[2023] KETAT 253 (KLR)

Francline Enterprises v Commissioner of Domestic Taxes (Appeal 73 of 2022) [2023] KETAT 253 (KLR) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 253 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 73 of 2022

E.N Wafula, Chair, RM Mutuma, RO Oluoch & EK Cheluget, Members

May 12, 2023

Between

Francline Enterprises

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered partnership based in Nakuru with the principal activity of dealing with the business of selling timber and the farming of cereals, buying and selling of cereals , and related activities .

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469, laws of Kenya, and the Kenya Revenue Authority is the agency of the Government for the collection and receipt of all tax revenue , and the administration and enforcement of all the provisions of the laws set out in the First Schedule to the Act , for purposes of assessing , collecting , and accounting for all tax revenues in accordance with those laws.

3. The dispute herein arose after an assessment was generated subsequent to the Respondent noting a variance between the Income tax returns and VAT returns for the period 2018 and 2019. The Appellant had declared Kshs 8,743,370. 00 in income tax whereas VAT was declared as Kshs 991,274. 00 which created a variance of Kshs 7, 752,095. 00

4. The Appellant stated that in the years of income ended 31st December 2017, the partnership had both vatable and non-vatable income and annexed its audited accounts for the year of income.

5. The Appellant stated that it received additional assessments for the year 2017 amounting to Kshs 1,240,335. 00 which was income from non-vatable goods sold and further indicated that the vatable and non-vatable income was clearly indicated.

6. A pre-assessment demand on outstanding tax was issued on 27thAugust 2020 and the VAT assessment was issued on 12th December 2020 for Kshs 1,240,335. 00 after the Appellant failed to respond to the pre-assessment notice issued.

7. The Appellant thereafter objected to the assessed tax on 23rd June 2021 which was a late objection citing reason of sickness and other reasonable causes.

8. The Respondent requested for the Appellant’s records and documents in support of the late objection. The Appellant failed to respond and provide documents as requested and the objection was rejected since there was no supporting documentation, and the objection decision was issued on 31st August 2021.

9. The Appellant being dissatisfied with the Respondent’s objection decision filed its Notice of Appeal with the Tribunal on 28th January 2022.

The Appeal 10. The Appellant filed its Memorandum of Appeal on 28th January, 2022 and set out the following grounds of appeal:-i.That the Respondent did not fairly make its decision dated 31st August 2021. ii.That the Respondent’s assessment was excessive and wrong.iii.That the taxpayer has been dealing with non-vatable goods as indicated in the accounts submitted.iv.That the assessed amount is already declared in the Income tax return for the year 2017.

The Appellant’s Case 11. The Appellant’s case is premised on its statement of factsfiled on 28th January, 2022.

12. The Appellant stated that in the years of income ending 31st December 2017 , it had both vatable and non-vatable income as per its annexed audited accounts.

13. The Appellant further stated that it received additional assessments for the year 2017 amounting to Kshs 1,240,335. 00 which income was from the non-vatable goods sold. The Appellant averred that in the submitted return , the vatable and non-vatable income was clearly indicated .

The Respondent’s Case 14. The Respondent in its response has relied on the Statement of Facts dated 25th February, 2022 and filed on 28th February 2022 and the written submissions dated and filed on 31st August 2022.

15. The Respondent stated that the VAT assessments were generated following a variance between the Appellant’s income tax return and the VAT returns.

16. The Respondent further stated that the Appellant has never proven to the Commissioner that it was dealing with non-vatable goods. Those are inconsistencies between supplier and purchaser information which the Appellant did not resolve at the inconsistency and objection review stages.

17. The Respondent further stated that the Appellant was tasked to provide documents to support its assertions and it failed to provide all the requested documents during the required period.

18. The Respondent further stated that the Appellant did not provide the requisite documents prior to the Commissioner‘s decision. The VAT assessment is therefore factual based on the comparisons between the income tax and VAT returns .

19. The Respondent also stated that the Respondent filed a late objection contrary to Section 51[2] of the Tax Procedures Act but failed to meet the requisite conditions for filing a late objection, and also failed to provide documents to support the objection as per Section 51[7] of the TPA.

20. The Respondent submitted that Section 51 [6] and [7] of the TPA provides that a taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection. That the Commissioner may then allow an application to lodge a late notice of objection if –a.The taxpayer was prevented from lodging the notice of objection within the period specified because of an absence from Kenya, sickness or any other reasonable cause , and ,b.The taxpayer did not unreasonably delay in lodging the notice of objection.

21. The Respondent averred that the Appellant did not meet these requirements and therefore the late objection was invalid.

22. The Respondent also reiterated that the Appellant’s objection was not valid as it did not meet the requirements of Section 51[3] of the TPA, which requires that an objection decision be supported by requisite documents. That the Section reads as follows:-“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;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33[1] ; andc.all the relevant documents relating to the objection have been submitted.”

23. The Respondent submitted that it is empowered by Section 31 [1] of the TPAto use the information available to it to make an assessment and where the Appellant failed , refused and or neglected to provide records of purchases , then the Respondent was justified to amend or alter the original assessment , based on the available information and to the best of the Commissioner ‘s judgement.

24. The Respondent further submitted that under Section 17[3]a of the VAT Act , registered taxpayers are required to possess an original tax invoice for the supply or a certified copy which the Appellant did not avail in two instances ie. when inconsistency notices were issued and when it lodged an objection.

25. The Respondent also submitted that the Appellant is under a statutory duty under Section 93[1] of the Tax Procedures Act to keep and maintain records that may be required in accordance with a tax law, and it is incumbent upon the Appellant to provide such records as and when required .

26. The Respondent also submitted that the Commissioner confirmed the assessments after the Appellant failed to provide documents to support the objection. The decision was given after allowing the Appellant ample time to support its objection.

27. It was also the Respondent‘s submission that the onus of proving the incorrectness of a tax decision lies on the taxpayer as per the provisions of Section 56[1] of the TPA , and the Appellant did not discharge this burden.

28. By reason of the foregoing the Respondent prays that the Tribunal dismisses the Appellant‘s Appeal for lack of merit , and uphold its VAT assessments in the objection decision .

Issues for Determination 29. The Tribunal having reviewed the pleadings filed and the submissions made is of the considered view that the Appeal herein crystalizes into one issue;-Whether the Respondent was justified in making the VAT assessment against Appellant for the sum of Kshs 1,240,000. 00 vide the objection decision dated 31st August 2021 ?

30. The Tribunal notes from the outset that the Appellant has not done justice in supporting its Appeal, as is apparent from the Statement of Facts on record , with hardly any supporting documentation submitted.

31. It is also apparent that due to lack of documentation from the Appellant, the Respondent invoked the provisions of Section 31 of the TPA, which grants the Commissioner the power to amend an original assessment by making alterations or additions from the available information and to the Commissioner‘s best judgement.

32. Subject to the above provisions of law, the Respondent is allowed to amend an assessment in order to ensure that the taxpayer is liable for the correct amount of taxes in respect of the reporting period.

33. The above is also made clear from the provisions of Section 56 of the TPAwhich provides that:-“In any proceedings under this part , the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

34. In addition Section 30 of the The Tax Appeals Tribunal Act, also provides ;“In a proceeding before the Tribunal , the Appellant has the burden of proving – (a) where an appeal relates to an assessment, that the assessment is excessive;”

35. The Respondent has referred to the Tribunal the case of Commissioner of Domestic Taxes v Galaxy Tools Ltd [2021] eKLR , where the court held as follows:-“This country operates under a self-assessment tax regime. Under this regime, the taxpayer assesses self and declares what he considers to be taxable income on which he then pays tax to the authorities . For this reason the tax laws are couched in such manner that gives the tax authorities wide discretion in ascertaining ex-post facto, what taxable income is. Further , the tax laws reverse the well-known principle of evidence of “ he who alleges must prove”. In this regard , the tax authorities would assess what it considers to be the tax due from a taxpayer and the tax laws would burden the taxpayer to disprove that the assessment or tax demanded is wrong or incorrect.This is borne by the fact that the taxpayer has assessed and made declaration of what according to him is the tax payable , and has already paid such tax ... ”

36. The Respondent further cited the Australian case of Mulherin v Commissioner of Taxation [2013] FCAFC 115 , where it was held that:-“The taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied”.

37. Accordingly, therefore the Appellant bears the burden of proving that the disputed assessment is excessive or incorrect . Section 31 of the TPAenjoins the Respondent to only amend the assessments with the information that it has, which conversely enjoins the Appellant to provide the requisite documentation that would enable the Commissioner ascertain the taxes due and payable .

38. This Tribunal is therefore satisfied that the Appellant ‘s inability or failure to provide the Respondent with the requisite documentation , failed to satisfy its burden to prove that the assessments and subsequent objection decision made was excessive , wrong or incorrect.

39. The Appellant also contended that as its business entailed the sale of timber and the buying and selling of cereals and related activities , the tax period ending 31st of December 2017 , it had incurred both vatable and non-vatable income and attached its audited accounts to prove that contention. The Appellant further contended that it dealt in non -vatable goods which would be exempt goods.Section 2 of the VAT Act defines exempt goods as ;“supplies specified in the first schedule which are not subject to tax."

40. If the Appellant was dealing with both vatable and non-vatable supplies and income, the law requires the taxpayer to clearly set apart through documentation what amounted to vatable income and what is not vatable income.

41. However, the Respondent has submitted and provided evidence that , the Appellant did not provide full and written information or records for purposes of calculating and charging VAT in line with the provisions of Section 43 of the VAT Act.

42. The burden of proving that the Appellant dealt in non -vatable income that is exempt from VAT solely rested on the Appellant , as provided for in the VAT Act, and which burden the Appellant failed to discharge as required by the law.

43. The cases here below were cited in support ;Commissioner of Domestic Taxes v Galaxy Tools Ltd ML HC ITA E088 of 2020,Metcash Trading ltd v Commissioner for South Africa Revenue Service & Anor CCT / 2000

44. The Tribunal is therefore satisfied that the Appellant did not discharge its burden of proving that it dealt in non-vatable income which was exempt from VAT.

45. By virtue of Section 24 of the TPA the Respondent is not bound by the returns filed by the Appellant for the tax period 2017 , and were allowed by Section 31 of the Act , to amend in order to ascertain the correct tax liability.

46. The Tribunal therefore finds the Respondent rightly amended the returns filed by the Appellant to ascertain the correct tax payable , and confirm the right assessment.

47. The Tribunal having found that the Appellant did not discharge its burden of submitting the requisite records to the Respondent , did not prove that they dealt in non-vatable income exempt from VAT, and that the Respondent rightfully amended the returns filed by the Appellant to determine the correct tax position, the Tribunal finds and holds that the Respondent was justified in making and confirming the assessment against the Appellant.

48. The upshot of the foregoing is that the Appellant’s appeal fails and the Tribunal proceeds to make the following orders.

Final Decision 49. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent's objection decision dated 31st August 2021 be and is hereby upheld.c.Each party to bear its own costs.

50. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 12TH DAY OF MAY, 2023. .............................ERIC N. WAFULACHAIRMAN.............................ROBERT M. MUTUMAMEMBER.............................RODNEY O. OLUOCHMEMBER.............................EDWIN K. CHELUGETMEMBER