[2024] KETAT 284 (KLR)

Farm Engineering Industries Limited v Commissioner of Domestic Taxes (Tax Appeal 1391 of 2022) [2024] KETAT 284 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 284 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1391 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, B Gitari & AM Diriye, Members

March 8, 2024

Between

Farm Engineering Industries Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Kenyan resident Company, whose income comprises trading income, rental income, and interest income. The Appellant's nature of business includes the manufacture of farm machinery, tools and implements.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued income tax and VAT assessments against the Appellant for the period from 2017 to 2020 dated 15th November 2021. The Appellant filed its notice of objection dated 14th December 2021. Consequently, the Respondent issued its objection decision dated 3rd October 2022 rejecting the notice of objection.

4. The Appellant being dissatisfied with the Respondent's decision lodged the Notice of Appeal dated 2nd November 2022, Memorandum of Appeal dated 9th November 2022 and Statement of Facts dated 9th November 2022 all filed on 18th November 2022.

The Appeal 5. The Memorandum of Appeal raises the following grounds of appeal:a.The Appellant case is that during the year 2021, the Respondent raised Value Added Tax (VAT) Additional Assessments dated 15th November 2021 for the Appellant's tax affairs for the Tax Periods — FY 2017 (August 2017), FY 2018 (August 2018) & FY 2020 (November 2019) in respect of Value Added Tax. This culminated in confirmed Additional Assessments of Kshs. 27,085,519. 28, Kshs. 58,956,101. 29 & Kshs. 5,770,089. 82 respectively for Value Added Tax (VAT) as per the schedule below: -Tax Period Assessment No. Principal VAT Interest charges Total Amount

Aug-17 KRA20212080XXXX 27,085,519. 28 13,667,359. 48 40,752,878. 76

Aug-18 KRA202120804XXXX 58,956,101. 29. 23,582,440. 52 82,538,541. 80

Nov-19 KRA202120804XXXX 5,770,089. 82 1,147,391. 98 6,917,481. 80

Total 91,838,877. 10 8,397,191. 98 130,208,902. 37b.According to the Appellant, in the above summary, the principal VAT assessed amounts for tax periods August 2017; August 2018 and November 2019 are Kshs.27,085,519. 28, Kshs. 58,983,268. 00 and Kshs. 5,770,089. 82 whereas the interest charges imposed are Kshs. 13,667,359. 48, Kshs. 23,582,440. 52 and Kshs. 1,147,391. 98 respectively.c.Out of the above principal VAT assessments, the taxpayer did not dispute only Kshs. 357,423. 78 and Kshs. 3,800 for the August 2017 and November 2019 tax periods, thus leaving disputed principal VAT assessed amounts of Kshs. 26,728,095. 52 and Kshs. 5,776,289. 82 for the said tax periods respectively. The undisputed VAT amounts highlighted above of Kshs. 357,423. 78 & Kshs. 3,800. 00 were due to purchases invoices, which the Respondent identified to have been duplicately claimed for the purposes of input VAT.d.The above undisputed VAT liability of Kshs. 361,223. 78, (a summation of Kshs. 357,423. 78 and Kshs. 3,800. 00) together with some other undisputed input VAT Assessments (arising from duplicate purchases invoices claimed for the purposes of input VAT) of Kshs. 544,716. 00 totalling to Kshs. 905,940. 00 was fully paid in February and March 2022 via PRN No. 202022000051XXXX, 202022000059XXXX and 2020220000615XXXX of Kshs. 2,100. 00, Kshs. 34,370. 00 & Kshs. 868,999. 00 respectively, dated 17th & 24th February 2022 and 1st March 2022 respectively.e.The Appellant thereafter raised objection applications on the disputed principal VAT assessed amounts of Kshs. 26,728,095. 52, Kshs. 58,983,268. 00 and Kshs. 5,766,289. 82 for the tax periods August 2017, August 2018 and November 2019 through the following Objection Application Acknowledgment Receipts Ref. No: KRA20212266XXXX, KRA20212266XXXX and KRA202122663XXXX respectively, dated 14th December 2021. f.The Objection applications highlighted above Ref. No: KRA20212XXXX, KRA202122XXXXX and KRA2021226XXXX rejected by the Respondent on 3rd October 2022 via an Objection Decision Ref: P051123822L, dated 3rd October 2022 mainly on the basis that the documents provided by the Appellant were not sufficient to address the variances and therefore, the VAT Assessment stand confirmed.g.The Appellant thereafter, raised a Notice of Appeal Ref: 2275/881/M, dated 2nd November 2022 against the issued Objection Applications Ref. No: KRA2021226XXXX, KRA2021226XXXX and KRA2021226XXXX of Kshs. 26,728,095. 52, Kshs. 58,983,268 and Kshs. 5,766,289. 82 respectively which were rejected by the Respondent via Objection Decision letter Ref: P051123822L, dated 3rd October 2022 mainly on the basis that the documents provided by the Appellant were not sufficient to address the variances.Reasons for Objectioni.The output VAT Additional Tax Assessments raised by the Respondent (KRA) are erroneous. The Respondent (KRA) entirely assumed that the variances highlighted/noted between the VATS filings and the Income Tax - Company Return filings for the Tax Periods under review were purely due to Taxable Sales at 16% VAT rate made by the Appellant, which were then under-declared in its monthly VAT3 filings. The Appellant also dealt with both Zero-Rated and Exempt sales, in addition to the taxable sales at a VAT rate of 16%.ii.The fact that the Appellant made taxable sales (16%), Zero-Rated sales and exempt sales within the Tax Periods under review — FY 2017, FY 2018 & FY 2020 invalidates the three issued Value Added Tax (VAT) Additional Assessments Ref. No: KRA20212080XXXX, KRA202120XXXX & KRA20212080XXXX of Kshs. 27,085,519. 28, Kshs. 58,956,101. 29, Kshs. 5,770,089. 82 respectively, which were computed on a summary assumption that the all the Appellant's sales made were all taxable at the VAT rate of 16%.

The Appellant’s Case 6. The Appellant set down its case in its Statement of Facts dated 9th day of November 2022 and filed on 18th day of November 2022. The Appellant did not file written submissions.

7. The Appellant averred that the Respondent raised Value Added Tax additional assessments dated 15th November 2021 for the tax periods FY 2017 (August 2017), FY 2018 (August 2018) and FY 2020 (November 2019) culminating to additional assessments of Kshs. 27,085,519. 28, Kshs. 58,956,101. 29 & Kshs. 5,770,089. 82. The Appellant argued that it objected to the assessments in time and that all the relevant supporting documents were provided to the Respondent.

8. The Respondent via a letter dated 6th July 2021, communicated desktop review findings on the Appellant’s tax affairs for the tax periods - FY 2017, FY 2018 & FY 2019. The shared findings highlighted variances noted between the Appellant's VAT3 filings and income tax — company returns declared for the tax period FY 2017, FY 2018 & FY 2019 as follows:Particulars FY 2017 FY 2018 FY 2019

Income Tax - Company Return 654,325,497. 00 538,169,211. 00 389,923,678. 00

VAT3 Filings 487,274,900. 00 169,522,786. 00 11,505,952. 00

Noted Variance 167,050,597. 00 368,646,425. 00 (21,582,274. 00)

9. The Appellant observed that for the FY 2019, the Respondent's alleged variance between the VAT filings vs Income tax return filings of Kshs. 21,582,274. 00 was erroneous because the Rental Income of Kshs. 14,746,745. 00 was not included while computing the variance. After taking into consideration the Rental Income of Kshs. 14,746,745. 00, the VAT filings turnover became more than the declared Income Tax Return by Kshs. 6,835,528. 40. Due to this, the Respondent charged the variance of Kshs. 6,835,528. 40 to income tax at 30% resulting to a Corporate Tax liability of Kshs. 10,339,544. 70. The resulting tax liability due to the variance of Kshs. 6,835,528. 40 was not disputed by the Appellant. The Appellant alleges that it paid the said exact tax liability of Kshs. 2,050,659. 00 to the Respondent via payment slip dated 18/5/2022 (KRA payment slip PRN No. 20202200014XXX).

10. As for the variances for the period 2017 and 2018, the Appellant argued that its nature of business is mainly the manufacturing farm machinery, tools and implements which fall under the three VAT categories i.e. Taxable, Zero-Rated or Exempt. Therefore, the Appellant acknowledged existence of the variances between the VAT filings and the income tax return filings but attributed the said variances of Kshs. 167,050,597. 00 and Kshs. 368,646,425. 00 to its zero-rated and exempt sales which were erroneously left out while declaring its monthly VAT filings for 2017 and 2018 respectively.

11. According to the Appellant, in addition to the variance of Kshs. 167,050,597. 00 and Kshs. 368,646,425. 00, the Respondent highlighted some duplicate purchases invoices amounting to Kshs. 905,940. 00 which had been claimed as input VAT. It is the Appellant’s case that it did not dispute the said Kshs. 905,940. 00 and that the amount was paid to the Respondent in February and March 2022 via payment slips dated 17th & 24th February 2022 and 1st March 2022, respectively, (KRA payment slip PRN No. 202022000XXXX, 202022000059XXXX & 202022000XXXX).

12. To further explain the 2017 and 2018 variances, the Appellant stated that since some of its products are zero-rated, the Respondent erroneously assumed that the variances highlighted above were entirely due to taxable sales at 16% which were under-declared by the Appellant. The Respondent therefore, charged the variance of Kshs. 167,050,597. 00 and Kshs. 368,646,425. 00 to Value Added Tax at the rate of 16% thus leading to Principal VAT Liabilities of Kshs. 27,085,519. 28 and Kshs. 58,956,101. 29 including of the duplicate claimed purchases invoices for input VAT.

13. The Appellant asserted that the Respondent’s tax decision is wrong due to erroneous assumption by the Respondent that the entire variance for 2017 and 2018 were due to taxable sales at 16%.

14. With regards to the VAT assessment of the year FY 2020 (November 2019) amounting to Kshs. 5,770,089. 82, Appellant asserted apart from duplicate purchases invoices claimed for input VAT, the Respondent did not provide any other basis for raising and issuing the Assessment. The Appellant also states that the input VAT for the duplicate claimed purchases invoices was Kshs. 3,800. 00 which the Appellant alleges that it paid to the Respondent via payment slip dated 1st March, 2022.

15. The Appellant alleged that it objected to the assessments but the Objections were rejected by the Respondent through the Objection decision on basis that the documents provided by the Appellant were not sufficient to address the highlighted variances and therefore the VAT Additional Assessments stand confirmed. The Appellant maintains that the Objections were rejected because the Respondent did not understand the Notice of Objections raised.

16. According to the Appellant, the Respondent rejected the entire Objection applications without making amendments to the raised assessments in consideration of the supporting documents which were provided by the Appellant. According to the Appellant, this contrary to Section 51 (9) of the Tax Procedures Act 2015. The Appellant asserted that the Respondent did not take all the necessary steps to give effect to the decision.

17. The Appellant reiterated that for the 2017 and 2018 assessments of Kshs. 27,085,519. 28 and Kshs. 58,983,268. 00, the Respondent provided very clear and precise basis of the assessments, unlike the 2020 assessments which is baseless and unfounded on any highlighted variance.

18. The Appellant relied on its 2017, 2018 and 2020 sales ledgers, to demonstrate that it engages in three sales categories i.e. vatable sales at 16%, zero-rated sales and exempt sales.

Appellant’s Prayers 19. In view of all our above submissions therefore, the Appellant requested that this Tribunal accepts and approve the Objection applications raised against the VAT additional tax assessment and thereafter request the Respondent to vacate the said principal VAT Tax additional assessments and its corresponding penalty and interest charges to NIL.

The Respondent’s Case 20. The Respondent’s case is premised on its:-a.Statement of Facts dated 18th December 2022 and filed on 19th December 2022 together with the documents attached thereto; andb.The Respondent also relied on its written submissions dated on 10th August 2023.

21. The Respondent asserted that it conducted desk review on the Appellant’s tax returns for the period 2017 to 2020 and noted some variances between sales declared in the Value Added Tax (VAT) returns against the ones declared in the Income tax returns. The Respondent requested the Appellant through emails to avail reconciliations which the Appellant failed to respond to.

22. The Respondent further alleged that it requested the Appellant vide a letter dated 6th July 2021 to provide bank advises on the interest income and to apportion common input VAT and make appropriate return amendments and pay taxes due. It is the Respondent’s case that the Appellant failed to reply to the said letter leading to issuance of additional assessment amounting to Kshs. 139,495,918. 00 VAT and Kshs. 4,676,424. 21 PAYE inclusive of penalty and interest vide letter dated 14th November 2021.

23. It is the Respondent’s case that the Appellant lodged its objection to the additional assessments on 14th December 2021 on the iTax portal without stating the remedy it was seeking or settling the taxes that were not in dispute which was contrary to Section 51 (3) of the Tax Procedure Act. Further, the Respondent alleged that the Appellant failed to provide the Respondent sufficient documents in support of the Objection prompting the Respondent to issue an Objection decision confirming the assessment through a letter dated 3rd October 2022.

24. The Respondent averred that during the review process, the Appellant provided some documents for review which were considered and the Respondent established that on issue of VAT, the Appellant provided ledgers for 2017 and 2018 but did not provide ledgers and reconciling schedules for 2019, 2020 and 2021; the reconciling schedules provided did not adequately explain the variance assessed; and that the reconciling items were way higher than the variance established in the assessment. In Respondent’s view, the documents provided were not sufficient to address the variance for the Respondent to vary the assessment.

25. The Respondent also maintained that though the Appellant made some payments amounting to Kshs. 903,369. 00 the Appellant did not specify what exactly it was conceding and making payments for.

26. The Respondent stated that contrary to the Appellant’s allegation, the payment towards PAYE were received, credited and acknowledged in the Objection Decision.

27. Pursuant to Section 56 (1) of the Tax Procedures act and Section 30 (a) of the Tax Appeals Tribunal Act, the Respondent stated that it is the onus of the Appellant to prove that indeed the assessment is inaccurate or excessive. The Respondent averred that it engaged the Appellant through the letter dated 6th July 2021 with a view of ensuring that the Appellant provides documents and explanation during the verification exercise but the Appellant failed to provide the same leaving the Respondent with no option but to confirm the figures as assessed.

28. The Respondent argued that the Appellant’s claim for interest as expense was disallowed since the same loan was issued to the Directors as loan for interest and did not qualify as an allowable deduction under Section 16 of the Income Tax Act.

29. According to the Respondent, Section 51 (3) of the Tax Procedures Act gives the Appellant opportunity to avail documents while filing its objection to the assessment. The Respondent also argued that that it is the responsibility of the Appellant to amend its returns when it realized the returns filed are erroneous or were not properly apportioned.

30. The Respondent further averred that the Appellant failed to demonstrate at the very least by attaching the bank statements and a breakdown of the reconciliation before this Tribunal on the vatable goods and services and the zero-Rated and exempt goods. Consequently, the Respondent maintained that the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts are unfounded in law and not supported by evidence.

Respondent’s Prayers 31. The Respondent, therefore, the Respondent prayed that the Appellant's Memorandum of Appeal dated 9th December 2022 be dismissed with cost to the Respondent for want of merit and validity.

Issues for Determination 32. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth the following issue for determination:Whether the Appellant has discharged its burden of proof?

Analysis and Findings 33. It is to that issue that the Tribunal will turn within as hereunder: -

34. The Appellant argued that for both the FY 2017 & FY 2018, the variances noted between the VAT3 filings and income tax Company return for the two years of Kshs. 167,050,597. 00 and Kshs. 368,646. 00, were entirely attributed by the Appellant to its zero-rated and exempt sales which were erroneously left out in its monthly VATS filings for the FY 2017 and FY 2018.

35. On the other hand, the Respondent submitted that the Appellant failed to provide evidence to explain the variance or support the objection.

36. The Appellant referred the Tribunal to Appendix 9 of its bundle of documents to support this allegation. The Appellant, at paragraph 28 of its Statement of Facts states as follows:-“in support of the said sales ledgers, copies of invoices will be availed in soft for your reference.”

37. The Tribunal notes that Appendix 9 is not on record. The Appellant’s documentation terminates at Appendix 8. The Appellant did not file any documents to support its claim on variances. On this issue, the Tribunal is in concurrence with the Respondent that the Appellant failed to provide documents to support its Appeal.

38. It would have been prudent for the Appellant to have availed documents and information such as the goods, which are exempt and zero-rated in its tax returns; quantify the exempt and zero-rated supply; provide evidence to show the nature the exempt or zero-rated goods or supplies; provide documents or information to prove the exempt or zero-rated goods or supply and provide sales ledgers and reconciling schedules that matches the variance. Not one of any of these documents are on record.

39. Conversely, the Appellant made general and sweeping statements that the variances were as a result of the exempt and rero-rated supplies which were not declared without giving the figures of each supply.

40. Additionally, the Tribunal notes that the Appellant alleged that it paid a number of taxes. The Appellant has filed a number of payment KRA Slips including PRN 2020220XXXX, 202022XXXXX, 20202200XXXX, 202022000XXXX as evidence of payment. The Tribunal notes that the said payment slips without are not endorsed by any bank. The Tribunal wishes to remind the Appellant that KRA Slip is not evidence of payment of taxes unless the slip is accompanied by evidence of payment such as a bank slip. The PRN on record merely indicates the amounts to be paid.

41. Section 56(1) of the Tax Procedures Act provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

42. Similarly, Justice Majanja in Tumaini Distributors Company (K) Limited vs. Commissioner of Domestic Taxes [2020] eKLR held that the taxpayer has the burden to prove that the tax decision is wrong.

43. This Tribunal in Digital Box Limited vs. Commissioner of domestic investigations and Enforcement [2020] wherein this Tribunal rules as follows:“The question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56(1) of the Tax Procedures Act states that: “In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

44. Consequently, the Tribunal finds and holds that the Appellant failed to provide documents in support of its Appeal. The Tribunal is satisfied that that the Appellant has not discharged its burden of proof as under Section 56 (1) of the Tax Procedures Act, 2015, Section 30 of the Tax Appeals Tribunal Act, 2013.

Final Decision 45. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal lacks merit and consequently makes the following Orders; -a.The Appeal is hereby dismissed.b.The Respondent’s decision rejecting the notice of objection dated 3rd October, 2022 be and is hereby upheld.c.Each party to bear its own cost.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERMOHAMED A. DIRIYE - MEMBER