[2024] KETAT 757 (KLR)

Frikah Investments Limited v Commissioner of Domestic Taxes (Tax Appeal 127 of 2023) [2024] KETAT 757 (KLR) (Commercial and Tax) (17 May 2024) (Judgment)

Neutral citation: [2024] KETAT 757 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 127 of 2023

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

May 17, 2024

Between

Frikah Investments Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private Company incorporated in the Republic of Kenya and is involved in the supply of consumables such as dry grains, milk, meat, vegetables, cooking oil, sugar and fruits.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5(1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Further, under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority 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 revenues in accordance with those laws.

3. The Respondent issued a tax assessment on 29th June 2022 to which the Appellant objected to in a letter dated 29th September 2022 and received Objection acknowledgement via its iTax portal on 30th September 2022.

4. The Respondent issued its Objection decision on 28th November 2022.

5. Aggrieved by the Respondent’s Objection decision contained in the letter dated 28th November 2022, the Appellant lodged this Appeal on 7th February 2023.

The Appeal 6. The Appeal as contained in the Memorandum of Appeal dated 7th February 2023 and filed on 22nd February March 2023 raised the following grounds of appeal;i.That the Respondent erred in law and in fact by arriving at an additional assessment for reason of errors or mistake in the apportioning of liability.ii.That the Respondent erred in law and fact by assuming that all withdrawals, withdrawn by the Director, Mr. Kenneth Mugambi were his to his benefit as a salary. The Director is a public officer and by law cannot draw two salaries, he is only entitled to a share of the profit at the end of the financial year.iii.That those withdrawals were for purchase of deductible inputs, payments of direct wages and payments of operational expenses for running of the Company.iv.That the Company was not able to secure any works and did not receive any payments for the years 2016 and 2017. v.That the cash deposit of Kshs 450,000. 00 and Kshs 1,500,000. 00 brought to charge by the Commissioner in the year 2016 and 2017 respectively indicated in the bank statement was capital injection by the Directors which was used to for operational expenses, purchase of inputs and undertake works that were awarded, they did not constitute a Sale.vi.That the additional assessments raised for income tax did not consider any deductible input incurred, operational expenses, bank charges, interest on loans and other expenses incurred. The bank ledgers were provided during the objection stage.vii.That the Company only traded with the County Government of Meru and that the IPOS, invoices and payment vouchers were provided during the objection stage.viii.That the Company mainly supplied consumables i.e., dry grains, milk, meat, vegetables, cooking oil, sugar and fruits to the Meru County Hospital which either fall under zero rated and VAT exempted goods.ix.That the Director Mr. Kenneth Mugambi bank accounts are under agency notice and has not been able to draw his salary since July 2022, he has had difficulties in raising the Tax Appels Tribunal application fees of Kshs 20,000. The additional assessments were raised in ITAX on the 31st August 2022 followed up by issuance of an agency notice on 22nd September 2022. This was an error on the part of the Commissioner Domestic Taxes since the 30-day statutory window where a taxpayer is allowed to lodge an objection had not elapsed.

Appellant’s Case 7. The Appellant has set out its case on its Statement of Facts dated and filed on 7th February 2023.

8. The Appellant stated that the Respondent erred in law and fact by charging VAT and Corporation tax on capital injections of Kshs 450,000. 00 and Kshs 1,500,000. 00, cash deposited in the Company's bank account in the years 2016 and 2017, respectively.

9. The Appellant contended that the Company had not traded in the years 2016 and 2017 with any entity and had incurred losses and that capital was used 2016 for running of the operations of the Company and for business development.

10. The Appellant averred that the capital injection of Kshs 1,500,000. 00 deposited in the Company's bank account and charged by the Commissioner Domestic Taxes was capital injection used in the year 2017 for purchase of inputs and cater for operational expenses.

11. The Appellant further contended that the Respondent raised VAT additional assessments for all sales which was an error and that the Company supplied zero rated consumables to the Meru County Hospital hence did not include the sale items in the monthly VAT returns.

12. The Appellant averred that LPOS and Invoices were submitted to the Respondent in hard copy during the objection stage.

13. It was the Appellant submission that it does not have permanent employees and thus cannot have PAYE Obligation and that it had only supplied foodstuffs and did road works (murraming and Grading of Earth Roads) for the County Government or Road works done i.e., grading and murraming of earth roads in Meru County.

14. The Appellant stated that the only time they engaged employees was during the bush clearing, grading and murraming of roads. The Appellant further averred that all workers involved in the project were casual labourers who were paid a daily rate and where total for one casual worker did not meet the monthly PAYE Threshold.

15. The Appellant stated that the Respondent erred in law and fact by imposing a salary to the Director of the Company Mr. Kenneth Mugambi on the basis of all in-house Cheques drawn with his name as an employee benefits/Salary. The Appellant stated that those funds were used to cater for operational expenses since he is a signatory to the Company's bank account at Cooperative Bank Kenya Account Number 01148201022400.

16. The Appellant contended that there was an error in law and fact to issue and additional assessment on the Company for PAYE, issue a demand notice and finally issue agency notices on the Director’s personal accounts without thorough verification that the withdrawals were not salaries drawn by him.

17. The Appellant submitted no written submissions and its case proceeds with the pleadings only.

Appellant’s Prayers 18. The Appellant prayed that this Tribunal;a.Allows this Appealb.That the Agency notice issued to the personal account of the Director is liftedc.That the decision of the Respondent in the ruling dated 28th November 2022 be set aside.

The Respondent’s Case 19. The Respondent has set out its case on its;a.Statement of Facts dated 26th July 2023 and filed on 28th July 2023. b.Written Submission 21st September 2023 and filed on 26th September 2023.

20. The Respondent submitted two issues for determination:i.Whether the Respondent was justified in issuing the assessment made; and,ii.Whether the Appellant discharged the burden of proof as provided by law.

21. The Respondent averred that the additional assessment was issued in accordance with the law and were therefore justified as the Appellant was not able to disclose the sources of its income.

22. The Respondent further averred that that the Appellant was not able to provide documentary evidence that the deposit of Kshs 1,500,000. 00 charged in the year 2017 be remitted from solid construction as indicated in the Appellant’s bank statement.

23. The Respondent submitted that the Appellant has the responsibility of filing the tax return in the prescribed form and in doing so, submit the correct information. The Respondent asserted that the Appellant filed Nil returns for the period 2016 to 2018 and declared an income of Kshs 1,124,921. 00 for the year 2019.

24. The Respondent further submitted that Section 24 (1) of the Tax Procedure Act provides that;“A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”

25. The Respondent 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 in its possession as stipulated under Section 24 (2) of the Tax Procedures Act which states that:“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.”

26. The Respondent submitted that Section 31 of the Tax Procedures Act 2015 empowers it to make alterations or additions to original assessments from available information for a reporting period based on its best judgement. This section provides as follows:“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the "original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that-a.In the case of a deficit carried forward the Income Tax Act (Cap 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period.b.In the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No 35 of 2013), the tax payer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.In any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

27. The Respondent submitted that it is mandated to use the best of its judgment and the available information to make an additional assessment to ensure that the correct amount of tax is paid by a taxpayer. The Respondent contended that there was no evidence of the sources of the funds in the Appellant's bank account and the purpose of withdrawals made by the Appellant’s Director and that in the said evidence, the variances were subjected to both Corporation tax and VAT tax while the withdrawals by the directors were subjected to PAYE.

28. The Respondent submitted that Section 56 (1) of the Tax Procedures Act places the burden on the taxpayer to proof that a tax decision is incorrect. The Section states;“In any proceedings under this Part, the burden shall be on the Appellant to prove that a tax decision is incorrect.”

29. The Respondent averred that the Appellant did not discharge its burden of proving that the assessment was incorrect since it did not adduce evidence to support its objection.

30. The Respondent further averred that it requested the Appellant to provide audited financial statements, sales ledger analysis, reports and purchase invoice among other documents but instead made an objection that was unsupported by the relevant documents as required by law and thus the burden of proof was not discharged.

31. The Respondent stated that it conducted a banking analysis of the Appellant for the years 2016 to 2021 by making the necessary adjustments on the gross bank credits and noted variances between the expected sales and the turnover declared in both the Income tax and VAT returns.

32. The Respondent submitted that the Appellant is expected to maintain documents necessary and relevant to determine its tax liability. The Respondent submitted that the Appellant can only discharge its burden of proof by producing documents that are relevant to the tax head and the tax period in question.

33. The Respondent relied on the following case laws;i.The High Court ruling in the case of Ushindi Limited v Commissionerii.The case of Republic v Kenya Revenue Authority: Proto Energy Limited (2022) eKLR

34. The Respondent submitted that the Appellant objected to the assessment made and provided bank statements, LPOs and invoices. The Respondent further submitted that however, the Appellant failed to provide the audited financial statements to fully establish the correct financial position, invoices for purchases made, proof of payments to support the expenses incurred, documents to proof the sources of funds and/or expenses of the cash withdrawals made by the directors.

35. The Respondent submitted that in absence of any evidence to proof the source of income, sales and payments made, the Appellant failed to discharge its burden of proof and has therefore had no justifiable cause and/or basis to amend the assessment made earlier.

36. The Respondent submitted that it was justified and within the law in making the additional assessment and the Appeal should be dismissed since the Appeal is not valid and is bad in law.

Respondent’s Prayers 37. The Respondent prayed that the Tribunal dismiss the Appeal with costs to the Respondent as the same lacks merit.

Issues for Determination 38. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts and submissions concludes that there are is a single issue that calls its determination as follows;Whether the Respondent was justified in issuing the assessment.

Analysis and Findings 39. The Respondent submitted that since there was no evidence of the sources of the funds in the Appellant’s bank account and the purpose of withdrawals made by the Appellant’s director, it relied on a banking analysis on the Appellant for the years 2016 to 2021 and noted variances which after the necessary adjustments were subjected to both Corporation tax and VAT while the withdrawals by the Company’s director were subjected to PAYE.

40. The Tribunal reiterates its position in the case of Digital Box Limited v Commissioner of Investigations & Enforcement which addresses the banking analysis approach and stated that: -“Further, the Courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment”.

41. The Respondent stated that the additional assessment was justified as it used the best of its judgement based on the available information since the Appellant filed Nil returns for the period 2016 to 2018 and failed to produce some of the additional documents requested including the audited financial statements, sales ledgers and analysis, Z-reports and purchase invoices.

42. The Appellant contended that the assessment was not done in accordance with the law as the Respondent did not consider any deductible input incurred including capital injections in the form of cash deposits, operational expenses, bank charges, interest on loans and other expenses incurred in running the business despite it providing the ledgers during the objection stage.

43. The Appellant further contended that it supplies milk, meat, vegetables, cooking oil, sugar and fruits which are either zero rated or exempt from VAT and that the only vatable sale the company was involved was for road works done.

44. The Tribunal has reviewed an electronic mail (e-mail) communication in which the Respondent on 4th October 2023 requested the Appellant to provide the following documents:i.Bank statements for the year 2019 (January-December).ii.Opening and closing debtors for the year 2019iii.Sales ledger for the year 2019 together with the copies of invoices raised in the period for the years under review.

45. The Tribunal also notes that the Respondent in its objection decision alluded to receiving some of the afore-stated documents particularly the bank statements, LPOs and invoices issued to Meru County and other Government agencies but not the audited financial statements and some other invoices.

46. The significance of keeping and maintaining documents for tax purposes is emphasized under Section 23 (1) of the TPA which provides as follows;“(1)A person shall -(a)Maintain any document required under a tax law in either of the official languages……(b)Maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained; and(c)Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

47. The Tribunal has observed that in its Statement of Facts and Memorandum of Appeal, the Appellant made averments that the Respondent erred in its assessment. However, the Tribunal did not come across sufficient evidence to support this averment.

48. Section 56 (1) of the TPA places the burden of proof in tax matters on the Appellant. It provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

49. It is the view of the Tribunal that it is the responsibility of the Appellant and its obligation to provide evidence that demonstrates the incorrectness of the Respondent’s tax assessment and its attendant decisions. It is to the Appellant’s advantage that it easily and readily provides documents under its possession when requested by the Respondent as they are integral of its business. and critical to the success of its case.

50. The Tribunal notes that the Appellant is statutorily required to keep such records and supply them when requested to help the Respondent ascertain its tax liability. Section 29 (1) of the TPA provides as follows regarding record keeping:“(1)A person shall—(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained;”

51. The Appellant was thus required to keep records that are related to the disputed tax liability and provide them when demanded, failure to avail the documents give credence that Respondent is right in its assessment.

52. It is of the view of the Tribunal that the Appellant did not provid the relevant documents at the objection stage to discharge its burden of proof hence compromising its position in this Appeal.

53. Further Section 30 of the TATAct places the burden of proof in tax cases on the Appellant. It provides as follows:“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; or(b)in any other case, that the tax decision should not have been made or should have been made differently”37. The Appellant was thus obliged to respond and address these assertions that were conspicuously and expressly raised by the Respondent in its Statement of Facts and the objection decision.”

54. The Tribunal is guided by the case of Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR where the court held that: -“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”The Tribunal wish to associate itself with the case of Primarosa Flowers Ltd v Commissioner of Domestic Taxes HCITA No 19 of 2017, the Learned Judge cited with approval the case of Mulherin v Commissioner of Taxation (2012) FCAFC115, where the court held: -“in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that an assessment was excessive by adducing positive evidence that demonstrates the taxable income on which tax ought to have been levied. It is the Tribunal’s considered view that the appelant in his case failed to discharge its burden of proof hence the respondent could hardly be faulted in raising the additional assessm

55. The Tribunal further associates itself with the case of Primarosa Flowers Ltd v Commissioner of Domestic Taxes HC ITA No 19 of 2017, the Learned Judge cited with approval the case of Mulherin v Commissioner of Taxation (2012) FCAFC115, where the court held: -“...In tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that an assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.It is the Tribunal’s considered view that the Appellant in this case failed to discharge its burden of proof hence the Respondent could hardly be faulted in raising the additional assessment.”

56. The consequence of this, is that the Appellant has failed to discharge its burden of proof regarding the issue of whether it had supplied the documents that it had been requested to supply as required under Section 56 (1) of the Tax Procedure Act and Section 30 of the Tax Appeal Tribunal act AT Act

57. In view of the above, The Tribunal concludes that the Respondent’s tax assessment on the Appellant was proper in law and the Appellant is obligated to settle the tax due as communicated in the Respondent’s Objection decision dated 28th November 2022.

Final Decision 58. The Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:i.The Appeal be and is hereby dismissed.ii.The Respondent’s Objection decision dated 28th November 2023 be and is hereby upheld.iii.Each party to bear its own costs.

59. It’s so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17THDAY OF MAY, 2024. ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU -MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI -MEMBERMOHAMED A. DIRIYE - MEMBER