[2024] KETAT 1442 (KLR)

Fast Conveyors Supplies Limited v Commissioner of Legal Services and Board Cordination (Tax Appeal E586 of 2023) [2024] KETAT 1442 (KLR) (Civ) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1442 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E586 of 2023

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

October 4, 2024

Between

Fast Conveyors Supplies Limited

Appellant

and

Commissioner of Legal Services and Board Cordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya and its principal business activity is the importation and trading in various commodities in the country.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection and accounting of all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out under the schedule to the said Act.

3. The Respondent carried out investigations into the tax affairs of the Appellant for the years 2019 and 2021 by analyzing the Appellant’s bank statements and sought to bring to charge income tax on all the deposits made into the bank account.

4. Subsequently the Respondent raised additional assessments in respect of corporation tax and VAT, as hereunder:i.Income Tax:a.Period 2019: assessment date 02/11/22 15,002,483. 62b.Period 2021: assessment date 02/11/22 26,378,594. 29ii.VAT:a.Period 2021: assessment date 02/11/22 4. 944,456. 49Total Assessment 46,325,534. 40

5. The Appellant objected to the additional assessment on 29th June 2022 and the Respondent issued its Objection Decision on 15th August 2023 rejecting the objection application and confirming the assessment for Income Tax in the sum of Kshs. 53,671,700. 30 and VAT in the sum of Kshs. 6,131,126. 05 together penalty and interest.

6. The Appellant being aggrieved by the Respondent’s decision dated 15th August 2023 demanding Kshs. 59,802,826. 39 filed this Appeal on 28th September 2023.

The Appeal 7. The Appellant filed its Memorandum of Appeal dated 28th September 2023 and set out the following grounds of appeal;a.That the Commissioner erred in law and fact in demanding Income Tax of Kshs. 59,802,826. 39 for the years of income 2019 and 2021 as the said demand is excessive and has no factual or legal basis.b.That the Commissioner erred and misdirected himself in raising an additional assessment against the Appellant based on excessive and inaccurate or erroneous estimates.c.That the Commissioner erred in fact and law by seeking to bring to charge Income Tax on all deposits made into the Appellant’s bank account.d.That the Commissioner erred and misdirected himself in relying on the Appellant’s bank statements to make an assessment, assuming that all the monies that passed through the Appellant’s bank accounts were income and or sales contrary to the provisions of the Income Tax Act and VAT Act.e.That the Commissioner erred in law and in failing to exercise its best judgement and using industry margins to determine the Appellant’s taxable income and sales as opposed to applying the Appellant’s taxable income and sales.f.That the Commissioner fell into error and misdirected himself in fact and law in failing to take into account the fact that the Appellant incurred expenses in the production of income which should be an allowable deduction when arriving at the taxable income in accordance with Section 15 of the ITA.g.That the Commissioner fell into error and misdirected himself in fact and law in finding that the Appellant had not provided to him the necessary supporting documents and explanations required to sustain its objection against the Commissioner’s tax assessment.

The Appellant’s Case 8. The Appellant’s case is premised on its;a.Statement of Facts dated and filed on 28th September 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 26th March 2023.

9. The Appellant stated that it objected to the additional assessment on 29th June 2022 and explained the reasons for the late filing of the objection was due to disruption of its business brought about by Covid – 19 pandemic and the sickness of one of its directors.

10. It stated that in the Notice of Objection it contested the additional assessments as on the basis that they were estimates and excessive. It explained that it correctly accounted for any tax due and accurately filed its self-assessment return for the years under review.

11. The Appellant further stated that the Respondent noted in its findings that the additional assessments were based on undeclared income and unsupported purchases.

12. The Appellant contended that the Respondent in its Objection Decision erred by heavily relying on figures derived from bank statements to confirm the tax assessment. However, not all deposits made into the Appellant’s bank account related to income as some of the deposits were to cater for the costs of purchasing and importing trading items into the country.

13. The Appellant further contended that in its banking analysis, the Respondent failed to consider the debit entries made which had purchases, reversals and expenses incurred.

14. It was also stated by the Appellant that by engaging in the business of importing various commodities into the country and distributing them locally, the Appellant incurred costs and expenses as importation and subsequent distribution of merchandise in the country is a capital-intensive business, requiring huge capital injection to cover costs of sourcing, purchasing, packaging and shipping the commodities. These costs are wholly incurred in the running of the importation business.

15. The Appellant also contended that it directed finances the day to day operational expenses of the Appellant by depositing cash into the Appellant’s bank account, as evidenced from the bank statements which credits clearly show the amounts deposited. The deposits (advances) were later reimbursed by the Appellant as seen from cash withdrawals from the Company’s bank account.

16. It contended that the Respondent despite being provided with explanations and analysis of the bank transfers during review and objection stage, failed to consider or otherwise ignored the Appellant’s explanations and analysis, and instead, resorted to making a finding that the Appellant had not provided all the required documentation, information and explanations.

17. It further contended that the Respondent failed to consider the costs wholly and exclusively incurred in the production of the Appellant’s income for the years under review contrary to the provisions of Section 15 of the ITA, which provides that for the purposes of asserting the total income payable, a person shall be entitled to deduct all expenditure incurred in that year of income which was wholly incurred by him in the production of income.

18. The Appellant averred that in arriving at its impugned Objection Decision, the Respondent failed to consider relevant considerations contrary to the provisions of Article 47 of the Constitution of Kenya and the Fair Administrative Actions Act.

19. It further averred that it was erroneous for the Respondent to disregard the totality of the business transactions when it failed to recognize the expenses wholly and exclusively incurred in the production of income and which was materially influenced by an error of law and violates the legitimate expectation of the Appellant.

20. The Appellant further averred that the Respondent erred in assuming that the Appellant was in a profit-making position during the period under review, yet the Appellant had correctly accounted and filed its self-assessment returns that accurately reflected the Company’s actual financial position, which in the circumstances, the Respondent’s decision was unreasonable.

21. The Appellant also contended that in situations where it is difficult to retrieve taxpayers’ records relating to prior years, the taxable income should be determined using industry average margins depending on the nature and type of business. It averred that this position was upheld by the Tribunal in TAT No. 70 of 2017 Afya X-Ray Centre Ltd vs. Commissioner of Domestic Taxes.

22. It stated that had the Respondent undertaken a benchmark analysis, it would have to the best of its knowledge been able to reasonably attribute profits generated, and sales made by the Appellant for the purposes of determining the tax due and payable.

23. It further stated that in the alternative and without prejudice to the foregoing, the Respondent should have reasonably relied on and applied net margin profits from other companies involved in the importation and distribution of various commodities to arrive at the Appellant’s taxable income and sales.

24. The Appellant stated that with regard to VAT, the Respondent based its VAT assessment on the analysis of deposits made into the Appellant’s bank account. However, the Appellant avers that such an assessment is erroneous as it is based on a generalized assumption that all the deposits made into the Appellant’s bank account related to the sales made.

25. It averred that the Respondent also failed to consider and grant input VAT deduction relating to valid and supported purchases of taxable supplies incurred by the company when confirming the assessment.

26. It further stated that the Appellant incurred input VAT deduction relating to valid and supported purchases of taxable supplies made to its customers, however the Respondent failed to allow input VAT that is directly attributable to the making of such supplies, in breach of the Provisions of the VAT Act.

27. The Appellant contended that in arriving at its Objection Decision, the Respondent failed to consider the applicable laws, or to take into account relevant considerations and in the end arrived at a decision which was materially affected by errors of law and principle, thereby making the Respondent’s Objection Decision perverse and therefore ought to be vacated.

28. In its submissions, the Appellant addressed the two issues of Corporation Tax additional assessment and VAT additional assessment.

29. On Corporation tax assessment, the appellant submitted that the Respondent imposed the additional assessment on the allegation that the Appellant undeclared income during the period under review, and proceeded to rely on net banking to determine the estimated turnover of the Appellant.

30. The Appellant submitted that in determining the net banking, the Respondent treated all deposits into the accounts as taxable income even though not all deposits were related to income. It contended that the bank deposits included non-income items such as client deposits, loans, bounced cheques, transfers, and reversals.

31. The Appellant submitted that as a freight agent, the Appellant’s income is only from agency fees, while the client bears other costs, including, duties, and taxes associated with importing various commodities in the country. It further contended that the monies that pass through or are held in their accounts are not necessarily theirs. The Appellant holds the money in trust to facilitate smooth payments of deposits, taxes, and other related charges.

32. The Appellant further submitted that during the audit, findings, and objection stage, it explained and provided documentation demonstrating that not all deposits into the bank account related to the Appellant’s turnover. However, despite being supplied with such information, the Respondent failed to consider non-income items when assessing the corporation tax due and payable by the Appellant.

33. It further submitted that the Respondent erroneously brought to charge all cash deposits into the Appellant’s bank account without considering the totality of the transaction.

34. The Appellant submitted that although Section 29 of TPA provides that the Respondent may make an assessment based on such information as may be available and to the best of their judgement, the same ought to be reasonable.

35. To buttress the submission, the Appellant cited the case of Republic vs. Kenya Revenue Authority Exparte Cosmos Ltd [2016] eKLR, where it was held that;“… even though the Respondent has powers to assess and demand payment of taxes due, such powers can only be exercised if they are exercised reasonably, rationally and properly.”

36. It also cited the case of Cussens vs. Revenue and Customs Commissioners [2019] UKFTT 543(TC).

37. The Appellant also submitted that it would have been prudent, within reasonable judgement and information available, for the Respondent to use the industry profit margin, depending on the nature and type of the Appellant’s business, of the cash deposits as taxable profit as opposed to bringing to tax all cash deposits in the Appellant’s bank account without considering the totality of the transactions.

38. It also submitted that the Respondent’s assessment of the cash deposits was in breach of basic accounting principles and was not based on information available to the Respondent for the following reasons:a.Bank credit entries do not qualify as income and gains or profits from a business chargeable to tax under Section 3 (2) (a) (i) of the ITA.b.The Respondent’s action of taking all of the Appellant’s bank credit entries as income does not allow the deduction of the expenditure incurred by the Appellant in the production of income.

39. In the circumstances, it was a submission of the Appellant that, the Respondent failed to consider the expenses wholly and exclusively incurred by the Appellant in the production of income as envisaged under Section 15 of the ITA, which states;“For the purposes of ascertaining the total income of a person for a year of income, there shall, subject to section 16, be deducted all expenditure incurred in that year of income which expenditure wholly and exclusively incurred in him in the production of that income.”

40. It was further submitted that logistics companies incur significant costs relating to transportation, shipping, warehousing and storage, inventory management, and labour among many others, and these costs are wholly and exclusively incurred to generate income, which is deductible as an expense in generating the income.

41. It was further submitted that the Respondent failed to consider these expenses wholly and exclusively incurred by the Appellant in generating income.

42. It was submitted that the Respondent ignored the debit entries of the bank statement and only sought to subject all the credit entries to a flat corporation rate of 30%.

43. The Appellant further submitted that a comparative analysis of the companies doing business in the logistics industry records a gross profit margin ratio of 10%, and it would have been prudent for the Respondent to use the industry margin in the circumstances instead of taxing all cash deposits without considering the totality of the transactions involved in operating a logistics business.

44. The Appellant cited the case of Afya X-Ray Centre Ltd vs. Commissioner of Domestic Taxes (TAT No.70 /2017), where the Tribunal stated;“However, we would remiss if we did not point out that this conduct of the Respondent relying on Bank Statements is likely to cause prejudice of untold measures to all taxpayers.The Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit is not necessarily income to the account owner. The Respondent in this case, could have used industry margins to determine the Appellant’s profits and then subject the figure to 30 % for corporate tax rather than a topline 30% on bank deposits …That being the case, we find that the assessment as it currently stands is in breach of basic accounting principles that, if allowed, will be prejudicial to the Appellant.”

45. The Appellant further submitted that Article 210 of the Constitution provides that no tax or licensing fee may be imposed, waived, or varied except as provided for by legislation. This Constitutional Principle requires that for the Respondent to demand taxes, the same has to have a legal basis.

46. The Appellant therefore submitted that the Respondent’s assessment is arbitrary, unfair, unreasonable and without any legal basis at it seeks to bring to charge all bank deposits without factoring in the cost incurred in generating such income.

47. On VAT additional assessment, the Appellant submitted that the Respondent confirmed its VAT assessment on the assertion that the Appellant had failed to provide ledgers and any other supporting documents, which show that not all the deposits made by the directors were sales.

48. It was submitted that the assessment was based on a generalized assumption that all the deposits made into the Appellant’s bank account relate to sales. However, such assumptions are not supported by any facts, as some of the transactions involved capital injections and reversals made by the directors.

49. The Appellant asserted that it availed ledgers and bank statements to the Respondent for the period, which showed the amount of tax due, if any. These statements shoe that the Respondent did not reasonably arrive at the assessment.

50. It was submitted that although the Tax Procedures Act, in granting the Respondent the power to assess taxpayers did not specify the type of methods to be used, it dictates the best judgement should be exercised. The question of what amounts to be best judgement has been dealt with several times in courts.

51. In Van Boeckel vs. C&E QB Dec 1980 (1981) STC 290, it was stated;“the very use of the word ‘judgement’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before them. Secondly, clearly there must be some material before the commissioners on which they can base their judgement. If there is no material at all it would be impossible to form a judgement as to what tax is due …What the words ‘best judgement’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material, come to a decision which is one which is reasonable and amount of tax which is due. As long as there is some material on which the commissioners act, then they are not required to carry out investigations that may or may not result in further material being placed before them.”

52. The Appellant also cited the case of Raghubar Mandal Harihar Mandal vs. The State of Bihar Air 1952 Pat 235, where the court held,“The officer is to make an assessment to the best of his judgement against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously, because he must exercise judgement in the matter. He must make what he honestly believes to be a fair estimate of the assessment ,and for this purpose he must , their Lordships think , be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances , and his own knowledge of previous return & assessment of the assesses , & all other matters which he thinks will assist in arriving at a fair and proper estimate , and though there must necessarily be guesswork in the matter , it must be honest guesswork.”

53. The Appellant submitted that had the Respondent made the impugned assessment to the best of its judgement on the materials supplied by the Appellant, it would have arrived at a different position that accurately reflects the Appellant’s situation.

54. It further submitted that the guiding test as to whether the Respondent applied the banking test reasonably was set out in the case of CA McCourtie LON/92/191, which was adopted by the Tribunal in TAT 115 of 2017 Digital Box Ltd vs. Commissioner of Investigations & Enforcement, where it was held,“In addition to the conclusion- drawn by Woolf J. in Van Boeckel, earlier the Tribunal decisions identified three further propositions of relevance in determining whether an assessment is reasonable. These are, first, that the facts should be objectively gathered and intelligently interpreted; Secondly, that the calculations should be arithmetically sound; and finally, that any sampling technique should be representative and free from bias.”

55. The Appellant therefore submitted that the Respondent’s VAT assessment is not arithmetically sound as entries were wrongly included in the bank analysis, which should not have been adjusted as they were unrelated to sales, thus leading the Respondent to misapply the banking test method, and therefore the VAT assessment ought to be set aside.

The Appellant’s Prayers 56. By reason of the foregoing, the Appellant prayed to this Tribunal for orders that;a.The Commissioner’s Objection Decision, Tax Assessment and Demand dated 15th August 2023 be aside;b.An order be issued restraining the Commissioner, either through its employees, agents or any other person acting on its behalf or under his instructions from demanding or taking any other action towards enforcement or recovery of the principal tax, penalties and interest from the Appellant;c.The costs of this appeal be awarded to the Appellant; and,d.Any other remedies the Tribunal may deem just and reasonable.

The Respondent’s Case 57. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on the 27th October 2023 together with the documents attached thereto; and,b.Written submissions dated 8th April 2024 and filed on 11th April 2024.

58. The Respondent stated that it flagged the Appellant for alleged tax evasion scheme when it noted the under declaration of sales based on comparison of sales in income tax and VAT returns, as the Appellant was a nil filer in the years 2016, 2017, and 2018 while its returns for 2019 and 2020 were in a loss position.

59. The Respondent stated that, on VAT, it established that on comparison between sales declared in the VAT return versus purchases claimed and sales to withholding agents showed under-declaration of VAT sales by Kshs. 52,450,786. 00 in 2021, and additional VAT payable of Kshs. 8,392,126. 00.

60. The Respondent stated that it also found out that the Appellant had made taxable supplies to customers who in turn claimed them as purchases. The purchases claimed from a pin data generated from “Jasper soft” was used /relied upon to come up with the figures cited.

61. The Respondent also stated that a comparison of the withholding VAT credits claimed by the Appellant was conducted and it was established that the Appellant had failed to declare in full the amounts supplied to Kenya Rural Electrification projects in the total sum of Kshs. 4,944,456. 49.

62. The Respondent further stated that it requested the Appellant to submit its records for examination in accordance with Section 59 of the Tax Procedures Act, but the Appellant did not provide the documents as requested, despite several reminders, except for bank statements for two banks i.e. KCB and DTB.

63. The Respondent therefore raised the additional assessments for Income Tax for the period 2019 and 2021 as well based on the information received. The assessments were based on undeclared income and unsupported purchases that were disallowed. The assessments were communicated to the Appellant on 2nd November 2022.

64. The Respondent also averred that for 2019, the purchases of Kshs. 56,147,853. 00 were disallowed out of the Kshs. 56,147,853. 00 were disallowed out of the Kshs. 64,768,543. 00 claimed by the taxpayer. Purchase of Kshs. 8,620,689. 00 were allowed since they had been declared by the suppliers (Shiv Construction Ltd) in their VAT returns.

65. It was averred that in 2021, the Appellant declared income of Kshs. 123,456. 00. However, purchases claimed from the Appellant’s PIN in the period were Kshs. 64,898,995. 00 and sales to withholding VAT agent, Rural Electrification, were Kshs. 23,190,274. 00. The undeclared income was therefore Kshs. 87,928,647. 00.

66. The averred that upon review of the Appellant’s grounds of objection and the evidence produced, it requested the Appellant to provide records to facilitate review of their objection. The specific documents requested were: -i.Audited financial statements and trial balances.ii.Sales invoices and ledgers.iii.Purchase invoices and ledgers.iv.Bank statements.v.Contract agreements.vi.Any other relevant documents in support of the grounds of objection.

67. The Respondent further averred that it requested the Appellant to provide documents specified above in support of their grounds of objection, and the Appellant submitted bank statements only, which were the same documents submitted before.

68. The Respondent therefore concluded that the assessments were correctly made on the basis of information available and to the best of his judgement as provided for under Section 31 (1) of the TPA.

69. The Respondent further averred that despite several reminders accorded to the Appellant to avail the said documents, the Appellant only submitted bank statements thereby failing to substantiate their grounds of objection.

70. It was further contended that in the absence of documents rebutting its assessment, then its assessments were correctly issued based on information available to the Respondent and best judgement in accordance with Section 31 (1) of the TPA. Therefore, the Respondent rejected the Appellant’s objection application and confirmed the earlier principal taxes due of Income tax of Kshs. 41,381,077. 00 and VAT of Kshs. 4,944,456. 00.

71. The Respondent in its submissions stated that it issued the Appellant with additional income tax assessments for the period 2019 and 2021 amounting to Kshs. 41,381,077. 00 as well as additional VAT assessments for December 2021 amounting to Kshs. 4,944,456. 00 on 2nd November 2022 pursuant to Section 24 and 31 of the TPA, and the assessments were based on undeclared income and unsupported purchases which were disallowed.

72. The Respondent submitted that the Appellant failed to provide the required documents as required under Section 51 (3) of the TPA and therefore the Respondent issued the Appellant with the Objection Decision dated 15th August 2023 confirming the earlier assessments for failure to avail sufficient documents to support the objection application.

73. It submitted that Section 56 (1) of the TPA states;“(1)In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

74. It was further submitted that the Appellant failed to discharge its evidential burden of proof under Section 107 (1) of the Evidence Act in demonstrating that the assessment by the Respondent was in any reasonable manner incorrect or excessive.

75. The Respondent also submitted that the Appellant’s under-declaration constitutes a tax offence of knowingly omitting from its tax returns an amount that should have been included contrary to Section 97 (a) of the TPA, which provides as follows;“(a)Any person who, in relation a tax period, knowingly -omits from its tax return any amount which should have been included; commits an offence.” 76. It was further submitted that although the law recognizes the self-assessment regime, the Respondent is empowered by Section 31 of the TPA to amend such assessment if it has available information.

77. In the case of TAT 25 OF 2016 Family Signature Ltd vs. Commissioner of Investigations & Enforcement, while considering the issue of whether the Respondent was justified in employing an alternative and indirect method of assessing the Appellant’s estimated tax liability, the Tribunal held,“when the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high-income margin.”

78. The Respondent submitted that it exercised its best judgement appropriately in the circumstances thereby arriving at the tax assessment it did.

79. It was also submitted that in Joycott General Contractors Ltd vs. Kenya Revenue Authority TAT No. 28 of 2018, the Tribunal while dismissing the Appeal held;“We find that the Appellant seems to forget that it bears the burden of proof in law, to demonstrate to this Tribunal that the Respondent’s assessment was wrong. Especially with regards to the under declarations and variance in respect of VAT and income sales. On the contrary, the Appellant has not bothered to substantially traverse the assessment raised. All it has done is to make sweeping and expansive accusations without substantial support.”

80. The Respondent submitted that the Appellant having under-declared its tax obligations, leading to additional assessments, confirmed based on other sources, and having fatally failed to demonstrate the same to be erroneous, then the said assessment and subsequent Objection Decision dated 15th August 2023, remains valid in law, and ought to be upheld, and the Tribunal dismiss the Appeal with costs.

The Respondent’s Prayers 81. By reason of the foregoing, the Respondent prayed that this Honourable Tribunal finds that;a.The Respondent’s Objection Decision dated 15th August 2023 is proper in law and the same be affirmed; and,b.The Appeal be dismissed with costs being awarded to the Respondent.

Issues For Determination 82. The Tribunal having carefully considered the pleadings and submissions filed by the parties is of the considered view that the appeal herein distils into one issue that commend for determination as follows:Whether the Respondent’s additional assessments against the Appellant for Corporation Tax and VAT for the period 2019 and 2021 were justified.

Analysis And Determination 83. The Tribunal proceeds to analyze and determine the issue as hereunder.

84. The dispute subject of this Appeal arose when the Respondent carried out investigations into the tax affairs of the Appellant for the years of income 2019 and 2021, and on the basis that the Appellant had under-declared its income thereby raising additional assessments in the total sum of Kshs. 46,325,534. 40.

85. The Appellant objected to the additional assessment on 29th June 2022 and the Respondent issued its Objection Decision on 15th August 2023 rejecting the objection application and confirming the assessment for income tax in the sum of Kshs. 53,671,700. 30, and VAT in the sum of Kshs. 6,131,126. 05 inclusive of penalties and interest.

86. The Appellant appealed the decision principally on the basis that the additional assessment was based on inaccurate, excessive and erroneous estimates, and was therefore excessive and had no legal basis.

87. The Appellant also based its Appeal on the basis that the Respondent erred by relying on the Appellant’s bank statements to make an assessment, and thereby assumed all the monies that were deposited in the Appellant’s bank account were income or sales, and also failed to exercise its best judgement using industry margins.

88. The Appellant also pleaded that the Respondent erred in finding that the Appellant had not provided the necessary documents and explanations required to sustain its objection against the Respondent’s assessment.

89. The thrust of the Appellant’s submission on Corporation Tax Assessment, is that the Respondent contended that the Appellant had undeclared income and proceeded to rely on the banking analysis method to determine the estimated turnover of the Appellant. It contended that the Respondent treated all deposits into the accounts as taxable income, even though not all deposits were related to income, as it included non-income items such as client deposits, loans, bounced checks, transfers and reversals.

90. The Appellant further submitted that during the audit, findings, and objection stage, it explained and provided documentation demonstrating that not all deposits into the bank account related to Appellant’s turnover.

91. The Appellant further contended that the Respondent despite being supplied with such information, failed to consider non-income items when assessing the corporation tax due and payable by the Appellant and erroneously brought to charge all cash deposits into the Appellant’s accounts.

92. The Appellant also submitted that it would have been prudent, within reasonable judgment and information available, for the Respondent to use the industry profit margins, depending on the nature and type of the Appellant’s business.

93. The Appellant also submitted that the Respondent failed to consider the expenses wholly and exclusively incurred by the Appellant in generating income.

94. On the VAT assessment, the Appellant submitted the Respondent confirmed the assessment on the basis that the Appellant had failed to provide ledgers and other relevant supporting documents requested by the Respondent, which would show that not all the deposits made into the bank accounts were sales.

95. The Appellant contended that its availed ledgers and bank statements to the Respondent for the period, which showed the amount of tax due, if any, thus the Respondent did not reasonably arrive at the assessment.

96. The Appellant further submitted that had the Respondent made the impugned assessment to the best of its judgement on the materials supplied by the Appellant, it would have arrived at a different position that accurately reflects the Appellant’s position.

97. The Appellant finally submitted that the Respondent’s VAT assessment is not arithmetically sound as the entries were wrongly included in the bank analysis, which should have been adjusted as it was not related to sales.

98. The Respondent on the other hand submitted that it had flagged the Appellant for alleged tax evasion scheme when it noted the under declaration of sales based on comparison of sales variances in the Income Tax and VAT returns, as the Appellant was a nil filer in the years 2016, 2017, and 2018, while its returns for 2019 and 2020 were in a loss position.

99. The Respondent averred that it found out that the Appellant had made taxable supplies to customers who in turn claimed them as purchases, and the data was in generated from their Pin.

100. The Respondent further submitted that on VAT, comparison between sales declared in the VAT returns versus purchase claimed and sales to withholding agents showed under declaration of VAT sales by Kshs. 52,450,786. 00 in 2021, and failure to declare in full amounts supplied to Kenya Rural Electrification.

101. The Respondent also averred that in year 2019, the purchase of Kshs. 56,147,853. 00 were disallowed out of Kshs. 64,768,543. 00 claimed by the Appellant, and a purchase of Kshs. 8,620,689. 00 were allowed since they had been declared by the supplier (Shiv Construction Ltd).t was also averred by the Respondent that in 2021.

102. It was also averred by the Respondent that in year 2021, the Appellant declared income of Kshs. 123,456. 00. However, purchase claimed from the Appellant’s Pin for the period were Kshs. 64,898,995. 00 and sales to withholding VAT agent, Kenya Rural Electrification were Kshs. 23,190,274. 00, and the undeclared income was therefore Kshs. 87,928,647. 00.

103. It was a submission of the Respondent that upon review of the Appellant’s grounds of objection and the evidence submitted, it requested the Appellant for submission of specified supporting documents to wit;i.Audited financial statements and trial balances.ii.Sales invoices and ledgers.iii.Purchase invoices and ledgers.iv.Bank statements.v.Contract agreements.vi.Any other relevant documents in support of the grounds of objection.

104. However, the Appellant did not submit the documents requested, in spite of several reminders, only submitting bank statements from KCB and DTB banks, which it had submitted before, thus failing to substantiate it objection, the Respondent averred.

105. Consequently, the Respondent confirmed the assessments as correctly made on the basis of information available and to the best of his judgement as provided under Section 31 (1) of the TPA. The Respondent averred that in the absence of documents rebutting the assessment, then its assessments were correctly issued based on information available to the Respondent.

106. The Respondent further submitted that the Appellant failed to provide the required documents as required under the provisions of Section 51 (3) of the TPA and therefore the Respondent issued the Appellant with the Objection Decision dated 15th August 2023 confirming the earlier assessments, as there was no sufficient documentation to support the objection.

107. The Tribunal at the outset notes that Section 56 (1) of the TPA clearly stipulates that the burden of proof rests on the tax to prove a tax decision incorrect;“(1)In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

108. In the same breath, Section 30 of the Tax Appeals Act weighs in on the burden of proof by providing that;“30. In proceedings 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.”

109. There is no doubt that the Appellant’s Appeal relates to an assessment and is within purview of the aforesaid Section 30 of the TAT Act. The thrust of the Appellant’s appeal is that the Respondent’s assessments were estimates and excessive, and did not consider the Appellant’s explanations.

110. It is therefore incumbent upon the Appellant to prove its contention that the assessments were excessive and did not consider its documents and explanations.

111. It is noteworthy that the Respondent requested the appellant to submit specific documents in support of its submission. However, the Appellant submitted the same bank statements it had submitted in earlier course of engagement with the Respondent. The Tribunal does not wish to rehash the said listing of the specified documents again as the same have been listed hereinabove. Suffice it to observe that had the Appellant submitted the said documentation as requested, perhaps the cause of the assessments would have changed.

112. It is also worth noting that though the Appellant has stated that it submitted supporting documentation to the Respondent, no evidence of such submission either by way of email, letter, delivery or copies of the alleged documents themselves has been submitted to this Tribunal through the Statement of Facts or bundle of documents, thus leave the existence of such documentation to conjecture.

113. The foregoing being so, then it is right for this Tribunal to find the Appellant failed to discharge its burden of proof imposed by Section 56 (1) of the TPA and Section 30 of the TAT Act, demonstrating that the Respondent’s assessment was in any manner unreasonable, incorrect, excessive or ought to have been made differently.

114. The Appellant having failed to provide documentation, the Tribunal is also of the considered view that the Respondent was within its mandate to apply the banking analysis method, as an alternative and indirect method of assessing the Appellant’s estimated tax liability.

115. The Tribunal has also considered the Appellant’s averments and submissions on this issue and notes that it has not provided any evidence demonstrating that the Respondent did not exercise its best judgement appropriately in the circumstances in arriving at the assessment.

116. The Tribunal reiterates the case of TAT No. 28 of 2028 Joycott General Contractors Ltd v Kenya Revenue Authority, cited hereinabove and which the Tribunal finds fitting in the instant circumstances, where it was stated;“We find that the Appellant seems to forget that it bears the burden of proof in law, to demonstrate to this Tribunal that the Respondent’s assessment was wrong. Especially with regards to the under declarations and variances in respect of VAT and income sales. On the contrary, the Appellant has not bothered to substantially to traverse the assessment raised. All it has done is to make sweeping and expansive accusations without substantial support.”

117. Flowing from the foregoing, the Tribunal concludes that the Appellant having been provided by the Respondent details of under declarations of its tax obligations, leading to additional assessments, and having fatally failed to demonstrate the same as incorrect, excessive or erroneous, then the Respondent was justified to confirm the said assessments based on other available information and best judgement.

118. In view of the above, the Tribunal finds and holds that the Respondent was justified in confirming the additional assessments against the Appellant for Corporation Tax and VAT for the period 2019 and 2021.

119. The upshot of the foregoing is that the Appellant’s Appeal is found devoid of merit and hereby disallowed.

Final Determination 120. The Appellant’s Appeal having been found without merits, the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby disallowed;b.The Respondent’s Objection Decision dated 15th August 2023 be and is hereby upheld; and,c.The parties to bear their own costs.

121. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4TH OF OCTOBER 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH.N. NJERU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI M. DIRIYE - MEMBER