[2024] KETAT 737 (KLR)

Gearbox Limited v Commissioner of Domestic Taxes (Tax Appeal E456 of 2023) [2024] KETAT 737 (KLR) (17 May 2024) (Judgment)

Neutral citation: [2024] KETAT 737 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E456 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

May 17, 2024

Between

Gearbox Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and a registered taxpayer.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Respondent conducted a compliance check on the Appellant after a credit verification process in August 2022 to establish if the credits were genuine.

4. On 2nd December 2022, the Respondent issued a notice to the Appellant requesting it to declare and make payments for the pending liabilities in the system.

5. On 21st December 2022, the Respondent issued a pre-assessment notice that highlighted its preliminary findings for the period 2018 and 2019.

6. The Appellant objected to the pre-assessments vide a letter dated 26th April, 2023.

7. On 4th May 2023, the Respondent issued additional assessments for Kshs. 35,297,733. 24, being additional principal Income tax and VAT for the years of income 2018 and 2019.

8. On 4th May 2023, the Appellant lodged an objection to the Respondent's additional assessments.

9. The Respondent issued the Appellant with an objection decision on 30th June 2023.

10. The Appellant, aggrieved with the Respondent’s objection decision, lodged this Appeal at the Tribunal on 10th August 2023.

The Appeal 11. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 10th August 2023:i.That the breakdown of taxes demanded in the pre-assessment notice dated 21st December 2022 differs from the numbers in the electronic tax assessments contrary to Section 50(2) of the Tax Procedures Act.ii.That the Respondent failed to communicate the insufficiency of information provided in our objection decision within the 14 days of invalidation under Section 51(4) of the Tax Procedures Act.iii.That the Respondent failed to take into account all information and explanations including documents provided by the Appellant before arriving at the Objection decision.iv.That the Respondent wrongfully disallowed the adjustment of training fees on the basis that it has limitation of scope.v.That the Respondent's demand of Kshs 52,082,874. 00 is excessive, punitive, and beyond the ability of the Appellant to pay contrary to generally accepted canons of taxation.

Appellant’s Case 12. The Appellant’s case is premised on the following documents before the Tribunal:a.Its Statement of Facts dated 9th August 2023 and filed on 10th August 2023. b.Its Written Submissions dated 15th February 2024 and filed on 21st February 2024.

13. The Appellant averred that the Respondent assessed the portion of the Appellant's income that was classified as exempt on the basis that the Appellant failed to provide evidence supporting the exempt income.

14. That the Respondent also disallowed some expenses claimed in the Appellant's returns such as rent expense, bank valuation and consultant expenses on the ground that they were not supported.

15. The Appellant submitted that there was a variance between the Respondent’s pre-assessment notice and the electronic assessments which caused confusion and ambiguity making it difficult for the Appellant to make a proper objection.

16. The Appellant averred that the legal requirement for the two numbers to tie exists under Section 50 (1) & (2) of the Tax Procedures Act 2015 which states that:“1)Except in proceedings under this Part—a.the production of a notice of an assessment or a document under the hand of the Commissioner shall be conclusive evidence of the making of the assessment and that the amount and particulars of the assessment are correct; andb.in the case of a self-assessment, the production of the original return of the self-assessment or a document under the hand of the taxpayer shall be conclusive evidence of the contents of the return.2. When the Commissioner serves an assessment on a taxpayer electronically, a copy of the notice of assessment shall be treated as a certificate under the hand of the Commissioner identifying the assessment and specifying the details of the electronic transmission of the assessment.”

17. The Appellant averred that the use of the word 'shall' in Section 50 (1) & (2) of the Tax Procedures Act 2015 ("TPA") implies that it is compulsory that the Commissioner's certificate accurately details the Respondent's electronic assessment.

18. The Appellant relied on the case of Republic v Council of Legal Education & another Ex parte Sabiha Kassamia & another [2018] eKLR, where it was stated;“Mr. Oduor argued that the word shall in the above provisions bestows a mandatory obligation. He relied on the Court Appeal decision in Ako vs Special District Commissioner, Kisumu & Another, where it was held that the prohibition is absolute and any other interpretation or view of the particular provision would be doing violence to the very clear provisions of the sub-section (3) of Section 9 of the Law Reform Act. He also cited Re an application by Gideon Waweru Githunguri whereby the colonial Supreme Court held that the said section imposes an absolute period of limitation.”

19. The Appellant averred that vide an email dated 27th June 2023, the Respondent shared an additional document referred to as an ‘internal document’, that the internal document introduced 'new reasons for assessment' that were never mentioned in the Respondent's tax decision on the pre-assessment notice.

20. That the Respondent's action was contrary to the requirement for exhaustion and conclusiveness of its assessment (tax decisions) guaranteed under Section 50 (l) (a) of the Tax Procedures Act.

21. The Appellant submitted that the Respondent's 'internal document' and objection decision were wrongly issued in this case as a means of 'invalidating' the Appellant's objection contrary to the timeline set under Section 51(4) of the Tax Procedures Act which provides that:-“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

22. The Appellant submitted that the Appeal ought to be allowed in order for the Respondent to be stopped from shifting goal posts by varying the reasons for assessment set out in its pre­ assessment notice (tax decision) against those in its 'internal document' and objection decision.

23. The Appellant averred that it was prejudiced by its inability to equally alter its grounds of objections as already restricted under Section 56(3) of the TPA which states that:“in an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.”

24. The Appellant averred that in accordance with the provisions of Section 56(1) of the TPA and Section 30 of the TAT Act, it provided all the documents required of it by the Respondent to disprove its liability as per the assessments.

25. The Appellant averred further that it provided documents supporting the expenses disallowed by the Respondent to prove that the expenses met the condition for allow-ability of expenses under Section 15(1) of the ITA, which states as follows:“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income, which is expenditure wholly and exclusively incurred by him in the production of that income,”

26. The Appellant relied on the case of TAT no. 1149 of 2022 Preferred Personnel Limited V. Commissioner of Domestic Taxes where the Tribunal has presented an instance of how an Appellant will be deemed to have failed to discharge its burden of proof as follows:“68. To the extent that the Appellant did not provide the further information requested by the Respondent, the Tribunal finds that it did not exhaust its burden of proof in demonstrating that the residual Corporation tax assessment was not justified information requested to support its averments on Corporation tax, the Respondent was justified in raising the Corporation tax assessments in relation to unreconciled staff variances, overclaimed direct costs and overstated professional fees. "

Appellant’s Prayers 27. The Appellant prayed that the Tribunal: -a.Upholds the Objection filed by the Appellant;b.Sets aside and annuls the Objection decision by the Respondent; andc.Makes such other orders that it may deem appropriate.

Respondent’s Case 28. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 6th September 2022 and filed on 13th September 2022. b.The Respondent’s Written Submissions dated and filed on 4th March 2023.

29. The Respondent averred that the Appellant is responsible for filing tax returns, that however the Commissioner is not bound by the returns and/or information provided by the Appellant. That Section 24 of the Tax Procedures Act gives the Commissioner the latitude to use any information available, it provides that:“1)A person required to submit a tax return under a tax law shall submit the return in the approved form and the manner prescribed by the Commissioner.2)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.”

30. The Respondent submitted that it carried out an audit of the Appellant and established that there was a variance between the salaries declared in the PAYE return compared to the salaries claimed in the audited accounts. That further, the banking analysis revealed a variance compared to the turnover declared in the VAT return for the years 2018 and 2019. The Respondent averred that, therefore, the Appellant had undeclared income.

31. The Respondent further submitted that the Appellant had claimed expenses and declared income as exempt but failed to support the same with documents.

32. The Respondent submitted that Section 31 (1) of the Tax Procedures Act provide that:-“1)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 judgment, to the original assessment of a taxpayer for a reporting period to ensure that—a.in the case of a deficit carried forward under 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 (Cap. 476), the taxpayer 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.”

33. The Respondent relied on the case of Oliver Merrick Fowler & another v Kenya Revenue Authority [2022] eKLR where the case of Saima Khalid V The Commissioner for Her Majesty's Revenue and Customs- Appeal No. TC/2017/02292 was quoted, wherein it was stated;“...The very use of the word 'judgment makes it clear that the commissioners are required to exercise their power in such a way that they make a value judgment on the material which is before them... What the words 'best of their judgment' 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 not arbitrary as to the amount of tax which is due."

34. The Respondent submitted that it is mandated to issue additional assessments to ensure that the correct amount of tax is paid. It further averred that in making the assessments it uses its best judgment on the available information. Thus, in doing so it disallowed the unsupported expenses and charged the variances and undeclared income to tax.

35. The Respondent averred that the Appellant failed to provide documents supporting the exempt income and expenses declared, the lease agreement to support rent expenses, and documents to support bank valuation and consultant expenses claimed that would necessitate adjustments to the said assessment. Therefore, the Respondent rejected the objection and confirmed the assessment.

36. The Respondent submitted that Section 56 of the Tax Procedure Act, as read together with Section 30 of the Tax Appeals Tribunal Act, provides that the Appellant has the burden of proof to prove that the Respondent's decision and/or assessment is incorrect.

37. The Respondent relied on the case of Alfred Kioko Muteti V Timothy Miheso & Another (2015) eKLR held that;“A party can only discharge its burden upon adducing evidence. ...........Merely making pleadings is not enough."

38. The Respondent averred that the Appellant could only discharge the burden of proof that the Respondent's decision and assessment were incorrect and/or that the Respondent failed to consider any or all the information and/or considered irrelevant information and therefore arrived at a wrong decision and/or assessment by providing sufficient, relevant, and competent documents.

39. The Respondent further submitted that the Appellant provided ledgers and bank statements and on considering the said documents they found them though relevant, insufficient to support the allegations made by the Appellant.

40. The Respondent submitted that Section 59 (1) of the Tax Procedure Act provides that;“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to—a.produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

41. The Respondent averred that it wrote to the Appellant on 15th May 2023 and 23rd June 2023 in addition to several reminders requesting it to provide specific documents that would help determine the Appellant's tax liability.

42. The Respondent averred that Section 23 of the Tax Procedure Act as read together with Section 54A of the Income Tax Act, the Appellant has the duty of maintaining documents required to determine its tax liability and the burden of proof can only be discharged when the Appellant produces the documents for consideration by the Respondent.

43. The Respondent relied on the case of Ngurumani Traders Ltd V Commissioner of Investigation and Enforcement (2019) eKLR where the Court held:“This Tribunal finds that it is emphatically the province and duty of the Appellant to keep and maintain records for the purpose of ascertaining its tax liability. It's equally the Appellant's duty to avail these records to the Respondent in order to make a proper assessment of the Appellant's tax liability. As far as requesting for these records is concerned, we find that the Respondent cannot be faulted. There is a chain of letters and correspondences evidencing the Respondent's unabating efforts requesting for the Appellant's records."

44. The Respondent averred that the Appellant failed to produce the requested documents. The Respondent submitted that from the documents provided by the Appellant, there was no evidence that any documents were provided and not considered and/or that irrelevant documents were considered in making the decision.

45. The Respondent submitted that in failing to produce the documents requested, the Appellant failed to discharge the burden of proof because the Appellant failed to support the variances and claimed expenses and exempt income.

46. The Respondent submitted that Section 51 (8) of the Tax Procedure Act provides that-“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".”

47. The Respondent submitted that Section 51 (8) of the Tax Procedure Act provided that once the Respondent considers the objection and the available documents, it may allow the objection in whole, meaning vacate the assessment, allow in part, meaning reduce the amount, or disallow the same, meaning retain the amount.

48. The Respondent averred that it considered the objection and the documents available and issued its decision dated 30th June 2023 whose amounts varied from those in the pre-assessments dated on 21st December 2022 and assessment dated 4th May 2023. It further submitted that once an amount is assessed and demanded and remains unpaid, it attracts interest and a penalty, which varies the amount as assessed in the initial notice of assessment as established below.

49. The Respondent submitted that a late payment interest is chargeable for every month the taxes due remain unpaid as provided for in Section 38 (1) of the Tax Procedures Act as read together with Section 83A of the Tax Procedures Act.

50. The Respondent submitted that even though the figures in the assessments differ and the difference is necessitated by the new information and documents considered by the Respondent and the penalties and interest that had accrued at the time of issuing each of the assessments.

51. The Respondent averred that the different decisions issued by the Respondent were issued two months apart. Further, during the said periods, the amount remains unpaid and it therefore attracted late payment interest and the late payment interest continues to accrue.

52. The Respondent submitted that where the information and documents provided are insufficient to determine the tax liability of the Appellant as provided for in Section 59 of the Tax Procedure Act, the Respondent is at liberty to request additional information. The Respondent further averred that Section 59 of the Tax Procedures Act does not provide timelines within which such additional information may be requested from the Appellant.

53. The Respondent submitted that the additional information requested under Section 59 of the Tax Procedure Act was to determine the Appellant's tax liability and not to validate the objection lodged by the Appellant. Further, the additional documents were to be considered in addition to the documents that had already been produced in support of the objection.

Respondent’s Prayers 54. The Respondent prayed that this Tribunal:a.Upholds the Objection decision dated 30th August 2022. b.Dismisses the Appellant's Appeal with costs as the same is without merit.

Issues For Determination 55. The Tribunal has carefully considered the pleadings and documentation of both parties and is of the view that the issue that calls for its determination is:- Whether the Respondent was justified in its decision to confirm the assessment of taxes on the Appellant.

Analysis And Determination 56. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same under three sub-issues as hereunder.

i. Whether the decision issued was an invalidation of the Appellant’s objection 57. The Appellant contended that the breakdown of taxes demanded in the pre-assessment notice dated 21st December 2022 differed from the numbers in the electronic tax assessments contrary to Section 50(2) of the Tax Procedures Act.

58. Whereas that was the case in this instance, the Tribunal reckons that there is no legal requirement for the figures on the pre-assessment to be the same as those in the notice of assessment. There is always a possibility of the figures varying informed by several factors including accumulation of interest or the provision of information to the Respondent by the Appellant during the process to justify adjustments.

59. That Appellant averred that the Respondent failed to communicate the insufficiency of information provided in its objection decision within the 14 days of invalidation under Section 51(4) of the Tax Procedures Act.

60. It was the Respondent's case that it never invalidated the Appellant's objection, that it considered the Appellant’s Objection dated 4th May 2023 and issued an Objection decision on 30th June 2023.

61. The Respondent posited that it is allowed by Section 59 of the TPA to call for information at any stage for the ascertainment of a taxpayer’s tax liability.

62. In its evaluation of the documents submitted by the parties, the Tribunal noted that at no point did the Respondent invalidate the Appellant’s Objection, that it was within the Respondent’s province to request for additional information for the purpose of ascertaining the Appellant’s tax liability as long as the same was done within the time stipulated for the issuance of an objection decision as provided for in Section 51(11) of the TPA.

63. The Tribunal therefore finds that the Respondent’s decision of 30th June 2023 was an objection decision and not an invalidation decision as averred by the Appellant.

ii. Whether the Appellant supported exemption income on membership and training fees 64. The Appellant contended that the Respondent wrongfully disallowed the adjustment of training fees on the basis that it had limitation of scope yet educational services are exempt under Paragraphs 3 and 11 of Part II to the First Schedule of the VAT Act.

65. The Appellant averred further that it had provided documents supporting exempt income in its email to the Respondent on 29th June 2023

66. The Respondent on its part propounded that whereas it is true that membership and training/ academy fees charged being educational services are exempted under paragraphs 3 and 11 of Part II to the First Schedule of the VAT Act, the Appellant failed to provide evidential records to support its claim for exemption, that it is the failure by the Appellant to provide evidence that led the Respondent to disallow the training fee.

67. The Tribunal’s analysis of the documents provided before it reveals that the Appellant did not provide any document in support of the claim for exemption as alleged other than a statement in its email dated 29th June 2023 stating:“In summary the training offered by Gearbox qualifies as both vocational and technical education. The fact that Gearbox is a not-for-profit organization renders it as an educational and philanthropic entity”

68. It is not in doubt that these are mere averments. It was expected of the Appellant to provide documents to show that it provided the said educational services and that indeed it was registered as a not-for-profit organization.

69. The said Paragraphs 3 and 11 of Part II to the First Schedule of the VAT Act both provide that exemption shall apply except where such services are rendered by way of business. It behoved the Appellant to provide evidence of its registration as a not-for-profit to the Respondent as well as in this Appeal so as to discharge its burden of proof that it qualified for exemption.

70. In discharging the burden of proof, Courts have held the position that merely making pleadings is not enough, the Tribunal finds the following holding in the case of in Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR to be instructive: -“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"

71. The Tribunal therefore finds that the Respondent did not err in disallowing the training fee.

ii. Whether the Respondent considered all the information and explanations by the Appellant 72. The Appellant submitted that the Respondent failed to consider all information and explanations provided by the Appellant before arriving at the objection decision.

73. The Respondent however maintained that it considered all the information and documents provided and issued a well-reasoned objection decision. That the allegation that it failed to consider the information and explanations given is a mere allegation that has not been substantiated.

74. The Respondent submitted that in its email on 15th May 2023 it required the Appellant to provide specific documents which it failed to provide in contravention of Section 23 of the TPA.

75. The Respondent contended that in support of its averments, the Appellant only provided ledgers and bank statements which though relevant were not sufficient to warrant adjustment of the assessment.

76. Section 23 of the TPA enjoins that Appellant to maintain records to enable ascertainment of its tax liability, while Section 59 of the TPA requires the Appellant to provide the said records when called upon by the Respondent.

77. Once the Commissioner issues an tax decision, Section 56 places the burden of proof squarely on the taxpayer to disprove the Commissioner’s assertions , it states that:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

78. The Tribunal noted that though the Appellant decried the Respondent’s failure to consider the information and explanations it provided, it did not attach the same for the Tribunal’s appreciation. Section 30 of the TAT Act provides as follows with regard to the burden of proof:“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.”

79. It is the Tribunal’s position that the Appellant’s failure to provide source documents which were crucial in disproving the Commissioner’s assessment alongside the bank statements and ledgers it is said to have provided rendered its assertions mere averments.

80. Despite having competently quoted the above Sections of statute on burden of proof in its submissions, the Appellant failed to adduce cogent evidence to disprove the Commissioner’s assertions.

81. The Tribunal has pronounced itself on numerous occasions concerning the burden of proof in tax cases, the Tribunal was guided by its holding in Tax Appeal No.55 of 2018 (Boleyn International Ltd -vs- Commissioner Domestic Taxes) where it held that:“The Appellant was given multiple opportunities to support its objections to the investigation findings. We find that the Appellant at all times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The Tribunal is guided by the provisions of section 56 (1) of the Tax Procedures Act, 2015”

82. The Tribunal therefore finds that in the instant Appeal, the Appellant failed to discharge its burden to prove that the Respondent erred in confirming the additional tax assessments.

Final Decision 83. 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 30th June 2023 be and is hereby upheld.c.Each party to bear its own costs.

84. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MAY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERTIMOTHY B. VIKIRU - MEMBER