[2023] KETAT 101 (KLR)

Golden Cara Investments Limited v Commissioner for Domestic Taxes (Tribunal Appeal 703 of 2021) [2023] KETAT 101 (KLR) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 101 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 703 of 2021

E.N Wafula, Chair, RO Oluoch & EK Cheluget, Members

February 10, 2023

Between

Golden Cara Investments Limited

Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya under the Companies Act. Its main business activity is dealing in construction works.

2. The Respondent is a Principal Officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On or around September 2019 the Respondent conducted investigations into the Appellant’s tax affairs which emanated from the Respondent’s intelligence office on suspicion of the Appellant’s evasion of taxes by under-declaring its correct sales for the period 2014 to 2018.

4. The Respondent requested information from third-party suppliers and agents of the Appellant which included the Appellant’s bankers. The Respondent also requested documents from third parties who were making payments to the Appellant’s bank accounts which included the Ministry of Housing and Urban Development, Meru County, Kwale County, Mandera County, and Kenya Ports Authority. These documents included contracts, payment vouchers, invoices, and work-in-progress certificates.

5. The request for information was responded to only by the Ministry of Housing and Urban Development which provided a copy of the contract, work-in- progress certificates, payment vouchers and schedule of payments to the Appellant.

6. Upon conclusion of the investigations, the Respondent made the finding that the Appellant was under-declaring income with a view of evading taxes payable from them which findings were communicated to the Appellant on April 28, 2020.

7. On August 11, 2020, the Appellant through its tax agent applied for and was granted 10 more days to respond to the findings within which the Appellant provided documentation concerning the transactions.

8. After further communication between the parties, on March 9, 2021, the Respondent issued a tax assessment Kshs 177,525,639. 00 which was objected to by the Appellant vide a Notice of Objection dated March 30, 2021.

9. The Respondent issued its Objection Decision on May 28, 2021 confirming the taxes at Kshs 257,429,348. 00 for Corporation tax and VAT.

10. The Appellant being dissatisfied by the Respondent’s decision, lodged a Notice of Appeal dated June 16, 2021 and filed on June 25, 2021.

The Appeal 11. The Appeal is premised on the following grounds as listed in the Memorandum of Appeal dated and filed October 29, 2021:-a.The Respondent erred in law and in fact by failing to evaluate and analyze the facts, evidence, and the law leading to an erroneous decision.b.The Respondent erred in law by failing to constitute an independent panel to hear the objection and instead used the same officers involved in the investigations to hear the objection which is an affront to the principle of fair administrative hearing.c.The Respondent erred in law by issuing an assessment beyond the statutory period of five years.d.The Respondent erred in law in disallowing costs of sale and business expenses without giving cogent reasons for doing so.e.The Respondent used nontrade banking which gave an exaggerated sales value and consequently high tax liability.f.The assessment was done without due consideration and without any justification or reason therein, of the adjustments requested in the taxpayer’s letter of August 21, 2020. g.The Respondent failed to use all the information at its disposal before coming up with the assessment.h.The Respondent erred in law by dismissing the Appellant’s objection without giving valid reasons.i.The Respondent ignored withheld taxes while coming up with the assessment.

The Appellant’s Case 12. The Appellant’s case is premised on its Statement of Facts dated and filed on October 29, 2021 and the Written Submissions dated July 8, 2022 and filed on July 12, 2022.

13. The Appellant stated that on April 28, 2020, the Respondent issued tax investigations findings for the period 2014 to 2018 which entailed details of various construction works and bank deposits all of which were treated as taxable income save for a few amendments.

14. It averred that the separate periodic deposits were compared with the respective sales declared and the variance was subjected to taxes. That the total bank deposits were indicated as Kshs 616,570,583. 00 with a tax liability of Kshs 184,448,773. 00 made up of Kshs 102,002,362. 00 income tax and Kshs 82,446,411. 00 on VAT where the Appellant was required to respond within 14 days.

15. It contended that on July 24, 2020, it appointed JG Nyamu and Associates to deal with the audit findings on its behalf and informed the Commissioner accordingly. On even date, JG Nyamu and Associates requested information on the matter.

16. The Appellant asserted that on July 24, 2020, the Respondent wrote and allowed 14 days for the response on the audit finding to be filed. Further, the Respondent on July 28, 2020 wrote to confirm that the requested information will be provided in soft and asked for a storage device to be availed.

17. It reiterated that on August 10, 2020 it requested the Ministry of Housing and Urban Development, its main customer, to provide it with all the payment vouchers and tax withholding certificates that the Ministry provided on August 11, 2020 together with the original copies of Withholding Tax Certificates showing that it had withheld Kshs 16,801,757. 00 on income tax and Kshs 21,650,513. 00 on VAT from various payments giving a breakdown of the recovery amount advanced to it in 2014 amounting to Kshs 142,648,265. 00.

18. It averred that on August 21, 2020, it issued a comprehensive response to the audit investigations which highlighted the following issues:a.The bank deposits were not adjusted for VAT before working out the variance with the tax returns.b.The project loan of Kshs 142,648,268. 00 was erroneously treated as income at the time of disbursement.c.Nonbusiness deposits were treated as sales.d.Income tax withheld as per the attached certificates was not considered.e.The excess expenses in 2014, 2017, and 2018 had not been taken into account.f.Correct business expenses incurred in generating the assessed income in 2015 and 2016 were not considered.g.The sales declared in 2014, 2015, 2017, and 2018 returns were not incorporated in the report.h.VAT withheld in 2015, 2016, 2017, and 2018 as per the attached certificates were not considered.i.VAT credit balances analysed for various months were not considered.j.Tax withheld by County Government and Kenya Ports Authority was not considered.1. It contended that on September 17, 2020, it provided 58 files with supplier’s bills supporting the business expenses of Kshs 308,179,703. 00 for 2015 and Kshs 102,924,047. 00 for 2016 among others. The Respondent, on the same date, confirmed receipt of the response and documents and requested further information, which it provided vide its letter dated September 23, 2020. 2.The Appellant stated that on March 9, 2021, the Respondent issued a Notice of Assessment which the Appellant objected to as follows:a.The Commissioner generally failed to consider and or analyse the evidence, facts, and the relevant law despite the taxpayer having responded to all issues raised and provided all information and respective supporting documents as requested leading to the issuance of an erroneous tax decision.b.The assessment was done without due consideration, and without any justification or reason therein for the adjustments requested in the taxpayer’s letter of August 21, 2020. c.The advance payment of 20% provided in the contract agreement was erroneously treated as income and subjected it to VAT in 2014 instead of applying the correct amount recognised in the respective supply periods in the contract identified as Kshs 14,264,824. 00 in 2015, Kshs 65,021,786. 00 in 2016 and Kshs 63,561,652. 00 in 2017 in line with the provisions of Section 12(3)(b) read together with Section 19(1) of the VATAct 2013 thus exaggerating the VAT payable.d.The assessment includes the years 2014 and 2015 which are outside the legal time allowed for income tax and VAT assessment.e.The gross deposit amount from Mandera County, Kenya Ports Authority, Meru, and Kwale Counties was not adjusted for VAT in determining the net income for both VAT and Income Tax Assessment.f.Withheld VAT amounting to Kshs 7,923,959. 00 in 2015, Kshs 7,333,098. 00 in 2016, Kshs 3,605,755. 00 in 2017 and Kshs 1,296,258. 00 in 2018 was not deducted from the assessed VAT payable.g.VAT credits duly declared as Kshs 2,496,106. 00 in December 2014, Kshs 21,752,072. 00 in December 2015, Kshs 16,983,123. 00 in December 2016, Kshs 10,927,353 in December 2017 and Kshs 8,813,102. 00 in December 2018 was not considered in calculating the VAT payable for the respective periods.h.The assessment did not incorporate the excess expenses over income deficits that should have reduced the taxable income as declared in the IT2C of Kshs 25,477,756. 00 in 2014, Kshs 4,064,695. 00 in 2017 Kshs 16,676,510. 00 in 2018 respectively.i.Income Tax Withheld by the payers amounting to Kshs 2,937,865. 00 in 2014, Kshs 7,268,153. 00 in 2015, Kshs 2,945,336. 00 in 2016, Kshs 2,397,704. 00 in 2017 and Kshs 648,129. 00 in 2018, respectively was not deducted in arriving at the tax payable.j.The assessment did not incorporate correct and supported business expenses in 2015 and 2016 contained in the documents provided by the taxpayer as per the letter of August 21, 2020. k.The Commissioner had erroneously treated as additional assessments in 2015 and 2016 as the original self-assessment returns in the audit findings. For Example, in 2016, the expenses allowed were estimated at 50% (Kshs 67,498,353. 00) of the net sales indicated as Kshs 134,996,706. 00 allegedly derived from the tax withholding certificates. For 2015, the additional sales were indicated as Kshs 862,366. 00 and the 50% estimated expenses was Kshs 431,183. 00. l.The correct and supported expenses provided to the commissioner for those periods were Kshs 308,179,703. 00 for 2015 and Kshs 102,924,047. 00 for 2016. No reason was given for not applying those expenses.1. It stated that on May 28, 2021, the Respondent issued an objection decision where income tax of Kshs 132,353,103. 00 and VAT of 125,076,245. 00 were confirmed due from the Appellant.

The Appellant’s Prayers 22. The Appellant prayed for:-a.The Appeal be allowed with costs to the Appellant;b.The Respondent’s objection decision dated October 28, 2021 be vacated.

The Respondent’s Case 23. The Respondent’s case is premised on its Statement of Facts dated and filed on November 17, 2021 and the Written Submissions dated and filed on May 27, 2022.

24. The Respondent stated that it relied on available facts, evidence, and laws to come up with tax findings, which to the best of its knowledge are due and payable. That the Appellant, despite requests for documents by the Respondent provided insufficient information which the Respondent considered alongside other information from third parties, and that in the absence of sufficient information from the Appellant, the Respondent is entitled under Section 31 of the Tax Procedures Act, 2015 to use the bank statements and any information available and to the best of his judgment to establish the taxes that were due.

25. It averred that despite the Appellant alleging that the Respondent used the same officers in investigations to review the objection, it has not shown any prejudice it has suffered. There is no proof of bias on procedural impropriety on the part of the Respondent that warrants the setting aside of the objection decision and that in any event, the Tax Procedures Act, 2015 mandates the Commissioner or his authorised officers to issue tax assessments, review objections and issue objection decisions. It was the Respondent’s position that the Act doesn’t specify who should and should not review a notice of objection and issue objection decisions.

26. It stated that the Appellant committed fraud in relation to a tax through omission from tax returns amounts that should have been included (Kshs 377,781,992. 00 and Kshs 339,410,196. 00 for the Corporation Tax and VAT respectively) and making incorrect statements through the tax returns which affected its tax liability.

27. It further stated the particulars of fraud were as follows:a.Failure to include in tax returns Kshs 377,781,992. 00 and Kshs 339,410,196. 00 for the Corporation Tax and VAT respectively; andb.Making incorrect statements through the tax returns which affected its tax liability.1. The Respondent posited that by failing to declare the correct income, the Appellant evaded payment of Kshs 144,552,801. 00 in principal taxes. That considering the colossal amount involved, the magnitude of tax evasion is huge and thus fraudulent. That Appellant was found to be in a perennial credit position and as such was required to provide documentation and VAT workings for the said period but the Appellant chose not to avail them and that the Appellant is under obligation to keep proper documentation which it should avail when required.

29. It averred that the Tax Procedures Act, under Section 29 (6) also allows the Respondent to go beyond the five-year period in the case of gross or wilful neglect, evasion, or fraud by a taxpayer. That neglect and fraud had been established from the investigations and that the tax assessments for the period between 2014 and 2018 stand.

30. It was the Respondent’s averment that it allowed all the cost of sales and the business expenses as filed in the Income Tax company tax returns as shown in the Objection Decision issued on May 28, 2021. That the sales of Kshs 276,562,710. 00 declared were allowed up to the last cent and that the other expenses worksheet were not fully supported as per Section 15 of the Income Tax Act and thus disallowed.

31. It submitted that it is evident that the tax assessment and objection decision used the payments from KISIP, Mandera County, Kenya Ports Authority, Meru County, and Kwale County as the basis for assessment and not solely banking income as suggested by the Appellant. That the bank statements were merely to confirm that the Appellant received the payments for goods and services rendered to the said entities therefore non-trade bankings were all factored in the assessment and that in any event, the Appellant did not provide documentation to show that the deposits in the bank were not from the trade/business hence the Respondent was justified to treat non-declared bank deposits as income.

32. It was stated that the Respondent analysed the letter dated August 21, 2020 and responded as follows:a.Corporation Taxi.That the banking method constituted preliminary investigation findings that were bound to change as the investigation went on. The assessments were based on work done and certificates issued thereon from KISIP plus banked amounts from KPA, Meru, Mandera, and Kwale Counties.ii.That Income tax withheld Kshs 2,937,865. 00, Kshs 7,268,153. 00, Kshs 2,945,336. 00, Kshs 2,397,704. 00 and Kshs 648,129. 00 for the years 2014, 2015, 2016, 2017, and 2018 respectively have been taken into account in the Respondent’s Objection Decision.b.VATi.That in their tax demand notice, the VAT sales of Kshs 84,221,417. 00, Kshs 23,139,020. 00, Kshs 48,025,706. 00, Kshs 60,095,917. 00, Kshs 21,604,300. 00 for the years 2014, 2015, 2016, 2017, and 2018 respectively were taken into consideration. That the amounts were adjusted in the amended workings at the Objection Decision. That the Appellant was found to be in perennial credit position and was supposed to provide that VAT workings for the said years which workings were not availed.c.Taxes withheld without issuance of certificates.i.The Appellant was not able to provide any documents to support the assertion.

33. The Respondent averred that it sought information from entities that transacted with the Appellant. Those entities provided information and documentation which helped the Respondent calculate the taxes payable from the Appellant. That banking came in handy where other information was not available. Through the letter dated September 17, 2020, the Appellant was asked to provide the Respondent with information and documents, a request which the Appellant partially complied with the Respondent considered all the documents and information at its disposal in arriving at the tax assessment and subsequently the objection decision. That if there is any information that was not considered by the Respondent as alleged, the same was unavailable or was not provided by the Appellant. Further, that the Appellant is under obligation to prove that the Respondent did not use all the information.

34. It contended that it responded to all issues raised in the Appellant’s Notice of Objection as is evident from the Objection Decision. The reasons provided therein are valid and the allegations made by the Appellant are unjustified and without any basis.

35. It submitted that the withholding VAT certificates all relating to the Ministry of Lands, Housing and Urban Development, and the State Department for transport were considered and factored in at the time the Respondent was reviewing the notice of objection. That the Respondent also took note of the consultancy fees paid by the Ministry of Transport for which taxes had been withheld and adjusted the workings accordingly.

The Respondent’s prayers 36. The Respondent consequently prayed that the Honorable Tribunal dismisses the Appeal herein.

Issues For Determination 37. After considering the pleadings and documentation produced before it together with the submissions of the parties the Tribunal is of the view that the following are the issues for determination:a.Whether the Respondent breached the Appellant’s right to fair administrative action while reviewing and determining the objection.b.Whether the Respondent erred in its assessment and demand for VAT and Corporation Tax.c.Whether the Respondent erred in law by issuing an assessment beyond the statutory period of five years.

Analysis And Findings 38. The Tribunal wishes to analyze the issues separately as herein-under:a.Whether the Respondent breached the Appellant’s right to fair administrative action while reviewing and determining the objection.1. The Appellant submitted that the Respondent had a duty under the Constitution to ensure fairness in its procedures by constituting an independent panel to hear its objection instead of using the same officers who conducted the investigations to review and make decisions on the same.2. It was the Appellant’s contention that the Respondent’s Independent Review of Objections (IRO) unit ought to have been involved in the review process as indicated in its website. The officers who were involved in the review process should not have heard and determined the objection.3. The Respondent on the other hand, submitted that the Tax Procedures Act, 2015 mandates the Commissioner or his authorised officers to issue tax assessments, review objections and issue objection decisions but does not specify who should or should not review the objection decision.4. The Respondent further submitted that the Appellant has not shown any prejudice it has suffered from the said process.5. Section 51(8) of TPA 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".”

44. From a reading of the guiding statute above, the Respondent is only required to ‘consider the objection and decide’. It is the prerogative of the Respondent to institute measures within its Departments and officers that ensure efficient and effective consideration and delivery of its decisions within the stipulated time.

45. For the Appellant’s rights to have been breached under this Section, it would have to prove that the Respondent did not ‘consider’ its objection in rendering the objection decision.

46. The Tribunal therefore finds that the Respondent did not breach the Appellant’s right to fair administrative action while reviewing and determining the objection.

b. Whether the Respondent erred in its assessment and demand for VAT and Corporation Tax. 47. The Respondent stated that it relied on available facts, evidence, and laws to come up with tax findings, which to the best of its knowledge are due and payable and that the Appellant provided insufficient information which the Respondent considered alongside other information from third parties despite requests for documents. It added that in the absence of sufficient information from the Appellant, it is entitled to use the bank statements and any information available and to the best of his judgment to establish the taxes that were due.

48. On its part, the Appellant contended that on September 17, 2020, it provided 58 files with suppliers’ bills supporting the business expenses of Kshs 308,179,703. 00 for 2015 and Kshs 102,924,047. 00 for 2016 among others. The Respondent, on the same date, confirmed receipt of the response and documents and requested further information, which it provided vide its letter dated September 23, 2020.

49. Section 31 of the Tax Procedures Act, 2015 provides:“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…”

50. The Tribunal has looked into the pleadings and arguments of the parties together with the evidence annexed thereto and observes that the Respondent did its due diligence in seeking information from various third parties. It is however not clear how and when the Appellant presented the impugned documents it submits to have filed as none have been presented to the Tribunal, therefore the Tribunal has not found occasion to interrogate the same.

51. Section 30 of the Tax Appeals Tribunal 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; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

52. Section 38 of the Tax Appeals Tribunal Act states as follows:“In any proceedings, whether criminal or civil, under this Act— (a) other than upon an appeal, a certificate from the Commissioner stating that any amount is due from any person by way of tax, or other liability under this Act, shall be conclusive evidence that the amount is due and payable from that person; (b) the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax; and (c) a statement by the Commissioner that a person is registered or is not registered under this Act, shall be conclusive evidence of the fact unless that person proves the contrary.”

53. Further, Section 62 of the Value Added Tax Act, No. 35 of 2013 provides that:-“In any civil proceedings under this Act, the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax.”

54. Additionally, Section 56(1) of the Tax Procedures Act states as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

55. Given the foregoing, the Tribunal would have expected the Appellant to vigorously support its argument before this Tribunal, with documents and any other material it deems necessary to thwart the Respondent’s position that the additional tax assessed had been properly included in the Appellant’s returns and that the expenses and input tax deductions were wrongly omitted by the Respondent in arriving at the additional assessment.

56. The Tribunal therefore finds that the Appellant has not sufficiently met its burden of proof and holds that the Respondent’s assessment and demand for VAT and corporation tax was proper.

b. Whether the respondent erred in law by issuing an assessment beyond the statutory period of five years. 57. The Appellant contended that on March 9, 2021, the Respondent issued a Notice of Assessment which included the years 2014 and 2015 which are outside the legal time allowed for income tax and VAT assessment.

58. The Respondent argued stated that the Appellant committed fraud tax through omission from tax returns amounts that should have been included (Kshs 377,781,992. 00 and Kshs 339,410,196. 00 for the Corporation Tax and VAT respectively) and making incorrect statements through the tax returns.

59. It further stated the particulars of fraud as follows:a.Failure to include in tax returns Kshs 377,781,992. 00 and Kshs 339,410,196. 00 for the Corporation Tax and VAT respectively; andb.Making incorrect statements through the tax returns which affected its tax liability.1. The Respondent posited that by failing to declare the correct income, the Appellant evaded payment of Kshs 144,552,801. 00 in principal taxes. That considering the colossal amount involved, the magnitude of tax evasion is huge and thus fraudulent.2. It averred that the Tax Procedures Act under Section 29 (6) also allows the Respondent to go beyond the five-year period in the case of gross or willful neglect, evasion, or fraud by a taxpayer. That neglect and fraud had been established from the investigations and that the tax assessments for the period between 2014 and 2018 stand.3. Section 29 (5) & (6) of TPA provides as follows with regard to default assessments;“(5)Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.(6)Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

63. The Respondent in its letter notifying the Appellant of the commencement of the tax investigation, dated October 4, 2019, indicated that the Appellant was under investigation for various offences relating to tax fraud. Further, in its letter of April 28, 2020, when notifying the Appellant of the investigation findings, stated that it had established that the Appellant had committed an offence under Section 97(a) of the TPA by knowingly omitting in its tax returns amounts that should have been included.

64. In its Objection decision the Respondent made reference to the provisions in Sections 97 (d) and 29(6) of the TPA. Section 97 provides as follows:-“(97)Fraud in relation to tax -Any person who, in relation to a tax period, knowingly—a.omits from his or her return any amount which should have been included; orb.claims any relief or refund to which he or she is not entitled; orc.makes any incorrect statement which affects his or her liability to tax; ord.prepares false books of account or other records relating to that other person or falsifies any such books of account or other records; ore.deliberately defaults on any obligation imposed under a tax law, commits an offence”

65. The Tribunal noted that this Appeal emanates from the Respondent’s investigation and findings that the Appellant had committed a tax offence by knowingly omitting from its tax returns amounts which should have been included.

66. The Tribunal having concluded in issue (b) that the Appellant had omitted to include the turnover as alleged by the Respondent, finds that the Appellant knowingly omitted in its tax returns which should have been included committed. The Respondent was therefore justified in assessing the Appellant for the period beyond 5years.

Final Decision 67. The upshot to the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders;-i.The Appeal be and is hereby dismissed;ii.The Objection Decision dated November 8, 2021 be and is hereby upheld;iii.Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023ERIC N. WAFULA CHAIRMANRODNEY O. OLUCHMEMBEREDWIN K. CHELUGETMEMBER