[2023] KETAT 949 (KLR)

Elle Kenya Limited v Commissioner of Investigation & Enforcement Department (Tax Appeal 1402 of 2022) [2023] KETAT 949 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 949 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1402 of 2022

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka, E Ng'ang'a & B Gitari, Members

December 20, 2023

Between

Elle Kenya Limited

Appellant

and

Commissioner of Investigation & Enforcement Department

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya under the Companies Act. Its principal business is the manufacture and sale of compounded spirits and spirituous beverages.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning 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 Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The issues in dispute herein arose when the Respondent investigated the alleged under-declaration of Excise duty, VAT and Income tax for the period 2015 to 2019.

4. Upon conclusion of the investigation, the Respondent issued the Appellant with a notice of assessment dated 13th October 2021 for Excise duty, VAT and Income tax totalling Kshs 525,653,847. 00.

5. The Appellant objected to the assessment vide a letter dated 10th November 2021 an

6. The Respondent subsequently issued an email dated 16th December 2021 invalidating the Objection because the Appellant did not provide all the required documents.

7. A letter confirming the assessment was thereafter issued on the 30th September 2022.

8. The Appellant was aggrieved by the Respondent’s decision and it filed its Appeal on 28th October 2022.

The Appeal 9. The Appellant’s Memorandum of Appeal which was filed and dated on 21st November 2022 was premised on the following grounds of appeal:-a.That the Respondent erred in law and fact by invalidating the Appellant’s objection based on lack of documents yet this was a reconciliation audit that was based on reconciliation of caps against production and cash received in the bank?b.That the Respondent erred in law and fact by using both the Bank Deposit Analysis and the Input-Output analysis in the determination of the taxable income, a scenario that may result in double taxation. Further, the Respondent used both Excise Stamps and caps in the determination of the Excise duty payable which would lead to double counting of the same income.c.That the Respondent erred in law and fact by raising additional assessments for Excise duty for the period between 2015 and 2020, based on ‘Activations with no corresponding tax declarations and payments,’ a period which the Appellant had already been assessed, (on the same basis) and additional assessments issued to them.d.That the Respondent erred in law and fact by not making adjustments for the variances between bottle and/or caps for the raw materials and finished goods in its assessment.e.That the Respondent erred in law and fact by ignoring the deliveries accounted for through the EGMS system and only considered the manual deliveries for the year 2015. f.That the Respondent erred in law and fact by using packaging estimates to determine imported caps instead of the actual caps imported.g.That the Respondent erred in law and fact by failing to make adjustments for non-income bank deposits received in the Appellant’s bank accounts thereby erroneously charging tax on non-income.

Appellant’s Case 9. The Appellant’s case was premised on its:a.Statement of Facts dated and filed on the 21st November 2022b.Written Submissions dated 25th July 2023 and filed on 1st August 2023.

10. The Appellant stated that Respondent ignored all the information it had provided and proceeded to issue a notice of assessment dated 13th October 2021 for VAT, Excise duty, an Income tax amounting to Ksh 525,653,848. 00.

11. It was its case that the Respondent had based its taxation on the following grounds:i.Excisea.Non-activated excise stampsb.Excise stamp activations with no corresponding tax declarations and paymentc.Input-output on caps/enclosureii.Income Taxa.Based on bank deposit analysisiii.VATa.Based on bank deposits analysis

12. That it responded to all issues raised by the Respondent through telephone conversations and correspondences but the Respondent disregarded its responses and the information it had shared with it by confirming its assessment in toto.

13. The Appellant submitted that Article 47 of the Constitution of Kenya 2010 guaranteed it a right to fair administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair. That this right required the Respondent to consider the explanations and information that had been availed to it by the Appellant as was stated in Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] eKLR.

14. The Appellant stated that further to the letter of objection dated 10th December 2021 which was delivered manually and received in the Respondent’s office, the Appellant also proceeded to send its objections in the i-Tax portal on the 15th December 2021. That due to IT and technological challenges in capturing the assessment order numbers, the Appellant could not object to all the assessments orders in the i-Tax portal.

15. That this prompted the Respondent’s agents, vide an email dated 26th January 2022, to demand taxes amounting to Ksh 268,349,945. That the issue was however explained vide its letter dated 31st January 2022 and further objections were filed and admitted by the Respondent as exhibited in the objection acknowledgement receipts that were issued to it. That this online objection was followed up with a manual objection that was received in the Respondent’s office on 11th November 2021 under the provisions of Section 73 of the TPA, 2015.

16. It was its position that the Respondent's failure to invoke Section 73(2) of the TPA by telling the Appellant that its Objection was not in the prescribed format implied that the said objection had been admitted.

17. That the Respondent instead wrote to the Appellant on the 16th December 2021, requesting documentation to support the objection. The Appellant affirmed that it did not see this communication from the Respondent until a follow-up reminder vide an email dated 24th February 2022.

18. That the documents regarding this Appeal had been presented to the Assessing Officer who was based in the same station as the Reviewing Officer. In its view, it was thus unnecessary for the Reviewing Officer to request documents and explanations which had already been presented to it through the Assessing Officer with whom he was sharing the same office and was seated only two desks away.

19. That despite this, the Respondent continued to send reminders for documentation and never considered the notice of objection together with the documents and explanations that had been submitted to its officers.

20. The Appellant opined that the Respondent's decision to issue its Objection decision dated 30th September 2022 while ignoring its explanations bordered on procedural impropriety and was also against the Fair Administrative Actions Act, 2015 and contrary to the decision of the High Court in Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR and Kenya Medical Association Housing Cooperative Society Limited v Attorney General & another [2016] eKLR

21. The Appellant identified the following as the issues for determination in its Appeal and addressed them as follows:a.Whether the Respondent was justified in using both the bank deposits analysis and the Input-Output methods in the determination of the taxable income.b.Whether the Respondent was justified in raising additional assessments for Excise Duty for the period between 2015 and 2020. c.Whether the Respondent was justified in raising additional assessments on gross established income.d.Whether the Respondent was justified in raising additional assessments based on banking without adjusting for non-income bank deposits received in the bank.e.Whether the Respondent was justified in validating the Appellant’s Objection on the basis that the Appellant did discharge its burden of proof.

a. Whether The Respondent Was Justified In Using Both The Bank Deposits Analysis And The Input-output Methods In The Determination Of The Taxable Income. 22. The Appellant submitted that the Respondent erred in law and fact by relying on both bank account deposits received in the Appellant's bank account and the Input-output method in the determination of the taxable income for the period under investigation.

23. This, the Appellant averred, amounted to double taxation since the same income earned by the company had been taxed twice, using two different bases of taxation.

b. Whether The Respondent Was Justified In Raising Additional Assessments For Excise Duty For The Period Between 2015 And 2020. 24. The Appellant averred that the Respondent issued a notice of assessment for Excise duty of Kshs 97,738,895 for the period between 2015 and 2020, based on 'Activations with no corresponding tax declarations and payments', a period during which the taxpayer had already been assessed, (on the same basis) and additional assessments issued to it.

25. It was thus its submission that the Respondent’s actions amounted to double taxation since the period had already been covered under audit by the TSO for the same period.

26. The Appellant posited that the Respondent's action breached the settled doctrine of legitimate expectation as was laid down in Kenya Revenue Authority, Commissioner Customs Services & Julius Musyoki V Darasa Investments limited [2018] eKLR.

27. The Appellant also held the view that the Respondent’s action in invalidating the Objection 10 months after the receipt of its objection was not only against Section 4 of the Fair Administrative Actions Act, 2015 and Article 47 of the Constitution of Kenya, 2010 but also against its legitimate expectation.

28. The Appellant’s further Submission was that it had a legitimate expectation under the provisions of Section 51 of the Tax Procedures Act, 2015 that its prayers were granted upon the lapse of 60 days after the issuance of its objection. Or at least the Respondent should have pronounced itself on the notice of objection, rather than invalidating the objection after 10 months.

c. Whether The Respondent Was Justified In Raising Additional Assessments On Gross Established Income 29. The Appellant averred that the Respondent erred in law and fact by raising additional assessments on gross established incomes contrary to the provisions of Sections 1(1) and 16(1) of the Income Tax Act, CAP 470 which allows the Appellant an opportunity to claim all the expenses and/or cost incurred wholly and exclusively for purposes of earning an income in determination of the taxable income. It relied on the case of Afya-X-Ray-Centre-Ltd-v-Commissioner-of-Domestic-taxes [2019] eKLR to stress this point.

d. Whether The Respondent Was Justified In Raising Additional Assessments Based On Bankings Without Adjusting For Non-income Bank Deposits Received In The Bank. 30. The Appellant submitted that the Respondent erred in law and fact by subjecting all the bank deposits in its bank account to taxation without making any adjustments for non-income bank deposits.

31. That the Appellant grossed up all the bankings received in its bank account and subjected it to taxation contrary to the provisions of Section3(2) of the Income Tax Act while acting on the assumption that all the monies received by the Appellant were gains and/or profits from the business carried out by the Appellant, contrary to the facts presented to the Respondent during the in-person interviews. It again relied on the case of Afya X-Ray-Centre-Ltd-v-Commissioner of Domestic Taxes [2019]eKLR to assert that the Appellant erred in taxing its business affairs using the banking method.

32. That the Respondent erred in subjecting all bank deposits in the Appellant’s bank account to taxation because they were grossly exaggerated.

e. Whether The Respondent Was Justified In Invalidating The Appellant’s Objection On The Basis That The Appellant Did Discharge Its Burden Of Proof 33. The Appellant posited that this was a reconciliation audit which required the counting and reconciliation of figures and that the Respondent had all the import data upon which all the imported caps and bottles were declared. That it provided the importation documents upon which the reconciliation had been based and flow meter data upon which the input and output data were based.

34. That it was thus prejudicial for the Respondent to aver that it had not discharged its burden of proof when the relevant documents regarding the reconciliation had been provided.

35. It was also its view that the Respondent was unfair to claim that it had not discharged its burden more than 10 months after the objection was issued.

Appellant’s Prayers 36. The Appellant's prayer to this Tribunal is for the the following orders:a.That this Appeal be allowed.b.That this Honourable Tribunal forthwith withdraws and cancels the Objection decision letter dated 30th September 2022. c.That this Honourable Tribunal directs the parties based on the determination of taxable income to cure the assessment of any instances of double taxation.d.That this Honourable Tribunal directs the Respondent to consider all the material facts presented before him to enable him it determine the correct tax position.e.That this Honourable Tribunal orders the Respondent to stay the enforcement of assessed taxes until the matter is conclusively determined.

Respondent’s Case 37. The Respondent opposed this Appeal while relying on its:-a.Statement of Facts dated 19th December 2022 and filed on the same date.b.Written Submissions dated 10th July 2023 and filed on 11th July 2023.

38. The Respondent stated that it investigated the Appellant on suspicion that it was under-declaring Excise duty, VAT and Income tax. That in carrying out these investigations it analysed the Appellant’s bank account at Equity, issued excise stamps, and an Input/output analysis of the caps/ enclosures from where it served it with a notice of tax assessments on the 13th of October 2021 with a tax liability of Kshs 525,653,848 in the tax heads of Excise duty, VAT and Corporation tax.

39. That the Appellant objected on the 10th November 2021, disputing its tax assessment on the basis that the Respondent used banking and Input-output analysis even though it had access to documentation and information on the Appellant’s factory production and other documents provided by the Appellant including declared deliveries for the financial year of 2015, the 2015 EGMS deliveries, the obsolete caps and the erroneous use of the GPM in banking analysis.

40. The Respondent maintained that it sought further documentation from the Appellant but the same was not provided thus leading to the invalidation of the objection and confirmation of the assessment amounting to Kshs. 525,653,848. 00 as due and payable.

41. That the documents provided by the Appellant to explain its loans, interbank transfers, inter-company transfers, director's advances, reversals, return to drawer cheques, unpaid cheques and other bank-related charges were not satisfactory and hence its decision.

42. The Respondent indicated that it had relied on Section 51(3) of the Tax Procedure Act to invalidate the Appellant’s objection because the Appellant was not able to provide documentation to support its objection. That as such it was not in err in its decision. It supported this position with the cases of Boleyn International Limited versus Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No 55 of 2019) and Rongai Tiles and Sanitary Ware Limited versus Commissioner of Domestic Taxes (tax Appeal Tribunal No 163 of 2017)

43. That it had factored spillage and wastages in the opening and closing stock of Appellant’s finished products when it made its decision. That the Appellant however did not provide supporting documentation to support the 73,728 finished product allegedly declared in 2015, and as such Excise duty was charged on that consignment.

44. The Respondent insisted that it requested the Appellant for documents vide emails dated 16th December 2021 and a reminder dated 24th February 2022. That the Appellant confirmed to the Respondent that it would avail all supporting documents vide an email dated 24th February 2022 but those documents were never availed.

45. The Respondent stated that according to Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate that it had discharged the burden of proof. That the Appellant did not discharge that burden of proof in this case as no documentary evidence was availed to the Respondent to enable it to render a meritorious decision in the circumstances it supported this position with the case of Ushindi Exporters Limited versus the commissioner of investigation and Enforcement (tax Appeals Tribunal No 7 of 2015)

46. The Respondent further submitted that it relied on its own best judgment based on information available to it in compliance with Section 31 of the Tax Procedures Act while raising the additional income tax assessments and as supported by the decision of the High Court in Commissioner of domestic taxes v Altech Stream (Ea.) Limited [2021] eKLR.

47. That the Appellant failed in its duty to keep records for five years per the provisions of Sections 23, 54A and 59 of the Tax Procedure Act.

48. The Respondent posited that the Appellant had failed to show that its assessments were incorrect, its allegations were just mere statements as opposed to grounds of objection and thus its decision retained its presumption of correctness. It cited the cases of Nairobi TAT No. 25 of 2016 family Signature Limited vs. the Commissioner of Investigations & Enforcement, and TAT NO. 28 OF 2018-Joycott General Contractors Limited -Vs- Kenya Revenue Authority, to support this position.

Respondent’s Prayers 49. Based on the above assertions the Respondent prayed that this Tribunal do:a.Upholds the Respondent’s confirmation of assessment dated 30th September 2022 as proper and in conformity with the provisions of the law.b.Dismisses the Appeal with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 50. The Tribunal having considered the pleadings filed and the submissions made by the parties is of the view that the Appeal herein crystallizes into the following issues for its determination:a.Whether the Appellant’s Objection was valid.b.Whether the Respondent was justified in invalidating the Appellant’s objection and in confirming its assessment.

Analysis And Determination a. Whether The Appellant’s Objection Was Valid. 51. The Respondent issued a communication dated 16th December 2021 invalidating the Appellant's objection under Section 51(3) of the TPA for failure by the Appellant to provide documents in support of its objection. Section 51(3) of the TPA provides as follows in regard to the validity of an objection:“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); and(c)all the relevant documents relating to the objection have been submitted.”

52. The parties thereafter engaged in a series of meetings and correspondences to allow the Appellant to validate its objection which had now been clarified vide an email dated 27th October 2020 where the Respondent itemised the following as the documents that it required to validate the Objection:-a.Opening and closing excise stamp balances(Jan 2015-31-08-2020b.Opening and closing balances of finished products (Jan 2015-31-08-2020c.Manual excise returns for the period Jan 2015-April 2016d.Manual VAT returns for the period Jan 2015-Nov 2015e.Opening and closing balances fori.Capsii.Bottlesiii.Labelsf.Quantities of wastage (stamps and packaging material) if any for each year.g.Audited financial statements for the company for the years 2015-2019. h.Payrolls for years 2015-2019

53. The Appellant stated that it wrote a letter to the Respondent on the 27tth November 2020 where it provided a reconciliation schedule for stamps, spirits and finished products, and on the 20th August 2020 where it provided additional information about its operations.

54. The Tribunal noted that contrary to the Appellant’s assertion that it had provided all the documents that had been asked of it, the said Appellant did not provide evidence to show that the required documents were ever supplied to the Respondent.

55. Further the record of Appeal shows that the Appellant only provided a reconciliation schedule for stamps, spirits and finished products. This reconciliation was not even among the list of documents that the Respondent had asked of it.

56. This means that the Appellant did not provide any of the documents that it had been requested to supply. It has also not proffered any reason or an explanation why it was not able to provide the documents that the Respondent had demanded from it so as to validate its objection.

57. The burden to prove that it had provided the documents that had been demanded by the Respondent lay with the Appellant. This legal position is concretised in Section 30 of the TAT Act which reads as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment isexcessive; or(b)in any other case, that the tax decision should not have been madeor should have been made differently.”

58. The issue of burden of proof under Section 30 of the TAT Act was clarified by the High Court in Primarosa Flowers Ltd -vs Commissioner of Domestic Taxes (2019)eKLR, where it was held that:-“In tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge the income tax assessment. The onus is on the taxpayer in proving that the assessment excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

59. The onus in this Appeal was thus on the Appellant to prove that the invalidation was erroneous or illegal; or that its objection was valid to the extent that it had provided the Respondent with all the documents required to validate the objection. Even now as the Appellant avers that the Respondent's Invalidation was erroneous, it has still not provided documents to support this allegation.

60. The Tribunal has also noted that the Respondent’s invalidation letter dated 16th December 2021 and a reminder letter dated 24th February 2022 both requested the Appellant to validate its objection within 7 days. However the Appellant did not respond and or comply with these directives to validate its objection by sharing documents with the Respondent to enable it validate its objection.

61. Moreover, nothing also exists on record to show that the- Appellant ever requested the Respondent to extend for it time to validate its objection.

62. The Tribunal had the chance to address the issue of an invalid objection in TAT APPEAL NO. 291 of 2021 Hasus Energy Limited vs Commissioner of Domestic Taxes, where it held that:“The Appellant was indulged by the Respondent to provide documents in support of its objection via a letter dated 14th October 2020; and later vide an email dated 21st October 2020 but that too, the Appellant failed to provide.Accordingly, the Tribunal does not consider the purported Notice of Objection as validly lodged and as being sustainable in law.”

63. Similarly in this case, the Appellant was given the chance and even issued with a reminder to provide documents so as to validate its objection, but it failed to do so. Accordingly the Tribunal finds and holds that the Appellant’s objection breached the expressed provisions of Section 51(3)(c) of the TPA. The Respondent was thus justified to confirm its assessment vide a letter dated 30th September 2022 for the reason the Appellant’s objection was not validly lodged.

64. Having held that the Appellant’s Objection was not validly lodged, the second issue that was identified for determination falls moot and it shall thus not be considered by the Tribunal.

Final Decision 65. On the basis of the foregoing analysis the Tribunal finds that the Appeal lacks merit and accordingly proceeds to issue the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent‘s invalidation decision dated 16th December 2021 and confirmation of assessment letter dated 30th September 2022 be and are hereby upheld.c.Each party is to bear its own costs.

66. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20THDAY OF DECEMBER, 2023. ERIC NYONGESA WAFULA..............CHAIRMANDR. RODNEY O. OLUOCH......................MEMBERABRAHAM K. KIPROTICH.....................MEMBERCYNTHIA B. MAYAKA.............................MEMBEREUNICE NG’ANG’A..................................MEMBERBERNADETTE GITARI............................MEMBER