[2023] KETAT 274 (KLR)

Hardware Trading Stores Ltd v Commissioner of Domestic Taxes (Tax Appeal 108 of 2020) [2023] KETAT 274 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 274 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 108 of 2020

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

May 19, 2023

Between

Hardware Trading Stores Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

BACKGROUND 1. The Appellant is a registered company under the Company’s Act and carries on a hardware sales business in Nakuru.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and the Kenya Revenue Authority is charged with the mandate of administration and enforcement of various revenue laws amongst them Income tax and VAT.

3. On November 15, 2019 the Appellant was assessed for VAT for the months of January 2018 up to May 2018 for Kshs 7,367,721. 00

4. On November 25, 2019 the Appellant objected and the Respondent acknowledged receipt of the objection on the same day.

5. On January 20, 2020 the Respondent wrote through an email to the Appellant requesting for records in support of the Appellant’s objection to be supplied by January 28, 2020.

6. On March 10, 2020 the Respondent confirmed the assessment and issued an objection decision and consequently the Appellant appealed.

THE APPEAL 7. The Appeal is set on the Memorandum of Appeal dated March 20, 2020 and filed on March 25, 2020 raising the following grounds of appeal:-a.The Respondent erred in law and facts and issued an invalid objection decision contrary to the Section 51(9) of the TPA.b.That Section 51(10) of the TPA further requires the Respondent in case of an objection decision to include a statement of findings on the material facts and reasons for the decision.c.The Respondent erred in law by disallowing input supplies as per the Section 17(3) (a) of the VAT Act.d.The Respondent erred in law and facts by demanding tax that is unreasonable and unfair as per Article 210 and 201 of theConstitutione.The Respondent erred in law and facts by eliminating certainty as an integral ingredient of the rule of law as stated to be the lifeline of business and business plans.f.That the Respondent’s actions are contrary to legitimate expectations on the operations of the tax payer as per Section 15 of the Income Tax Act and Article 47 (1)(2) of theConstitution.

APPELLANT’S CASE 8. The Appellant’s case is set on its Statement of Facts dated March 20, 2020 and filed on March 25, 2020.

9. The Appellant averred that it was informed by the Respondent of its VAT assessment for Kshs 7,367,213. 00 on November 15, 2019.

10. The Appellant averred that consequently it did object to the assessment on November 25, 2019 and the Respondent issued it with an objection decision on March 13, 2020.

11. The Appellant averred that the Respondent disallowed its input supplies in reaching its final objection decision and also did not include in the objection decision a statement of findings on material facts.

12. The Appellant also averred that the demanded tax is unreasonable and unfair as per Article 210 and 201 (b) of theConstitution.

13. The Appellant argued that the Respondent’s actions are contrary to the legitimate expectations on the operations of a taxpayer and that the Respondent in its behavior has eliminated certainty as an integral ingredient of the rule of law as the lifeline of business and business plans.

Appellant’s Prayers 14. The Respondent prays for the Tribunal to finds that:a)The Respondent’s decision is invalid, incorrect, unfair, time barred and failed to meet the legitimate expectations of the tax payer as per Section 47 and Article 201(b) (i) of theConstitution.b)The Appellant’s objection be upheld and the Respondent’s demand and confirmation be quashed.c)The Respondent’s demand for additional taxes and confirmation of VAT be struck out.d)The Respondent’s actions be declared to be arbitrary, capricious, subjective, unfair and contrary to the fair administration of justice and to the legitimate expectations of the Appellant.e)The Respondent and its agents be estopped from demanding or taking further action or steps to ensure recovery of the alleged principal tax, penalties and interest.f)Costs of the appeal.

RESPONDENT’S CASE 15. The Respondent’s case is premised on the following:a.Statement of Facts dated April 24, 2020 and filed on the same dateb.The Written submissions dated May 17, 2021 and filed on May 20, 2021.

16. The Respondent averred that the assessment was as a result of cross-validation of data from invoice declarations made in the Appellant’s VAT returns with those made in the corresponding supplier’s returns. The assessments were raised on the Appellant’s invoices which were not mirrored in the supplier’s returns thereby showing inconsistencies.

17. The Respondent submitted that the Appellant objected in time but failed to state the precise grounds of objection as provided for under Section 51(3) of the TPA.

18. The Respondent argued that the Appellant was given enough time to provide the records but failed to do the same. The Respondent stated that the confirmation was done due to this failure.

19. The Respondent argued that the Appellant failed to provide evidence contrary to the Respondent’s assessment.

20. The Respondent prays for the Appeal’s dismissal with costs

ISSUES FOR DETERMINATION 21. The Tribunal upon considering the Statement of Facts filed by the parties and the submissions filed by the Respondent is of the considered view that there is a single issue for determination as hereunder:

Whether the assessments issued by the Respondent were proper ANALYSIS AND FINDINGS 22. Having identified the issue for determination, the Tribunal proceeds to deal with the issue as hereunder:

23. The facts of the matter as filed by both parties are fairly simple.

24. The Appellant was assessed by the Respondent for Kshs 7,367,721. 00 and objected to the whole assessment within time whereupon the Respondent requested the former to provide documents in support of its objection but according to the Respondent’s summation, this was not done.

25. The Appellant stated that after sending its objection to the Respondent, it did not receive any communication from the latter until March 13, 2020 when it was issued with the objection decision.

26. The Respondent on its part stated that on January 20, 2020, it did write to the Appellant through an email requesting for records/documents in support of the Appellant’s objection and the same to be submitted by January 28, 2020. That the requested documents included:i.VAT Registers (Analysis books/Spread sheetsii.VAT Control accounts for the affected periodiii.Purchases and Sales Journalsiv.Evidence of receipt and payments for the goodsv.Z reports

27. The Respondent in its Statement of Facts has annexed a copy of the email of January 20, 2020 sent to the Appellant in regard to the requested documents. The Appellant on its part has not tendered any evidence, documentary or otherwise, to prove its assertion that it never received the email requesting for the documents from the Respondent. It has not also indicated that the email address used by the Respondent was either nonexistent or did not belong to it.

28. In the circumstances the Respondent’s position in the matter seems to be more tenable leading to the conclusion that the Appellant did not reply to the aforesaid request for documents.

29. It was all along the burden of the Appellant to disprove the Respondent’s assessments with sufficient records. The Tribunal on perusing the record herein has not seen any document emanating from the Appellant in support of its case. The Appellant therefore failed to conform with the provisions of Section 43 of the VAT Act which provides:(1)Every registered person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic 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 tax invoices and simplified tax invoices issued in serial number order;b)Copies of all credit and debit notes issued, in chronological orderc)Purchase invoices, copies of customs entries, receipts for the payments 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 purposee)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 maybe, at the end of each period;f)Copies of stock records kept periodically as the Commissioner may determineg)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; andh)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 authorized officer for inspection and shall give the officer every facility necessary to inspect the records.'

30. The Tribunal observes that the Appellant was legally bound to provide the documents required by the Respondent, and or an explanation if it was not in a position to, or give substitute documents with an explanation to serve the purpose thereby enabling the Respondent to ascertain the tax liability as per the Appellant’s objection.

31. The law also in Section 23 of the TPA requires the taxpayer to keep records of its transactions and provide them when required to do so and the same to assist the taxpayer to discharge its burden of proof. The Section states as follows:(1)A person shall-a)Maintain any document required under a tax law, in either of the official languagesb)Maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained; andc)Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates to or such shorter period as may be specified in a tax law.'

32. The Tribunal reiterates its earlier holding in the case of Digital Box Ltd vs Commissioner of Domestic Taxes, with regard to the importance of parties keeping and producing the necessary documents to assist them in disproving the tax man’s assessments, where in Para 91 and reiterating the judgement in CMC Aviation Ltd vs Cruisar Ltd (1)[1978] KLR 103 it observed that:'Pleadings contain the averments of the parties concerned. Until they are proved or disproved, or there is an admission of them or any of them, by the parties, they are not evidence and no decision could be founded upon them. Proof is the foundation of evidence. Evidence denotes the means by which an alleged matter of fact, the truth of which is submitted for investigation. Until their truth has been established or otherwise, they remain unproven. Averments in no way satisfy, for example, the definition of 'evidence' as anything that makes clear or obvious; ground for knowledge, indication or testimony; that which makes truth evident, or renders evident to the mind that it is the truth'

33. The Tribunal has also considered the holding in Boleyn International vs Commissioner of Investigations & Enforcement [TAT NO 55 of 2019] with regard to the production of documents in support of a taxpayer’s objection, where the Tribunal held that there was no conceivable way the Respondent would have considered the objection as the same did not comply with the provisions of Section 51(3) of the TPA which states as follows:-'A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a)The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b)In relation to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc)All the relevant documents relating to the objection have been submitted.'

34. The Tribunal upon considering the aforementioned provisions of the law and the relevant authorities finds that the Appellant was unable to effectively object to the Respondent’s assessments on the VAT and concludes that the tax assessment were properly raised.

FINAL DECISION 35. The upshot of the foregoing is that the Appeal lacks merit and Orders that commend themselves to the Tribunal are as follows:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated the March 10, 2020 be and is hereby upheld.c.Each party to bear its own costs.

34. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 19TH DAY OF MAY, 2023. ………………………..ERIC N. WAFULACHAIRMAN………………………..CYNTHIA B. MAYAKAMEMBER…………………….ABRAHAM K. KIPROTICHMEMBER…………………….GRACE MUKUHAMEMBER…………………….JEPHTHAH NJAGIMEMBER