[2023] KETAT 1020 (KLR)

Gitahi v Commissioner of Domestic Taxes (Tax Appeal 360 of 2022) [2023] KETAT 1020 (KLR) (Civ) (8 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1020 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 360 of 2022

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

September 8, 2023

Between

Grace Wanjiro Gitahi

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a female adult operating a hardware shop in Kakamega Town, Kakamega County.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and Kenya Revenue Authority 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 thereafter on November 24, 2021 issued the Appellant with Additional Assessment Orders on income tax and VAT amounting to Kshs. 9,712,879. 00 and Kshs. 6,118,574. 00, respectively.

4. The Appellant objected on December 23, 2021.

5. The Respondent issued its Objections decision to the Appellant's objection application on February 28, 2022.

6. The Respondent thereafter issued Confirmation Assessment Notices on March 2, 2022.

7. Following its dissatisfaction with the Respondent’s decision, the Appellant commenced the Appeal process by lodging a Notice of Appeal to the Tribunal dated March 28, 2022 and filed on March 29, 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated and filed on April 8, 2022:-i.The Respondent erred in fact and in law by refusing to amend assessments in full despite the Appellant having lodged valid Objection Applications.ii.The Respondent erred in fact and in law by issuing an Objection decision more than 60 days after the Appellant had lodged her objection Applications.iii.The Respondent erred in fact and in law by failing to permit allowable expenses and deductions provided and allowed in law.iv.The Respondent erred in fact and in law by issuing the Objection decision as the same contains glaring errors with respect to computation of taxable sales.v.The Respondent erred in fact and in law by failing to give credit for input tax against output tax.

Appellant’s Case 9. The Appellant’s case is premised on the hereunder listed documents:i.The Appellant’s Statement of Facts filed on 8th April 2022 together with the documents attached thereto.ii.The Appellant’s written submissions dated and filed on November 7, 2022 together with the authorities adduced thereto.

10. That in regard to sales, the Respondent erred by taking wrong amounts of banking thus overstating the sales by Kshs. 2,448,258. 00.

11. That further the sales were overstated by Kshs. 5,400,000. 00 by treating loan disbursements as sales bankings.

12. That the sales were overstated by Kshs. 5,378,528. 00 by treating bank payments as cash payments hence overstating cash payments.

13. That the Respondent violated Section 17 of the VAT Act2013 (Rev. 2018) by refusing to grant the Appellant credit for input tax against output tax amounting to Kshs. 564,734. 00 and Kshs. 2,753,606. 00 for 2019 and 2020, respectively.

14. That the Respondent violated Section 15 of the Income Tax Act 470 by failing to allow the Appellant deduct allowable expenses amounting to Kshs. 3,547,645. 00 and Kshs. 19,326,328. 00 for 2019 and 2020, respectively.

15. That consequently, and based on the foregoing as well as computations provided by the Appellant and the provisions of Section 51 of the Tax Procedures Act, 2015, Section 44 (5) of VAT Act 2013 (revised 2018), Section 17 (1) of the VAT Act2013 (revised 2018) and Sections 31 (2) and (4) (b) (l) of the Tax Procedure Act 2015, the Respondent erred both in fact and law in issuing the Objection decision dated February 8, 2022.

16. The Appellant proposes the following as the issues for determination:i.Whether the Objection decision by the Respondent was issued within the statutory period of 60 days.ii.Whether the Objection decision contains glaring computation errors.iii.Whether the Respondent failed to permit allowable expenses and deductions provided and allowed in law when calculating Income tax payable.iv.Whether the Respondent failed to allow credit for input tax against output tax.

i. Whether the Objection Decision by the Respondent was issued within the Statutory Period of 60 days. 17. That the Appellant lodged objections to the Respondent's additional assessments on December 23, 2021. The Respondent issued the Objection decision on February 28, 2022 and confirmed the assessments on March 2, 2022.

18. That the Objection decision was given and Confirmation was done 66 and 68 days, respectively, from the date that the Appellant made Objection applications to the assessments made on December 23, 2021. That this was contrary to and outside the mandatory statutory period of 60 days espoused under Section 51 (11) of the Tax Procedures Act 29 of 2015.

19. That Section 51 (11) of the TPAprovides that:“Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objection shall be allowed.”

20. That the Respondent alleges that the Objection decision was issued on time because the Respondent wrote a letter to the Appellant requesting for documents on January 18, 2022. That it must however be noted that the said letter is not an Objection decision and in no way relieves the Respondent from its obligation to issue an Objection decision within 60 days.

21. That in Judicial Review Application 152 of 2019: Republic vs. Commissioner of Domestic Taxes Ex Parte Fleur Investments Limited {2020} eKLR the court held,“a pertinent issue has been raised in this case. The applicant argues that the Respondent failed to render an objection decision within the meaning of Section 51 (11) of the TPA. From this sub-section, two consequence flow from the Respondent's failure to make a decision. First, the objection by operation of the law stands allowed. As held in the first issue, on this ground alone the applicant's case succeeds. That is the clear language of section 51 (11) of the TPA.”

ii. Whether the Objection Decision Contains Glaring Computation Errors Computation of Taxable Sales. 22. That the Objection decision is based on wrong banking amounts. That the Respondent erred by taking wrong amounts of banking thus overstating the sales by Kshs. 2,448,258. 00.

23. That the Appellant provided the information relating to the RD or Unpaid cheques/payments in tables that it submitted for 2018, 2019 and 2020, respectively.

24. That the Respondent, in its Statement of Facts, alleges that proper adjustments for the unpaid cheques issued in 2018, 2019, and 2020 were made and captured in the Objection decision.

25. That the Respondent's Statement of Facts gives the following amounts for unpaid cheque:2017 No amount is provided

2018 No amount is provided

2019 474. 711

2020 1,406,300

26. The Appellant submitted that the information provided by the Respondent above are all wrong. The Appellant demonstrated that the correct amounts of the RD cheques are as follows:Amount Bank statement page

Year 2018

66,048 27,28

71,200 27,28

140,000 28

7,500 29,30

46,600 31

15,000 32

Year 2020

161,184 40

300,000 41

105,990 42

168,300 43

900,000 44,45

38,000 46

27. That based on the above evidence the Appellant submits that the sales computation by the Respondent is erroneous as it includes the RD cheques and reversed payments.

28. The Appellant submits that the Respondent overstated sales by Kshs. 5,400,000. 00 by treating loan disbursements as sales in the banking analysis.

29. That the Respondent refutes this allegation but fails to provide the amount of loan disbursements that were deducted from the banking in the banking analysis.

30. That the Appellant's loan disbursement claims are supported by the Bank Statements provided in the Appellant's bundle containing the Memorandum of Appeal as follows:Amount Bank statement page3,500,000 381,900,000 47

31. That based on the above the Appellant submits that the sales computation by the Respondent is erroneous as it includes the loan disbursements.

32. That in computing cash expenses made from sales, the Respondent took all expenses in the profit and loss account not knowing that the expenses shown in the Appellant’s statement of facts were paid through bank.

33. The Appellant submits that the amount stated by the Respondent as cash payments includes payments through bank thus overstating sales by Kshs. 5,378,528. 00.

34. That the Respondent in its Statement of Facts provided an analysis for the source and application of funds in a table. That the information on total funds available in the said table contradicts the sales information provided by the Respondent resulting in a difference of Kshs. 22,127,143. 00.

35. The Appellant submits that the only sources of funds for the Appellant are revenue from sales and bank loans. That as such sales should almost be equal to available funds That the huge variances evidence that the Respondent's computations were not accurately done.

36. The Appellant, therefore, disapproves Paragraph 20 of the Respondent's Statements of Facts and the entire computation on expected sales and submits that even the Respondent's computation's disparities indicate that its computations of sales are not accurate and proper.

37. The Appellant denies the allegations on documentation and submits that all required documents were provided as requested by the Respondent.

iii. Whether the Respondent failed to permit allowable expenses and deductions provided and allowed in law when calculating Income Tax payable. 38. That the Respondent violated Section 15 of the income Tax Act Cap 470 by failing to allow for purchases and expenses all amounting to Kshs. 5,378,528. 00 and, Kshs. 3,547,645. 00 and Kshs. 19,326,328. 00 for 2019 and 2020, respectively.

39. That the Respondent disallowed the expenses thus violating Section 15 of the Income Tax Act Cap 470 of the laws of Kenya. That instead, the Respondent added the said expenses to sales thus causing errors in the computation of sales.

40. That Section 15 (1) of Income Tax Act CAP 470 of the laws of Kenya states that:-“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, and whereunder Section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

iv. Whether the Respondent failed to allow Credit for input VAT against output VAT. 41. That the Respondent violated Section 17 of the VAT Act 2013 (Rev. 2018) by refusing to grant the Appellant input VAT against output amounting to Kshs. 564,734. 00 and Kshs. 2,753,608. 00 for 2019 and 2020, respectively.

42. That Section 17 of the Value Added Tax Act, 2013 provides credit for input tax against output tax on taxable.

43. The Appellant submitted that the Respondent refused to grant credit for input VAT for the documents provided to support the same.

44. The Appellant submitted that the Objection decision of the Respondent dated 28th February 2022 is not proper as it does not meet the criteria established under the Income Tax Act, Cap. 470 and the Value Added Tax Act, 2013.

Appellant’s Prayers 45. The Appellant made the following prayers:i.That this Appeal be allowed.ii.That the Honorable Tribunal set aside the Objection decision dated February 28, 2022. iii.That this Honorable Tribunal be pleased to discharge the Appellant from paying any additional Income tax and VAT amounting to Kshs. 9,712,873. 00 and Kshs. 6,118,574. 00, respectively.iv.That the costs of the Appeal be awarded to the Appellant.

The Respondent’s Case 46. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated May 6, 2022 and filed on May 9, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated January 24, 2023 and filed on January 26, 2023 together with the legal authorities filed therewith.

47. That in regard to income tax, the Respondent reviewed the documents availed by the Appellant consequently revealing the following: total additional income tax payable amounting to Kshs. 8,688,427. 00 and total additional VAT payable amounting to Kshs. 5,039,288. 00.

48. That pursuant to the foregoing finding, the Respondent requested the Appellant to offer explanations to the said inconsistencies and variances and to forward its submissions together with the supporting documents to the Commissioner, failure to which the assessments would be revised upwards.

49. That in the absence of any response from the Appellant, the Respondent issued the Appellant with additional assessments dated November 24, 2021 for income tax and VAT as hereunder:Income Taxi.Period commencing 01/01/2017 - 31/12/2017 - Kshs. 232,027ii.Period commencing 01/01/2018 - 31/12/2018 - Kshs. 293, 375iii.Period commencing 01/01/2019-31/12/2019- Kshs. 3,036,859iv.Period commencing 01/01/2020 - 31/12/2020 - Kshs. 7,584,680VATi.Period commencing 01/12/2017 - 31/12/2017 - Kshs. 152,520. 07ii.Period commencing 01/12/2018 - 31/12/2018 - Kshs. 1,625,245. 97iii.Period commencing 01/12/2019- 31/12/2019- Kshs. 331,303. 36iv.Period commencing 01/11/2020-30/11/2020-Kshs. 4,344,213. 72

50. That consequently, and upon receipt of the additional assessment notices, the Appellant filed objections dated 23rd December, 2021 objecting the entire assessed amounts.

51. That after a thorough review and consideration of the objections filed by the Appellant together with the documents in support, the Respondent rendered an objection decision dated February 28, 2022.

52. That the Respondent conducted an in-depth bank deposit analysis in order to compute the taxable sales. That consequently, variances due to under declarations amounting to Kshs. 2. 070. 646. 00, Kshs. 4,470,468. 00 and Kshs. 26,724. 00, were noted for the years 2018, 2019 and 2020, respectively.

53. That from the foregoing, the under declared taxable income was brought to charge for income tax and VAT in 2018, 2019 and 2020.

54. That further, an analysis of the source and application of funds revealed the following variances: Kshs. 1,030,270. 00, Kshs. 90,917. 00, Kshs. 411,654. 00 and Kshs. 307,835. 00 for the years 2017, 2018, 2019 and 2020 respectively.

55. That as such, the variance of Kshs. 1,030,270. 00 was captured for tax purposes since the capital injection was not accounted for.

56. That the upshot of the said decision was that the Appellant's objections were partially accepted after adjusting for the unpaid cheques, non-cash expenses (depreciation) and finance costs under the bank analysis for the periods between 2017 - 2020. That resultantly, the income tax liability was revised to Kshs. 9,712,879. 00 whereas the VAT liability was revised to Kshs. 6,118,574. 00.

57. That the Respondent thereafter issued confirmation assessment notices on March 2, 2022.

58. The Appellant asserts that the Respondent overstated its computation of taxable sales by virtue of the unpaid cheques. That however, the Respondent notes that proper adjustments for the unpaid cheques issued in 2018, 2019 and 2020 were made as captured in the objection decision.

59. The Respondent disallowed the loan entries captured noting that the Appellant failed to provide any documents in support of a loan facility. That as such, the Appellant failed to discharge its burden of proof to demonstrate that the Respondent's assessment was in error.

60. That in light of the foregoing, the Respondent notes that the computation of sales was accurate since proper adjustments were made after due consideration of the documents availed by the Appellant.

61. That with respect to the claim for input tax, the Appellant failed to provide the relevant documentary evidence in the form of invoices that supported a reasonable commercial transaction. That in the absence of such evidence, the claim for input tax was disallowed.

62. That consequently, there was no evidence provided in support of the purchase invoices for the period under review to warrant the Respondent to allow such deduction to be made. That the Appellant utterly failed to discharge her burden of proof in this regard.

63. That the Appellant failed, refused and neglected to provide the documents espoused under Section 17 (3) of the VAT Act in support of the purchases claimed and the Respondent could not determine whether the input VAT claimed was genuine or fictitious.

64. That the Appellant furnished the Respondent with the certified copies of the bank statements. That however, the same does not indicate which debits related to payments of which input VAT is claimed.

65. The Appellant also alleged that the objection decision was issued outside the statutory period of sixty (60) days. The Respondent notes that the Commissioner wrote to the Appellant on January 18, 2022 requesting for further documentation. That as such, the objection decision was well within time.

66. That due to the foregoing series of facts, and with the Appellant's failure to provide all the documents requested, the Appellant's Objection was rejected and the assessment confirmed as issued.

67. The Appellant states that it made its objection application on December 23, 2021. That thereafter the Respondent made its objection decision on February 28, 2022. That therefore the Respondent made its decision beyond the 60 days' period prescribed under Section 51 (11) of the TPA.

68. The Respondent wishes to point out that there was a request for documents issued by the Respondent on January 18, 2022 before 60 days had elapsed. That this should therefore be the date used in calculating the number of days that had lapsed.

69. That this is supported by the applicable Section 51 (11) of the Tax Procedures Act which states as follows:“The Commissioner shall make the objection decision within sixty days from the date of receipt of-(a)the notice of objection: or(b)any further Information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

70. That the provision cited by the Appellant at Paragraph 5 of its submissions as Section 51 (11) was one which was introduced by the Finance Act 2022 Section 44 (d) which came into force on July 1, 2022 by virtue of Section 1 which stated as follows:“This Act may be cited as the Finance Act 2022 and shall come into operation or be deemed to have come into operation as follows:a.Sections 3, 6, 10, 15, 16, 22 (b) (ii) and 32, on the 1st January 2023. b.All other sections on the July 1, 2022. ”

71. That where an Act specifies its commencement date then it takes effect from the specified date. That this is anchored on Article 116 (2) of the Constitution which provides as follows:“Subject to clause (3), an Act of Parliament comes into force on the fourteenth day after its publication in the Gazette, unless the Act stipulates a different date on or a time at which it will come into force.”

72. That the provision cited by the Appellant, having come into force on July 1, 2022, cannot apply to a decision that was rendered before its commencement. That this is provided by Section 23 (3) of the Interpretations and General Provisions Act which states as follows:“Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears the repeal shall not -(b)affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed;”

73. That it is clear that the provision cited by the Appellant which does not talk about request and receipt of documents, does not apply. That since the applicable provision is the one cited by the Respondent, the date should thus be calculated from date of request of documents. That this was confirmed by this Honourable Tribunal's decision in Stuntwave Limited vs. Commissioner of Inv. & Enforcement Appeal No. 279 of 2021 where the Tribunal in interpreting Section 229 of theEACCMA which is identical with the applicable Section 51 (11) of the Tax Procedures Act stated in Paragraph 218, 219 and 220 as follows:“Section 229(4) of EACCMA provides as follows with regard to the Issuance of a decision by the Commissioner: -“The Commissioner shall, within a period not exceeding thirty days of receipt of an application under sub-section (2) and any further information the Commissioner may require from the person, communicate his or her decision In writing to the person lodging the application stating reasons for the decision.”

74. From the foregoing the Respondent was authorised under the applicable Section 51 (11) of the TPA to issue the decision within 60 days of its request for documents. That as such the Appellant's contention that the objection decision is invalid is not founded on the applicable law.

75. The Respondent submits that in its objection decision it adjusted the assessments to take account of the unpaid cheques. That additionally. the Appellant failed to produce any documents proving existence of a loan facility. That there were no loan agreements or any charge instrument provided supporting its claim that some of the deposits were amounts taken as loan and not sales made.

76. The Respondent further clarifies that instead of claiming errors on part of the Respondent the Appellant has a positive duty to show what amounts were actually taxable as was stated in Mulherin vs. Commissioner of Taxation - [2013] FCAFC 115:“That is to say, did the Tribunal err in law in concluding (at R [51]) that:The cases demonstrate that it is not enough for a taxpayer to show error in the respondent’s assessment: the taxpayer must also show what the actual taxable income was. That was a burden that the applicant here did not discharge….”

77. That the Appellant had a positive duty under Section 56 (1) as read with Section 50 (4) both of the TPA to show what its actual taxable income was at the objection stage.

78. That Section 56 (1) of the TPA provides as follows:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

79. That Section 50 (4) of the TPA provides that:“In this section, "proceedings under this Part" means —(a)an objection made under Section 51;(b)an appeal made to the Tribunal under Section 52 in relation to an appealable decision;(c)an appeal made to the High Court under Section 53 in relation to a decision of the Tribunal; or(d)an appeal made to the Court of Appeal under Section 53 in relation to a decision of the High Court.”

80. That the Appellant failed to adduce the necessary document to discharge this burden of proof and instead resorted to exposing the Respondent's errors. That the Respondent can only estimate the tax liability from information in its custody. That the errors alleged are occasioned by the Appellant's reluctance to provide the necessary documents. That the Appellant should not therefore seek to benefit from a problem which can be substantively traced to its actions or omissions.

81. That the deduction of expenses from taxable income is principally founded in Section 15 (1) of the Income Tax Act which provides 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, and where under Section 27 of this Act any income of an accounting period ending on some day other than the faff day of such year of income is, for the purpose of ascertaining total Income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

82. That from this provision it is clear that there are certain conditions to be met before a claimed expenditure is deducted. That it has to comply with the provisions of Section 16 (1) as follows:“Save as otherwise expressly provided, for purposes of ascertaining the total income of a person for a year of income, no deduction shall be allowed in respect of –(a)expenditure or loss which is not wholly and exclusively incurred by him in the production of the income;(b)capital expenditure, or any loss, diminution or exhaustion of capital.”

83. That the Respondent is mandated by law to ensure that any expenditure presented for deductions by a taxpayer meets these conditions. That as such, any deductions proposed must be analysed to determine whether they are allowed. Section 24 (2) of the Tax Procedures Act 2015 provides that the Respondent in executing this mandate shall not be bound by a taxpayer's returns or information:“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.”

84. That this is also fortified by Section 31 (1) of the Tax Procedures Act as follows:-“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that —(a)in the case of a deficit carried forward 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, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or(c)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.”

85. That the foregoing provisions emphasise the fact that the Respondent can only make a decision in light of information in its possession. That this is why the Appellant was requested to submit documents to support the expenditures. That the Appellant should have submitted purchase invoices, debit notes, bank statements, contracts, cheques, credit notes, receipts and any other document to show that the nature and extent of expenses that were actually incurred.

86. That at the time of the objection the Appellant had not provided the documents mentioned above. That it was only at the Tribunal that the Appellant sought to provide the receipts and invoices to support its claim on expenditures. That the Appellant is challenging a decision that was made without the benefit of looking at the documents which it sought to adduce by its application dated November 7, 2022.

87. That the Appellant should have produced these documents when it was requested by the Respondent. That since it failed to do so, the Respondent could only make a decision based on the information that was before it.

88. That the High Court in Leah Njeri Njiru vs. Commissioner of Investigations and Enforcement Kenya Revenue Authority and Another[2021] eKLR at paragraph 28 indicated that expenditures must be supported, and only then can the deductions be made, when it stated that:-“As I understand the Appellant, the Commissioner ought to have presumed the expenses incurred by her in light of the nature of her business and Income she was making notwithstanding that these expenses were unsupported. This is a misapprehension of the burden of proving one's income and expenses lies with the taxpayer. The only way the Commissioner could have allowed deductions of expenses as per Section 15 (1) of the ITA is if they were supported to its satisfaction.”

89. That the foregoing unavoidably leads the Respondent to point out that it is the Appellant's legal duty to keep records. That Section 54 A (1) of the Income Tax Act provides that:“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts. books. deeds. contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

90. That the provision above is worded in mandatory terms. That there is no qualification to this duty provided under the Income Tax Act, a taxpayer must abide by it whether it operates a small, medium or large business. That this duty is further restated under Section 23 (1) of the Tax Procedures Act that provides as follows:“A person shall -(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained: and(c)subject to subsection (3), retain the document fora period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

91. That the accounts, books, deeds, contracts and vouchers are specifically mentioned in the Income Tax Act as documents to be maintained under the tax law. That the Appellant having failed to provide these documents during its objections cannot fault the Respondent for failing to deduct the expenses which it only sought to support during Appeal.

92. The Respondent submits that the input VAT claimed to have been incurred could not be deducted from the variance for two reasons:i.Lack of supporting documents.ii.Expiry of period within which input VAT claims are allowable.

93. The Respondent submits that the importance of keeping records can never be overstated. That with regard to input VAT claims, Section 17 (2) (a) as read together with Section 17 (3) of the VAT Act provides that a taxpayer must present certain documents before being allowed to deduct input VAT incurred during purchase or import of the goods with which he deals from its payable tax:-

94. That Section 17 (2) (a) of the VAT Act provides that:“If, at the time when a deduction for input tax would otherwise be allowable under subsection (1) -a.the person does not hold the documentation referred to in subsection (3)…...the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation...”

95. That Section 17 (3) of the VAT Actprovides as follows:“The documentation for the purposes of subsection (2) shall be -(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under Section 16 (2); or(e)a debit note in the case of input tax deducted under Section 16 (5).”(f)in the case of a participant in the Open Tender System for the Importation of petroleum products that have been cleared through a non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the other oil marketing company participating in the tender.”

96. That the documents mentioned by the foregoing provisions were not presented by the Appellant. That the Appellant failed to provide tax invoices from its suppliers to support its input VAT claims. That the Respondent is required by law to verify if the transactions alleged actually transpired. That the learned Judge A. Mabeya in Commissioner of Domestic Taxes vs. Priyguru Company Limited (Income Tax Appeal 085 of 2020) [2021] KEHC 132 restated the duty to provide invoices and other documents as condition precedent for allowing input VAT deductions at paragraphs 26 and 27 in the following terms:“From the foregoing, the appellant was well within the law to demand for the additional information. The Respondent was under a legal obligation to provide the additional information and discharge its burden of proving that there had been commercial transactions that re1ulted in the alleged input VAT or the invoices produced. There was a genuine expectation that if a reasonable businessman. the Respondent must have had the custody of all transaction details concerning the trade relations between it and its suppliers.Having failed to provide those transaction details, its appeal before the Tribunal could not have been successful its case before this Court cannot be successful as well.”

97. The Respondent submits that input VAT cannot be deducted without corroborated proof of purchases. That it is in this spirit that the VAT Act 2013 requires a taxpayer to maintain documents under Section 43 in more detailed terms than even the Income Tax Act:“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes, and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include:(a)copies of all tax invoices and simplified tax invoices issued in serial copies number order;(b)of all credit and debit notes issued, in chronological order;(c)purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which Section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.”

98. That in the light of the provisions above, the Appellant was under duty to keep full and true records of every transaction. That the Appellant cannot therefore fault the Respondent for failing to allow the input VAT when it is the Appellant who failed to support its claims using the requisite documents.

99. That Section 17 (2) of the VAT Act2013 provides that any taxpayer who seeks to make input VAT deductions must do so within six (6) months after the end of the tax period in which a taxpayer incurred such input VAT, that is within six (6) months after the end of the tax period in which the taxpayer purchases or imports the goods.

100. That the relevant periods are 2015 to 2019, the input VAT incurred in any of these periods cannot be claimed in 2022, as six (6) months have well and truly elapsed. That the time is computed from the date the input VAT is incurred as was stated In Highlands Mineral Water Limited vs. Commissioner of Domestic ,Taxes [2021] eKLR at paragraph 35 and 39:“...The straightforward interpretation of Section 17 (2) is that the 6-month period of claiming input VAT begins to run when the supply or importation occurred and not necessarily when the return is filed. Meaning, if a taxpayer filed a VAT return say, 7 months after when the supply or importation occurred, then the Input tax claimed on that return cannot be allowed....I therefore find and hold that Section 17 (1) and (2) of the VAT Act, permits the taxpayer to claim input tax at any time provided the claim falls within 6 months from period which the supply or importation occurred notwithstanding that the VAT return is filed late.”

101. The Respondent submits that the fact there has been an additional assessment does not displace the clear words of this provision. That this was unequivocally stated by the Honourable Learned Judge D.S Majanja in Gracan Construction Limited vs. Kenya Revenue Authority HCCOMMITNE162/2021 at paragraph 16:“Therefore, hold [sic] that under Section 17 (2), a claim for input tax is not dependent on whether there if an amended or additional assessment made by either the taxpayer or Commissioner. As long as the purchase is within the six-month window period then the same ought to be allowed. Asking the court to examine whether Section 17 (2) if applicable to additional assessments made by the Commissioner is inviting the court to make a determination on the intention of the legislature. something that is frowned upon in interpretation of tax statutes as explained inStanbic Bank Kenya Limited v Kenya Revenue Authority(Supra) above.8998/”

102. That this very majestic forum has a commendable precedent of refusing to adjudicate on the issue of input VAT claims where the taxpayer failed to claim for the input VAT within the provided time, and waits until the Respondent raises an assessment thereafter asking the Respondent to set off the input VAT against such assessments. That in Paleah Stores Limited vs. Commissioner of Investigation and Enforcement TAT No. E009 of 2021, at paragraphs 85 and 87 this Honourable Tribunal stated that:-“...The Appellant, in its submission, did not contest that it made Its Input VAT claim after the statutory periods. On the extension of time in respect of input VAT deductibility, the Tribunal's hands are tied and Is therefore unable to vary the same...The Appellant cannot ask the Respondent to extend the time to claim input VAT as the Respondent cannot be compelled to perform a duty that it has no powers to do as is clearly envisaged in legislation...”

103. That asking the Respondent to deduct input VAT at this moment and offset the same against the taxes assessed on the undeclared turnovers is asking the Respondent to extend time for making the input VAT claims. That this is beyond the power the Respondent is endowed with. That this is beyond the power this high Tribunal is endowed with. That it is the Respondent’s submission that the Appellant should not burden the esteemed Tribunal with an impossible task.

104. That in conclusion the Respondent submits that:i.The Respondent’s objection decision was not issued beyond the statutory limit of 60 days.ii.The Appellant has failed to positively show that the assessments were excessive and cannot therefore point to the Respondent's errors as an easy escape.iii.The Respondent did not err in failing to deduct the alleged expense from the taxes payable in respect of income tax.iv.The Respondent did not err in failing to deduct the input VAT from the VAT liability assessed.

Respondent’s Prayers 105. The Respondent prayed that the Tribunal finds that:a.The Objection decision dated February 28, 2022 be upheld as the true reflection of the Appellant's tax liabilities.b.The Appeal herein be dismissed with costs to the Respondent.

Issues For Determination 106. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises the following issues for its determinationa.Whether the Respondent’s objection decision was valid.b.Whether the Income Tax assessment was justified.c.Whether the VAT assessment was justified.

Analysis and Determination 107. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

108. This dispute arose from the Respondent’s assessment of additional income tax and Value Added Tax based on an analysis of the Appellant’s bankings for the period 2017 to 2020.

a. Whether the Respondent’s objection decision was valid 109. The Tribunal noted the below chronology of events in regard to the assessments, objection and objection decision as are concerned:i.The Respondent issued Additional Assessment Orders on income tax and VAT on November 24, 2021. ii.The Appellant objected on December 23, 2021. iii.The Respondent issued a letter acknowledging the Appellant’s online objections and requesting for further documentation on January 18, 2022. iv.The Respondent issued its Objection Decision to the Appellant's Objection Application on 28th February, 2022. v.The Respondent thereafter issued Confirmation Assessment Notices on March 2, 2022.

110. The Tribunal notes that Section 51 (11) of the TPA was amended by the Finance Act2022 by deleting the previous subsection 11 that stated as follows:“The Commissioner shall make the objection decision within 60 days from the date of receipt of: -(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”And substituting with a new paragraph as below:“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

111. It is apparent to the Tribunal therefore that at the time when the objection by the Appellant was lodged and the Respondent issued its objection decision, the provision on timing of objection decisions by the Commissioner under the TPA allowed for the Respondent to factor in any request for additional information in establishing the start date for the 60-day timeline for the issuance of an objection decision.

112. The Tribunal therefore finds that the objection decision by the Respondent dated February 28, 2022 and the Confirmation Assessment Notice dated March 2, 2022 were issued within time.

b. Whether the Income Tax assessment was justified. 113. The Appellant submitted that the Respondent erred by taking wrong amounts of banking thus overstating the sales by Kshs. 2,448,258. 00. That further, the sales were overstated by Kshs. 5,400,000. 00 by treating loan disbursements as sales bankings.

114. The Appellant further averred that the sales were overstated by Kshs. 5,378,528. 00 by treating bank payments as cash payments hence overstating cash payments.

115. Further, the Appellant argued that the Respondent violated Section 15 of the Income Tax Act 470 by failing to allow the Appellant deduct allowable expenses amounting to Kshs. 3,547,645. 00 and Kshs. 19,326,328. 00 for 2019 and 2020, respectively.

116. The Respondent, on its part, submitted that the Appellant's objections were partially accepted after adjusting for unpaid cheques, non-cash expenses (depreciation) and finance costs under the bank analysis for the periods between 2017 - 2020. That resultantly, the income tax liability was revised to Kshs. 9,712,879. 00 whereas the VAT liability was revised to Kshs. 6,118,574. 00.

117. The Respondent thereafter submitted that the Appellant did not provide further documents to support its claims even after the Respondent requested for documents after receiving the Appellant’s objection.

118. The Tribunal observed that the Appellant was indeed requested for further documents on 18th January 2022 of which she did not respond to the Respondent.

119. In her pleadings, the Appellant attached copies of certified bank statements, listings of all invoices for the period under dispute, copies of the invoices for the period under dispute as well as computations of the overstated sales transaction.

120. The Tribunal reviewed the bank statements supplied by the Appellant and confirmed that the sales were overstated as averred by the Appellant by Kshs. 2,448,258. 00 as a result of RD cheques as demonstrated both in the computations as well as the supplied bank statements.

121. The Tribunal was unable to verify from the bank statements that the amounts of Kshs. 3,500,000. 00 and Kshs. 1,900,000. 00 claimed by the Appellant to be loan disbursements from Equity Bank and Family Bank, respectively, were as stated as the narratives in the bank statements read “0500579231561 Disbursement Credit” and “RTGS John Gitahi Kimani”. Additionally, the Appellant did not provide any loan agreements or other documents to support its assertion that the said amounts were loan disbursements.

122. The Tribunal was unable to establish the veracity of the item claimed to be “bank payments mistakenly taken as cash payments” as averred by the Appellant as the provided breakdown did not give the details of the figures quoted for the years 2018, 2019 and 2020.

123. The Tribunal noted that the Appellant provided a listing of deductible expenses as well as copies of the actual invoices relating to the said expenses; which she insists that she provided to the Respondent at objection stage prior to the filing of the instant Appeal.

124. The Tribunal reviewed the information provided, as stated above, in detail and found that these expenses were invoiced to the business and related to the business undertaken by the Appellant and were deductible as per Section 15 (1) of the Income Tax Act which states as follows in regard to deductible expenses:“For the purpose of ascertaining the total income of a person for a year of income there shall, subject to Section 16, be deducted all expenditure incurred in that year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under Section 27 any income of an accounting period ending on some day other than the last day of that year of income is, for the purpose of ascertaining total income for a year of income, taken to be income for a year of income, then the expenditure incurred during that period shall be treated as having been incurred during that year of income.”

c. Whether the VAT assessment was justified 125. The Appellant submitted that the Respondent violated Section 17 of the VAT Act 2013 (Rev. 2018) by refusing to grant the Appellant credit for input tax against output tax amounting to Kshs. 564,734. 00 and Kshs. 2,753,606. 00 for 2019 and 2020 respectively.

126. The Respondent averred that with respect to the claim for input tax, the Appellant failed to provide the relevant documentary evidence in the form of invoices that supported a reasonable commercial transaction. That in the absence of such evidence, the claim for input tax was disallowed.

127. The Respondent submitted that the Appellant failed, refused and neglected to provide the documents espoused under Section 17 (3) of the VAT Act in support of the purchases claimed and the Respondent could not determine whether the input VAT claimed was genuine or fictitious.

128. The Respondent further submitted that the Appellant furnished the Respondent with the certified copies of the bank statements. That however, the same does not indicate which debits related to payments of which input VAT is claimed.

129. The Tribunal found that the Appellant did indeed provide copies of certified bank statements, listings of all invoices for the period under dispute, copies of the invoices for the period under dispute as well as computations of the unallowed expenses.

130. Further, the Tribunal noted that during the period in dispute i.e. 2019 and 2020, the documents required under Section 17 in order to claim input tax by a taxpayer were as follows:“(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under Section 16 (2); or(e)a debit note in the case of input tax deducted under Section 16 (5).”

131. In her pleadings, the Appellant provided a schedule of invoices as well as copies of actual invoices with ETR receipts to cover the period under review. Further, contrary to the Respondent’s averment that these were never provided at objection stage, the Appellant insists that they were availed but never reviewed by the Respondent.

132. In this regard, the Appellant complied with Section 17 (3) of the VAT Act 2013 contrary to the Respondent’s averments that the Appellant did not provide any documents to support its input VAT claims.

133. Due to the foregoing, the Tribunal finds that the Respondent was not justified in its disallowance of the Appellant’s input VAT.

Final Decision 134. In view of the foregoing, the Tribunal finds that the Appeal is partially merited and accordingly makes the following Orders: -a.The Appeal be and is hereby partially upheld.b.The Respondent’s review decision dated 21st January, 2022 be and is hereby varied in the hereunder manner:-Corporation Taxi.The Respondent to review by way of reduction of the sales computation by a figure of Kshs. 2,448,258. 00 relating to overstated sales.ii.The Respondent to allow for deductible expenses amounting to Kshs. 3,547,645. 00 and Kshs. 19,326,328. 00 for the years 2019 and 2020 respectively.Value Added Taxiii.The Respondent to recompute VAT in consideration of the overstated sales of Kshs. 2,448,258. 00. iv.The Respondent to allow input VAT deductions relating to the allowable expenses of Kshs. 3,547,645. 00 and Kshs. 19,326,328. 00 for the years 2019 and 2020, respectively. The deductions ought to comply with the Six (6) months statutory claim period in accordance with Section 17 (2) of the VAT Act.c.The Respondent to undertake the foregoing review within Ninety (90) days of the date of delivery of this Judgment.d.Each Party to bear its own costs.

135. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF SEPTEMBER, 2023ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKAMEMBERGRACE MUKUHAMEMBERJEPHTHAH NJAGIMEMBERABRAHAM K. KIPROTICHMEMBER