated 25th October, 2022 and filed on 26th October, 2022 is premised on the following grounds:i.That the Respondent erred in law and fact by failing to appreciate the applicable law on making application for investment deduction as stipulated in Paragraph 24 (1) (d) of the Second Schedule to the Income Tax Act, Cap 470 of Kenya’s Laws (hereinafter ‘ITA’).ii.That the Respondent erred in law and in fact by refusing to accept the Appellant’s claim for investment deduction on construction of an industrial building, purchase and installation of plant and machinery used for purpose of manufacture as provided under paragraph 24 of the second schedule of ITA.iii.That Respondent erred in law and in fact in failing to apply the criteria for deduction on investment undertaken by the Appellant in the year 2014/2015. iv.That Respondent erred in law and fact in failing to allow the Appellant’s investment deduction in respect of machinery by providing invoices of the purchase of the machinery and installation and use in manufacturing undertaken.v.That Respondent erred in law and in fact carrying out an assessment without due compliance with the mandatory requirement of the Tax Procedures Act, No. 29 of 2015 (hereinafter ‘TPA’) the ITA, the Fair Administrative Actions Act and the Constitution of the Republic of Kenya.vi.That Respondent erred in law and in fact by failing to appreciate and rely on records provided in support of capital investments on 22nd November, 2018 in arriving at its decision on the 20th of June, 2022 affirmed in its decision dated 12th September, 2022. vii.That Respondent erred in law and in fact in arriving at a decision without inspection of the premises to establish whether construction was done and whether pursuant thereto capital expenditure was incurred.viii.That the Respondent erred in law and in fact in undertaking assessment for additional/ adjustment tax amounting to Kshs. 14,939,981. 00 being unreconciled salary variance between the salaries as per the PAYE return and accounts returns uploaded in the I-Tax, and Donations (CSR).ix.That the Respondent erred in law and in fact in undertaking another assessment order no. KRA202210853166 for the year 2018 on 21st June, 2022 which shows incremental tax liability of Kshs. 244,940,360. 16. x.That Respondent erred in law and in fact by issuing another tax assessment on the 20th of June, 2022 demanding for additional tax amounting to Kshs. 2,915,972. 00 being the difference between the salaries as per the PAYE return and the accounts return uploaded in I-Tax.xi.That Respondent erred in law and in fact in disallowing the Appellant’s objection to additional PAYE and objection to assessment and further additional/ adjustment tax for the period between 2015 to 2020. xii.That Respondent erred in law and in fact by failing to provide reasons for its decisions in issuing the assessments therefore violating the Appellant’s constitutional right to fair administrative action.xiii.That Respondent erred in law and in fact by failing to consider supporting documentation provided by the Appellant and introduced additional requirements in its objection decision.

The Appellant’s Case 9. The Appellant set out its case in the Statement of Facts dated 25th October, 2022 and filed on 26th October, 2022 in which it stated as hereunder:

10. The Appellant stated that following the tax assessment by the Respondent pursuant to Section 31 of the TPA and in respect of the years 2015 and 2020 on 20th June, 2022. The Appellant had claimed a Capital allowance of Kshs. 174,880,599. 00 in 2015 but the Respondent adjusted the amount claimed on the basis that out of the capital allowances claimed, in 2015, it was only Kshs.45,244,883. 00 that was supported and therefore capital allowances amounting to Kshs. 129,635,716. 00 was disallowed by the Respondent.

11. That the Appellant had however supported its claim for investment deduction as requested in November, 2018 by delivery of a file to the Respondent with complete records of capital allowances.

12. That the Respondent provided it with a summary of how it arrived at adjustments of the additional corporate tax payable. The adjustments across the 4 years was assessed at Kshs. 444,943,190. 00 which was erroneous in its view as it did not consider the documents that it had provided in support of the application for capital allowances/investment deductions.

13. That the Appellant provided documents to support the purported unsupported claim of Kshs. 142,437,754. 96 which would have caused the total investment deduction it was entitled to be Kshs. 172,325,913. 96. In this regard, the additional Capital expenditure had been capitalised in its balance sheet and the items purchased captured in the Company’s asset register.

14. That the Respondent requested information in the pre-assessment undertaken in 2018 and the information was provided on 22nd November, 2018. The Respondent did not revert or request further information until its I-tax assessment order on 28th April, 2022.

15. According to the Appellant, there was no pending tax liability in 2015 and 2016 and it was taken by surprise when assessment order No. KRA202210853266 in respect of th year 2018 dated 21st June, 2022 showed an incremental tax liability of Kshs. 244,940,360. 16. It insisted that since it provided supporting documents for investment deduction the issue had been resolved and the subsequent disallowance of the investment deduction was in bad faith as the matter had been appropriately addressed.

16. That notably, it supplied documents in support of investment deductions in the year 2015 to the Respondent. The same was received and acknowledge and then later its file was reported missing and/or misplaced and could not be retrieved by the Respondent causing the matter to be referred to the Nairobi office. At tat point the Respondent served it with a pre-assessment notice on 28th January, 2022 notifying it of the findings for the years 2015 to 2020.

17. The Appellant stated that it engaged in correspondence, meetings, discussions, visits , calls and electronic mails and on each occasion, it provided additional information and explanations for the period between 2015 and 2018 as justification for the information earlier provided in support of claims raised.

18. That it had provided information sought through the Respondent’s Eldoret office and has endeavoured to re-submit the same through the i-tax portal. It has explained the salary and wages noted in the objection decisions and explained that the variances were in relation to casual wages paid in 2016 and all PAYE tax due for the period that was duly paid. It has explained variances in income tax and VAT returns amounting to Kshs. 7,125,374. 00 in respect of the year 2018 which arose out of its failure to file annual returns in respect of the year 2017.

19. The Appellant explained variances in bad debts expenses and donations that it had undertaken on account of its Corporate Social Responsibility program. That the additional assessment by the Respondent in respect of the year 2019 was due to the assumption by the Respondent that the amount filed using the i-tax portal was Kshs. 23,766,239. 00 which related to salaries paid but the explanation it gave was that it constituted other staff related expenses including staff training, NSSF employer contribution, staff uniform including protective equipment, staff medical, payroll salaries and wages, NITA, Staff travelling expenses, daily casual wages making the total Kshs. 38,327,995. 71.

20. That in respect of the year 2019, the variance of Kshs. 14,939,981. 00 was due to the wrong classification of payroll and labour costs in the accounts for the period under assessment and the same explanation applies for variances noted for the year 2018 and 2016. According to it, PAYE tax paid agreed with the payroll amount hence there was no need for additional tax.

21. According to the Appellant the tax assessment notices and subsequent assessment issued by the Respondent did not have a basis in law. It quoted in its pleadings the provisions of the ITA governing investment deductions namely Part V of the Second Schedule of the Act in paragraph 24 titled ‘buildings and machinery.’

22. According to the Appellant, the documents provided including records of invoices, payments and export documents in support of the capital deductions and that its deduction claim ought to have been allowed in full. The Respondent had an opportunity to undertake a site visit to verify the nature of installations, equipment purchased and buildings constructed.

23. That in any case, the Appellant had demonstrated its entitlement to investment deduction in respect of machinery by providing invoices for the purchase of the machinery, installation and use in the manufacture of Tea. The Respondent had outlined its reason for disallowing the deduction as being the lack of documents / records lack of documents and these had been availed and acknowledged by the Respondent.

24. That the action of disallowing capital deductions was not founded in law and being that it was without legal basis was ultra vires and void ab initio.

25. The Appellant averred that the Respondent did not provide reasons for its decision in the tax assessment notices that were issued. It noted that Article 47 of the Constitution of Kenya provides that ‘every person has a right to administrative action that is expedient, efficient lawful, reasonable and procedurally fair’. That the Fair Administrative Actions which gives effect to Article 47 of the Constitution requires in Section 4(2) that everyone has a right to be given reasons for a particular administrative action.

26. That the Respondent, had a statutory duty to provide its reasons for disallowing the claim for investment deductions and the variances. The failure to provide reasons for that was not only a violation of its right to fair administrative action but also placed it in a prejudiced position as it was unsure of the basis it required to defend its position.

27. That the Respondent failed to consider the supporting documentation provided by the Appellant, it did not conduct a site visit and introduced additional requirements in its objection decision. As a compliant taxpayer, it engaged the Respondent, provided supporting documentation for the assessments and despite disagreeing with the legality of the tax assessment notices.

28. The Appellant stated that the Respondent’s failure to visit the site in 2018 contributed to the rejection of the supporting documents submitted to verify the capital investment incurred by the company and the buildings constructed on site. The allegation by the Respondent that some of the supporting documentation was not availed was unfounded and was an attempt to deny the Appellant its right to claim investment deductions incurred on it purchases on capital expenditure. It has complied and provided this information to the Tribunal to disprove the assertions by the Respondent that it had missing information.

Appellant’s Prayers 29. In view of the foregoing, the Appellant prayed for the following orders from the Tribunal:a.That the objection decision contained in the letter dated 12th September, 2022 be annulled and set aside in its entirety;b.This appeal be allowed with costs to the Appellant; andc.Any other orders that the Honourable Tribunal may deem fit.

Respondent’s Case 30. The Respondent’s case was as set out in its Statement of Facts dated and filed on 25th November, 2022. The Respondent stated as follows:

31. The Respondent stated that upon issuing the pre-assessment notice on 28th January, 2022 in respect of the period 2015-2020 it requested the Appellant to provide reconciliations and explanations in 14 days. The Appellant failed to avail the requested information and it therefore proceeded to issue a notice of assessment on 20th June, 2022 making a total adjustment amounting to Kshs. 444,943,190. 00 leading to the ‘carried forward loss’ in respect of 2019 being Kshs. 92,486,107. 00 instead of Kshs. 542,899,033. 00 as claimed by the Appellant. It also raised additional assessment on i-tax on variant dates.

32. The Respondent averred that the Appellant made late objections in respect of the years 2015 and 2016 which it allowed on 29th July, 2022. It issued its objection decision vide a letter dated 12th September, 2022.

33. It responded to grounds (i), (ii) (iii),(iv),(v),(vi) and (vii) by indicating that it sought to verify the correctness of the capital allowances claimed by the Appellant amounting to Kshs. 219,784,046. 00 in respect of the 2015 year of income and disallowed Kshs. 129,635,716. 00 which the Appellant could not verify. However, out of the amount of Kshs. 129,635,716. 00, the Appellant provided documents on 22nd November, 2018 to support Kshs. 29,888,159. 00.

34. The Respondent placed reliance on Section 59 of the TPA which empowers it to seek information relating to ascertainment of the correct tax liability of the Appellant, which provides as follows:“Production of records(1)For the purposes 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; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

35. According to the Respondent, when the Appellant objects to the assessments it has issued, it ought to provide all the relevant information that it relies upon in making its objection. In this regard Section 51(3) (c) of the TPA provides that notice of objections are treated as validly lodged if all the relevant documents relating to the objection have been submitted.

36. That the Respondent also reviewed the Appellants VAT returns for the first year of trading and upon review established that items amount to Kshs. 15,356,724. 00 qualified for Investment deduction. It however, noted that items such as furniture and fittings, phones computers and printers listed in the schedule did not qualify for investment deduction.

37. That in response to grounds (viii), (x) and (xi) the Respondent had noted variances between salaries and wages as filed in the monthly PAYE returns and compared those declared in the income returns in respect of 2016 and 2019. It reviewed the general legers provided in 2016 and 2018 which revealed that the salaries and wages expensed in the income tax returns comprised of salaries and wages paid, training fees, NITA, welfare expenses, staff uniform expenses, staff travelling and meals expenses.

38. The Respondent averred that the Appellant failed to provide support for these for example, daily worksheets, proof of payment of casual staff, NITA /NSSF returns and payment receipts invoices for staff uniforms bought, training fee invoices amongst other items. That during a meeting with the Appellant’s tax agent on 8th August, 2022, the Appellant stated that it was dropping its contention against bad debts and donations allowed.

39. In response to ground (ix) of the Appeal, the Respondent noted that the Appellant claimed credit amounting to Kshs. 244, 940,360. 16 in relation to investment deductions under Section 42 of ITA which provides as follows:“42. Computation of credits under special arrangements(1)This section shall have effect where, under a special arrangement, foreign tax payable in respect of income derived by a person resident in Kenya is to be allowed as a credit against tax chargeable in respect of that income.”

40. The Respondent noted that the Appellant never earned foreign income, nor did it pay tax in a foreign jurisdiction and therefore lodgement of its tax claims under Section 42 of ITA was incorrect and misguided.

41. In response to grounds (v), (xii) and (xiii), the Respondent stated that it had requested reconciliations, explanations and support documentation for the issues raised yet the Appellant failed to submit the requisite documents despite several reminders from it. It therefore proceeded to issue additional assessment based on the information available such as the documents provided on 22nd November, 2018 and used its best judgement pursuant to Section 24(2) of TPA.

42. The Respondent’s view is that it exercised fairness by taking into consideration the Appellant’s VAT returns for the first year of trading to establish if there were items that could have been claimed relating to investment deduction. That the Appellant failed to submit documents to fully support the grounds stated in its objection to satisfy the amendments sought. It therefore issued the objection decision giving reasons for rejection in line with the relevant law and statutes.

Respondent’s Prayers 43. In view of the foregoing the Respondent prayed that its objection decision be upheld as proper and in conformity with the provisions of the law and that the Appeal would be dismissed with costs as the same was devoid of any merit.

Submissions by the Parties 44. The Written Submissions of the Appellant dated 24th July, 2023 and filed on 10th August, 2023 and those of the Respondent dated 5th July, 2023 and filed on 7th July, 2023 were adopted during the hearing on 27th September, 2023. The Appellant submitted as follows in its written submissions:-

45. That according to the Appellant, it had identified 6 issues for determination and each has been identified and has been analysed as shown below:

i. Whether the Appellant was entitled to Capital Investment Deduction 46. That it provided the Respondent with all supporting documents for investment deduction through its letter dated 22nd November, 2018 and accordingly the issue was resolved in light of the information it provided. That the disallowance of the claim for deduction was therefore in bad faith as it was disallowed more than 5 years after the issue had bene addressed and supported adequately. It asserted that it supplied documents in support of investment deductions in the year 2015 to the Respondent’s office in Eldoret and the same were duly received and acknowledged.

47. That the Appellant was there for genuinely surprised by the assessment notice dated 28th January, 2022 and more shocked that its file was reported missing or misplaced and could not be retrieved. The statement by the Respondent that it did not facilitate conduct of a proper verification through a site visit and provision of all necessary documents.

48. The Appellant admitted that citing Section 42 of the ITA was an oversight on its part and cited Article 159 (2) (d) of the Constitution which states that justice shall be administered without undue regard to technicalities. That the Respondent failed, refused, ignored and/ or neglected to act on the objections lodged by the Appellant affirming its position on the pre-assessment notice.

49. To buttress its position, the Appellant relied on Commissioner of Domestic Taxes Vs. Maltings Limited [2013] eKLR Commercial Civil Case of 2010 and Income Tax vs. T Limited (No. 2) EA (1971) where it was held that:‘for expenditure to be deductible under circulating capital it must have been incurred for the direct purpose of producing profits’

50. The Black’s law Dictionary Free Online Legal Dictionary 2nd Edition defined the following terms:a.A capital asset is one that is set to generate income and one for which depreciation is claimed usually.b.A capital loss is the amount by which the purchase price of an asset exceeds the selling price; the loss is realised when the asset is sold.c.Capital expenditure is described as that which is incurred when a business spends money either to buy fixed assets or to add the value of an existing fixed asset with a useful life beyond the taxable year. ‘

51. That in this Appeal the Appellant had demonstrated that it was entitled to investment deduction in respect of machinery by providing the invoice of the purchase of the machinery, installation and use in manufacture of tea. That the expenses were ‘once of’ and qualified to be classified as capital investment as held in Income Tax vs. T Limited (No. 2) EA (1971) where the court opined that:-“Expenditure resulting into an asset procured in a “once for all payment” would be considered as capital outlay.”

52. According to the Appellant, the general principle in Kenya was that expenses were tax deductible if incurred wholly and exclusively to generate taxable income. The same principle, applied to capital allowances that are permitted at varying rates (on a straight-line basis) for assets used for business purposes, including building and machinery used in manufacturing, industrial buildings and hotels, machinery and plant, agricultural works and mining.

53. That it was imperative that the real reason for the expense would be looked at to determine whether the same amounted to capital expenditure or expenses wholly or exclusively incurred for the production of income. It provided records of invoices payments and export documents in support of the capital deductions and therefore the investment deduction claim ought to have been allowed in full.

54. That the Respondent had an opportunity to visit the site and verify the nature of installations, equipment purchased and buildings constructed and it was ready , willing and available for the site visit and its relevance in resolving the controversy, The Respondent’s decision to disallow capital deductions was unfounded in law, prejudicial to the Appellant and subsequently by disallowing objections to assessment by the Appellant was without legal basis. The Respondent was on a fishing expedition, a complete detour and in the process failed to consider all the claims presented for deduction.

55. The Appellant further cited Adix Plastics Limited Vs. Commissioner of Domestic Taxes (Tax Appeal No. 173 of 2017) and Sukari Investments Limited Vs. Commissioner of Domestic Taxes (Tax Appeal No. 81 of 2021[2022] eKLR) to buttress its position on capital deductions.

(ii) Whether the Respondent carried out proper assessment of the sums claimed in a letter dated 22nd November, 2018. 56. The Appellant noted that the Respondent’s reason for disallowing input capital deductions in the objection decision was on account of its failure to provide records which it insists had been availed and acknowledged by the Respondent. That the assessment was undertaken on the basis of information that it had supplied to the Respondent and this offended its legitimate expectation to be treated fairly and without bias.

57. That the Respondent acted in contempt by issuing it with another tax assessment notice in complete disregard to the objection to the assessment based on variances noted in the I-Tax portal and accounts. That regardless of the information requested and provided, the Respondent went on to issue a further assessment in gross abuse of its office and powers.

58. That the Appellant provided all information and explanation as outlined below:-a.It explained that the variances in salary and wages as being a result of casual wages paid in the year 2016 and all PAYE tax due for the period duly paid.b.The variances in income tax and VAT returns amounting to Kshs. 7,125,374. 00 in respect of 2018 arose over its failure to file annual returns for the year 2017. It filed and provided the requisite supporting documents through the i-tax platform.c.It explained variances in bad debts (2017) and donations (2017 -2019). The donations were on account of repair of access roads to the factory which it undertook on account of Corporate Social Responsibility.d.PAYE tax paid was in agreement with the amount indicated in the payroll hence there was no need for additional tax.e.The supporting documents for items posted in the ledger on account of NITA were provided to support the claim for NITA payments.f.The additional assessment by the Respondent in respect of 2019 was on the assumption that the amount filed using the i-tax return under salaries and wages was Kshs. 23,766,239. 00 but it also constituted other staff related expenses. The variance of Kshs. 14,939,981. 00 was therefore due to wrong classification of payroll and labour costs in the accounts for th period under assessment. The same explanation applied to variances noted in this regard in respect of the years 2018 and 2016.

(iii) Whether the Respondent provide reasons for its decision in the tax assessment notices issued? 59. That the Respondent failed to give reasons for its decision in the tax assessment notice that was issued. It was its view that the Respondent had a statutory duty to provide reasons why it disallowed claim for investment deductions and the variances inspite of it providing sufficient proof and supporting documents in support. The failure to provide reasons made it difficult to determine the basis on which it needed to defend its position.

60. According to it there was not basis in law for the tax assessment and notices issued by the Respondent. It reiterated its position that some of the payments it made under salaries and wages related to salaries paid but constituted other staff related expenses.

61. It had fully paid all PAYE tax for the period under assessment and the rejection of its objection to the additional PAYE tax was unsupported and unfounded in law. It lodged a valid objection based on the fact that the Respondent purported to tax untaxed expenses.

(iv) Whether the decision by the Respondent issue through the letter dated 12th September, 2022 should be upheld 62. That the Respondent did not provide reasons for its decision in confirming the tax assessments which was itself issued after inordinate delay. The Respondent failed to consider the supporting documentation provided by it and failed to conduct a site visit that was planned without providing reasons and then went ahead to introduce additional requirements in tis objection decision.

63. That accordingly, the Respondent’s objection decision dated 12th September, 2022 which was based on the Respondent’s notice of assessment on 20th June, 2022 was defective, ill-advised and should not be upheld. That the fact that the Respondent failed to visit the site contributed to the rejection of the supporting documents submitted to verify the nature and extent of the capital investment incurred by the company in land acquisition, construction of the factory premises and buildings and the assorted equipment installed at its factory.

64. That the Appellant provided all documents and denied that the same were not availed. That the allegation that it did not provide documents was an attempt to deny the Appellant its right to claim investment deduction incurred on account of capital investments and expenditure.

(v) Whether the Respondent’s Statement of Facts dated 25th November, 2022 should be considered. 65. The Appellant urged the Tribunal to ignore the Respondent’s statement of Facts dated 25th November, 2022 as it denied that it did not supply information in paragraphs 12, 13 and 14 it admit that documents were supplied by it on 22nd November, 2018. The delay from 2018 when documents were supplied until-January 2022 when the Respondent gave its pre-assessment notice dated 20th June, 2022 smacked of abuse of office, negligence and misuse of powers or discretion.

66. That it was unfortunate that the Respondent sought to apply the provisions of Section 24 (2) of the TPA without exhausting the avenues for reconciliation of items produced prior to i-TAX and proceeded to have made decisions that contravened the express provisions of the law. That Section 59 of TPA was exercised without provide it an opportunity to review the information required from the correspondence of the Respondent.

67. The Respondent’s Statement of facts did not address the issues of criteria for capital deductions nor did it itemize the items presented, the claims allowed and disallowed for any additional information to be provided by it. It was therefore untrue that the Respondent provided reasons based on law, procedures and that notices issued to it were never responded to. Infact, the Respondent’s letter dated 29th July, 2022 which is marked ‘INTERNAL’ was never shared with it.

68. The Respondent reviewed the prayers of the Appellant and identified as single issue for determination in its submissions as outlined below.

Whether the Respondent erred in the computation and confirming the additional assessment 69. The Respondent stated that in exercising its mandate pursuant to section 31 of TPA, it issued additional assessment against the Appellant to ensure that the returns of the Appellant reflected the true tax position. This Section of TPA allowed it to amend assessments by making alterations or additions from the available information and on its best judgement. It also made the Appellant liable for the correct amount of tax payable in respect of the reporting period to which the original assessment was related.

70. That once the assessment was received by the Appellant, the burden of disproving the assessment lay with the Appellant. In an ideal situation the Appellant would be expected to demonstrate how the Respondent erred in coming to the tax position in the assessment pursuant to section 56(1) of TPA.

71. To buttress its position regarding the Appellant’s burden of proof it cited Grace Njeri Githua Vs. Commissioner of Investigations and Enforcement (TAT No. 102 of 2018) in which the Tribunal emphasised that the burden of proving that an assessment was wrong lay with the Appellant. More particularly the Tribunal held as follows:“In this Appeal, the Appellant has not provided the Tribunal with enough evidence to show that the net income the Respondent has based the tax assessment was not income or is subject to further cost deduction arriving at a net profit. It is trite in law that the burden of proof is on the taxpayer to show that the tax so assessed is not due from her.”

72. That the Appellant ought to have raised an objection pursuant to Section 51 (3) of TPA which provides as follows:“A notice of objection shall be treated as validly lodged by a taxpayer undersubsection (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.”

73. That the Appellant failed to provide specific relevant documents relating to the objection and due the failure, the grounds of objection remained mere averments by the Appellant without basis. That there was communication between itself and the Appellant wherein it sought documents from the Appellant to validate the objection and the since the Appellant was non- compliant it was forced to confirm the assessment.

74. The Respondent cited Boleyn International Limited vs. Commissioner of Domestic Taxes [TAT No. 55 of 2018] where the Tribunal had held as follows: -“On March, 2018 the Appellant lodged an objection with the Respondent. However, the said objection did not reiterate the grounds of objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide relevant documents in support of its alleged objection. Therefore, there was not conceivable way the Respondent would have considered the Appellant’s objection as the same did not place itself within the parameters of section 51(3) of the TPA.”

75. It further cited Afya Xray Centre Limited Vs. Commissioner of Domestic Taxes [TAT No. 70 of 2017] where it was held that:-“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent’s finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent’s Assessment after all the Appellant by law bears the burden of proof…….”

76. That whereas Section 24 of TPA allows for self-assessment, the Respondent is not bound by the information therein and can assess for additional taxes based on any other available information. It was free to use all the information and evidence provided before it to determine that the taxes were due and owing in exercising its statutory mandate as bestowed by Article 210 of Kenya’s Constitution.

77. The Respondent cited Holland Vs United States of America 121 (1954) in which the Supreme Court held that:“to protect the revenue from those who do not render true accounts, the government must be free to use all legal evidence available to it in determining whether the taxpayer’s books and records accurately reflect his financial history and that the indirect method used need to be exact, but must be reasonable in the light of the surrounding facts.”

78. The Respondent stated that it applied the proper criteria in relation to raising the assessments and declined of the investment deduction raised by the Appellant. It also cited the case of Republic vs Commissioner of Customs & Excise Exparte Abdi Gulet Olus [2014] eKLR where Justice Murithi in his judgement stated as follows:-“Having found that the Respondent acted reasonably within its statutory authority without arbitrariness, bad faith, bias or discrimination, there is no occasion for the grant of the judicial review orders sought. It must be accepted that where a statute grants power to a body, the court will not interfere with its exercise unless it is exercised without the necessary statutory basis or it is being exercised oppressively.”

79. That the Appellant did not make any attempt to discharge its burden of proof even before the Tribunal. That Section 107 of the Evidence Act provides that whoever desires any court to give judgement on any legal right or liability dependent on the existence of facts which he asserts must prove those facts exists. Where a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.

80. The Respondent averred that the Appellant was yet to provide the statutory foundation of its error in the assessment and disallowance of the investment deduction. That having established that there was no error in its additional assessment, it submitted that the assessment and objection were both right in law.

Issues for Determination 81. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions finds that there is a single issue that calls for its determination as follows:

i. Whether the adjustment in respect of Corporate Taxes was justified. Analysis and Findings 82. The Tribunal has noted that this dispute seems to stem from the fact that the Appellant did not file a tax return in 2020 thereby prompting an investigation by the Respondent. The Respondent then issued an assessment of additional taxes as outlined in its letter dated 20th June, 2022 and subsequent objection decision dated 12th September, 2022. The Respondent’s audit was conducted in respect of the years 2015 to 2019 and led to a review of the loss carried forward in the Appellant’s books from Kshs. 542,899,033. 00 to Kshs. 92,486,107. 00.

83. The Tribunal has noted that the Respondent, in its pleadings, averred that its reason for issuing the adjustments to Corporation tax was that the Appellant did not provide adequate documents or information. Pursuant to Section 59 (1) of TPA, The Respondent is empowered to seek any information in relation to the ascertainment of the correct tax liability of an Appellant. This Section states as follows:-“59. Production of records(1)For the purposes 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; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

84. The Tribunal has observed that the tax adjustments were due to the following analysis by the Respondent:i.In respect of the year 2015, the capital allowances that had been claimed by the Appellant.ii.In respect of 2016 -2019 – variances between income tax and VAT return sales declarations; variances between PAYE returns and employment costs in income tax returns.iii.In respect of 2017- The Appellant submitted a Nil return.iv.In respect of 2018- claims of a credit under Section 42 of ITA.v.In respect of 2020 – the Appellant failed or neglected to file their income tax return.

85. The Tribunal found that the Appellant provided documents through its letter dated 22nd November, 2018 and the Respondent acknowledged this fact. However, the documents could support only a portion of the capital allowances claimed. The Respondent also reviewed the Appellant’s VAT input tax and noted that some of the VAT input claimed related to capital purchases/expenditure and based on that analysis, the Respondent allowed a further portion of the capital allowances claimed by the Appellant.

86. The Tribunal further notes that the Appellant provided some documentation at the Appeal stage including but not limited to:-i.Financial statements for the period under review,ii.A title deed in its name,iii.Part of a page of a valuation report in respect of the land it owned,iv.Several invoices,v.Agreements for the purchase of a generator (dated 13th May, 2015); a warranty for the purchase of a tractor;vi.Proforma invoice and acknowledgement of payment for equipment purchased from south Africa in 2014;vii.A receipt from Pembroke limited for Kshs. 3. 5 million for an instalment payment in respect of construction works the company carried out at the Tea factory.

87. Most of the documents provided as analysed above were obtained in 2014 or 2015. The Tribunal has found that the documentation produced in support of the Appeal appears to be those already provided to the Respondent through the letter dated 22nd November, 2018. It is therefore not clear whether or not there was a duplication of documents provided at both the Objection and Appeal stage.

88. Pursuant to Section 56 (1) of TPA and Section 30 of the Tax Appeals Tribunal Act (hereinafter ‘TAT’) the Appellant has the burden of proving the incorrectness of a tax decision. More particularly, Section 56 (1) of TPA provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

89. It is Tribunal’s view that once the taxpayer adduces evidence by providing documents, relevant facts, and agreeing to site inspections, site visits and interviews, the burden must shift to the Respondent to controvert the proof put forward by the Appellant.

90. In Mbuthia Macharia vs. Annah Mutua Ndwiga & Another Civil Appeal No. 297 of 2015 [2017] eKLR, the Court of Appeal when dealing with the issue of burden of proof observed as follows:“The legal burden is discharged by way of evidence, with the opposing party having a corresponding duty of adducing evidence in rebuttal. This constitutes evidential burden. Therefore, while both the legal and evidential burdens initially rested upon the Appellant, the evidential burden may shift in the course of trial, depending on the evidence adduced. As the weight of evidence given by either side during the trial varies, so will the evidential burden shift to the party who would fail without further evidence.”

91. In the instant case, the Appellant has failed to discharge the burden of proving that the tax decision was incorrect by failing to produce documents to support its objection to the Respondent’s decision. The Tribunal finds that the Appellant did not explain adequately why it filed a nil return in 2017. It did not support the failure to file a tax return in the year 2020. It never supported, with documents, its claim under section 42 of the ITA [ section 42 credits]. It only partially supported its investment deductions/ capital allowance claims.

92. The Tribunal has observed that in its pleadings, the Appellant did not provide new information to support its averments. For example, the Appellant indicated that the Respondent failed to provide reasons for its decision in the tax assessment notices issued. The Tribunal finds that this averment is incorrect as clearly outlined in the objection decision dated 12th September 2022.

93. In view of the foregoing, the Tribunal holds that the adjustment in respect of corporate taxes was justified.

Final Decision 94. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 12th September, 2022 be and is hereby upheld.c.Each party to bear its own costs.

95. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI MOHAMMED A DIRIYEMEMBER MEMBERSPENCER S. OLOLCHIKEMEMBER