[2024] KETAT 486 (KLR)

Extreme Futuro Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 1330 of 2022) [2024] KETAT 486 (KLR) (19 April 2024) (Judgment)

Neutral citation: [2024] KETAT 486 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1330 of 2022

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

April 19, 2024

Between

Extreme Futuro Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya. Its principal business activity is in hospitality based in Malindi town.

2. The Respondent is principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 of the laws of Kenya. Under Section 5(1) of the Act, the Respondent is also an agency of the Government for the collection and receipt of all tax revenue. Further under Section5(2) of the Act with respect to the performance of its functions under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 &2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Appellant was issued with additional Income tax and VAT assessments vide the Respondent’s demand dated 29th June, 2022. The demand was for a total of Kshs 5,043,979. 46 comprised of Income tax and VAT for the period July 2019 to June 2022(Income tax) and June 2020, December 2022 and January 2021 to January 2022 (VAT).

4. The Appellant objected to this demand vide its letter dated 1st July, 2022 stating its grounds of objection.

5. The Respondent thereafter issued its objection decision dated 9th September, 2022 confirming Value Added Tax of Kshs 3,860,528. 21 and Income tax of Kshs 1,793,824. 15.

6. Aggrieved by the Respondent’s decision the Appellant filed its Notice of Appeal on 7th October, 2022.

The Appeal 7. The Appeal is premised on the following grounds of Appeal as stated in its Memorandum of Appeal dated 29th October, 2022 and filed on 7th November, 2022:a.That the Respondent erred in law and facts and issued an invalid objection decision contrary to the Tax Procedures Act 2015 Section 51(a) which states; “The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.” Section 10 further requires the Respondent to in case of an objection decision must include a statement of findings on the material facts and the reasons for the decision.b.That the Respondent erred in law by taxing non-existing income contrary to Section 3(2) of Income Tax Act Cap 470 of Kenya’s Laws (hereinafter ‘ITA’) and Section 5(1) of the Value Added Tax Act No.35 of 2013 (hereinafter ‘VAT Act’).c.That the Respondent erred in law and methods by taxing an assumed income which was not based on any factual information.d.That the Respondent erred in law and fact by demanding taxes that are unreasonable and unfair as per Articles 210 and 201 (b) (i) of the Kenya Constitution, 2010 (hereinafter ‘the Constitution’).e.That the Respondent’s action is contrary to legitimate expectations on the operations of the taxpayer, as per Section 15 of the ITA and Article 47(1)(2) of the Constitution.

The Appellant’s Case 8. In its Statement of Facts dated 28th October, 2022 and filed on 7th November, 2022, the Appellant asserted that contrary to its legitimate expectation, the Respondent issued an objection decision on 9th September, 2022 where it rejected the Appellant’s objection and confirmed the assessment.

9. It was the Appellant’s contention that the information from the Respondent’s accounting system was not from the Appellant’s business operations and that the Respondent erred in the method and model it used in arriving at the estimated assessment by including non-existing income while the Appellant provided all relevant information including financial statements and bank statements.

Appellant’s Prayers 10. The Appellant made the following prayers:a.The Respondent’s objection decision is invalid, incorrect, unfair and it failed to meet the legitimate expectation of the taxpayer as provided under Article 47 201 (b) (1) & 210 of the Constitution.b.Upon determination that the objection decision of the Respondent is invalid, wrong and unreasonable, the Appellant’s objection be upheld and the Respondent’s demand and confirmation be quashed entirely.c.The Respondent’s demand for additional taxes and confirmation of estimated assessment be struck out entirely.d.The Respondent’s actions be declared arbitrary, capricious, subjective, unfair and contrary to the fair administration of justice and to the legitimate expectations of the taxpayer.e.The Respondent and its agent be estopped from demanding or taking further action or steps to ensure recovery of the alleged principal tax, penalties and interests.f.Cost of the Appeal; andg.Any other remedies that this Tribunal may determine.

The Respondent’s Case 11. The Respondent’s Statement of Facts dated and filed on 6th December, 2022 responded to the Appellant’s grounds of Appeal by analysing two issues for determination which it had identified:

(a) Whether the additional assessments were justified in law. 12. The Respondent averred that the decision to arrive at the assessment was justified and had basis in law as provided for under the TPA. It contended that it is not bound by the Appellant’s returns or self-assessment and that it is empowered to vary the assessments using any available information as per Sections 24 (2) and 31 of the TPA.

13. The Respondent asserted that the additional VAT and Income tax assessments in question were raised after the Respondent noted that there were variances between the sales declared in the Appellant’s tax returns and the sales obtained from the sales records provided by the Appellant. Further that it engaged the Appellant regarding the issue of filing the correct returns after which the Appellant provided its sales records to the Respondent on 3rd December 2021.

14. The Respondent averred that it established that the Appellant derived income from two sources, namely bar/restaurant and accommodation and that the bar operates under the name Extreme Futuro Lounge while accommodation services were offered under the name Triple B. It therefore summed up the income as derived from the Appellant’s sales system from the bar and the income from accommodation services and obtained a total annual sales amount of Kshs 7,070,680. 00.

15. It was the Respondent‘s contention that despite requesting the Appellant to file returns and declare the correct sales, the Appellant filed Nil VAT returns for the period under review. On the income tax return, the Appellant amended the return, however, it did not declare the correct income hence the Respondent’s justification to raise the additional Income tax and VAT assessment.

16. The Respondent averred that it raised the additional Income tax and VAT assessments based on the information that had been provided by the Appellant contrary to the Appellant’s argument that the Respondent taxed an assumed income which was not based on any factual information.

17. The Respondent contended that during the objection review stage, the Appellant provided its signed audited accounts and sales summarises summed up from the manual sales receipt. However, from the information it provided, the Respondent established that the Appellant was not declaring the correct income.(b)Whether the Appellant discharged its burden of proof by providing documentary evidence in support of its objection.

18. The Respondent averred that Section 56(1) of the TPA places the burden on the taxpayer to proof that a tax decision is incorrect and that in this case, the Appellant did not discharge its burden of proving that the Respondent’s VAT and Income tax assessments were erroneous since it did not adduce sufficient evidence to support its objection.

19. The Respondent therefore prayed that this Appeal be dismissed with costs, the additional VAT and Income tax assessment raised by the Respondent amounting to Kshs 5,654,352. 36 be confirmed and the principal taxes and interest be found due and payable as per the objection decision rendered by the Respondent.

Submissions Of The Parties 20. In its Written Submissions dated 28th August, 2023 and filed on 29th August, 2023, the Appellant raised two issues for determination which it analysed as outlined below:(a)Whether the Respondent acted ultra-vires by taxing non-existing income contrary to Section 3(2) of the ITA and Section 5(1) of VAT Act.

21. The Appellant referred to Section 3(2) of the ITA and Section 5(1) of the VAT Act and submitted that whereas the Respondent may be empowered to assess a taxpayer under Section 24(2) of the TPA, the same should be within the law. Further that such assessments and ensuing varied incomes should fall within the meaning of Section3(2) of the ITA which provides, inter alia, that income upon which tax is chargeable under this Act is income in respect of gains or profits from business carried on for whatever period of time.

22. The Appellant agreed with the position that the Respondent is not bound by the Appellant’s return and that it may make alterations which might lead to an additional assessment based on the available information. However, it holds, on the contrary that the alleged information opined by the Respondent in arriving at the additional taxes is not correct. The Appellant argued for instance that it does not operate and/ or derive accommodation income within its revenue streams as alleged by the Respondent. It therefore termed the information as outrageous.

23. The Appellant submitted that the Respondent offended Section 5 of the VAT Act which posits that Value Added tax is charged on a taxable supply made by a registered person in Kenya. As such any Value Added Tax arising from the assumed accommodation income was null and void ab-initio and should be vacated.

24. The Appellant was in concurrence with the Respondent on the fact that the Appellant was registered for VAT obligation on 28th February, 2019, which was barely three (3) days after the Appellant was incorporated. As such it was practical that the said company had not effectively commenced operations hence the NIL returns during the nascent stages.

25. The Appellant submitted that while it agreed in part with the Respondent that the Appellant continued to erroneously file NIL returns, it asserted that this anomaly was brought to its attention by the Respondent during the discussion process. It subsequently abided with the Respondent’s advice and agreed to amend its returns.

26. The Appellant asserted that it provided the Respondent with a schedule of Income derived from its manual records and audited financial statements. The sales schedule from the manual system totalled Kshs 6,835,012. 00 which figure the Respondent erroneously classified as VAT not in dispute and subsequently raised additional taxes from a source unknown to the Appellant and summarized in the Respondent’s Objection decision dated 9th September, 2022.

27. The Appellant submitted that contrary to legitimate expectation, the Respondent overlooked the income schedules and audited accounts provided but instead based its assessment on records derived from “a system” and “information” which was not operated by the Appellant and that this allegation was denied and deposed through an Affidavit dated 27th October 2022.

28. It was the Appellant’s assertion that as a sign of goodwill, it amended its income tax returns for the years ending 30th June 2020 and 30th June 2021 which returns were approved by the Respondent. It therefore disagreed with the Respondent’s assertion that the Appellant’s amended Income tax returns did not contain the correct income.

29. The Appellant submitted that the Respondent’s conduct was curious and suspect arising from the fact that after amending the Income tax returns, it embarked on putting its records in order so as to occasion the amendment of the VAT returns to be in conformity with the said amended Income tax for the corresponding period. However, the Respondent hurriedly raised the additional assessment, in a way forestalling the Appellant’s efforts to remedy the situation.

30. The Appellant was aggrieved by that fact that the Respondent ignored the dictates of Section 31(3) of the TPA and arbitrarily applied the provisions of Section 24(2) of the TPA. It argued that by the dictates of Section 31(2) where the Respondent rejects an amended self-assessment, it ought to furnish the taxpayer with reasons for such rejection within thirty days of receiving the application. In the instant case, however, despite the Appellant filing the amended Income Tax returns, the Respondent proceeded to raise an additional assessment on the returns without affording the Appellant any reason(s) for doing so.

31. The Appellant therefore averred that the Respondent acted ultra-vires by taxing non-existing income, and that the additional tax assessment and subsequent objection decision by the Respondent were not valid and were neither justified nor within the law as established.

(b) Whether the Appellant has discharged the burden of proof by providing documentary evidence to dislodge the Respondent’s actions in raising additional assessment. 32. The Appellant agreed with the Respondent that Section 56 (1) of the TPA places the burden of proof on the taxpayer to prove that a tax decision is incorrect. However, it submitted that as observed by Justice Majanja in HCCOMMITA/E086/2020, the burden of proof is a pendulum which has to shift between the Appellant and the Respondent. It averred that it had produced competent and relevant evidence in form of sales records for the period under review which records were capable of dislodging the assessments.

33. The Appellant placed reliance in the case of Alfred Kioko Muteti vs Timothy Miheso & Another (2015) eKLR where it was held that a part can only discharge its burden of proof upon adducing evidence. Merely making pleadings is not enough. Further that Section 107(1) of the Evidence Act, Cap 80 of Kenya’s Laws (hereinafter ‘the Evidence Act’) provides as follows:-“whoever desires any court to give judgement as to any right or liability dependent on the existence of facts which he asserts must prove those facts exist.”

34. The Appellant submitted in conclusion by stating that an action that is initially void cannot be ratified or validated.

35. In its written submissions dated and filed on 23rd August 2023 the Respondent reiterated the two issues for determination raised in its Statement of Facts:

(a) Whether the Respondent was justified in issuing the additional assessment 36. The Respondent submitted that the Appellant filed NIL VAT returns for the months of February 2019 to February 2022 despite trading during that period contrary to Section 24(1) of the TPA. Further that it is not bound by the Appellant’s return and that Section 24(2) of the TPA empowers it to vary and make amendments to a tax return using the available information. It argued further that Section 31(1) of the TPA also empowers it to make alterations or additions to original assessments from available information for a reporting period based on the Respondent’s best judgement.

37. The Respondent submitted that the Appellant registered for VAT in February 2019 but did not file its VAT return. Further that the taxpayer filed NIL Income tax returns despite being in operation over the period under review.

38. It was the Respondent’s submission that the Appellant derived income from two sources, the bar operating under the name Extreme Futuro Lounge while the accommodation services operated under the name Triple B. It submitted further that despite requesting the Appellant to file returns and declare correct sales, it filed NIL VAT returns and amended its income tax return but did not declare the correct income. As such the Respondent raised the additional Income tax and VAT assessments since the Appellant failed to declare the correct income and sales respectively.

(b) Whether the Appellant discharged its burden of proof by providing documentary evidence in support of its objection. 39. The Respondent submitted that in issuing the assessments of Kshs 5,043,979. 46, the Appellant had the burden of proving that the said assessments were incorrect as required under Section 56(1) of the TPA. In this instance, in a bid to discharge its burden, the Appellant provided audited accounts and sales summaries. However, the said documents proved that the returns as filed were inaccurate and did not in any way prove that the assessment made by the Respondent was excessive or not within the law. The Appellant therefore failed to discharge its burden before the Respondent hence the Respondent was justified in confirming its earlier assessment.

40. The Respondent submitted that the onus was therefore on the Appellant to provide documents and that in this case the Appellant ought to have provided the documents that prove that the expenses claimed were allowable and that the variances in turnover declaration had been declared elsewhere or was not subject to VAT or Income tax.

41. In conclusion, the Respondent submitted that the Appellant failed to discharge its burden of proof by failing to provide relevant documents in support of its objection. As such it averred that it was correct in using the available information to assess the tax due.

42. To buttress its argument, the Respondent relied on the following cases: -i.Commissioner of Income Tax vs Lerematesho Ltd (1976) eKLR.ii.Kenya Revenue authority vs Man Diesel & Turbo Se, Kenya (2021) eKLR.iii.Commissioner of Domestic Taxes vs Golden Acre Limited (2021) eKLR.iv.Ngurumani Traders Ltd vs Enforcement (2019) eKLR.

Issues For Determination 43. The Tribunal has considered the parties pleadings, documentation and written submissions and is of the considered view that this Appeal raises one issue for determination.Whether the objection decision dated 9th September, 2022 is justified.

Analysis And Findings 44. Having identified the single issue for determination, the Tribunal will proceed to analyse it as follows:

45. The Tribunal notes that the Appellant registered for VAT obligation on 28th February 2019, yet despite doing so it failed to file its VAT returns although its business was operational from 2019. Section 5(1) (a) of the VAT Act obligates the Appellant to charge Value Added Tax. It provides as follows:“(1)A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on-(a)A taxable supply made by a registered person in Kenya…”

46. Section 5(3)(4) of the same Act also spells out the obligation of a registered person making taxable supplies. It provides as follows:“(3)Tax on a taxable supply shall be a liability of the registered person making the supply, and subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply……(4)The amount of tax payable on a taxable supply, if any shall be recoverable by the registered person from the receiver of the supply, in addition to the consideration.”

47. The Appellant had argued at paragraph 13 of its Written submissions that it registered for VAT obligation on 28th February 2019 which was three (3) days after the Appellant was incorporated therefore justifying its non-filing of returns as the business was still in its nascent stage. This argument, in the Tribunals view does not hold as the assessments done were from June 2020 to January, 2022 a period which the Appellant was doing business. As such, being registered for VAT obligation, it ought to have accounted for VAT in the taxable supplies.

48. The Appellant’s argument that the business was at its nascent stage hence its NIL returns for income tax also fails flat as the assessment for income tax was done for the years of income 2020 and 2021 by which time the Appellant ought to have been receiving income from its business. Further that nowhere in its pleadings has the Appellant stated that it never received any income during the period under review. Section 3(2)(a) is specific as to what is chargeable to income under ITA. It provides as follows:“Subject to this Act, income upon which tax is chargeable under this Act is income in respect of –(a)gains or profits from –(i)any business for whatever period of time carried on;(ii)any employment or services rendered: -(iii)any right granted to any other person for use or occupation of property……..”

49. The Appellant admitted to errors at paragraph 14 of its Written Submissions where it stated as follows:“While we agree in part with the Respondent that the Appellant continued to erroneously file NIL returns, this anomaly was brought to their attention by the Respondent during the discussion process….”

50. By registering for the various tax heads, the Appellant ought to have known its obligation and what was entailed in the provisions of these tax heads and not wait for the Respondent to point out what its obligation ought to be as “ignorance is no defence in law” The Respondent cannot therefore be faulted for raising the additional assessment. Section 24(2) of the TPA empowers the Respondent to vary and make amendments using the available information. It provides as follows:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer’s tax liability using any information available to the Commissioner.”

51. The Tribunal notes that in justifying the Appellant’s source of income from which it levied tax, the Respondent stated at paragraph 19 of its Statement of Facts that it established two sources of income being, bar and restaurant and accommodation. The bar and restaurant operated under the name Extreme Futuro Lounge while accommodation services were offered under the name Triple B. The Respondent has however not confirmed whether Extreme Futuro Lounge and Triple B are registered under the same Personal Identification number to justify its assessment for the income of Triple B. It is worth noting that the Appellant at paragraph 11 of its Written Submissions submitted in part:“For instance, the Appellant does not operate and or derive accommodation income within its revenue streams or at all as alleged by the Respondent”.

52. The Tribunal further notes that the onus was therefore on the Respondent to prove that the two establishments were indeed related. In the absence of the Respondent’s proof to link Extreme Futuro Lounge with Triple B, the Tribunal finds that the two establishments may not be related for tax purposes.

53. In view of the foregoing, the Tribunal finds that except for the tax affairs of Triple B, the Respondent’s objection decision dated 9th September, 2022 was justified and the tax due was therefore due and payable.

Final Decision 54. The upshot of the above is that the Appeal partially succeeds and the Tribunal proceeds to make the following final Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 9th September, 2022 be and is varied as follows:i.Respondent to exclude the income and tax affairs of Triple B in its assessment; andii.Any additional assessments in relation to the Appellant remain due and payable.a.Each party to bear its own costs.

55. It so ordered

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF APRIL, 2024CHRISTINE A. MUGA.......................CHAIRPERSONBONIFACE K. TERER ...................... MEMBERDELILAH K. NGALA..........................MEMBERGEORGE KASHINDI .......................... MEMBERSPENCER S. OLOLCHIKE........................MEMBER