[2024] KETAT 1612 (KLR)

Hamron Logistics Limited v Commissioner of Domestic Taxes (Tax Appeal E972 of 2023) [2024] KETAT 1612 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1612 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E972 of 2023

Grace Mukuha, Chair, E Komolo, GA Kashindi & AM Diriye, Members

November 22, 2024

Between

Hamron Logistics Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya and is in the construction and general supplies industry.

2. The Respondent is the Commissioner of Domestic Taxes appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1), the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) with respect to the performance of its function 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. The Respondent undertook income tax and value added tax (VAT) return review of the Appellant for the period 1st July 2020 to 31st July 2022.

4. On 16th August 2023, the Respondent issued assessment orders to the Appellant raising additional taxes on the Appellant in relation to income tax and VAT amounting to Kshs. 13,232,273. 58.

5. On 19th September 2023, the Appellant lodged notices of objection to the assessments.

6. On 28th September 2023, the Respondent vide email wrote to the Appellant directing the Appellant to provide the documentary evidence in support of its objection not later than 5th October 2023 to expedite review of the case.

7. Respondent issued an Objection Decision on 10th November 2023.

8. The Appellant, being dissatisfied with the Respondent’s objection decision, filed a notice of appeal dated 10th December 2023, appealing the Respondent’s decision in whole.

The Appeal 9. The Appellant filed its Memorandum of Appeal dated 21st December 2023 and set out the following grounds of appeal:a.That the Respondent erred in law and fact by overstating the Appellant's revenues for the periods in question based on erroneous summation of bank credits.b.That the Respondent erred in law and fact by charging income tax on bank credits that were not revenue in nature but rather loans and capital injections.c.That the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant.d.The Respondent erred in law and fact by disregarding all the reconciliations, explanations and documentation provided by the Appellant including financial statements and tax returns and proceeded to confirm the erroneous tax assessments.

The Appellant’s Case 10. The appeal is anchored on the following documents filed before the Tribunal:a.Appellant’s Statement of Facts dated 21st December 2023. b.The Appellant’s Submissions dated 22nd July 2024 and filed on 25th July 2024

11. The Appellant stated that the Respondent erred in law and fact by overstating the Appellant’s revenues for the periods in question based on erroneous summations of bank credits.

12. The Appellant further stated that the Respondent erred by disregarding the actual turnover realized by the Appellant in its financial statements and tax returns by arbitrary subjecting the Appellant to a bank analysis process that unfairly increased the Appellant's turnover for the periods under review.

13. The Appellant averred that it received a request from the Respondent for provision of documents during the audit verification exercise and availed the requested information for verification including copies of its bank statements, financial statements, sales, and purchases ledgers.

14. The Appellant contended that the Respondent went ahead to subject the bank credits to tax on the assumption that all bank deposits were income of the Appellant.

15. The Appellant averred that the Respondent deliberately ignored the information, explanations and documents submitted by the Appellant for review and without any basis or justification adjusted the turnover of the Appellant upwards for the periods under review by subjecting the Appellant’s bank accounts to scrutiny on assumption that all bank credits were income.

16. The Appellant averred that based on the explanations, documents and reconciliations provided, the Appellant declared and accounted for tax based on the correct turnover.

17. On the ground that the Respondent erred in law and fact by charging income tax on bank credits that were not revenue in nature but rather loans and capital injections, it was the Appellant's position that the Respondent erred in this regard and further, that the Respondent was misguided by seeking to charge VAT on the variance between the declared turnover and the recomputed turnover as per bankings.

18. The Appellant stated that the documents provided by the Appellant demonstrated that the deposits in the Appellant's bank accounts included loans, contra entries, bounced cheques and capital injections which could not constitute taxable income within the confines of Section 3(2) of the Income Tax Act and the Respondent erred by considering the said loans, contra entries, bounced cheques and capital injections as taxable income for the period in question.

19. The Appellant averred that Section 3(2) of the Income Tax Act provides for the type of income upon which tax is chargeable, but the Respondent chose to contravene the same by subjecting non-taxable bank credits to tax based on assumptions, yet the variances were mainly due to reconcilable items.

20. It was the Appellant's averment therefore that the opportunistic and arbitrary action of the Respondent to disregard the documents provided and instead subject the Appellant's bank credits to tax is unsubstantiated and speculative.

21. On the ground that the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant, the Appellant averred that the Respondent arbitrarily proceeded to disallow some expenses which had been incurred by the Appellant in generation of the taxable income citing lack of supporting documentation yet it availed copies of the respective invoices and requisite receipts in support of the expenses claimed but the same were disregarded by Respondent.

22. Further to provide evidence in support of the expenses claimed, the Appellant stated that it submitted to the Respondent all the invoices (with ETR Receipts) as well as supporting documentation such as evidence of payment, but the Respondent disregarded these explanations and documentation and proceeded to disallow the input VAT and confirm the assessment.

23. The Appellant averred that it had claimed valid input VAT supported by valid tax invoices in compliance with the provisions of the VAT Act and the VAT Regulations in force at the time.

24. The Appellant averred that had the Respondent appreciated all explanations, documents and information provided by the Appellant it would not have made the impugned decision and that the Respondent’s workings were erroneous and consequently any conclusions arising from them are incorrect.

25. On the ground that the Respondent erred in law and fact by disregarding all the reconciliations, explanations and documentation provided by the Appellant including financial statements and tax returns, and proceeded to confirm the erroneous tax assessments, the Appellant stated that the Respondent erred by failing to rely on the Appellant's physical documents in carrying out its audit which resulted to an erroneous tax liability.

26. The Appellant averred that the Respondent without any basis of justification adjusted the turnover of the Appellant upwards for the period under review and thereafter erroneously assessed additional taxes on the difference between the adjusted turnover and what the Appellant had declared.

27. The Appellant submitted that it would have been prudent, within reasonable judgment and information available for the Respondent to take into consideration all the records and information provided by the Appellant in making its decision.

28. The Appellant submitted that the Respondent admitted in its notice of findings and intention to issue additional assessment that it indeed received records from the Appellant but went ahead to reach its findings based on an alleged variance between the Appellant’s declarations and established incomes as per IFMIS data.

29. The Appellant submitted that it was not agreeable with the findings of the Respondent’s computation and provided schedules of sales and purchases for the period in question.

30. The Appellant submitted that from its schedules of sales and purchases and books of accounts, it was clearly demonstrated that the computation applied by Respondent was incorrect as it did not portray the correct position for the Appellant’s kind of business.

31. The Respondent in its notice of findings further alleged that the Appellant was noncommittal on the commencement of the audit and on provision of records requested, an allegation which the Appellant vehemently disputed.

32. The Appellant submitted that it was evident that the Respondent’s failure to take into consideration the information provided by the Appellant resulted to the Respondent applying an excessive and exaggerated Gross Profit Margin without giving supporting information to justify the same.

33. The Appellant submitted that based on foregoing, the Appellant fully associated itself with the case of Minazini Enterprises Limited -vs- Commissioner of Domestic Taxes at paragraph 50 of the judgement, where the Tribunal stated as follows:“The Tribunal has relied on the following cases in determining that the Respondent must always provide the rationale and clarity while making or arriving at a determination. In the case of Republic v Kenya Revenue Authority Ex parte Jaffer Mujtab Mohamed [2015] eKLR the Court held that; A taxing authority is not entitled to pluck a figure from the air and impose it upon the taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court in intervening.”

34. Further, the Appellant submitted that having provided the Respondent with material and factual evidence challenging its impugned and exaggerated Gross Profit Margin, it was the Appellant’s position that the Respondent had the burden to challenge the evidence provided, a position also supported by the High Court in Kenya Revenue Authority -vs- Man Diesel & Turbo Se, Kenya [2021] eKLR, where it stated that:“Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.”

35. The Appellant relied on the case of Afya X-ray Centre Limited -vs- The Commissioner of Domestic Taxes, which pronounced itself on this issue and stated under paragraph 43 of its judgement that even though the Appellant bears the burden to prove that a tax decision is incorrect in accordance with section 56 (1) of the Tax Procedures Act, 2015, it contended as follows in paragraphs 44 and 45:“44. …. Given, the Appellant bears the duty of availing records and books of accounts. The Respondent is required to undertake the assessment using all the records provided. This Tribunal’s hands are tied in so far as intendment and implications into tax statutes are concerned. However, we would remiss if we did not point this conduct of the Respondent relying solely on bank statements is likely to cause prejudice of untold measures to all taxpayers.

45. The tribunal is concerned with status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner.”

36. The Appellant submitted that it therefore follows that failure of the Respondent to take into consideration the documents provided, and the expenses incurred by the Appellant during the periods in question was not only prejudicial but also excessive.

37. The Appellant submitted that its Appeal is therefore merited.

Appellant’s Prayers 38. The Appellant prayed to the Tribunal for orders that:a.The Appeal be allowed.b.The Respondent’s decision dated 10th November 2023 be set aside and reversed.c.The costs of and incidental to this appeal be awarded to the Appellant.d.Any other orders the Tribunal may deem fit.

The Respondent’s Case 39. The Respondent’s case is premised on the following documents filed before the Tribunal:a.Respondent’s Statement of Facts dated 22nd January 2024. b.Respondent’s Written submissions dated 19th August 2024

40. The Respondent averred that on 28th September 2023, the Appellant was allowed to submit their objection out of time together with relevant supporting documents i.e. audited financial statements, trial balances, relevant ledgers supporting the financial statements together with supporting transaction documents, tax computation, certified copies of bank statements and reconciliation of bank credits and declared income.

41. The Respondent further averred that the Appellant did not provide the above documents despite follow-up reminders made vide telephone on 11th October 2023 and 16th October, 2023.

42. In light of the foregoing, the Appellant's objection application was disallowed and the resulting tax payable summarized as in paragraph 6 of the Objection Decision.

43. The Respondent averred that the Appellant disregarded section 23(b) of the Tax Procedures Act which provides that a taxpayer shall maintain any document required under tax law to enable the taxpayer’s tax liability to be readily ascertained.

44. The Respondent stated that whereas Section 24 of the Tax Procedures Act, 2015 allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information and to the best of the Commissioner's judgement.

45. The Respondent averred that the assessment by the Respondent was in accordance with Section 31 of the Tax Procedures Act that gives the Respondent leeway to issue additional assessments based on the available information and best of judgement.

46. The Respondent stated that pursuant to Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate that they have discharged their tax liability.

47. The Respondent stated that this burden was never discharged as no sufficient documentary evidence was availed to the Respondent to enable it render a meritorious decision in the circumstances.

48. The Respondent relied on the provisions of section 109 of the Evidence which provides thus:“The burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence, unless it is provided by any law that the proof of that fact shall lie on any particular person."

49. The Respondent stated that considering the foregoing, the Appellant's assertions that the Respondent disregarded all reconciliations, explanations, and documentation they provided was incorrect and misleading. On the contrary, the Appellant was granted ample time to avail documentation in support of their objection.

50. The Respondent submitted that without prejudice to the foregoing, the Respondent has the power to assess any taxpayer’s liability by virtue of Section 24(2) of the Tax Procedures Act which provides that: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.

51. The Respondent further relied on the case of The Commissioner for Her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid Appellant -vs- The Commissioners for Her Majesty's Respondents Revenue & Customs at paragraph 29 therein where the Tribunal set out the following requirements for a decision to be to the best of HMRC's judgment as follows:“...the very use of the word ‘judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them...What the words 'best of their judgment' envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due."

52. The Respondent also relied on TAT Appeal No. 538 Of 2021 Greenroad Kenya Limited vs Commissioner of Domestic Taxes, where the Tribunal at paragraph 52 and 53 held that: -“52. The Tribunal's considered view is that the failure by the Appellant to avail the documents requested granted the Respondent the power to use its best judgement as provided for under Section 31(1) of Tax Procedures Act.”

53. The Respondent further relied on the case of Nick Kikalos and Helen Kilos v. United States of America, No. 2:98 CV 618. 313 F. supp. 2d 876 (2003) wherein it was held that:“Courts routinely accord deference to the Commissioner in the reconstruction of a taxpayer's Income noting that 'the Commissioner may use any reasonable method of calculation where the taxpayer fails to produce or maintain adequate records from which actual Income may be ascertained. Other Circuits have stated that the "court must accept the Commissioner's method of reconstructing income so long as it is rationally based in the ordinary case, the determination of taxable income by the Commissioner is presumptively correct...”

54. The Respondent submitted that in Digital Box Ltd v Commissioner of Investigation & Enforcement (2019) eKLR the Tribunal held that in both instances, the Respondent is allowed to use any information that is available to it and use the best of his or her judgement in making the assessment. The Tax Procedures Act in granting the Respondent powers to assess taxpayers does not specify the methods that may be used instead the law provides that the best judgment must be exercised.

55. The Respondent further relied on Section 59(1) of the Tax Procedures Act that requires the Appellant to produce documents for examination and submitted that the Appellant was granted more than sufficient time to produce documents that would address the issue raised in the assessment but failed to do so despite reminders and follow-up on various dates made via telephone.

56. The Respondent further submitted and relied on the case of Mars Logistics Limited -vs- Commissioner of Domestic Taxes (2021] eKLR wherein the Honorable Court noted thus:“One of the fundamental conditions that must be satisfied for an item of expenditure to be deductible, is that it must incurred wholly and exclusively for the purposes of the trade, profession or vocation. The wholly and exclusively test can only be satisfied if the sole reason for incurring the expenditure is for the purposes of the trade in question. There are two matters for consideration in determining if this is the case, one of law and one of fact.The question of law is whether expenditure is capable of being incurred wholly and exclusively for the purpose of the trade. After determining that the expense is capable of being incurred in this way, it is necessary to determine whether the expenditure was in fact incurred for the sole purpose of the trade in question.”

57. The Respondent submitted and relied on the case of Commissioner for Inland Revenue -vs- Genn & Co (Pty) Ltd wherein Schreiner J stated that: -“In deciding how the expenditure should properly be regarded the court has to assess the closeness of the connection between the expenditure and the Income earning operations, having regard both to the purpose of the expenditure and to what it actually effects.”

58. From the foregoing, it was submitted, it was evident that the Respondent acted within the confines of the law. A connection between the expenditure and the income earning operations must be established.

59. In the instant case, the Respondent submitted that the Appellant had failed to prove that the Respondent's tax decision was in any way inconsistent, based on extraneous factors, excessive or incorrect.

60. The Respondent submitted that it was upon this backdrop that the Respondent contended that its assessment was hinged on the letter of the law. The Respondent submitted that it was upon the Appellant to provide evidence to support its assertions against the assessment at the objection stage, a burden of proof the Appellant utterly failed to discharge.

Respondent’s Prayers 61. The Respondent prayed that this Honourable Tribunal finds that:a.The objection decision dated 10th November 2023 be upheld.b.This appeal be dismissed with costs to the Respondent as the same lacks merit.

Issues For Determination 62. Based on the pleadings and submissions filed by parties, the Honorable Tribunal has framed the following single issue for determination:a.Whether the Respondent’s Objection Decision dated 10th November, 2023 is justified

Analysis And Findings 63. The Appellant has contended that the Respondent erred by issuing its objection decision which did not take into consideration the documents provided by the Appellant.

64. The Appellant averred that the Respondent relied solely on the bankings and gross profit margin of the Appellant in issuing its additional assessment and also disallowed the deductible expenses claimed by the Appellant.

65. The Tribunal notes that the Objection Decision of the Respondent was based on the Appellant’s failure to provide the documents requested by the Respondent. The Objection Decision stated that having failed to provide the supporting documents, the Appellant had failed to discharge the burden of proof required under the provisions of Section 56(1) of the Tax Procedures Act which provides that in proceedings under the Act, the burden shall be on the taxpayer to prove that the tax decision is incorrect.

66. The Tribunal notes that upon receipt of an additional assessment from the Respondent, the burden of proof lies on a taxpayer to disprove the Respondent’s position under Section 56(1) of the Tax Procedures Act which states that:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

67. This burden on the Appellant entails providing all relevant documents that would determine the correct amount of taxes to be paid by the Appellant. The Respondent in confirming its assessment should be guided by best judgement and the documents at the disposal of the Respondent in line with Section 31(1) of the Tax Procedures Act. The Respondent is required to consider all the documents available to the Respondent as was held in The Commissioner for Her Majesty’s Revenue and Customs TC/2017/02292 (supra) cited by the Respondent.

68. In the instant case, the Respondent stated that it did not have access to the Appellant’s audited financial statements, trial balances, relevant ledgers, tax computation, certified copies of bank documents, reconciliation of bank credits and declared income.

69. On the contrary, the Appellant averred that the Respondent solely relied on the bank transactions of the Appellant and did not take into account issues such as bank credits, which are not subject to income tax and the correct computation of the Appellant’s income.

70. The Tribunal notes that whereas it is true as held in Afya X-ray Centre Ltd -vs- The Commissioner of Domestic Taxes (Appeal No.70 of 2017) that relying solely on bank statements is likely to cause prejudice to taxpayers and assessments should not be based solely on bank statements, where a taxpayer has failed to provide relevant documents requested by the Respondent, the Respondent is justified to resort to its best judgement in determining the taxpayer’s liability.

71. In the instant case, the Respondent requested the Appellant to provide a reconciliation of its bank credits which were indeed not taxable as well as its audited financial statements. The request of such documents among other documents demonstrates that the Respondent did not intend to solely rely on the bank statements of the Appellant in issuing the additional assessment and confirming the said assessment in its objection decision.

72. The Appellant averred that it provided the documentation requested. However, the Appellant has not furnished any email correspondence or evidence responding to the email of 28th September 2023 requesting for documents upon being allowed to file their objection out of time.

73. The burden of proof still rested on the Appellant and the evidential burden did not shift to the Respondent to prove that the documents provided were not sufficient since there is no evidence before this Tribunal to demonstrate that the documents were availed. The Appellant did not annex its objection as well as the supporting documents submitted with it or availed to the Respondent upon its request to help the Tribunal check if indeed the Respondent’s decision was incorrect. In the circumstances, it would be difficult to fault the Respondent’s decision.

74. In view of the foregoing, the Tribunal finds and holds that the Appellant did not discharge its burden of proof and accordingly, the Respondent’s objection decision was justified.

Final Decision 75. For the reasons set out above, the Tribunal finds that this Appeal is not merited and accordingly, proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection Decision dated 10th November 2023 be and is hereby upheld.c.Each party to bear its own costs.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER 2024. ...............GRACE MUKUHACHAIRPERSON...............GEORGE KASHINDIMEMBER...............DR. ERICK KOMOLOMEMBER...............ABDULLAHI DIRIYEMEMBER