[2024] KETAT 570 (KLR)

Embassy Crystal Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal 154 (NRB) of 2023) [2024] KETAT 570 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 570 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 154 (NRB) of 2023

E.N Wafula, Chair, E Ng'ang'a, AK Kiprotich, EN Njeru & M Makau, Members

March 22, 2024

Between

Embassy Crystal Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act Cap 486 of the laws of Kenya in April 2020, and is engaged in the business of electrical supplies located in Kericho County. The Appellant also operates a fleet of heavy commercial trucks offering transport services to factories in Kericho, Bomet and Kisii Counties.

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 (the Authority) is an agency of the Government for the collection and receipt of all tax revenue.

3. Upon conclusion of the investigations, the Respondent issued the Appellant with a notice of assessment dated 13th October 2021 for Excise, VAT and income tax totaling to Kshs. 525,653,847. 00.

4. The Respondent objected to the assessment vide a letter dated 10th November 2021, subsequently the Respondent vide an email dated 16th November 2022 issued its decision invalidating the Appellant’s Objection.

5. Being aggrieved with the Respondent's confirmation of assessments the Appellant filed the present Appeal on 16th February 2023.

The Appeal 6. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal filed on 17th February 2023: -a.That the Respondent erred in law and fact in comparing the data for the income tax return for 2015 with the VAT filings for the period 2015 for the 6 months July, 2015 to December, 2015. b.That the Respondent erred in law and fact in assuming that cash sales made by the taxpayer cannot suffice to support the purchases made by purchasers who never gave the taxpayer their PIN certificates when making purchases.c.That the Respondent erred in law and fact in failing to use the matching concept in the review of costs incurred to produce income.d.That the Respondent erred in law and fact in disallowing the interest expenses claimed by the taxpayer in the financial statements.e.That the Respondent erred in law and fact in assuming that cash withdrawals made from the USD bank account were payments to Directors when the funds were withdrawn by the Director for business purposes when they travelled to China and Dubai to purchase trade items. The Respondent has assumed that because 2 transfers were made to a director of the company then all withdrawals were made to the same director.

Appelant’s Case 7. The Appellant’s case is premised on its:a.Statement of Facts dated on 16th February 2023 and filed on the 17th February 2023. b.Written submissions dated and filed on 20th October 2023.

8. The Appellant stated that it was issued with income tax assessment orders dated 29th March 2022 demanding taxes of Kshs. 52,741,615. 00 plus penalty and interest.

9. The Appellant averred that it was issued with VAT assessment orders on 29th March 2022 demanding total VAT taxes of Kshs. 14,308,867 .00 plus penalty and interest.

10. The Appellant stated that the Respondent through a desk review of the reconciliation between the filed Income tax returns and the bank statements and the third-party input VAT claims to arrive at variances between Income Tax returns and VAT returns to raise VAT assessment on the variances. The Respondent raised additional assessment for the years 2015 to 2020 of Kshs. 13,871,718. 00, Kshs. 894,414. 00, Kshs.12,205,395. 00, Kshs. 2,682,487. 00, Kshs. 17,860,727. 00 and Kshs. 5,226,972. 00 for Income Tax respectively.

11. The Appellant avowed that the Respondent also raised an additional assessment for the year 2015 for Kshs.14,305,867 relating to VAT.

12. The Appellant stated that the assessments were served upon it on 29th March 2022 through the iTax Portal.

13. The Appellant averred that it objected to the assessments on 8th May 2022 vide the iTax Portal as well as serving the letter to the Respondents tax service station.

14. The Appellant stated that the Respondent rejected the Appellant’s Objection on 16th November 2022. That the Respondent never communicated to the Appellant for the physical evidence required to verify the assertions made in the Objection. That there had been no communication from the Respondent for the documents like bank statements, invoices, Audited financial statements or any accounting records to collaborate the Appellants filings.

15. That the Appellant’s Objection to the assessment clearly indicated willingness to engage and provide the required documents like manual VAT returns for the period before iTax, the physical sales invoices to support the purchases claimed by the purchasers’ for whom the Respondent was alleging under declaration. That the Respondents decision to reject an objection without seeing the support documents points towards vendetta against the Appellant without giving the Appellant a hearing at all.

16. The Appellant stated that the Respondent fully rejected the Objections to the assessments vide an objection decision letter dated 16th November 2022. The Respondent confirmed the assessments on 16th November 2022 on the iTax portal.

17. The Appellant claimed that in raising the assessments, the Respondent relied on an investigation report done on the taxpayer and the Directors of the company and their related businesses. That the investigation clearly confirmed that there were trade transactions between the Directors business which had also been disallowed

18. The Appellant asserted that the Respondent also assessed VAT and income tax on variances between sales and VAT for the year of income 2015 just by not considering manual returns filed for the period January to June 2015 when the iTax system was still under consideration.

19. The Appellant stated that it had filed Income tax, VAT and PAYE returns for the period of review in full. That the Appellant had declared its income fully in the years under review.

20. The Appellant further stated that it had paid all the self-assessed tax on the declared income as per the Income Tax Act.

21. The Appellant claimed to have sought Alternative Dispute Resolution (ADR) with the Respondent which the Appellant claimed had gone without a firm resolution.

22. The Appellant averred that the Respondent also omitted the purchases made in the period when the taxpayer filed manual returns. That the Respondent also erred in assuming that sales made to cash sales customers had not been declared when the same was properly done in the VAT returns as well as the audited accounts which were declared in the income tax returns.

23. The Appellant averred that the income declared for VAT purposes and income tax purposes for the period 2015 agreed as per the VAT 57 prepared and shared with the Respondent. That the Appellant also provided evidence of the invoices claimed by purchasers which had been declared as cash sales since the purchasers had not provided PIN certificates when they made purchases.

24. The Appellant averred that due to the lack of the understanding of the tax payers heavy investment of commercial trucks which were financed by bank hire purchase facilities, the Respondent assumed that the taxpayer had utilized the hire purchase facilities in building the commercial buildings when the development was funded from internally generated proceeds of the business. That the diversification of business had been completely been missed by the Respondent

25. The Appellant stated that in the year 2015, the Respondent changed the filing of VAT returns from manual filing to online filing through the iTax system. The date for online filing was June 2015. That in the periods January to May 2015, the taxpayer filed manual VAT 3 returns and made payments for the taxes due every month.

26. The Appellant averred that the Respondent's officers omitted the income filed through the manual VAT returns and thus assumed an under declaration of income for both VAT and Income taxes when comparing the data in the iTax systems since the Manual VAT returns were not done on the iTax portal.

27. The Appellant further stated that the manual returns were availed to the Respondent's objection review team who never considered the same. That the Respondent’s IRO team never issued an objection decision on the matters at hand. The Manual VAT declarations for January to May 2015 had Vatable income of Kshs. 65,456,172. 00 with a commensurate output tax of Kshs. 10,472,987. 00 with related vatable purchases of Kshs. 63,629,698. 00 with a commensurate input tax of Kshs. 10,180,751. 00. That the taxpayer made VAT payments of Kshs. 292,236. 00 in the period.

28. That the income subjected to assessment in the period 2015 is as a result of the Respondent's officers not considering the incomes and purchases declared through the manual VAT returns.

29. That in the period under review the taxpayer made cash sales of Kshs. 274,995,319. 00 with a commensurate output VAT of Kshs. 43,144,918. 00.

30. The Appellant averred that it had given the Respondent the whole sales schedule of the taxpayer consisting of 2,787 invoices for the year 2015, 4,068 invoices for 2016, 4,868 invoices for 2017, 5,046 invoices for 2018, 4,662 invoices for 2019 and 4,657 invoices for 2020.

31. That in the schedule, the Appellant stated that it had isolated invoices made to customers who had purchases from the taxpayer and claimed input tax for ease of reference. The Appellant stated that it made referenced indexes in the workings to show sales made to each customer for ease of review.

32. The Appellant averred that the Respondent had not made any effort to look at the data provided. That the invoices data provided clear insight on the Appellant’s declarations. The comparison of the sales declared for income tax purposes and the Vatable sales indicated that income declared for income tax was higher since the taxpayer made Vat exempt sales.

33. The Appellant averred that it availed data for the periods 2017, 2018, 2019, 2020 and 2021 to confirm full declaration of sales made in the period. That Appellant asserted that it gave a detailed schedule of the sales made to the respective purchasers who had not given the taxpayer their PINs to be used in declaring sales on the VAT returns.

34. The Appellant submitted that it operated 18 heavy commercial vehicles which mainly transported tea for tea factories in Kericho, Nandi and Kisii Counties namely: Rorok Tea Factory, Teebesonik Tea Factory, Toror Tea Factory, Evergreen Tea Factory, Kobel tea Factory, Sangalo Tea Factory, Momul Tea Factory, Tirgaga Tea Factory, Kiamokama Tea Factory, Kapset Tea Factory, Mogogosiek Tea Factory, Unilever Kenya Ltd, Boito Tea Factory, Kapkoros Tea Factory, Boito Tea Factory, Gianchore Tea Factory and Tegat Tea Factory.

35. The Appellant further submitted that the trucks were also used in transportation of goods bought from Nairobi and Mombasa back to the taxpayer’s premises in Kericho. That the iTax ledger on advance tax clearly indicates how much advance tax the Appellants had paid to have the commercial vehicles operate and therefore the existence of the same was beyond dispute by the Respondent.

36. The Appellant further submitted that the comparison should also consider exempt purchases of petroleum products used by the Motor vehicles which were exempt from VAT until September 2018. The Appellant stated that it had shared the general ledger with the Respondent which clearly gave a breakdown of all the expenses incurred by the Appellant in generating taxable income.

37. The Appellant stated that its investment in transportation trucks has a value of Kshs. 110,294,813. 00 which is bank financed. The trucks were acquired on hire purchase from NIC bank and CFC Bank at the rate of 14. 75% per month. That the interest on motor vehicle financing in the period of tax review is Kshs. 27,168,229. 00.

38. The Appellant stated that the Respondent erred in assuming that all the interest relates to the residential property when most of the interest related to the motor vehicle asset finance.

39. The Appellant submitted that it completely disagreed with the Respondent on disallowing the interest expenses. That the petroleum products used in powering the trucks were exempt from VAT until September 2018 when petroleum products became Vatable. That the Respondent’s assumption that all purchases are vatable and thus assuming that purchase above the purchase declared for input VAT is baseless.

40. The Appellant further submitted that the Appellant had failed to demonstrate how he arrived at the VAT tax liability. The Appellant relied on Section 59 of the Tax Procedure Act which provides as follows;“(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; orc.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."

41. The Appellant argued that the law required that the Commissioner is entitled to require any person to produce any documents for examination for purposes of assessing the taxable income.

42. With regard to fair administration action, the Appellant relied on the Constitution under Article 47 which provides as follows:“(1)Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.2. If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.”

Appellant’s Prayer 43. The Appellant prayed for the following orders, that:a.This Appeal be allowed;b.The Respondent’s decision to demand VAT is inconsistent with the VAT Act;c.The Respondent’s decision to demand Corporation tax contravenes the Income Tax Act;d.The Respondent’s assessment dated 16th November 2022 be set aside and the same is unjust, unfair and in contravention of the law; ande.The Respondent amends the assessment to reflect the correct status.

Respondent’s Case 44. The Respondent opposed this Appeal while relying on its:a.Statement of Facts dated and filed on 29th March 2023 together with the documents annexed thereto.b.Written submissions dated 23rd October 2023 and filed on 31st October 2023.

45. The Respondent stated that it commenced investigations against the Appellant covering the period between 2015 to 2020 to establish the accuracy of the Appellants' tax returns.

46. The Respondent averred that it carried out the following test in order to ascertain the Appellant’s tax liability:a.Banking test - Comparison of the trade amount banked to the declarations in the filed iTax returns.b.Turnover test - Comparison of the income tax declared to the VAT returns.c.Jaspersoft and insight interrogation - To confirm the accuracy of sales declared and purchases claimed data from the two systems.d.Cost and expenses test - Comparing the total vatable cost and expenses claimed in VAT returns to all vatable cost and expenses claimed in Income Tax returns.

47. The Respondent stated that it noted that the Appellant failed to account for the income in the period under review. That it found negative variances in all the years under review, which was an indication that there was a likelihood of the existence of another bank account or that the Appellant did not bank all its business income.

48. The Respondent averred that the Appellant’s business was mostly cash based and this could explain why some business income may not have been deposited in its bank accounts.

49. The Respondent submitted that the turnover analysis which was a comparison of income declared in Income tax and VAT returns was conducted by the Respondent which revealed variances.

50. The Respondent therefore raised additional income tax assessments for the period 2015 to 2020 on 29th March 2022, amounting to Kshs. 52,741,614. 80.

51. The Respondent further raised additional VAT assessments for the period 2015 amounting to Kshs. 14,305,867. 09 on 29th March 2022.

52. The Respondent averred that the Appellant made an Objection to the assessments on 8th May 2022 on the iTax portal as well as serving the letter to the Respondent.

53. The Respondent stated that vide a letter dated 25th August 2022 it confirmed the assessments.

Respondent’s Prayers 54. The Respondent prayed for the following orders, that:a.The Appeal be dismissed for lack of merit; andb.The cost of the Appeal be awarded to the Respondent.

Issue for Determination 55. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there is only one issue that calls for its determination;Whether the Respondent’s assessment was justified.

Analysis and Determination 56. The Tribunal having determined the issue falling for its determination proceeds to analyse it as hereunder.

57. The crux of this matter is whether the Appellant was able to discharge its burden of proof as per Section 56 (1) of the Tax Procedures Act, which provides that the burden of proof shall be upon the taxpayer to prove that the Respondent’s decision is incorrect or could have been made otherwise.

58. The Appellant submitted that it filed manual returns for the period January 2015 to June 2015 since the iTax system was still under implementation. That the manual returns filed for the period January to June 2015 were availed to the Respondent as evidence to support the variance. It was the Appellant’s case that the Respondent omitted the same and issued an assessment for income tax on the variance in complete disregard of the manual returns which were validly filed and the requisite taxes paid.

59. With regard to manual VAT returns, the Appellant submitted that it had consistently filed its VAT returns since it commenced business as a sole proprietor before converting into a company.

60. With regard to sales declaration, the Appellant submitted that it had declared all its sales in the period 2015 to 2019. That there are many incidences where individuals and companies procured goods and transportation services from the taxpayer without capacity to make specific declaration of VAT sales in their individual PIN Numbers. The taxpayer went ahead and declared the sales as sales to customers not registered for VAT. The Appellant claimed that where the customer had given their names the sales invoice would be made in their names for the ease of identification.

61. With regard to non-declared sales the Appellant submitted that cash sales declared every year are much higher than the non-declared sales of Kshs. 44,790,937. 00 by the Respondent. The Appellant further submitted that it had further provided the sales data relating to the customers who had not provided PIN numbers which indicated that the sales made and declared by the taxpayer were higher than whatever the Respondent is alleging under declaration. The Appellant further submitted that it consistently operated an Electronic tax register which matched the sales declared for VAT purposes and thus there was no need to under declare sales.

62. With regard to under declared sales the Appellant submitted that it provided the Respondent with the schedules supporting the sales made to the customers who had claimed input tax which had been lumped together since they had not provided PIN numbers during the objection process.

63. Relating to over claimed expenses, the Appellant submitted that the Respondent's comparison of the purchases claimed in the VAT returns to the expenses claimed for income tax purposes were misguided. That the purchases in the VAT returns included fixed assets purchases of commercial vehicles and other equipment on which input VAT was claimable.

64. With regard with interest expense, the Appellant submitted that the Respondent erred in assuming that the interest expenses relates to the development of rental property only. The Appellant stated that it took a loan of Kshs. 55,000,000. 00 in May 2016 to partially fund the develop of the real estate development. The said loan was for a period of 8 years and the monthly interest on loan were Kshs. 227,083. 00 with an annual interest was Kshs. 2,775,000. 00.

65. The Tribunal has perused the documents presented before it and the Tribunal takes note of the fact that the Appellant has not provided documents or supporting documents in support of its averments.

66. The Appellant submitted that there was a lack of the understanding of its business of commercial trucks which were financed by bank hire purchase facilities. That the Respondent assumed the Appellant had utilized the hire purchase facilities in building the commercial buildings when the development was funded from internally generated proceeds of the business. The Tribunal notes that documents like the hire purchase agreement referred to herein by the Appellant have not been presented before the Tribunal.

67. The Appellant also submitted that it availed data for the periods 2017, 2018, 2019, 2020 and 2021 to confirm full declaration of sales made in the period.The Appellant asserted that it gave a detailed schedule of the sales made to the respective purchasers who had not given the taxpayer their PINs to be used in declaring sales on the VAT returns. However, these data on full declarations of sales as well as the detailed schedules of sales were also not provided before the Tribunal.

68. The Tribunal is guided by the case of Alfred Kioko Muteti vs. Timothy Miheso another [2015] eKLR where the court held that: -“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

69. The Respondent submitted that it relied on the banking analysis system in determining Appellant's income which is all the material the Respondent could find in coming up with the basis of the assessment on the best judgement principal.

70. The Tribunal notes of the case of Digital Box Limited vs. Commissioner of Investigations & Enforcement which addresses the banking analysis approach and stated that: -“Further, the Courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment.”

71. The same position was held in the matter of Bachmann vs. The Queen,2015 TCC51 where the Court stated that:“The Court has recognised that in an appropriate case a bank deposit analysis is an acceptable method to compute income.”

72. The Tribunal observes paragraph 108 of the Digital Box Judgement, that states that:“Once it is established that the method is allowed, the question is whether the method was applied in arriving at a reasonable assessment in the case at hand. The Tribunal is guided by the test set out in CA McCourtie LON/92/191 where it was stated:“In addition to the conclusions drawn by Woolf J in Boeckle earlier Tribunal decisions identified three further propositions of relevance in determining whether an assessment is reasonable. These are, first that the facts should be objectively gathered and intelligently interpreted; secondly, that the calculations should be arithmetically sound; and finally that, any sampling technique should be representative and free from bias."

73. The Tribunal notes that the Appellant did not provide any document relating to the Objection for review by the Respondent. Further, the Respondent submitted that while conducting its investigations, it relied on available information and applied its best judgement to arrive at the assessments, in the absence of explanations and evidence provided by the Appellant.

74. In the application of the best judgement principle, the Tribunal relies on High Court case of Van Boeckel vs. C & E Commissioners where Woolf J, as he then was, said:“...the very use of the word judgment' makes it clear that the commissioners are required to exercise their 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 dueThirdly, it should be recognised, particularly bearing in mind the primary obligation of the taxpayer, to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain the information without carrying out exhaustive investigations. What the words best of their judgment' envisage, in my view, is that the that material, come to a decision which is one which is reasonable and not required to carry out investigations which may or may not result in further material being placed before them.”

75. The Tribunal is guided by the case of Pili Management Consultant Ltd vs. Commissioner of Income Tax Kenya Revenue Authority Civil Appeal no 154 of 2007 (2010) eKLR where the Court of Appeal held that the Commissioner was entitled to view the monies in the Appellant’s account as income in the absence of proof to the contrary.

76. The Tribunal is guided by Section 56 of the Tax Procedures Act which places the burden on the taxpayer to prove that a tax decision by the Respondent is incorrect. The lack of provision of documentation allowed the Respondent to rely on the banking test, the turnover test, the jaspersoft and insight interrogation test and the cost and expenses test.

77. The Tribunal, in view of the foregoing, therefore finds that the assessment made by the Respondent was justified.

Final Decision 78. On the basis of the foregoing analysis, the Tribunal finds that this Appeal lacks merit and proceeds to issue the following orders;a.The Appeal be and is hereby dismissed.b.The Respondent’s decision confirming the assessments and contained in the letter dated 16th November 2022 be and is hereby upheld.c.Each party is to bear its own costs.

79. It is so ordered.

DATED and DELIVERED at NAIROBI this 22nd Day of March, 2024ERIC NYONGESA WAFULA - CHAIRMANEUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBER