[2025] KETAT 57 (KLR)

Eshiwani Ashubwe & Company Advocates & another v Commissioner for Domestic Taxes (Tax Appeal E801 of 2023) [2025] KETAT 57 (KLR) (31 January 2025) (Judgment)

Neutral citation: [2025] KETAT 57 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E801 of 2023

RM Mutuma, Chair, M Makau, Jephthah Njagi, T Vikiru & D.K Ngala, Members

January 31, 2025

Between

Eshiwani Ashubwe & Company Advocates

1st Appellant

Nelly Peris Ashubwe

2nd Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

Background 1. The 1st Appellant is a law firm, a firm of Advocates registered under the registration of the business names Act, a partnership carrying on business under a business name and style of Eshiwani Ashubwe & Company Advocates, whose main activity is to offer legal services. The 2nd Appellant is a Commissioner at the Salaries and Remuneration Commission (SRC) and the managing partner at Eshiwani Ashubwe and Company Advocates, for purposes of this Appeal and on the basis of the relationship of the Appellants, they shall be addressed in a singular manner (hereinafter referred to as the “Appellant”).

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

3. The Respondent commenced investigations against the Appellant covering the period between 2016 and 2022 for Corporation Income Tax and VAT obligations. The investigation revealed that the Appellant has an outstanding liability for VAT and Income Tax obligations. The Respondent proceeded to issue a tax assessment with tax liability of Kshs. 17,722,472. 00 vide a letter dated 17th August 2023.

4. Aggrieved with the assessment, the Appellant objected on 15th September 2023. Upon consideration of the objection, the Respondent issued an Objection Decision dated 16th October 2023 confirming the principal tax liability of Kshs. 17,722,472. 00 as assessed.

5. Aggrieved by the Respondent’s decision, the Appellant lodged this Appeal vide the Notice of Appeal dated 15th November 2023 and filed with leave of the Tribunal granted on 22nd February 2024.

The Appeal 6. The Appellant lodged Memorandum of Appeal dated 25th November 2023 and filed on 22nd February 2024 raising the following grounds of appeal:a.That the revised individual net banking the 2nd Appellant submitted the supporting documents, it has come to the attention of the Appellants that 1st assessment dated 17th May 2023 and the 2nd revised assessment dated 17th August 2023, that the Commissioner removed the salary and the gratuity amount but still the total amount is same as the previously done first assessment. This is evident in the two copies of assessment dated 17th Mav 2023 and 17th August 2023 respectively, the Commissioner erred in totalling the computed figures in their revised 2nd assessment of the individual’s net banking.b.That the Commissioner erred in fact and law by charging Corporation Tax and VAT on bank credits relating non-revenue bankings. The 1st Appellant, which is a law firm and the 2nd Appellant is a director, has been mixing up cash flows from a client’s settlement case and fees for the services by the firm. This led to non-separation of accounts and mix up of both funds from client’s settlements and the fees for the 1st Appellant.c.The Commissioner acted in bad faith by disregarding other non-revenue banking such as contra entries (inter-bank transactions), reversal and loans from friends and financial institutions.

The Appellant’s Case 7. In support of the Appeal, the Appellant founded its case on its;a.Statement of Facts filed with leave of the Tribunal on 22nd February 2024 together with the documents attached thereto; and,b.Written submissions dated 4th September 2024 and filed on 7th October 2024.

8. The Appellant’s case is that both Appellants are registered taxpayer in Kenya who have always paid taxes and filed them on time.

9. The Respondent carried out assessing Income Tax and VAT Obligations as against the Appellant in the sum of Kshs. 11,335,766. 00 and Kshs. 6,386,705. 00 respectively for the period January 2016 to December 2022 through assessment dated 17th May 2023 and the 2nd revised assessment dated 17th August 2023, in which the Respondent removed the salary and the gratuity amount but still the total amount is same as the previously done first assessment.

10. The Appellant alleged that the Respondent erred in totaling the computed figures in its revised 2nd assessment of the individual’s net banking.

11. According to the Appellants, the Respondent erred in fact and law by charging Corporation Tax and VAT on bank credits relating non-revenue bankings. They argued that the 1st Appellant, which is a law firm and the 2nd Appellant is a director, has been mixing up cash flows from a client’s settlement case and fees for the services by the firm. This led to nonseparation of accounts and mix up of both funds from client’s settlements and the fees for the 1st Appellant.

12. The Appellant asserted that the Respondent erred in fact and law by charging Corporation Tax and VAT on a loan in the sum of Kshs. 1,400,000. 00, a loan taken by the 2nd Appellant from Maisha Bora Sacco Limited which should not be taxed at all.

13. In addition to the Statement of Facts, the Appellant relied on its written submissions wherein it submitted that it was awaiting the ADR decision having subjected the matter to ADR.

14. The Appellant submitted that having examined first assessment dated 17th May 2023 and the second revised assessment dated 17th August 2023, it noted that the Respondent removed the salary and the gratuity amount but still the total amount remained same as the previously done first assessment. The Appellant submitted that the Respondent erred in totaling the computed figures in its revised 2nd assessment of the individual’s net banking.

15. It was submitted that the 2nd Appellant requested for 2 months advance salary as at 25th November 2020 from the National Treasury which was automatically taxed before it is released to the employee but the Respondent factored that in the assessments.

16. The Appellant also submitted that the 2nd Appellant’s imprest payable from the employer which is automatically taxed by the employer was included in the assessments and treated it as an income from which the Respondent was demanding taxable income. It also submitted that the Respondent erroneously treated the 2nd Appellant’s loans from Maisha Bora Sacco Limited as an income from which the Respondent was demanding taxable income.

17. Finally, the Appellant submitted that the s sought to unlawfully treated money paid to clients’ through the 1st Appellant as income yet the money belongs to clients.

Appellant’s Prayers 18. The Appellant prayed for the following reliefs;a.This Appeal be allowed and the Respondent’s decision dated 16th October 2023 be set aside, with an order that the Appellants have complied in remitting taxes; and,b.The costs of the Appeal be in the cause.

The Respondent’s Case 19. The Respondent based its case on its;a.Statement of facts dated and filed on 19th March 2024 together with the documents attached thereto; and,b.Written submissions dated and filed on 28th August 2024.

20. The Respondent stated that it commenced investigations against the Appellant covering the period between 2016 and 2022 for Corporation Income Tax and VAT obligations. The Respondent through a letter dated 17th May 2023 informed the Appellant of the investigation findings which allegedly revealed that the Appellant had an outstanding liability for VAT and Income tax obligations.

21. The Respondent established the that Appellant’s taxable income through banking test. The Respondent stated that the Appellant’s deposits from the bank accounts were then treated as income. It alleged that it adjusted for non-incomes including; disbursements, refunds, salaries and reversals and compared with the Appellant’s declarations in the self-assessment returns. The Respondent alleged that it treated the variance as undeclared income and brought to charge at applicable rate. Therefore, the Respondent proceeded to issue a tax assessment with tax liability of Kshs. 17,722,472. 00 vide a letter dated 17th August 2023.

22. The Appellant objected to the assessments though a letter dated 15th September 2023. The Respondent vide a letter dated 25th September 2023 invalidated the Appellant’s objection for failing to meet the requirements of Section 51 (3) of the Tax Procedure Act 2015 (TPA). The Respondent allegedly sent a reminder to Appellant dated 2nd October 2023 to validate the objection.

23. The Respondent stated that in its email, it highlighted the Appellant’s failure to specify the grounds of objection and to provide the necessary supporting documents. It allegedly requested the Appellant to substantiate their application but the Appellant failed to validate its objection therefore, the Respondent declined to grant the prayers sought in the application. Consequently, the Respondent through Objection Decision dated 16th October 2023 confirmed the principal tax liability of Kshs. 17,722,472. 00 as assessed which moved the Appellant to file this Appeal.

24. The Respondent averred that it has a wide berth assessing the correctness or falsity of returns as provided for in Section 31 of the TPA which gives the Respondent liberty to reassess a taxpayer based on available information.

25. According to the Respondent, during the Objection Review process, the Appellant was requested to provide documents in support of their objection on 25th September 2023. The requested documents included but not limited to: P9 forms from Salaries and Remuneration Commission (SRC); payment voucher which shows the service gratuity and the relevant deductions made; staff imprest showing the per diems received; Partnership deed and other documents for the partnership firm.

26. The Respondent relied on Section 24 and 28 of the Tax Procedures Act which allows a tax payer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information.

27. The Respondent averred that the Appellant provided payment voucher showing the service gratuity and relevant deductions made, P9 forms from the Salary and Remuneration Commission, Advance salary documents requested on 25th November 2020. The Respondent reviewed and considered the documents and found that the Appellant’s argument on the unadjusted salary, per diems and service gratuity was correct.

28. The Respondent stated that it made appropriate adjustments as per the mentioned entries that were not initially considered in the initial calculations. It stated that it used the bank deposits to ascertain the total income from 2016 to 2022 and compared it with the self-assessed returns.

29. The Respondent averred that the Appellant failed to provide documentation for the partnership firm to support that the deposits in the company account which is under the Appellant’s name belong to the clients. It argued that in failing to provide the partnership deed among other documents for the partnership firm, the Respondent was unable to ascertain the partnership sharing ratio.

30. It is the Respondent’s position that the Appellant failed to comply with the mandatory statutory provisions of Section 51 (3) (c) when lodging their objection and declared the Appellant’s objection as invalid. The Respondent also averred that the Appellant failed to state the grounds of objection nor provide the relevant documents in support of the Objection raised as provided in Section 51 (3) (a) & (c) of the TPA.

31. The Respondent maintained that in the absence of a valid objection it confirmed the principal tax liability as per the notice of assessment together with the resultant penalty and interest.

32. Further, The Respondent stated that that it communicated to the Appellant on 25th September 2023 and further sent a reminder dated 2nd October 2023 asking the Appellant to validate the objection in line with Section 51 (4) of the TPA that provides that;‘‘where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.’’

33. It averred that the allegations by the Appellant have not been supported by the requisite documentation and sufficient clarity to shift the burden to the Respondent. It also stated that the Appellant has not pointed out any documentation that Respondent ignored or did not taken into consideration in determining the taxes due.

34. The Respondent argued that the burden to prove the assessments were wrong rested on the Appellant in line with Section 56 (1) of the TPA and Section 30 of the Tax Appeals Tribunal Act (TATA).

35. It is the Respondent’s case that upon reviewing the documents submitted by the Appellant regarding salary adjustments, per diems, and service gratuity, they were adjusted correctly. It added that despite this, the Appellant has not furnished any additional documents to substantiate or highlight any overlooked facts that may have influenced the Respondent’s decision. The Respondent also argued that the Appellant failed to provide evidence to support that the deposits in the company account which is under the Appellant’s name belong to the clients.

36. It cited the case of Boleyn International Ltd vs. Commissioner of Domestic Taxes (TAT 55 of 2018) where the Tribunal stated that:“We find that the Appellant at all-time bore the burden of proving that the commissioner's decision and investigations were wrong. The Tribunal is guided by the provisions of section 56 (1) of the Tax Procedure act which states that "in any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

37. The Respondent admitted that there is an arithmetic error in the computation of taxes, however the error is apparent but does not go to the root of the assessment and that it undertook to correct it by way of an addendum or corrigenda. It stated that under Section 79 of TPA the Respondent reserves the right to rectify the mistake and/or arithmetic error within the prescribed time limit of five (5) years.

38. Due to the foregoing, the Respondent asserted that the Appellant is undeserving of the prayers sought.

39. In addition, the Respondent relied on its written submissions wherein it submitted that the Appellant’s objection was invalid on grounds that the Appellant failed to adduce documents in support of the objection despite reminders.

40. Further, the Respondent submitted that it considered all the documents provided by the Appellant. It insisted that the Appellant did not provide partnership deed among other documents for the partnership firm, therefore, the Respondent submitted that it was unable to ascertain the partnership sharing ratio hence the Respondent relied on the available information.

41. Finally, the Respondent submitted that the Appellant failed to discharge its burden of proof. The Respondent cited the cases of PZ Cussons East Africa Limited vs. Kenya Revenue Authority [2013] eKLR, and Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR to submit that the taxpayer has a duty to prove that the Respondent’s decision is incorrect but the Appellant herein failed to discharge the duty. It therefore asserted that the Appellant do not deserve the prayers sought.

The Respondent’s prayers 42. The Respondent prayed for the following reliefs:a.The Objection Decision dated 16th October 2023, for the Income Tax of Kshs. 11,335,766. 00 and VAT of Kshs.6,386,705. 00 be upheld; and,b.The Appeal be dismissed for lack of merit.

Issues For Determination 43. The Tribunal having carefully evaluated parties’ pleadings it is of the respectful view that the main issues that call for its determination is as hereunder: -i.Whether the assessments are statute time barred; and,ii.Whether the Respondent erred in confirming the assessments.

Analysis And Findings 44. The Tribunal having identified the issues for determination, it shall analyze the same as herein under.i.Whether the assessments are statute time barred.

45. The Respondent issued a tax assessment with tax liability of Kshs. 17,722,472. 00 vide a letter dated 17th August 2023 covering the period 2022 to 2016.

46. The Tribunal shall proceed to test whether the assessment was statute time barred.

47. To begin with, tax assessment, objection to the assessment and issuance of the Objection Decision are activities that must be done within statutorily stipulated timelines. For instance, the taxpayer has to object to assessment within 30 days of being served with the assessment while the Respondent has to issue its Objection Decision with 60 days upon receipt of the notice of objection. In a word, time is of essence in tax matters.

48. There are a number of statutory provisions that envisage various timelines within which certain actions must be carried out or must not be carried out as the case maybe. Section 23 of the Tax Procedures Act provides for timelines for keeping records. In particular Section 23 (1) (c) requires documents to be kept for five years or lesser period. The said section provides as follows:‘‘(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; andc.Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’ (Emphasis is ours).

49. With the exception of that, a default tax assessment is to be made within a period five years in accordance with Section 29 (5) of the TPA, which section provides that;‘‘Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’

50. In relation to amendment of assessment, Section 31 (4) (b) of the TPA provides as follows:‘‘The Commissioner may amend an assessment——b.In any other case, within five years of—i.For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; orii.For any other assessment, the date the Commissioner notified the taxpayer of the assessment.’’

51. In addition to timeframe under Section 27 of the Income Tax Act (ITA), time begins running in relation to Income Tax from 1st July of the year upon submitting a return on or before 30th day of June of the year. Section 52 B of the ITA deals with time frames and final return with self-assessment. It Provides as follows;‘‘52B. Final return with self-assessment1. Notwithstanding any other provision of this Act—a.every individual chargeable to tax under this Act shall for any year of income commencing with the year of income 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income.’’

52. Pursuant to the foregoing The Tribunal affirms that an assessment has to be issued within the period of five years from the last date of the reporting period. However, there are exceptions in the law to this rule permitting the Respondent to issue assessments beyond five years, if the elements provided for under Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act are pleaded and proven. The said elements include, gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer.

53. The High Court in the case of Commissioner of Domestic Taxes vs. Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) stated as follows regarding the issue on timeframe;‘‘…under section 31(4) of the Tax Procedures Act, an amendment outside the 5-year period can only be permitted if there is evidence of wilful neglect, evasion, or fraud by or on behalf of the tax payer…The legal position is that, all assessments ought to be made within 5 years except when there is evidence of gross or wilful neglect, evasion or fraud on the part of the taxpayer. This also goes hand in hand with the provisions of section 23 of the Tax Procedures Act, which requires a taxpayer to retain documents for the same period. The implication is that, after 5 years, since no assessment can be made, the taxpayer is absolved of his burden of maintaining such records.’’

54. The Tribunal reiterates its position taken in the case of Gitere Kahura Investments Ltd vs. TheCommissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019 observed as follows;‘‘The Respondent has the burden of proof pursuant to sections 107 and 108 of the Evidence Act to prove that the Appellant breached section 29(6) of the Act…’’

55. The Tribunal examined the Respondent’s assessment dated 17th August 2023 and noted that the assessment covered the period 2022 to2016 relating to Income Tax and VAT. The Tribunal upon perusal has established that the assessment for the period 2016 as relates to Corporate Income Tax and the assessment prior to 16th August 2018 as relates to VAT are beyond five years therefore, beyond the Respondent’s reach.

56. There is nothing from the Respondent’s pleadings attempting to proffer any explanations as to why it issued assessments beyond five years as is envisaged in the law, thus the Tribunal finds no justification for the assessments beyond the five-year period.

57. Consequently, the assessments relating to the years of income 2016 as relates to Corporate Income Tax and assessments prior to the 20th July 2018 as relates to VAT are unlawful.ii.Whether the Respondent erred in confirming the assessments.

58. The Respondent’s case is that the Appellant failed to validate its notice objection, even though the Respondent issued a notice deeming the Appellant’s objection as invalid and requiring the Appellant to validate the objection.

59. The position taken by the Respondent as regards the Appellant’s objection was that it allegedly failed to validate the objection, the Respondent thus confirmed the assessment vide confirmation notice letter dated 16th October 2023.

60. It was the Respondent’s contention that vide the correspondence dated 25th September 2023, it notified the Appellant that its notice of objection of 15th September 2023 was invalid as the same did not provide the grounds of objection and for want of documents in support of the objection. Further, vide the email dated 2nd October 2023, the Respondent reminded the Appellant to provide documents within seven days in efforts to validate its objection.

61. The Respondent in its request for documents, particularized the same as;i.P9 forms from Salaries and Remuneration Commission (SRC);ii.Payment voucher which shows the service gratuity and the relevant deductions made;iii.Staff imprest showing the per diems received; and,iv.Partnership deed and other documents for the partnership firm.

62. The Tribunal has perused the pleadings and documents availed and noted that the Respondent admitted having received some documents from the Appellant, the said documents were considered and the necessary adjustments made.

63. The Commissioner’s decision subject of this Appeal is the one issued on 16th October 2023 being a Confirmation of Assessment/Notice of Invalidation, the Tribunal has carefully perused the decision and confirms the same to be a Confirmation of Assessment, as the decision in its current constructive state is not and does not meet the requirements of an Objection Decision.

64. The validity of a notice of objection is provided for under the provisions of Section 51 (3) and (4) of the Tax Procedures Act, which provides3. 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; andb.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).c.all the relevant documents relating to the objection have been submitted.4. Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

65. The Tribunal has not had the benefit of sighting the notice of objection dated 15th September 2023 as well as the notice deeming the objection as invalidly lodged dated 25th September 2023 and the reminder thereof of 2nd October 2023, however, the Appellant has not disputed having been issued with the aforesaid notice deeming its objection as invalid as well as being requested to validate it notice of objection.

66. The Appellant has not availed to the Tribunal for its consideration any evidence that it validated its objection by providing the grounds of objection or that it provided the documents requested or any other documents in support of its objection. Further, in the absence of documents, the Appellant ought to have demonstrated efforts to made to respond to the requests by the Respondent, it has not done so.

67. 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 and the High Court held as 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”

68. As part of the Appellant’s record, the Tribunal examined the documents that the Appellant filed in support of the Appeal. The Appellant filed a number of documents including certified bank statements, request for two months’ salary advance, impressed analysis from SRC, loan statement, payment vouchers, cheques, judgements in favour of the Appellant’s clients, discharge vouchers among other documents. However, the Tribunal may not consider such documents unless the same were provided to the Respondent at the objection review stage for consideration as is envisaged by the provisions of Section 13 (6) of the Tax Appeals Tribunal Act, there is no evidence that the said documents were presented to the Respondent for consideration during the objection review stage and prior to the impugned decision.

69. Whereas this Tribunal confirms that the banking method is method that can be employed in assessments, the Tribunal shall not descend to the arena of the merits and demerits of the Respondent’s assessment as the issue at hand revolves the tenets of an invalidation notice to the objection.

70. To this end, the Tribunal has not been persuaded that the Appellant’s notice of objection was validly lodged to afford the Respondent the opportunity to consider the same and make a decision thereof.

71. Based on the foregoing, the Tribunal finds and holds that the Respondent did not erred in confirming the assessments, thus the Appeal partially succeeds.

Disposition 72. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal partially succeeds and makes the following orders:a.The Appeal be and is hereby partially allowed;b.The Respondent’s Confirmation of Assessment of 16th October 2023 be and is hereby varied to the extent that all the assessments on Corporate Income Tax for the year of income 2016 and all assessments prior to 20th July 2018 on VAT be and are hereby expunged;c.Each party to bear its own cost.

73. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 31ST DAY OF JANUARY 2025ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERDELILAH K. NGALA - MEMBER