[2023] KETAT 517 (KLR)

Gichengo v Commissioner of Investigations & Enforcement (Tax Appeal 484 of 2022) [2023] KETAT 517 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 517 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 484 of 2022

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich, E Ng'ang'a & B Gitari, Members

October 13, 2023

Between

Bernard Kingori Gichengo

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a sole proprietor trading as Messrs. Bernard Kingori Gichengo and is a commission agent involved in sourcing and marketing and for supplier’s facilitation both locally and internationally.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and is 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. The Respondent conducted investigations on the tax affairs of the Appellant for the period between 1st January 2015 to 31st December 2020.

4. The Appellant was issued with the tax findings through an email dated 17th September 2021 on its tax computation and subsequently issued with the Tax Assessment Orders dated 7th October 2021 for a total of Kshs 69,622,710. 00 being outstanding Income tax and VAT including interest and penalties for the period 2015 to 2020 as shown below;a.PAYE for the period 2015 to 2020 Kshs 45,660,327. 00b.VAT for the period 2015 to 2020 Kshs 23,962,383. 00

5. The Appellant aggrieved by the Respondent’s assessments objected to the entire assessments vide its notice of objection dated 21st October 2021. SUBPARAGRAPH 2.

6. The Respondent vide an email dated 6th December 2021 wrote to the Appellant acknowledging receipt of the objection however deemed it as invalidly lodged objection application having not satisfied the requirements outlined under Section 51(3) of the Tax Procedures Act (TPA) 2015.

7. The Respondent advised the Appellant to provide all the documents in support of the objection and the Appellant availed the documents on 10th January 2022 and 17th March 2022.

8. Upon review of the documents provided by the Appellant, the Respondent issued an objection decision dated 13th April 2022 confirming the tax assessment.

9. The Appellant aggrieved by the Respondent’s objection decision and hence lodged its Notice of Appeal with the Tribunal on 12th May 2022.

The Appeal 10. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal and filed on 12th May 2022;a.Computation of Taxable Income Based on Gross Banking’sThat the commissioner erred in fact and in law in the computation of taxable income based on gross bankings. That the Commissioner relied on creditor’s transactions in the Appellant Equity Bank Account number 0260190111545 to ascertain taxable income, thus excessively overstating its tax liabilities. That the decision by the commissioner to disallow the Appellant’s explanations and support documents on the basis that it’s not logical to transact the amounts in its bank without agreements, invoices and delivery notes is punitive, unreasonable and legally unjustified.b.Commissioner Understanding on the Nature of BusinessThat the Commissioner erred in fact and law by ignoring the nature of the Appellant’s business as a broker and which was explained in details both in writing & interviews and support documents provided in the objection to commissioner assessment. Further the Appellant demonstrated that its taxable income is from brokerage commissions and schedules showing clients names, items descriptions, creditors funds, vendor payments and commissions was availed, and support evidences and claim by the commissioner that the evidence was not sufficient to demonstrate commission broker is arbitrary, unreasonable and oppressive.c.Commissioner Imposition of VATThe Appellant states that the nature of its business as a broker does not involves buy and sell a fact that was explained and support documents provided in its objection to Commissioner Assessment. The nature of deposits and credit transactions was explained in details. Therefore, the Appellant business is not mandated to charge VAT as set out in section 5 of VAT Act. That the Respondent alleges that the Appellant had met the threshold set out in sections 5 of the VAT Act based on investigation findings not known or shared with the Appellant and further that the Respondent claims that it did not demonstrate bankings in its account did not constitute sales is untrue, unfounded and unsupported.d.Commissioner Computation of TAX LiabilitiesThat the Commissioner assertions that the lack of information to attest to actual business income forced to resort to alternative sources of information from the banks is untrue, unfair and unjustified and further that the claims that the Appellant had failed to discharge its burden of proof placed by law to warrant adjustment and therefore the deposits in its personal accounts have been treated as taxable income resulting to grossly overstated tax liabilities. The Respondent has turned a blind eye on the capacity challenges of record management to businesses of similar nature and instead has resulted to punitive measures of assessments of excessive and overstated tax liabilities.

Appellant’s Case 11. The Appellant’s case is premised on the following documents:-a.The Appellant’s Statement of Facts dated 12th May 2022 and filed on the same date together with the documents attached thereto.b.The Appellant’s written submissions dated 20th January 2022 and filed on the 23rd January 2023 together with the authorities attached thereto.

12. The Appellant submitted that the Respondent wished to collect income tax principal tax amounting to Kshs 45,660,327 and VAT ksh.25,052,271. 70 plus penalties and interest based on the bank deposits analysed below;TransactionDescriptions 2015 2016 2017 2018 2019 2020 Total

Equity BankA/c 4,538,915 35,110,737 25,650,220 51,266,971 20,474,563 18,788,371 156,576,698. 00

TotalIncome 4,538,915 35,110,737 25,650,220 51,266,971 20,474,563 18,788,371 156,576,698. 00

PAYE 1,361,675 10,533,227 7,611,065 15,288,082 6,274,426 4,591,852 45,660,327. 00

VAT@16% - - - - - 25,052,271. 70

13. The Appellant stated that the above was contained in a KRA letter. The letter further advised that the summary of investigative findings is limited to the information available to the commissioner and advised to avail further information or documents that the Appellant would wish to disclose within 14days of the letter.

14. The Appellant stated that on 1st September 2021 it applied for Income tax resident amendments for year 2015 to 2020 and same was approved and resultant taxes, interests and penalties paid.

15. The Appellant stated that on 16th September 2021 the Respondent questioned why the Appellant did not object to the taxes on the investigative findings.

16. The Appellant stated that on 16th September 2021 it responded to the Commissioner by referring to its amendments and documents sent in an email attachment dated 16th September which provided further information as requested by the investigator.

17. The Appellant stated that on 7th October 2021 the Commissioner posted Assessments KRA202119775917, KRA202119775994 & KRA202119776118 for year 2018, 2019 & 2020 and VAT for December 2016, 2017, 2018, 2019 and 2020.

18. The Appellant stated that the Respondent disregarded the information on the nature of business and business income availed in the self-amended assessments and support documents and issued grossly overstated additional assessment contrary to Section 31(1) TPA.

19. The Appellant stated that the Respondent disregarded the information availed on nature of business and erroneously charged VAT based on bank deposits.

20. The Appellant stated further that the Respondent did not undertake the verification of the self-amended assessments to ensure the best of the Respondent judgment before issuance of the additional assessments as required by Section 31(1) of TPA Act

21. The Appellant stated that on 21 October 2021 it objected to the Respondent additional assessments and provided the grounds for objections, reasons for objections and amendments required.

22. The Appellant stated that on 13 April 2022 the Respondent issued a decision on its objection confirming the additional assessments.

23. The Appellant submitted that on 10th January 2022 it provided to the Respondent a bundle of support documents which were stamped with the received stamp. The documents included among others.a.Financial accounts 2016-2020b.Sales ledgers 2016-2020c.Purchases ledgers 2016-2020d.General ledger -loan statementse.General ledger-direct wagesf.General ledger- Travel and accommodations Receiptsg.Bank statements 2016-2020h.Invoices of Vendors to Sellers

24. The Appellant asserted that the above documents as provided and several meetings held to further explain were enough to come up with the correct tax liabilities assessment devoid of over-statement and arbitrary use of banking analysis.

25. The Appellant further asserted that the above documents as provided illustrates that the business is internationally done in China and the turnover being commission earned does not meet the threshold under Section 5 of the VAT Act for VAT registration, withholding, and remittance of VAT taxes. instead the Respondent resulted to punitive measures of assessments of excessive and overstated tax liabilities.

26. The Appellant submitted that the use of banking analysis, in this case, is against all the provisions of the Income Tax Act on the computation of taxable income and therefore not rendered in accordance with the laws.

27. The Appellant further submitted that in an effort to amicably resolve the dispute arising from the Respondents ’s investigation findings and assessments, it proposed a settlement in a letter dated 13th December 2022 based on its analysis of the income as shown below.Period 2018 2019 2020 Total

Sales PerBanking’s 51,266,971. 00 20,474,563. 00 18,788,371. 00 156,576,698. 00

Commission Rate 6. 00% 6. 00% 7. 00%

IncrementalTaxable Income 893,600. 00 255,400. 00 45,700. 00 1,194,700. 00

Self-AssessmentIncome 1,944,640. 74 1,057,470. 02 1,321,948. 67 4,324,059. 43

Total TaxableIncome 2,838,240. 74 1,312,870. 02 1,367,648. 67 5,518,759. 43

Tax Liability 234,739. 00 51,504. 00 13,449. 00 299,692. 00

Tax Paid 3,067. 00 2,657. 00 3,297. 00 9,021. 00

Tax Due 231,672. 00 48,847. 00 10,152. 00 290,671. 00

28. The Appellant submitted that the Respondent accepted the alternative dispute resolution however it failed to execute or participate in the process within the timelines stipulated by law.

29. The Appellant submitted that the issue for determination is Whether the Assessments and subsequent decisions by the respondent are supported by law and facts.

30. The Appellant submitted that in order to arrive at a decision, the Tribunal take into consideration the following pertinent questions while determining whether assessments and decisions are based on law and facts.a.Was the Computation of taxable income based on gross banking supported by law and availed documents by the appellant?b.Did the Respondent take into consideration the nature of business of the Appellant in determining taxable Income?c.Was the Respondent’s imposition of VAT based on law and availed documents by the appellant?d.Was the Respondent’s computation of tax liabilities in line with Section 31 Tax Procedure Act and other relevant tax laws?e.Was the Tax Liabilities as claimed by the Respondent fair and just?

Appellant’s Prayers 31. Pursuant to the arguments and submissions advanced herein above, the Appellant prayed to the Tribunal that:-a.The impugned decision of the Commissioner of Investigations and Enforcement dated 13th April 2022 plus all consequential orders there upon be reviewed and set aside ex-debito justitiae.b.The Honourable Tribunal finds that assessments KRA202119775917 2018, KRA202119775994-2019 and KRA202119776118-2020 are excessive, unfair, and contrary to the provisions of the Income Tax Act are excessive, unfair, contrary to the provisions of the Income Tax Act.c.The Honourable Tribunal order adoption of the Appellant Alternative Dispute Resolution ADR settlement proposal dated 13th December 2022d.The cost of this Appeal be borne by the Respondent herein.

RESPONDENT’S CASE 32. The Respondent’s case is premised on the documents set out hereunder-;a.The Respondent’s Statement of Facts dated 13TH June 2022 and filed on the same date.b.The Respondent’s written submissions dated 4th January 2023 and filed on 5th January 2023.

33. The Respondent stated that it commenced an in-depth investigation on the tax affairs of the Appellant for the period between January 2015 and December 2020 where it obtained and analysed the Appellant's bank account statements amounting to Ksh.156,576,698. 00

34. That resultantly, the Appellant was issued with the tax findings through an email dated 17th September 2021 on Its tax computation.

35. That subsequently, the Appellant was issued with the Tax Assessment orders dated 7 October 2021.

36. That the Appellant thereafter lodged an objection on 21st October 2021 on the grounds that the Commissioner failed to appreciate the nature of its business, erred in the methodology used to determine VAT due and that the Commissioner erred in the determination of taxable income resulting in grossly overstated taxes

37. That once in receipt of the objection, the Respondent reviewed the same and informed the Appellant that the objection was invalid as per the requirements of Section 51(3) of the Tax Procedures Act on 6th December 2021.

38. That following the invalidation of the objection, the Appellant proceeded and availed some supporting documents on 10th January 2022 and 17th March 2022 which the Respondent then reviewed.

39. That following the review of the documents provided by the Appellant the respondent on 13th April 2022 issued an objection decision confirming the tax assessment.

40. That the Appellant dissatisfied with the decision subsequently filed an appeal on 12th May 2022.

41. The Respondent raised one issue for determination: -a.Whether the assessment and objection decision is valid and should be upheld by the Tribunal

42. The Respondent submitted that Section 51(3) (c) of the Tax Procedures Act states that an objection shall be treated as valid where all the relevant documents relating to the objection have been submitted; The Section of the TPA provides as follows:-―A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if –a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments: andb.in relation to an objection to an assessment, the tax payer has paid the entire amount of tax due under the assessment that is not in dispute. QUOTEc.all the relevant documents relating to the objection have been submitted‖

43. The Respondent submitted that the objection decision issued was accurate based on the documentation provided by the Appellant and the investigations done by the Respondent. That the Appellant was awarded adequate opportunity to defend its position.

44. The Respondent submitted that the Tax Procedure Act empowers the Respondent to carry out assessment based on the information available. The Respondent states that the assessment was issued based on information provided pursuant to Section 24 of the Tax Procedure Act which states that:-―1)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.(2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of a taxpayer and the Commissioner might assess a taxpayer, tax liability using any information available to the Commissioner.

45. The Respondent submitted that the Appellant bears the burden of proving that the objection decision and the finding of the investigations were erroneous. It relied on Section 56(1) of the Tax Procedure Act, that the tax payer in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different decision.

46. The Respondent reiterated that the assessments were correctly issued and conforms to the Income Tax Act and that the Appellant did not provide any evidence that would have altered the assessment.

47. The Respondent submitted that the Appellant having lodged the objection on 21st October 2021, the same was received and acknowledged, however, the objection was invalid as per the provisions of Section 51(3) of the TPA for the Appellant had not availed sufficient documentation to support the same. That as per the requirement under Section 51(3)(c)the Respondent notified the Appellant to furnish the necessary documents. However, the Appellant failed to provide the requested documents.

48. The Respondent further submitted that the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents hence no relevant records were provided to support the objection by the Appellant. As a result, the assessment was made based on the only available information based on the best judgment by the Respondent. The Respondent relied on the provisions under Section 59(1),24(1)(2) and 29(1) of the TPA. To buttress its argument the Respondent cited the case of Boleyn International Limited Vs Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No.55 of 2019).

Respondent’s Prayer 49. The Respondent prays that the Honourable Tribunal finds that:-a.The outstanding tax arrears are due and payable by the Appellantb.The confirmed assessments were proper in lawc.The Appeal herein be dismissed with cost to the Appellant.

Issues For Determination 50. The Tribunal upon due consideration of the pleadings of the parties is of the considered view that the issue for determination is:-a.Whether the Objection Decision is proper in law

Analysis And Findings 51. The Tribunal having determined the issue for determination as stated above proceeds to deal with the same as hereunder.

52. The Tribunal noted that it is of paramount importance to note that the Appellant, in a departure from established legal procedures, submitted its witness statement dated 4th August 2023 and submitted on 7th August 2023 after the official close of pleadings and after the matter had already been scheduled for delivery of the judgment. As per the well-settled principles governing legal proceedings, any submissions made beyond the prescribed timelines are deemed invalid and procedurally irregular.

53. The Tribunal noted that adherence to procedural fairness and the integrity of the legal process are pivotal to ensuring the just and equitable resolution of disputes. Hence, the Tribunal finds no basis to accord any weight or consideration to the aforementioned witness statement submitted after the close of pleadings. The foundational premise of the judicial system rests upon the adherence to established legal procedures, and any departure from this undermines the fairness and integrity of the process

54. The Respondent conducted an investigation into the tax affairs of the Appellant for the period between January 2015 and December 2020 resulting in tax findings assessments dated 7th October 2021 which the Appellant objected to and the Respondent issued its objection decision confirming the tax assessment.

25. The crux of the present case revolves around the issue of documentation to support bank transactions in the Appellant’s bank account. The Appellant contends that the materials furnished to the Respondent, coupled with numerous meetings convened to elucidate matters, sufficiently facilitated the accurate determination of tax liabilities.

56. However, it is imperative to note that the Appellant did not present all the documents captured in the Appellant’s submissions as the Objections support documentary evidence before the Tribunal for consideration other than the Annual Reports and Financial Statements for the period.

57. Conversely, the Respondent contended that the objection decision was grounded upon the furnished documents, and challenges the Appellant to substantiate any contrary assertion.

58. The Tribunal notes that the Respondent further argued that the consequence of the failure of the Appellant to provide relevant documents as laid in the statute particularly Section 51(3)(c) of the Tax Procedure Act, 2015 allows the Respondent to make decision in view of the available documents.This then gives rise to the central question; Did the Appellant furnish sufficient documents to persuasively convince a reasonable person that the Respondent's assessment of the Appellant's tax liabilities was flawed?

59. Section 56(1) of the TPA provides that;―In any proceedings under this part the burden shall be on the taxpayer to prove that the tax decision is incorrect.

60. Section 30 of the Tax Appeals Tribunal Act provides with regard to burden of proof that;―In proceedings before the Tribunal, the appellant has the burden of proving that ;a.where an appeal relates to an assessment, the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.‖

61. To satisfy the above duty, the taxpayer ought to submit all the relevant evidentiary material in its possession. The Tribunal made similar observation in Tax Appeal Number 25 of 2021 Mugo Macharia Kigo v Commissioner of Investigations & Enforcement wherein it stated that a taxpayer with an assessment arrived at based on an indirect method where information is secured from alternative sources is enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justified in the circumstances.

62. The Tribunal has also dealt with a similar matter in Tax Appeal Number 353 of 2018 Rumish Limited vs Commissioner of Domestic Taxes, 23 rd. July 2021 at paragraph 51, the Tribunal stated as follows: - ―Additionally, Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case...‖

63. The Tribunal has further cited the case of Commissioner of Domestic Taxes - vs- Metoxide Ltd (2021) eKLR where Justice Mabeya stated that:-―Section 56(1) of the Tax Procedures Act provides that; a taxpayer has the burden of proving that a tax decision is incorrect. It is common knowledge that, the Kenyan system of taxation is based on self- assessment. The taxpayer assesses self and remits what he/it considers to be the tax due to the tax authorities. In this regard, the tax laws mandate the appellant to later on assess the taxpayer in order to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment is made years after the tax has fallen due and been paid on the economic activity or commercial transaction for which the tax arisen had been undertaken. It is for this reason that the tax laws in this country shoulder the taxpayer with the burden of disproving the correctness of the appellant’s tax decision.

64. In other words, when a taxpayer challenges a tax decision, it is responsible for providing evidence that demonstrates the incorrectness of that decision.

65. In the absence of relevant documentation to facilitate in the assessment and/or verification of the appropriate tax liability, the Respondent is empowered under Sections 29(1) and 31(1) of Tax Procedures Act to use its best judgment in making its tax assessment.

66. The Tribunal in Digital Box Limited V Commissioner of Investigations & Enforcement (TAT Case No 115 of 2015) affirmed the above legal position wherein it pronounced itself as thus: -―In both instances, the Respondent is allowed to use any information that is available to it and to use the best of his or her judgment in making assessment … The Tax Procedure Act in granting the Respondent powers to assess taxpayers does not specify the methods that may be used instead the law provides that the best judgment must be exercised.

67. The Appellant raised issue with the Respondent’s resort to analysis of bank account in the assessment of tax. The Tribunal has held before that exercise of best judgment include use of bank method, In TAT Appeal No. 115 of 2017 Digital Box Limited -Vs-Commissioner of Investigation & Enforcement the Tribunal stated as follows:-“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. This Was held to be so in the case of Bachmann v.The Queen, 2015 TCC 51where the court stated that: -"This court has recognized that in an appropriate case a bank deposit analysis is an acceptable method to compute income" Once it is established that the method is allowed, the question is whether the method was applied in arriving at a reasonable assessment in the case at hand. The Tribunal is guided by the test set out in CA McCourtie LON/92/191 where it was stated: - "In addition to the conclusions drawn by Woolf Jin Van Boeckel earlier tribunal decisions identified three further propositions of relevance in determining whether an assessment is reasonable. These are, first that the facts should be objectively gathered and intelligently interpreted; secondly. that the calculations should be arithmetically sound; and finally, that any sampling technique should be representative and free from bias."

68. The Appellant has not proven that the use of banking method is against the law and that when used it arrived at unreasonable assessment, lacked objectivity, was arithmetically wrong and biased.

69. The Tribunal has looked at the evidence presented before it by the Appellant and it did not find any document addressing the claim that he is a commission broker or an intermediary for both seller and buyer. The Appellant has not explained itself sufficiently and or provided documents to prove that the Respondent has erred or had considered irrelevant issues in arriving at its Objection Decision.

70. The Appellant argued that the Respondent did not consider the nature of business he is engaged in. The Appellant appear to be engaged in brokerage. In the Tribunal’s considered view, brokerage services where revenue exceeds five million shillings are vatable as per Sections 5 and 34 of the VAT Act, 2013 which states as hereunder:-Section 5 states:-(1)A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on—a.a taxable supply made by a registered person in Kenya;b.the importation of taxable goods; andc.a supply of imported taxable services.Section 34 of the VAT Act states that:-(1)A person who in the course of a business—a.has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; orb.is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form.‖

71. From the above the Tribunal notes that the Appellant’s nature of business doesn’t exempt it from paying VAT. In addition, the Appellant was duty bound to prove that it is engaged in business exempted from VAT, a duty he failed to discharge.

72. The Tribunal is also of the view that though the Appellant alleged that it was in the business of brokerage no evidence was adduced to confirm this allegation in terms of agreements with the suppliers or buyers of the imported products from China.

73. Just like the in the case of Tax Appeal Number 25 of 2021 Mugo Macharia Kigo v Commissioner of Investigations & Enforcement, found that the Appellant had failed to explain the variance in the disclosed sources of income and bank deposits, the Appellant herein did not render plausible explanation of the variance between the income it disclosed and the deposits in the bank yet the law unequivocally places a burden on it.

74. Based on the aforementioned provisions of the law and the case laws, the Tribunal finds the Appellant has not discharged its burden of proof to show that the Respondent erred in confirming the tax assessments.

75. Taking into consideration all the evidence in this matter and the laws and authorities the Tribunal finds that the Respondent failed to comply with the specific requirements set out in Section 51(11) of the Tax procedures Act 2015.

Final Decision 76. In view of the foregoing analysis, the Tribunal finds that the Appeal has no merit and the Tribunal accordingly makes the following Orders:-a.The Appeal be and is hereby dismissed.b.The Objection decision dated 13th April, 2022 be and is hereby upheldc.Each Party to bear its own costs

77. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OF OCTOBER, 2023ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY OLUOCH - MEMBERCYNTHIA MAYAKA - MEMBERABRAHAM KIPROTICH - MEMBEREUNICE NG’ANG’A - MEMBER