[2024] KETAT 428 (KLR)

Environmental and Combustion Consultants v Commissioner of Domestic Taxes (Tax Appeal 1454 of 2022) [2024] KETAT 428 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 428 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1454 of 2022

E.N Wafula, Chair, RO Oluoch, LK Kimaru, Cynthia B. Mayaka & T Vikiru, Members

March 22, 2024

Between

Environmental and Combustion Consultants

Appellant

and

The Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited company registered under the Companies Act and whose principal business is in the handling and management of hazardous wastes.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The Respondent carried out a return review exercise on the Appellant’s iTax records as compared to its banking’s and it disallowed expenses related to salaries and wages for the year 2018 to 2022 totaling Kshs 68,289,070/-inclusive of penalties and interests.

4. The Appellant objected to the assessment and the objection were acknowledged as received in the iTax system on 15th September 2021.

5. The Respondent issued its objection decision vide a letter dated 29th August 2022.

6. Being aggrieved by the objection decision, the Appellant filed the Appeal on 30th November, 2022.

The Appeal 7. The Appellant in its Memorandum of Appeal dated 29th November 2022 and filed on 30th November 2022 cited the following grounds of Appeal:a.That the Honourable Commissioner erred in law and fact by failing to accord the Appellant the opportunity to be heard fairly before the determination of the objection in breach of Article 50 of the Constitution of Kenya which guarantees the right to be a fair hearing.b.That the Honourable Commissioner erred in law and fact by failing to find that the additional assessment of Kshs. 68,289,070 was erroneously and irregularly made.c.That the Honourable Commissioner erred in law and the fact by failing to find that the Appellant is not liable for the additional tax assessment of Kshs 68,289,070 since it was erroneously assessed.d.That the Honourable Commissioner erred in law and fact by failing to find that the Appellant had met the threshold for review of the additional tax assessment of Kshs 68,289,070. 00e.That the Honourable Commissioner erred in law and fact by failing to consider the objection purposively and find that the Kenya Revenue Authority had acted irregularly and unprocedural when making the additional tax assessment of Kshs 68,289,070 .00.

Appellant’s Case 8. The Appellant’s case is supported by its Statement of Facts dated 29th November 2022 and filed on 30th November 2022 and the written submissions dated 11th August 2023 and filed on 2nd October 2023.

9. The Appellant stated that it wrote its objection letter dated 29th August 2022 where it indicated that it was willing to cooperate and avail all the required documentation and information required by the Respondent.

10. That the Respondent delivered its decision on 29th August 2022 whereby it dismissed the objection because the supporting documents were not sufficient.

11. The Appellant averred that it had been denied the right to a fair hearing which is against Article 50 of the Constitution of Kenya and the principles of natural justice that no man shall be condemned unheard.

12. The Appellant stated that it had been denied the chance to be heard and to avail documents to help it support its objection. That the documents that it supplied to the Respondent were not considered in arriving at its assessment.

13. The Appellant stated that it had reported its income based on sales and services provided to the client under Section 3 of the Income Tax Act which specifically recognizes incomes what should be brought to charge excluding transfers from related companies and loans from other financial institutions. That the additional assessments based on variances between banking and filed returns should thus be vacated.

14. The Appellant was of the view that banking analysis should be used as a test of providing income but not as a foolproof method of income generated from business.

15. That it also made supplies to non-governmental organizations whose services were either exempt or zero-rated.

Appellant’s Prayers 16. The Appellant’s prayers to the Tribunal were for orders that:a.The decision of the Respondent dated 29th August 2022 be quashed /set asideb.The Notice of Additional Assessment of Kshs. 68,289,070. 00 for the year 2018 -2020 against it be quashed /set aside.c.The Appeal herein be allowed in its entirety.d.The costs of this suit be borne by the Respondent.

Respondent’s Case 17. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 13th January 2023 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 14th August 2023.

18. The Respondent stated that it noted:i.Variances in turnover declarations in the Appellant’s income tax and VAT returns as compared to turnovers established from the Appellant’s banking records for the years 2018 – 2020. That these variances were subjected to charges for income tax and VAT respectively.ii.That the Appellant had some input claims which had no corresponding sales declarations on the suppliers’ VAT returns. That these inputs were disallowed as over-claimed inputs.

19. The Respondent averred that the Appellant objected to the assessment on 14th September 2021 through iTax and contended that it needed time to verify supporting documents to ascertain its true tax position.

20. That to review the Appellant's objection, it requested several documents from the Appellant, such as banking analysis reconciliation, schedules of exempt sales and supporting documentation, and trial balances among other documents.

21. The Respondent averred that the assessments were correctly issued and conform to the Value Added Tax Act because the Appellant did not provide any evidence that would have altered the assessment.

22. Further, the Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to requests for documents hence no relevant documents or records were provided to support its objection.

23. The Respondent identified the following issues for determination:i.Whether the Respondent was justified in issuing the additional assessment;ii.Whether the Appellant discharged their burden of proof that the amount assessed was incorrect;

On whether the Respondent was justified in issuing the additional assessment; 24. The Respondent stated that it noted variances in the Appellant’s turnover declarations in the Appellant’s Income Tax and VAT returns as compared to turnovers established from its banking records for the years 2018-2020. That in addition, the Appellant had some input claims which had no corresponding sales declarations on the suppliers' VAT returns.

25. The Respondent submitted that the Appellant has a responsibility to file tax return and in doing so declare income earned during the tax period. That the Respondent was however not bound by the information provided and returns filed by a taxpayer such as the Appellant herein. It supported its position with the case of Oliver Merrick Fowler & Another v Kenya Revenue Authority [2022] eKLR.

26. That upon the Appellant’s failure to provide documents, it opted to exercise its mandate using the information available and to the best of its judgment.

27. That it made several follow-ups until 24th August 2022 when it decided to issue its objection decision.

On whether the Appellant discharged their burden of proof that the amount assessed was incorrect; 28. The Appellant stated that Section 56(1) of the Tax Procedure Act placed the burden of proof in any proceedings that relate to objections and appeals on the taxpayer. That it was upon the taxpayer to prove that a tax decision was incorrect or that the information relied on in making the assessment was wrong.

29. The Respondent submitted that the Appellant failed to discharge the burden of proof in failing to provide any documents in support of its objection and the expenses claimed.

Respondent’s Prayer 30. The Respondent prayed that the Tribunal:i.Dismisses the Appeal.ii.Upholds the decision dated 29th August 2022 issued by the Respondent demanding PAYE, Income tax and VAT of Kshs. 68,289,070 .00. iii.Awards costs of the Appeal to the Respondent.

Issue for Determination 31. Having considered the parties’ pleadings and all the documents attached to the Appeal, the Tribunal was of the view that the only issue for determination was: Whether the Respondent was justified in issuing its objection decision.

Analysis and Findings 32. The Appellant contended that the assessment against it was not justified because:i.The Respondent did not consider its documents.ii.The inter-company transfers were not part of its incomeiii.Exempted transactions with non-governmental organizations should have been excluded from the VATiv.The banking income should not have been relied on to determine its income

33. The Respondent on its part, retorted that the Appellant declined to supply it with relevant documents to help it reconsider its assessment. That in the circumstances it was obliged to apply its best judgment in arriving at its final assessment.

34. The Appellant has stated in paragraph 9 of its Statement of Facts that it“requested several documents from the Appellant, such as banking analysis, reconciliation, schedules of exempt sales and supporting documentation, trial balances etc.”

35. It again stated as follows in its objection decision dated 29th August 2022:“We requested you to provide the following documents for review in vain:i.Banking analysis reconciliationii.Schedules of exempt sales and supporting documentsiii.Trial balances…”

36. Section 30 of the TAT Act places the burden of proof in tax cases on the Appellant. It provides 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 is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

37. The Appellant was thus obliged to respond and address these assertions that were conspicuously and expressly raised by the Respondent in its Statement of Facts and the objection decision.

38. The Tribunal has looked at the Appellant’s Statement of Facts and Submissions on record and it has noted that the Appellant neither responded to these assertions nor did it specifically traverse and or deny these assertions.

39. The consequence of this, is that the Appellant has failed to discharge its burden of proof regarding the issue of whether it had supplied the documents that it had been requested to supply.

40. The Respondent’s assertion that it was never supplied with the specific itemized documents despite issuing several reminders to the Appellant stands undisplaced and proved.

41. Additionally, the Appellant is statutorily required to keep such records and supply them when requested to help the Respondent ascertain its tax liability. Section 29(1) of the TPA provides as follows regarding record keeping:“(1)A person shall—a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained;”

42. The Appellant was thus required to keep records that are related to the disputed tax liability and to also provide them when demanded. It failure to do so means that that Respondent was within its right to apply its best judgment to ascertain its tax liability.

43. Given the above, the Tribunal finds and holds that the Appellant’s failure to keep and share the documents that were required to help the Appellant ascertain its tax liability meant that it had failed to discharge its burden of proof in this Appeal.

Final Decision 44. The upshot of the foregoing is that the Appeal lacks merit. Consequently, the Tribunal makes the following Orders: -i.The Appeal be and is hereby dismissed.ii.The Respondent’s oobjection decision dated 29th August 2022 be and is hereby upheld.iii.Each party is to bear its own costs.

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBER.ABRAHAM K. KIPROTICH - MEMBER.CYNTHIA B. MAYAKA - MEMBER.TIMOTHY B. VIKIRU - MEMBER.