[2025] KETAT 183 (KLR)

Equip Agencies Limited v Commissioner of Legal Services and Board Coordination & another (Tax Appeal E424 of 2024) [2025] KETAT 183 (KLR) (Commercial and Tax) (14 March 2025) (Judgment)

Neutral citation: [2025] KETAT 183 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E424 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members

March 14, 2025

Between

Equip Agencies Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

1st Respondent

Commissioner of Domestic Taxes

2nd Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated and registered in Kenya under the Companies Act whose main principal activity is general wholesale trade

2. The 1st and 2nd Respondents are principal officers appointed under Section 13 of the Kenya Revenue Authority Act, and the Authority is charged with the responsibility of among others, assessment, collection, receipting and accounting for all tax revenues as an agency of the Government of Kenya, and the administration and enforcement of the statutes set out under the schedule to the Act.

3. The Respondents issued the Appellant with a notice of assessment dated 21st December, 2023 for VAT and Corporation tax amounting to Kshs. 310,085,415. 00.

4. The Appellant objected on iTax and by a letter on 18th January, 2024.

5. The Respondents issued an objection decision to the Appellant on 18th March, 2024.

6. The Appellant aggrieved by the Respondents’ objection decision lodged a Notice of Appeal to the Tribunal dated 4h April, 2024 and filed on the even date.

The Appeal 7. The Appellant lodged its Memorandum of Appeal dated 17th April, 2024 on 18th April, 2024 setting out the following grounds of Appeal;i.That the Respondent’s decision is illegal for disallowing legitimate interest expenses.ii.That the Respondent erred in finding that a sum of Kshs. 6,985,000. 00 received from Archer and Wilcock Advocates was not a refund on a cancelled sale of property.iii.That the Respondents erred in disallowing purchases worth Kshs. 375,585,501. 00 from various suppliers.iv.That the Respondents erred in upholding the decision to charge motor vehicle benefit on vehicles owned by the Appellant.v.That the Respondents’ decision is erroneous in law and in fact in that it disallowed the Appellant's input VAT without any reasonable basis and without considering that the same were made within six months as provided for by the law.vi.That the Respondents erred in law and in fact in holding that the Appellant had not provided sufficient supporting documents.vii.That the Respondents' decision is illegal, null and void for breaching the clear provisions of the Tax Procedures Act and the Value Added Tax Act.viii.That the Respondents' decision violated the Appellant's legitimate expectation of proper and fair administration of tax law by the Respondents to the detriment of the Appellant.ix.That without prejudice to the foregoing grounds, the Respondents failed to consider that the Appellant had VAT credits which could be carried forward and which the Respondents could have offset against the demand for VAT.

Appellant’s Case 8. The Appellant set out its case based on the following documents:i.Its Statement of Facts dated 17th April, 2024 and filed on 18th April, 2024. ii.Its written submissions dated 9th November, 2024 and filed on 13th November, 2024

9. That the objection decision by the Respondent is illegal, unconscionable, oppressive and therefore null and void for the following reasons:-i.The Respondents erred in law and in fact in holding that the Appellant had not provided sufficient supporting documents in support of its objection decision.ii.It breached the clear provisions of the Tax Procedures Act and the Value Added Tax Act.iii.It violated the Appellant's legitimate expectation of proper and fair administration of tax law by the Respondents to the detriment of the Appellant.iv.It violated the Appellant's right to fair administrative action.

10. That fair administrative action is a right that is guaranteed to all persons under Article 47 of the Constitution of Kenya, 2010. That it accrues to all persons including legal persons such as the Appellant. That the Fair Administrative Action Act No. 4 of 2015 was enacted by Parliament to give effect to Article 47 of the Constitution. That Section 4(3) of the said Act is of relevance herein.

11. That the Appellant has a legitimate expectation that the Respondent will administer tax laws fairly. That the doctrine of legitimate expectation was discussed in the case of Kalpana H. Rawal v Judicial Service Commission & 4 others [2015] eKLR where the court observed as below:“The doctrine of legitimate expectation was developed by English courts to hold rulers to their promises. In the 4th Edition, 2001 Reissue, of Halsbury's Laws of England the authors at page 212, paragraph 92 explain the concept behind the development of the principle as follows:A person may have a legitimate expectation of being treated in a certain way by an administrative authority even though there is no other legal basis upon which he could claim such treatment. The expectation may arise either from a representation or promise made by the authority, including an implied representation, or from consistent past practice. In all instances the expectation arises by reason of the conduct of decision maker and is protected by the courts on the basis that principles of fairness, predictability and certainty should not be disregarded.The existence of a legitimate expectation may have a number of different consequences; it may give standing to seek permission to apply for judicial review, it may mean that the authority ought not to act so as to defeat the consequence of the expectation without some overriding reason of public policy to justify its doing so, or it may mean that, if the authority proposes to act contrary to the legitimate expectation, it must afford the person either an opportunity to make representations on the matter, or the benefit of some other requirement of procedural fairness...”

12. That in this instance, the Appellant had a legitimate expectation that the Respondents would administer tax laws procedurally and fairly and not in an arbitrary and rash manner as they did. That this on its own is sufficient ground to allow the Appellant's Appeal.

13. That most of the taxes assessed by the Respondents have been the subject of another assessment wherein the parties reached a consent in HCAIT E073 OF 2024. That the Respondent has not factored in those taxes.

14. That the Respondent violated various provisions of the Value Added Tax Act. That firstly, the Appellant is under an obligation to provide documents and that it is not in contention that the Appellant provided documentation to support its objection.

15. That indeed, this is aptly captured by the Respondents in theirs objection decision. That indeed, the Appellant fulfilled its obligation under Section 17(1), (2) and (3) of the Value Added Tax Act as relates to input tax by availing purchase invoices, ETR receipts and purchase ledgers as requested by the Respondents and as the Respondents have rightfully acknowledged.

16. That however, the Respondents then claims that the documents are not sufficient proof without giving any specifics. The Appellant submitted that the Respondents actually never considered the documents provided by the Appellant in arriving at its objection decision and the decision is therefore null and void and should be set aside.

17. That on VAT credits, in its objection decision, the Respondent purports that the VAT credits available to the Appellant had already been carried forward for future utilization. That this is patently illegal as the Respondent cannot purport to decide to allocate the credit to future liabilities which may never arise instead of this particular liability.

18. That in Commissioner of Domestic Taxes vs. Unga Limited [2021] eKLR, the High Court agreed with this Tribunal that the Respondent could not withhold VAT refunds against future liabilities which have not arisen. That by parity of reasoning, the Respondent could not choose to utilize the VAT credits against some future liabilities which may never arise.

19. The Appellant summarized the Respondent's missteps as below:-i.Failing to properly and legally notify the Appellant of the assessments.ii.Failing to consider the documents and ETR receipts supplied by the Appellant in support of its input VAT claims.iii.Failing to consider the Appellant's objection on merit.iv.Failing to uphold the Appellant's right to fair administrative action and legitimate expectation of fair and just administration of tax laws.

Appellant’s Prayers 20. The Appellant prayed that the Tribunal:i.Allows the Appeal in its entirety.ii.Sets aside the Respondents' decision dated 18th March, 2024 and the subsequent tax demand for Kshs. 216,292,308. 00. iii.Awards costs of the Appeal to the Appellant.

Respondents’ Case 21. The Respondents’ case is premised on the following documents:i.The Respondent’s Statement of Facts dated and filed on 24th April, 2024. ii.The Written Submissions dated 15th October, 2024 and filed on the same date.

22. That the Respondent carried out investigations into the business of the Appellant for the period years 2017-2021 with a view of confirming its tax compliance under Income tax obligations, Withholding VAT and Income with a view to confirm if income declared under Section 3(2) and Part IV on Income Tax Act and VAT Act.

23. That the information from the iTax data base on non-filers showed that the Appellant had received income and made sales leading to an under declaration of sales turnover with some expenses attracting withholding taxes.

24. That further to the review, it was established that the bank reconciliation provided by the Appellant were not sales as claimed and some of the entries captured as loans were established to be payments for creditors

25. That additionally, the review established that the Appellant had an amount of Kshs. 12M from Stejane Enterprises which was categorized as a loan. That however the Appellant had issued a credit note on the same.

26. That an analysis of the Appellant’s creditors established that claims from the suppliers were made yet the Appellant had booked these purchases as creditors in its books of account

27. That it was discovered that these were shell companies used to inflate the cost of sales to the company as most of the said companies had been incorporated within two years of trading with the Appellant. That as such the purchases were disallowed amounting to Kshs. 375,585,503. 00.

28. That during the review, it was discovered that there were inconsistencies between the returns filed by the Appellant's suppliers and invoices claimed by the company for the period years 2017-2021 and under declared income, credit notes, zero-rated sales and the missing traders instances were subjected to 16% VAT.

29. The Respondent submitted that the Appellant’s claims of purchase to the Presidency (NMS) and Unicom Limited were reviewed and established to be used as products for pest control as per Section 19 Part A of Second Schedule of VAT hence the same were allowed.

30. That additionally, an analysis of the vehicles as per NTSA showed four high end vehicles namely Range Rovers (3) and one Land Rover. That however, from the NTSA records, it was established that the Appellant has only one motor vehicle; a Land Rover. That based on this, the motor vehicle benefit taxes were computed for directors amounting to Kshs. 9,974,542. 00.

31. That a further analysis of the Appellant’s declared income in comparison to the financial statements established that the Appellant failed to declare income for the period 2017-2021 despite accruing income from supplies of goods resulting in an under declaration of taxes amounting to Kshs. 310,085,415. 00 comprising Corporation Tax of Kshs. 138,546,997, VAT of Kshs. 161,563,876 and Directors taxes of Kshs. 9,974,542. 00.

32. That the Appellant lodged an objection on 19th January, 2024 on iTax and vide a letter which was duly acknowledged by the Respondent stating that the Respondent failed to take into account some banking transactions and documents provided by the Appellant among other queries.

33. That in the light of the above, the Respondent issued a demand for documents vide email, in line with the objection lodged through email, for audited financial statements, payroll schedule, proof of expenses incurred and certified bank statements.

34. The Respondent submitted that the Appellant, however, failed to provide all the relevant supporting documents, records and bank statements for the period 2017-2021 in support of its objection. That the Appellant's Corporation tax, directors tax and VAT was partially allowed as this was the only reasonable basis of assessing the VAT, directors' taxes and Income tax. That thereafter, the objection decision was issued confirming assessments of Kshs. 216,292,308. 00.

35. That in response to grounds 1 and 2 of the Memorandum of Appeal and ground 1-7 of the Statement of Facts, the Respondent averred that the assessments were correctly issued and conform to the Income Tax Act. That the Appellant did not provide any evidence that would have altered the assessment. That Section 56 of the Tax Procedures Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

36. That in further response to grounds 1 and 2 of the Memorandum of Appeal, the Respondent averred that examination of the Appellant's records, audited accounts and Income tax returns established that the Appellant failed to declare business income and all their incomes for years of income 2017-2021. That the Respondent is empowered under Section 73 of the Income Tax Act to bring to charge income where the same is established due.

37. That in further response to grounds 1 and 2 of the Memorandum of Appeal, the Respondent asserted that the Appellant lodged the objection on iTax, and the same was received and acknowledged. That however the same was treated as invalidly lodged as it did not have grounds of objection.

38. The Respondent submitted that the Tax Procedures Act empowers the Respondent to notify a party where an objection as lodged is invalid. That in this regard, the Appellant was notified and requested to provide documents. That however, the Appellant failed to provide documents as requested.

39. That the relevant section provides as follows:-“51. Objection to tax decision(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.(3)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; and(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.”

40. That in response to ground 3 of the Memorandum of Appeal, and ground 1-4 of the Statement of Facts, the Respondent averred that the tax was reached at based on the information available and provided by the Appellant and the Commissioner is empowered by the Tax Procedure Act to make such decisions. That the assessment was based on the information provided.

41. That the relevant Section provides as follows:“29(1) Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a “default assessment)”

42. That in response to ground 3 of the Memorandum of Appeal, the Respondent submitted that the taxpayer despite declaring some income knowingly continued to under declare income for the period under review contrary to the provisions of the Income Tax Act. The Respondent averred that according to the Income Tax Act, it is the responsibility of any person carrying on business to maintain records of all transactions.

43. That the relevant Sections provide as follows:-“54A (1) A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.and:55(2) person carrying on a business shall preserve every book of account, and every document which is essential to the explanation of any entry in any book of account, relating to the business for a period of not less than ten years after the year of income to which that book of account or document relates.”

44. That in response to ground 4 of the Memorandum of Appeal and ground 6 of the Statement of Facts, the Respondent averred that it is empowered by Section 31 of the Tax Procedures Act, 2015 to carry out amendments on assessments where adjustments are due to bring to charge the correct amounts.

45. That the relevant Section provides as follows:-“31(1) Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner's judgment, to the original assessment of a taxpayer for a reporting period to ensure that -…”

46. That in response to ground 5 and 9 of the Memorandum of Appeal, and ground 5 of the Statement of Facts, the Respondent insisted that the Appellant filed all necessary returns and paid what they had assessed themselves to be payable.

47. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents hence no relevant documents or records were provided to support the objection by the Appellant. That as a result, the assessments were made based on the only available information and based on the best judgement by the Respondent.

48. That the Tax Procedure Act empowers the Respondent to require production of such documents vide issuance of notice as deemed necessary in determination of tax liability. The relevant Section provides as follows:“59. (1)For the purpose of obtaining full information in respect of the income of a person or class of persons, the Commissioner may, by notice in writing, require, in the case of the income of a person, that person or any other person, and in the case of a class of persons, any person -(a)to produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary; and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.”

49. That in further response to ground 5 and 9 of the Memorandum of Appeal, the Respondent submitted that the Appellant did not file income tax returns for the accounting period 2017-2021 in contravention of the requirements of the Tax Procedures Act and that the estimated assessments were correct.

50. That the relevant Section provides as follows:“94. Failure to submit tax return or other document(1)A person commits an offence if the person without reasonable cause fails to submit a tax return or other document required under a tax law by the due date.”and

“95. Failure to pay taxA person commits an offence if that person fails to pay tax by the due date.”

51. That in further response to ground 5 and 9 of the Memorandum of Appeal ,the Respondent submitted that the tax assessments are correct and the same was based on the best judgement where the Appellant's audited accounts and records were analyzed and adjustments made for income declared at source. That hence, they were brought to charge.

52. That in response to grounds 6 - 8 of the Memorandum of Appeal and ground 7 the Statement of Facts, the Respondent averred that examination of the Appellant's records established that the Appellant earned income from supply of service in the period under audit.

53. That however, these incomes were not declared for tax purposes for the year earned. The Respondents’ asserted that the Appellant carried on business in contravention of the Tax Procedure Act which requires such documents be maintained and for purposes of taxation.

54. That the relevant Section provides as follows:-“42. Tax invoice(1)Subject to subsection (2), a registered person who makes a taxable supply shall, at the time of the supply furnish the purchaser with the tax invoice containing the prescribed details for the supply.”and

“43. Keeping of records(1)Every registered person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.”and

“93. Failure to maintain documents(1)A person commits an offence if the person fails to keep, retain or maintain a document that may be required to be kept, retained or maintained in accordance with a tax law without reasonable excuse during a reporting period.”

55. That in further response to grounds 6 - 8 of the Memorandum of Appeal, the Respondent reiterated that the Appellant failed to provide signed financial statements and books of account to support its allegations. That the Tax Procedure Act empowers the Respondent to carry out assessment based on the information available. The Respondent averred that the assessment was issued based on information provided.

56. That the relevant Section provides as follows:-“24 (1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.(2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner might assess a taxpayer's tax liability using any information available to the Commissioner.”

57. That in response to ground 18 of the Statement of Facts, the Respondent denied that the Appellant has paid all its tax dues and reiterated that because of its under-declaration, the Appellant is in debt of Kshs. 216,292,308. 00.

58. The Respondent averred that the Appellant is undeserving of the prayers sought due to the foretasted reasons.

59. The Respondent relied on the following authorities to support its case:i.TAT E 072 OF 2023 - Joyce Mwende Titus vs. Commissioner of Domestic Taxes and Commissioner of Investigations and Enforcement vs Kidero; Income Tax Appeal E028 of2020 eKLR.ii.TAT NO.1400 OF 2022 - Julie Magwi Njute vs. Commissioner Of Domestic Taxes.iii.Monaco Engineering Limited vs. Commissioner Domestic Taxes TAT Appeal No. 67/2017. iv.Osho Drapers Ltd vs. Commissioner of Domestic Taxes, TAT No.159 of 2018. v.Miao Yiv Commissioner of Investigations & Enforcement TAT no 441 of 2019. vi.Ritz Enterprises Limited vs Commissioner of Investigations &Enforcement TAT No. 227 of 2018. vii.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR.viii.Janet Kaphiphe Ouma and another vs. Marie Stopes International (Kenya), HCC No. 68 of 2007. ix.Dyer & DyerLimited vs. Commissioner of Domestic Taxes TAT 139 of 2020. x.Commissioner of Domestic Taxes vs, Metoxide Limited [2021].xi.Ken Iron and Steel Limited vs. Commissioner Investigations and Enforcement (2021).xii.Commissioner of Domestic Services vs. Galaxy Tools Limited (2021) eKLR.

Respondent’s Prayers 60. The Respondent prayed that the Tribunal considers the case and finds that:i.That the Respondent's objection decision be upheld.ii.The outstanding tax arrears of Kshs. 216,292,308. 00 are due and payable by the Appellant.iii.The confirmed assessments dated 21st December, 2023 were proper in law.iv.That the Appeal herein be dismissed with costs to the Respondent.

Issues For Determination 61. The Tribunal, having considered the pleadings and evidence adduced by the parties was of the considered view that the issue that crystalized for its determination is:Whether the assessments by the Respondent were justified

Analysis And Determination 62. The Tribunal, having identified the issue that falls for its determination, proceeds to analyse it as hereunder.

63. This dispute arose from the confirmation of assessment of Corporation tax, directors’ tax and VAT amounting to Kshs. 216,292,308. 00.

64. The Appellant averred that it had a legitimate expectation that the Respondent would administer tax laws procedurally and fairly and not in an arbitrary and rash manner as it did. That this on its own is sufficient ground to allow the Appellant's Appeal.

65. The Respondent, on its part, argued that the Appellant did not provide sufficient documents to enable the Respondent vacate the assessment.

66. The Tribunal having reviewed the parties’ pleadings observes that the Respondent amended its initial assessment based on documents provided by the Appellant ahead of the issuance of its objection decision. The Respondent reviewed the assessment downward from Kshs. 310,085,415. 00 to Kshs. 216,292,308. 00.

67. The Tribunal has further observes that in its objection decision, as well as its Statement of Facts, the Respondent stated that the objection decision was based on its best judgment as well as an analysis of the audited accounts, records and documentation provided by the Appellant prior to the issuance of its objection decision.

68. The Tribunal further perused the Appellant’s pleadings and notes that the Appellant provided explanations but did not adduce any documents to support its arguments.

69. It is trite law that once the Respondent has made a tax assessment or decision, the burden is on the Appellant to prove that the said assessment or decision is erroneous. This is supported by Section 56 (1) of the TPA which provides thus;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

70. Further, Section 30 of the TAT Act provides as follows regarding the burden of proof in tax cases:-“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; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

71. The burden was thus on the Appellant to prove that the Respondent’s assessment was erroneous. The easiest way to discharge this burden would have been by sharing, with the Tribunal, the documents that it supplied to the Respondent to prove that the Respondent’s assessments were inaccurate, excessive or should have been made in a different way.

72. In tax matters the onus to demonstrate that the Commissioner’s decision is incorrect or could have been made otherwise rests upon the Appellant. The Court in the case of Primarosa Flowers Limited vs. Commissioner of Domestic Taxes [2019] eKLR, in which the Australian case of Mulherin vs. Commissioner of Taxation [2013] FCAFC 115 was quoted held thus;“The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to be levied”.

73. The fact that the burden of proof that the Respondent’s tax decision was wrong rests on the Appellant has been affirmed by this Tribunal in Tumaini Distributors [K] Ltd vs. Commissioner of Domestic Taxes [2020] eKLR, where the Tribunal held that the taxpayer has the burden to prove that the tax decision is wrong.

74. Guided by the foregoing authorities, Section 56 (1) of the TPA and Section 30 of the TAT Act, the Tribunal thus finds and determines that the Appellant failed in discharging its burden of proof to show that the Respondent’s assessments were not justified.

Final Decision 75. The Tribunal on the basis of the foregoing analysis finds that this Appeal is not merited and makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 18th March, 2024 be and is hereby upheld.c.Each Party to bear its own costs.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 14TH DAY OF MARCH, 2025ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBER