[2023] KETAT 128 (KLR)

Frontier Engineering Limited v Commissioner of Domestic Taxes (Tribunal Appeal 45 of 2022) [2023] KETAT 128 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 128 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tribunal Appeal 45 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

March 17, 2023

Between

Frontier Engineering Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited company incorporated under the Companies Act, Chapter 486 of the laws of Kenya. The Appellant's principal activity is general construction.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act and Kenya Revenue Authority is an agency 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. Vide a letter dated 29th September 2020, the Respondent informed the Appellant that he had commenced investigations against the company and its directors, outlined its preliminary findings and requested for additional information under Section 59(1) of the Tax Procedures Act 2015 (TPA).

4. On 9th November 2020, the Appellant replied to the Respondent's letter of 29th September 2020 stating that the company had received similar requests from the Respondent's two other offices namely West of Nairobi Tax Services and Medium Taxpayers Office and had provided information and reconciliations in relation to the same matter.

5. On 16th April 2021, the Respondent issued the findings from its investigations showing a liability of Kshs. 445,368,368. 00 from underpayment of tax due to under-declaration of income for the period 2015 to 2019 in relation to Corporation tax and Value Added Tax (VAT). The Respondent asked the Appellant to respond to the findings within fourteen (14) days.

6. The Appellant wrote to the Respondent on 26th April 2021 requesting for extension of the deadline to respond to the Respondent's letter by ten (10) days. The Respondent granted the Appellant an additional fourteen (14) days vide a letter issued on the same day.

7. On 24th June 2021 the Respondent issued Corporation tax assessment for the years of income 2015 to 2019 via iTax and subsequently sent an assessment letter for the same period showing additional Corporation tax and VAT of Kshs. 402,563,390. 00 and Kshs. 38,927,772. 00, respectively.

8. Aggrieved by the assessment, the Appellant proceeded to object against the same pursuant to the provisions of Section 51 (1) of the Tax Procedures Act, 2015 vide a letter of objection dated 21st July, 2021.

9. The Respondent requested the Appellant for further information and clarification on its objection via various email correspondences.

10. On 7th December 2021, the Respondent issued its objection decision confirming assessment for additional tax of Kshs. 396,220,354. 00 as tabulated below:Summary of assessmentTABLETRTC{style border-top: 1pt solid #000; border-bottom: 2. 25pt solid #000; border-left: 1pt solid #000; width: 17%}YearTC{style border-top: 1pt solid #000; border-bottom: 2. 25pt solid #000; width: 15%}2015TC{style border-top: 1pt solid #000; border-bottom: 2. 25pt solid #000; width: 14%}2016TC{style border-top: 1px solid #000; border-bottom: 2. 25pt solid #000; width: 13%}2017TC{style border-top: 1px solid #000; border-bottom: 2. 25pt solid #000; width: 12%}2018TC{style border-top: 1px solid #000; border-bottom: 2. 25pt solid #000; width: 11%}2019TC{style border-top: 1px solid #000; border-bottom: 2. 25pt solid #000; border-right: 2. 25pt solid #000; width: 14%}TotalTRTRTC{style border-top: 2. 25pt solid #000; border-bottom: 1px solid #000; border-left: 1px solid #000; border-right: 1px solid #000; width: 17%}CorporationTaxTC{style border-top: 2. 25pt solid #000; border-bottom: 1px solid #000; border-left: 1px solid #000; border-right: 1px solid #000; width: 15%}69,819,515TC{style border-top: 2. 25pt solid #000; border-bottom: 1px solid #000; border-left: 1px solid #000; border-right: 1px solid #000; width: 14%}108,803,343TC{style border-top: 2. 25pt solid #000; border-bottom: 1px solid #000; border-left: 1px solid #000; border-right: 1px solid #000; width: 13%}43,481,856TC{style border-top: 2. 25pt solid #000; border-bottom: 1px solid #000; border-left: 1px solid #000; border-right: 1px solid #000; width: 12%}14,811,483TC{style border-top: 2. 25pt solid #000; border-bottom: 1px solid #000; border-left: 1px solid #000; border-right: 1px solid #000; width: 11%}0. 0TC{style border-top: 2. 25pt solid #000; border-bottom: 1px solid #000; border-left: 1px solid #000; border-right: 1px solid #000; width: 14%}236,916,196TRTC{style border: 1px solid #000; width: 17%}VATTC{style border: 1px solid #000; width: 15%}46,938,344TC{style border: 1px solid #000; width: 14%}59,270,825TC{style border: 1px solid #000; width: 13%}45,580,367TC{style border: 1px solid #000; width: 12%}0. 0TC{style border: 1px solid #000; width: 11%}7,514,622TC{style border: 1px solid #000; width: 14%}159,304,158TRTC{style border: 1px solid #000; width: 17%}TotalTC{style border: 1px solid #000; width: 15%}116,757,858TC{style border: 1px solid #000; width: 14%}168,074,167TC{style border: 1px solid #000; width: 13%}89,062,223TC{style border: 1px solid #000; width: 12%}14,811,483TC{style border: 1px solid #000; width: 11%}7,514,622TC{style border: 1px solid #000; width: 14%}396,220,354

11. Aggrieved by the objection decision, the Appellant filed a Notice of Appeal on 20th January, 2022.

THE APPEAL 12. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 19th January filed on 20th January 2022: -a.That in its assessment, the Respondent erred by including non-trade receipts and advances in arriving at the Company's taxable income.b.That the VAT assessment for the years 2015, 2016, 2017 and 2018 are subject of an earlier objection which is currently under review by the Respondent's Independent Review of Objection team resulting in duplication of assessments hence prejudicial to the Appellant.c.That the VAT assessments for the period January 2015 to May 2016 is outside the statutory time limit of five (5) years as per Section 31(4)(b) of the Tax Procedures Act, 2015 (TPA) and should therefore be vacated in their entirety.d.That in arriving at the tax amount payable, the Respondent did not take into account tax overpaid/ paid in advance by the Appellant in line with the provisions of Section 47 of the TPA.

APPELLANT’S CASE 13. The Appellant’s case is also premised on the Appellant’s Statement of Facts dated 19th January 2022 and filed on 20th January 2022 together with the documents attached thereto and the Appellant’s written submissions dated 12th August 2022 and filed on the same date.

14. In the Statement of Facts, the Appellant stated that there are four (4) key issues for determination in this Appeal. That the issues are as follows:-a.Whether the Respondent, in its assessment, erred in fact by including non-trade receipts and advances in arriving at the taxable income;b.Whether by raising and confirming VAT assessment for the years 2015, 2016, 2017 and 2018 which were subject of an earlier objection and were under review by the Respondent's Independent Review of Objection team resulted in duplication of assessments hence prejudiced the Appellant.c.Whether the VAT assessments for the period January 2015 to May 2016 is outside the statute of limitation period of five (5) years;d.Whether in arriving at the tax amount payable, the Respondent ought to have taken into account tax overpaid/paid in advance by the Appellant in line with the provisions of Section 47 of the TPA.

a. Whether the Respondent, in its assessment; erred in fact by including non- trade receipts and advances in arriving at the Company's taxable income 15. The Appellant avers that as expected of any business, not all money received into the Appellant's bank accounts in the period under review related to taxable income. Some of the receipts related to non-trade receipts such as loans, invoice discounting, inter accounts transfers cash margin release, bounced cheques and advances.

16. That the Appellant booked all the trade receipts as revenue in its books based on invoices and certificates of completion issued. That based on the Appellant's bank accounts and audited financial statements, the correct position for trade and non-trade receipt is as summarized below:Summary of Appellant’s ReceiptsYear 2015 2016 2017 2018 2019

Total credits per bank stateme nts 424,453,049 986,605,266 1,057,802,124 675,689,526 772,789,815

Less: Trade receipts declared as sales (369,053,752) (446,324,233) (446,324,233) (460,887,400) (604,955,656)

Non- Trade Receipt 55,399,297 522,281,033 467,373,024 214,802,126 167,834,159

17. That the Appellant assessed .tax on the its trade receipts in line with the self - assessment regime provided for under Section 28 of the TPA.

18. That the Appellant avers that part of the amount that the Respondent has demanded tax on relates to no-trade receipts which are not taxable.

19. That in addition, the workings on the Respondent's objection decision, in arriving at the net banking amounts, the Respondent considered the debtors' opening and closing balances per the Appellant's audited financial statements. The Appellant is of the view that the Respondent is cherry picking what suits its narrative by ignoring the revenue booked in the profit and loss account but relying on the debtors' amount per the balance sheet of the same set of financials in arriving at the taxable income.

b. Whether by raising and confirming VAT assessment for the years 2015, 2016, 2017 and 2018 which were subject of an earlier objection and were under review by the Respondent's Independent Review of Objection team resulted in duplication of assessments hence prejudiced the Appellant 20. The Appellant avers that at the time of raising the assessment, there was an outstanding objection in relation to VAT for the years of income 2015, 2016, 2017 and 2018 which was under review by the Respondent's Independent Review of Objection team. That to raise and confirm an assessment of VAT on similar grounds for the same period amounted to duplication of assessments hence prejudicial to the Appellant. That this contravened the Appellant's right to fair administrative action as provided for by the Constitution of Kenya 2010 and Fair Administrative Action Act 2015 (FAA). That Article 47(1) of the Constitution of Kenya which is echoed by Section 4(1) of the FAA stipulates:“Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair."

c. Whether the VAT assessments for the period January 2015 to May 2016 is outside the statutory time limit of five (5) years 21. That Section 31(1) of the TPA empowers the Respondent to amend the tax returns filed by taxpayers based on available information, subsection 4(b) of the said Section restricts such amendment to 5 years.

22. That Section 31(1) of the TPA 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"

On the other hand, section 31(4)(b)(i) stipulates:“The Commissioner may amend an assessment -(b)in any other case within five years of -(i)for a self-assessment the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates " 23. That in the case of Commissioner of Domestic Taxes vs Unga Limited (2021), eKLR, where one of the issues for determination was whether the Commissioner could issue default assessments after five years of the due date for filing of VAT returns as provided for under section 29(5) of the TPA, the High Court in upholding the Tax Appeals Tribunal's position held that:-"Our courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment. The law regarding the procedure for filing self assessment, the consequences for late filing and of failure to file are clearly set out in the TPA as I have set out above. There is nothing in those provisions, that allows the Commissioner to circumvent those provisions and none can be implied on reading of the statutes. Counsel did not point any other provision of the law that allows the Commissioner circumvent the strictures of section 29(5) of the TPA by implication. Nor is the Tribunal decision an open door for gaming the system as the Commissioner suggests."

24. That the VAT return for the month of May 2016 was filed on 20th June 2016. On the other hand, the Respondent raised its assessment which is the subject of this Appeal on 28th June 2021. The assessment date fell outside five (5) years from the date of filing of the VAT return for May 2016.

25. That the implication of the above is that the returns for the period May 2016 and going backwards were time barred by virtue of the statutory limit of assessments and the Respondent had no powers to seek to amend the same by way of raising additional assessments. That the Respondent's actions were therefore null and void ab initio.

b. Whether in arriving at the tax amount payable, the Respondent ought to have taken into account tax overpaid/paid in advance by the Appellant in line with the provisions of Section 47 of the TPA 26. That the Appellant noted that in arriving at the tax payable for Corporation tax, the Respondent did not take into account credits relating to tax overpayment brought forward from prior years and manual withholding tax credits.

27. That the Appellant carried forward tax overpayments from prior years and offset them against tax liabilities in the subsequent years. That the Appellant disclosed the same as "credits under special arrangements" since iTax did not have a designated field to disclose such credits. 28. Year Tax overpayment b/f WHT on iTax Manual WHT Othercredits Total

2015 11,399,372 2,355,767 4,655,731 11,307,238 29,718,108

2016 10,058,575 13,546,515 N/A N/A 23,605,090

2017 18,933,280 17,717,673 N/A N/A 36,650!953

2018 36,650,953 13,328,283 N/A N/A 49,979,236

2019 35,167,759 20,327,733 N/A N/A 55,495,492

29. That the TPA provides for the refund of overpaid taxes by the Respondent. That specifically, Section 47 (1) of the TPA confirms that a taxpayer may apply to the Respondent, in the prescribed form, for a refund of overpaid taxes provided the application is made within five years of the date on which the tax was paid.

30. That the use of the word "may" in relation to the requirement to apply for a refund of tax overpaid ought to be interpreted in line with the rules of interpretation of statutory instruments. That Halsbury's Laws of England, 4th Edition, Volume 23 stipulates as follows: -“in the construction of a taxing Act, the court has primary regard to the statutory words themselves and to their proper construction...".

31. That it is a generally accepted principal that the word "may" is merely permissive or directory and not obligatory. Therefore, the Appellant had an option to apply for a refund of the tax overpayments or use the same to offset against future tax liabilities due, under the same tax head. That the Appellant opted for the latter.

32. That it is trite law that tax legislations should be interpreted strictly and in case of ambiguity, the legislation should be construed in favour of the taxpayer. That in the case of Keroche Industries Limited v Kenya Revenue Authority & 5 Others [20071 2 KLR 240 it was held that:“taxation can only be done on clear words and cannot be on intendment and that where there are two or more possible meanings, the inclination of the court should be against the construction or interpretation which imposes a burden, tax or duty on the subject".

33. That in addition, where the meaning of a provision is clear, there is no room for a party to interpret the provision and read into any other intendment other than what a plain reading of the law provides. That had it been the intention of the legislature to provide that all overpaid tax must be refunded, then the draftsmen would have drafted Section 47 in mandatory terms by use of the word "shall" instead of the word "may".

34. That Section 47 (1) of the TPA as read together with Section 47 (4) of the Act clearly indicates that Section 47 would apply when a taxpayer has overpaid tax under a tax head. That a taxpayer is permitted to utilize the approved refund to settle any other tax owing by the taxpayer under the tax law. That Section 47 of the Act does not stipulate mechanisms for utilizing a tax overpayment or advance to set-off final tax balance or taxes payable in subsequent periods under the same tax head. That the Section does not impose a requirement for a taxpayer to apply for a refund prior to set-off. That this does not give the Respondent discretion to allow or refuse the Appellant its right to utilize its valid tax overpayments.

35. In its submissions, the Appellant submitted as follows on each of the 4 issues that they raised.

a. Inclusion of non-trade receipts and advances in arriving at the Company's taxable income 36. That the Respondent's allegations that some of the non-trade receipts were not supported by documentation assumes that all such receipts were from loans supported by loan agreements. That as explained and illustrated in the Statement of Facts, some of the non-trade receipts related to inter-accounts transfer, cash margin release, bounced cheques and advances which unlike loans may not be supported by formal agreements.

b. The VAT assessment for the years 2015, 2016 and 2017 were subject of an earlier objection and were under review by the Respondent's Independent Review of Objection team resulted in duplication of assessments hence prejudiced the Appellant 37. That as admitted to by the Respondent in its Statement of Facts, at the time of raising the assessment, there was an outstanding objection in relation to VAT for the years of income 2015, 2016 and 2017 which was under review by the Respondent's Independent Review of Objection team.

38. That while the Respondent in its Statement of Facts alleges that the current objection decision took into consideration the grounds given in the previous objection, this was not clear from the reading of the current objection decision as no reference was made to the earlier objection.

b. The VAT assessment for the period January 2015 to May 2016 is outside the statute of limitation period of five (5) years; 39. That while the Respondent admits that the VAT assessment for the period January 2015 to May 2016 is outside the statutory period for assessments, the Respondent alleges that there was wilful neglect on the part of the Appellant to declare full income hence reliance of Section 31(4)(a) of the TPA.

40. That Section 31(4)(a) of the TPA provides as follows-:''The Commissioner may amend an assessment in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time "

41. That while the Respondent has alleged wilful neglect and relied on the allegations to amend assessments for a period beyond five years, the Respondent has not demonstrated or proved existence of wilful neglect.

42. That Section 107 of the Evidence Act Cap 80 laws of Kenya provides that;“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.,,”

SUBPARA b. The Respondent failed to take into account tax overpaid/ paid in advance by the Appellant in line with the provisions of Section 47 of the TPA 43. That while the Respondent admits that the Appellant has tax credits, the Respondent avers that the same needs to be validated pursuant to the provisions of Section 47(2) of the TPA before being availed for set off.

44. The Appellant submitted that it had applied for refund of the above tax credits and it is the Respondent's team that is yet to validate and approve the same for set off. The Appellant submitted that the Respondent should not demand more tax while the Appellant has already overpaid taxes and availing of the credit is impeded by the inaction of the Respondent's team.

45. That demand for additional taxes inspite of tax overpayments by the Appellant is unfair and a violation of the Appellant's right to property (tax credits) as provided for under Article 40 of the Constitution of Kenya.

46. That in addition, the Appellant avers that since the Respondent's team is yet to finalize the validation of the tax credits, then the assessment is premature and the Respondent ought to have waited for the validation process to be finalized before raising the assessment in order to avoid the risk of prejudicing the Appellant by demanding additional taxes while there are available tax credits.

Appellant’s prayers. 47. The Appellant prays that this Tribunal be pleased to order that:-a.This Appeal is allowed;b.The Respondent’s assessment be annulled.c.Costs of this Appeal be awarded to the Appellant.

RESPONDENT’S CASE 48. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated and filed on 18th February, 2022 together with the documents attached thereto.b.The Respondent’s written submissions dated 14th September, 2022 and filed on the same date.1. In its Statement of Facts, the Respondent refuted the allegations by the Appellant and responded to the issues raised as follows:-a.Ground 1 of the Memorandum of Appeal -that in its assessments, the Respondent erred by including non-trade receipts and advances in arriving at the Company's taxable income2. The Respondent avers that in its review of the Appellant's objection, they considered all the adjustments proposed by the Appellant. The only pre- condition for the adjustments sought was the provision of documentation to support.3. That the adjustments that were not supported through documentation by the Appellant were not considered.b.Ground 2 of the Memorandum of Appeal - that the VAT Assessments for the years 2015, 2016, 2017 nod 2018 are subject of an earlier objection, which is currently under review by the Respondent's Independent Review of Objections team resulting in duplication of assessments hence prejudicial to the Appellant

52. The Respondent avers that it is true an earlier objection took place with regard to the assessment. However, the current objection decision took into consideration the grounds given in the previous objection lodged by the Appellant.

b. Ground 3 of the Memorandum of Appeal - That the VAT Assessments for the period January 2015 to May 2016 is outside of the statutory time limit of five (5) years as per Section 31(4)(b) of the Tax Procedures Act, 2015 and should be vacated in their entirety 53. The Respondent contends that there was willful neglect on the part of the Appellant to declare full income received in 2015 and 2016 in their returns.

54. The Respondent avers that it relied on the provisions of Section 31(4)(a) of the TPA, to bring to charge the variance established.

b. Ground 4 of the Memorandum of Appeal - That in arriving at the tax amount payable, the Respondent did not take into account tax overpaid/paid in advance by the Appellant in line with the provisions of Section 47 of the Tax Procedures Act 55. The Respondent avers that they needed to verify the credits so as to be certain of the validity of the claims through an audit pursuant to the provisions of Section 47(2) of the TPA.

56. The Respondent submitted that the Appellant should make an application for refund to the Commissioner Domestic Taxes as required under Section 47(1) of the TPA.

57. The Respondent also submitted that Section 3 of the Income Tax Act imposes in mandatory terms an Income tax for each year of income upon all the income of a person, whether resident or non resident, which accrued in or was derived from Kenya, which includes gains or profits from any business.

58. That further, Section 17(1) of the VAT Act 2013 provides that:“Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.”

59. That the High Court in Highlands Mineral Water Ltd vs Commissioner of Domestic Taxes [2021] eKLR highlighted the conditions for deduction of input tax as;a.That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period,b.That the input tax is deducted by a registered person on taxable supplies made by him; andSUBPARA c. That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred.

60. That Section 24 (1) & (2) of the Tax Procedures Act, allows a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information.

61. That since the Appellant failed to properly declare income for VAT purposes, banking income was compared with VAT declarations and variance charged output VAT at the standard rate of 16%.

62. The Respondent 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 Tax Procedures Act,2015, which provides that:“Any person who, in relation to a tax period, knowingly-omits from his or her return any amount which should have been included; commits an offence.”

63. The Respondent submitted that although the law recognizes the self- assessment regime, the Respondent is empowered by Section 31 to amend such assessment if it has available information.

64. That in the case of Nairobi TAT No. 25 of 2016 Family Signature Limited Vs. The Commissioner of Investigations & Enforcement, one of the issues for determination was whether the Respondent was justified in employing an alternative and indirect method of assessing the Appellant's estimated tax liability and the Tribunal held that“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.”

65. The Respondent further submitted that it exercised its best judgment appropriately in the circumstances thereby arriving at the tax assessment it did.

66. The Respondent also submitted that the Appellant has 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.

67. The Respondent relied on the decision in TAT NO. 28 OF 2018- Joycott General Contractors Limited vs Kenya Revenue Authority, where the Tribunal in dismissing the appeal held that,"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”.

68. The Respondent submitted that the Appellant having under-declared its tax obligations, leading to additional assessment confirmed based on its own available supporting documents, together with un-filed audited accounts for the year 2019 and having fatally failed to demonstrate the same to be erroneous, then the said assessment and subsequent objection decision dated 7th December 2021, remain valid in law, ought to be upheld and the Appeal dismissed with costs.

Respondent’s Prayers. 69. The Respondent prays that:-a.The Appeal be dismissed for lack of merit.b.The Respondent’s decision contained in its letter dated 7th December 2021 be upheld.c.The Respondent be awarded the costs of the Appeal.

ISSUES FOR DETERMINATION. 70. The Tribunal has carefully studied the pleadings and documentation of both parties and is of the respectful view that that the issues that call for its determination are as follows:-a.Whether the Respondent erred in law and in fact by issuing VAT assessments for the period January 2015 to May 2016 which periods are outside the statutory timelines of five (5) years provided by the law.b.Whether in arriving at the tax amount payable, the Respondent erred in law and in fact by not taking into account tax overpaid/paid in advance by the Appellant in line with the provisions of Section 47 of the TPA.c.Whether the Respondent erred in fact by including non-trade receipts and advances in arriving at the Company's taxable income.

ANALYSIS AND FINDINGS.a.Whether the Respondent erred in law and in fact by issuing VAT assessments for the period January 2015 to May 2016 which periods are outside the statutory timelines of five (5) years provided by the law1. The Appellant submitted that Section 31(1) of the TPA empowers the Respondent to amend the tax returns filed by the taxpayers based on available information. Subsection 4(b) of the said Section restricts such amendment to 5 years.2. The Appellant relied on the case of Commissioner of Domestic Taxes vs Unga Limited (2021) eKLR where the Court held that:-“There is nothing in those provisions, that allows the Commissioner to circumvent those provisions and none can be implied on reading of the statutes. Counsel did not point any other provision of the law that allows the Commissioner circumvent the strictures of section 29(5) of the TPA by implication. Nor is the Tribunal decision an open door for gaming the system as the Commissioner suggests." 73. The Appellant submitted that the VAT return for the month of May 2016 was filed on 20th June 2016. On the other hand, the Respondent raised its assessment which is the subject of this Appeal on 28th June 2021. The assessment date fell outside five (5) years from the date of filing of the VAT return for May 2016.

74. The implication of the above is that the returns for the period May 2016 and going backwards were time barred by virtue of the statutory limit of assessments and the Respondent had no powers to seek to amend the same by way of raising additional assessments.

75. In their response, the Respondent submitted that there was wilful neglect on the part of the Appellant to declare full income received in 2015 and 2016 in its returns.

76. The Respondent submitted that they relied on the provisions of Section 31(4)(a) of the TPA, to bring to charge the variance established.

77. The Respondent further 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 Tax Procedures Act, 2015.

78. The Tribunal notes that Section 4(3) of the Tax Procedures Act 2015, confers powers of enforcing tax laws to the Respondent. The Section states as follows-:“An authorized officer shall enforce, and ensure due compliance with, the provisions of the tax law, and shall make all due inquiries in relation thereto”.

Since the Respondent submitted that “there was willful neglect on part of the Appellant,” the Tribunal finds that it was their duty and responsibility to enforce the law. They should therefore have prosecuted the Appellant if they had the evidence. But they chose not to for reasons that they did not disclose to the Tribunal. 79. The Tribunal has pronounced itself on the issue of wilful neglect and fraud in TAT No 88 of 2021 Glenrose Ltd V Commissioner of Investigations & Enforcement where it stated that:-“the Tribunal finds that the burden of proof, which essentially in law rests upon the Appellant, shifted to the Respondent at the point where issues of fraud were raised. In this regard, the Tribunal relies on the Halsbury’s Laws of England, 4th Edition, Volume 17, Paragraphs 13 and 14, which provide as follows: -QUOTE“(13) The legal burden is the burden of proof which, remains constant throughout a trial, it is a burden on establishing the facts and contentions which will support a party’s case. If at the conclusion of the trial he has failed to establish that to the appropriate standard he will lose.(14) The legal burden of proof normally rests with the party desiring the court to take action: thus, a claimant must satisfy the court or tribunal that the conditions which entitle him to an award have been satisfied. In respect of a particular allegation, the burden lies upon the party for whom substantiation of that particular allegation is an essential element of this case. There may therefore be separate burdens in a case with separate issues.”

80. The Tribunal is also guided by the ruling in Evans Kidero vs Speaker of Nairobi City County Assembly & another [2018] eKLR where the Court stated as follows:-“30. Its trite law that he who alleges fraud must prove it. Allegations of fraud must strictly be proved. Great care needs to be taken in pleading allegations of fraud or dishonesty. In particular the pleader needs to be sure that there is sufficient evidence to justify the pleading. This was considered in some detail by Lewison J in Mullarkey -v- Broad.(17)In Central Bank of Kenya Ltd -Vs- Trust Bank Ltd & 4 Others [18] the Court of Appeal in considering the standard of proof required where fraud is alleged had this to say-“The Appellant has made vague and very general allegations of fraud against the Respondent. Fraud and conspiracy to defraud are very serious allegations. The onus of prima facie proof was much heavier on the Appellant in this case than in an ordinary Civil Case.”

81. The Tribunal finds that the allegations of willful neglect on part of the Appellant have not been proved as no evidence was tendered. The Respondent erred in law and in fact by issuing assessments for the years January 2015 to May 2016 which periods are outside the statutory timelines of five (5) years provided by the law.

a. Whether in arriving at the tax amount payable, the Respondent erred in law and in fact by not taking into account tax overpaid/paid in advance by the Appellant in line with the provisions of Section 47 of the TPA 82. The Appellant submitted that in arriving at the tax payable for Corporation tax, the Respondent did not take into account credits relating to tax overpayment brought forward from prior years and manual withholding tax credits.

83. The Appellant submitted that they carried forward tax overpayments from prior years and offset them against tax liabilities in the subsequent years. Further, the Appellant disclosed the same as "credits under special arrangements" since iTax did not have a designated field to disclose such credits.

84. The Appellant submitted that the credit position for the respective years is as tabulated below:Summary of Appellant's tax creditsYear Tax overpayment b/f WHT on iTax Manual WHT Other credits Total

2015 11,399,372 2,355,767 4,655,731 *11,307238 29,718,108

2016 10,058,575 13,546,515 N/A N/A 23,605,090

2017 18,933,280 17,717,673 N/A N/A 36,650!953

2018 36,650,953 13,328,283 N/A N/A 49,979,236

2019 35,167,759 20,327733 N/A N/A 55,495,492

85. The TPA provides for the refund of overpaid taxes by the Respondent. Specifically, Section 47 (1) of the TPA confirms that a taxpayer may apply to the Respondent, in the prescribed form, for a refund of overpaid taxes provided the application is made within five years of the date on which the tax was paid.

86. In response to this issue, the Respondent submitted that the process of application for refunds is spelt out in Section 47(1) of the TPA.

87. The Tribunal finds that the Appellant did not provide any evidence to show that they applied for a refund as spelt out in Section 47(1) of the TPA. Secondly the issue of tax credits was not addressed in the objection decision that is the subject of this Appeal. The Tribunal therefore finds that the issue of tax credits due to the Appellant is outside the scope of this Appeal.

a. Whether the Respondent erred in fact by including non-trade receipts and advances in arriving at the Company's taxable income 88. The Appellant submitted that not all money received into the Appellant's bank accounts in the period under review related to taxable income. Some of the receipts related to non-trade receipts such as loans, invoice discounting, inter accounts transfers cash margin release, bounced cheques and advances.

89. The Appellant further submitted that it booked all the trade receipts as revenue in its books based on invoices and certificates of completion issued.

90. In response to this issue, the Respondent submitted that in its review of the Appellant's objection, they considered all the adjustments proposed by the Appellant. The only precondition for the adjustments sought was the provision of documentation to support the said adjustments.

91. The Respondent submitted that adjustments that were not supported through documentation by the Appellant were not considered.

92. In analyzing this issue, the Tribunal is guided by Section 56(1) of the Tax Procedures Act which places the burden of proof on the taxpayer. The Section reads as follows:-“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

93. Further, Section 30 of the Tax Appeals Tribunal Act provides as follows with regard to burden of proof:-“In any proceeding before the Tribunal the Appellant has the burden of proving-a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

94. The Appellant came before the Tribunal and provided no evidence to show that the income tax and VAT demanded by the Respondent was excessive. The Appellant did not provide the documents they alleged were not part of the business income for review by the Tribunal. The Appellant had the opportunity to tender documentary evidence in support of its Appeal at the Tribunal but failed to do so.

95. The Tribunal relies on the case of Erricsson Kenya Limited vs Attorney General & 3 Others, where Justice Majanja in emphasizing the obligation to produce records said that:“The Court is not concerned with whether the petitioner is entitled to the amount but whether the process afforded was one that complied with the dictates of Article 47 of the Constitution. In considering the circumstances, it is important to recall the fact that a taxpayer has lodged a refund claim in accordance with the VAT Act and regulations does not discharge the respondents from the responsibility of examining the claim and confirming that it meets the full requirement of the law. The Commissioner when processing the claim, is not merely a conveyer belt performing a perfunctory exercise. He is required to examine and verify the claim and where irregularities, fraud and other deficiencies are discovered, draw the petitioner’s attention to them. The Commissioner is also entitled to call for further information if necessary, to satisfy himself that the claim meets the legal threshold of payment”.

96. The Tribunal also relies on the case of Boleyn International Limited vs Commissioner of Investigations & Enforcement (Tax Appeals Tribunal No 55 of 2019), where, The Appellant failed to provide documents, the Tribunal held that there was no conceivable way the Respondent would have considered the objection as the same did not place itself within the parameters of Section 51(3) of the Tax Procedures Act.

97. Consequently, the Tribunal finds that the Respondent did not err in fact and in law including any none disclosed non-trade receipts and advances in arriving at the Company's taxable income.

FINAL DECISION 98. The upshot of the foregoing is that this Appeal partially succeeds. Consequently, the Tribunal makes the following Orders: -a.The Appeal is partially successful.b.The Respondent’s objection decision contained in the letter dated 7th December 2021 be and is hereby set aside.c.The matter is referred back to the Respondent for re-calculation of the Appellant’s tax liabilities excluding any tax liability for the period prior to May 2016. d.Each party to bear its own costs.

99. It is so ordered.

DATED and DELIVERED at NAIROBI this 17th day of March, 2023…………………………**ERIC N. WAFULACHAIRMAN…………………………CYNTHIA B. MAYAKAMEMBER…………………………GRACE MUKUHAMEMBER MEMBER…………………………JEPHTHAH NJAGIMEMBER…………………………ABRAHAM K. KIPROTICHMEMBER