[2023] KETAT 133 (KLR)

Good Earth (Group) Limited v Commissioner of Domestic Taxes (Appeal 168 of 2022) [2023] KETAT 133 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 133 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 168 of 2022

RM Mutuma, Chair, RO Oluoch, E.N Njeru, D.K Ngala & EK Cheluget, Members

March 17, 2023

Between

The Good Earth (Group) Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya and its principle activity is operating a chain of restaurants in Nairobi.

2. The respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act with the mandate of assessing. Collecting. receipting and accounting for all tax revenues in accordance with the relevant tax statutes. as well as the administration and enforcement of the tax laws set out in the schedule to the said Act.

3. The respondent conducted a review of the appellant ‘s declarations on VAT. and noted inconsistencies in the months of January 2018 to May 2018 between the invoices declared by the appellant and its suppliers. The respondent sent notices on iTax system to the appellant requesting it to remedy the inconsistencies. The respondent stated that following the appellant ‘s failure to amend the VAT returns for the period under review, the respondent issued VAT automated assessments in the sum of Kshs 11,431,928. 00The respondent raised the assessment on the basis of the information it had on the iTax ledger for the period January 2018 to May 2018.

4. The appellant objected to the assessment and provided additional records in support of the objection. Following review of the additional records the respondent partially accepted the objection allowing input tax that was fully supported in the sum of Kshs 6,497,109. 00 while disallowing input tax that was not fully supported.

5. The respondent disallowed invoices amounting to Kshs 4,934, 818. 00 and provided reasons thereof in the objection decision dated November 24, 2021.

6. The appellant being dissatisfied with the respondent’s Objection decision filed its Notice of Appeal on February 7, 2022 and the Appeal herein on February 21, 2022.

The Appeal 7. The appellant filed its Memorandum of Appeal dated February 19, 2022 and filed on February 21, 2022and set out the following grounds of appeal;a.That the respondent erred in law and fact in not considering the additional supporting documents provided by the appellant.b.That the appellant remained co-operative during the entire exercise.c.That the respondent- never informed the taxpayer of additional information or clarifications required.

8. By reason of the grounds aforesaid the appellant prays that the Tribunal allows the Appeal and set aside the respondent’s objection decision.

THE appellant’S CASE 9. The appellant’s case is premised on the Statement of Facts dated February 19, 2022and filed on February 21, 2021.

10. The appellant stated that it provided the evidence of remittance and supporting documents which it annexed as “TGEG 3” , and also contended that the respondent partially disallowed some invoices on the basis that they were not provided yet the appellant provided the same to the respondent before the objection decision of November 24, 2021.

11. The appellant further stated that in the course of the review exercise with the respondent, it fully co-operated and provided all the explanations and documents to the respondent as requested.

12. The appellant stated that during the year 2018 it filed the returns correctly and disputed the respondent’s position of not comparing with its suppliers whether they filed their returns correctly.

13. The appellant contended that having submitted all the documents and explanations to the respondent, the respondent exercised its duty wrongly and erred in disallowing its documents.

14. The appellant also contended that the respondent acted contrary to the requirements of the right to fair administrative action in that it did not inform the appellant of the additional information or clarifications required to enable it provide the necessary responses and thereby breached its right to fair administrative action, contrary to the requirements of the Fair Administrative Actions Act.

15. The appellant submitted that the respondent raised the additional assessments based on the information it had on the appellant’s iTax ledger for the period January 2018 to May 2018 in respect of the VAT assessment, and after review of the documents submitted in support of the objection decision disallowed some invoices on the basis that they were not provided yet they were all provided in the objection decision dated November 24, 2021.

16. The appellant further stated that though the respondent stated the reasons for disallowing invoices with VAT input of Kshs 4. 934,818. 00 in the objection letter it disagrees with that view as the proper explanations and supporting documents were all submitted.

17. By reason of the submissions aforesaid, the appellant prayed the Tribunal to allow its Appeal and set aside the respondent’s Objection Decision.

THE respondent’S CASE 18. The respondent has set out its response to the appellant’s Appeal in the Statement of Facts filed on March 17, 2022, and the written submissions filed onOctober 28, 2022.

19. The respondent stated that it conducted a VAT returns review on the appellant’s declarations on iTax and noted inconsistencies in the months of January 2021 to May, 2021 between the returns declared by the appellant and its suppliers. The respondent sent notices on iTax to the appellant requesting it to amend and remedy the inconsistencies.

20. The respondent stated that following the appellant’s failure to amend the VAT returns for the period under review, the respondent issued a VAT automated assessment in the sum of Kshs 11,431,928. 00 The appellant objected to the assessment and provided additional records in support of its objection.

21. The respondent further stated that following review of the additional records, the respondent partially accepted the objection allowing input tax that was fully supported in the sum of Kshs 6,497,109. 00 while disallowing input tax that was not fully supported, in the sum of Kshs 4,934,818. 00. The respondent therefore, after review of the appellant’s objection amended the VAT automated assessments of Kshs 11,431,928. 00 downwards to Kshs 4,934,818. 00 and provided the reasons in the objection decision dated 24th November 2021.

22. The respondent averred that it partially rejected the appellant objection as the rejected documents did not meet the threshold ofsection 51(3) (c) of the Tax Procedures Act(TPA), which provides: -“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subSection (2) if – (c) all the relevant documents relating to the objection have been submitted.”

23. The respondent submitted that section 24(1) of the TPA requires a taxpayer to submit its returns in the manner prescribed by the Commissioner. The Section further provides that the Commissioner is not bound by the information provided therein and can assess additional tax liability based on any other available information. The Section provides as follows:-“(24)(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, a taxpayer and the Commissioner may assess a taxpayer ‘s tax liability using any information available to the Commissioner.”

24. The respondent submitted that the appellant claimed input tax and did not support the same by providing invoices and proof of payment, as shown in the schedule annexed to the respondent ‘s Statement of Facts and marked “DTD1”

25. The respondent further stated that it requested the appellant to provide the invoices, proof of payment and or supplier ‘s confirmations, but this request was not heeded by the appellant and therefore the respondent disallowed the input VAT as the same could not be verified.

26. The respondent submitted that section 31 of the TPA empowers the Commissioner to amend an original return to reflect the correct tax payable in respect of the reporting period to which the original assessment relates based on the available information and the Commissioner ‘s judgement.

27. The respondent averred that the appellant claimed input VAT and failed to produce supporting documents contrary tosections 17 and 42 of the VAT Act, as read together with Paragraphs 7 and 9 of the VAT Regulations, 2017.

28. The respondent cited the High Court case of Ericsson Kenya Ltd v Attorney General & 3 others[2014] eKLR where it was stated:“ ..In considering the circumstances , it is important to recall that the fact that a taxpayer has lodged a refund claim in accordance with the VAT Act and regulations does not discharge the respondent from the responsibility of examining the claim and confirming that it meets the requirements of the law. The Commissioner, when processing the claim, is not merely a conveyor belt performing a perfunctory exercise, He is required to examine and verify the claim and where irregularities, fraud or other deficiencies are discovered draw the petitioner’s attention to them.The Commissioner is also to call for further information, if necessary, to satisfy himself that the claim meets the legal threshold for payment. Ultimately, the Commissioner is entitled to reject a VAT refund claim by giving written reasons which would entitle the taxpayer to Appeal or challenge the decision.”

29. It was the respondent’s submission that the appellant cannot therefore compel the respondent to perform a duty that it does not have the power to act on. The respondent contended that its hands are tied to abiding with the provisions of the VAT Act.

30. The respondent supported this submission with the case of Tata Chemicals Ltd v Commissioner of Domestic Taxes (Large Taxpayers)[2014] eKLR , where Justice Majanja stated:“In my view, as long as the claim is lodged within the time limited and proper documentation is submitted and the claim is verified, the respondent has a duty to pay the claim”.

31. The respondent also submitted that pursuant tosection 56 of the TPA it is the obligation of the appellant to prove the decision of the respondent is incorrect, and hence the appellant failed to discharge its burden of proof.It cited the case of Tumaini Distributors Company (K) Ltd v Commissioner of Domestic Taxes [2020] eKLR, where the court stated:“Having appraised the record. I find that the conclusions of the Commissioner and the Tribunal in respect of the assessments Appealed against were in accordance with the evidence and material available to the Commissioner. The appellant did not discharge its burden of showing that the tax decision was wrong or incorrect.”

32. The respondent submitted that it partially allowed the appellant ‘s objection in accordance with documents submitted. by allowing input tax that was fully supported.

33. The respondent therefore contended that the appellant’s grounds of Appeal are not merited and do not hold water at all and the Appeal is brought in bad faith to delay collection of taxes already due.

34. It was further the respondent ‘s contention that the input tax of Kshs.4,934,818. 00 claimed in the appellant ‘s self-assessment return was disallowed on the basis that the same failed to meet the requirement for deduction of input tax as set out under Section 17 of the Value Added Tax.

35. By reason of the aforesaid submissions, the respondent prayed the Honourable Tribunal to dismiss the appellant’s Appeal and uphold the objection decision dated November 24, 2021.

Issues for determination 36. The Tribunal having considered the filings, evidence adduced and submissions made by the parties, is of the considered view that the Appeal herein distils into one issue for determination, to whit;Whether the respondent was justified in disallowing the appellant’s claimed invoices and raising taxes amounting to Kshs 4,934,818. 00?

37. In the Appeal herein, the underlying issue in contention between the parties herein is whether the records and information submitted by the appellant to the respondent met the required threshold to support the alleged VAT claim, and whether the respondent was justified in disallowing the said records.

38. The respondent has submitted that the appellant claimed input VAT without supporting documents. Section 24 of the TPA provides that it is the responsibility of the taxpayer to file correct returns.

39. The respondent further submitted that the appellant’s purchase declarations in their- VAT returns had been declared inconsistent, not fully supported and could not be verified as genuine and that the appellant was not able to avail any evidence to controvert the same.

40. The law is clear on the burden of proof, as section 56(1) of the TPA provides that;“The burden shall be on the taxpayer to prove that a tax decision is incorrect.”Pursuant to this provision, the appellant had an obligation to produce sufficient evidence to support the averments contained in its Statement of Facts.

41. The Tribunal has had the occasion to peruse the respondent’s Objection Decision dated November 24, 2021, whereon the respondent has given the appellant the reasons for its decision in disallowing its invoice. We quote;“following a review of the documents submitted in support of your objection, the Commissioner has agreed to partially accept your objection by allowing input that was fully supported while disallowing input tax that was not fully supported.Relating to the inconsistencies, you are advised to always have your identity captured at the point of sale and always capture the correct reference in your VAT returns.Invoices with input VAT of Kshs 4,934,818. 00 as detailed in the appended schedule were found to have been improperly deducted in the VAT returns for January 2018 to May 2018 and consequently disallowed. Input VAT of Kshs 6,497,109. 00 previously adjusted under VAT automated assessment was found to meet the requirements for deduction under section 17 of the VAT Act, 2013. ”

42. The respondent further averred that the appellant claimed input tax for which it did not provide invoices or proof of payment, or confirmation by the suppliers, despite requests by the respondent to do so, thus the partial claim was disallowed as the VAT input tax could not be verified.

43. It is also worth noting that the appellant has not assisted this Tribunal to appreciate the evidence or records it has contended to have submitted to the respondent during the review, and which were not considered. The Tribunaltherefore lacks the benefit of this evidence, if any, to the appellant’s detriment.

44. In Primarosa Flowers Ltd v Commissioner of Domestic Taxes HCITA NO. 19 of 2017, the Learned Judge cited with approval the case of Mulherin v Commissioner of Taxation [2013] FCAFC 115, where the court held.“…in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that an assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

45. The Tribunal is persuaded by the evidence submitted by the respondent that the appellant did not produce valid invoices and proof of payment for consideration by the respondent, and consequently failed to prove that input VAT was lawfully due. Section 17 provides for the documents which must be produced by taxpayers to support allowable input for deduction, and in the instance case ,”an original tax invoice issued for the supply or a certified copy. ‘’ a threshold the appellant failed to meet in respect of the disallowed claim.

46. The respondent averred that the appellant by claiming an invoice before its existence puts itself in a credit position as opposed to a payment position thus deceiving the respondent and abusing the tax system.

47. It is noteworthy that the appellant did not exhibit the documents in contention to its statement of claim hence watering down its case.

48. The appellant had alluded in its grounds of Appeal that the respondent did not inform it of the additional documentation or explanations required. TheTribunal finds implausible as the respondent’s letter to the appellant on their findings upon review of documents submitted, leaves no doubt as to the shortcomings of the appellant ‘s supporting documents in regard to the disallowed invoices and VAT input claim, and the reasons for disallowing were duly explained.

49. The Tribunal cannot also lose sight of the fact that the original assessment issued to the appellant by the respondent was in the sum of Kshs 11,431,928. 00 which was reviewed downwards by the respondent to Kshs 4,934,818. 00 upon the appellant supporting the sum of Kshs 6,497, 109. 00 confirming that indeed the respondent reviewed the appellant‘s additional documents and allowed those which could be verified to the required threshold.

43. In view of the foregoing, the Tribunal concludes that the respondent did not err in considering the additional supporting documents provided by the appellant, and was justified in disallowing the appellant’s claimed invoices, and raising the VAT tax demand in the sum of Kshs 4,934,818. 00

FINAL DECISION 45. The upshot of the foregoing analysis is that the Appeal is devoid of merit and fails and the Tribunal proceeds to issue the following Orders;a.The Appeal be and is hereby dismissed.b.The respondent’s assessment and Objection Decision dated November 24, 2021 be and is hereby upheld.c.Each party to bear its own costs.

45. It is so ordered.

DATED and DELIVERED at NAIROBI this 17th day of March, 2023. …………………………….ROBERT M. MUTUMA CHAIRPERSON…………………………. ………….……………..RODNEY O. OLUOCH ELISHAH NJERU MEMBER MEMBER……………………………. ……………..……………DELILAH K. NGALA EDWIN K. CHELUGET MEMBER MEMBERJUDGMENT- APPEAL NO. 168 OF 2022- THE GOOD EARTH LITD –VS- COMMISSIONER OF DOMESTIC TAXESPAGE 1 OF 13