[2025] KETAT 72 (KLR)

Heavy Lift Logistics East Africa Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal E269 of 2024) [2025] KETAT 72 (KLR) (31 January 2025) (Judgment)

Neutral citation: [2025] KETAT 72 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E269 of 2024

CA Muga, Chair, BK Terer, E Ng'ang'a & SS Ololchike, Members

January 31, 2025

Between

Heavy Lift Logistics East Africa Limited

Appellant

and

Commissioner Of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a private Limited Liability Company, registered under the Companies Act, CAP 486 of the Laws of Kenya. The Appellant's principal activity is in the clearing and forwarding services and transport logistics services. The Appellant is registered for Corporate Income Tax, PAYE and VAT obligations. The Appellant deregistered the Company in December 2022.

2. The Respondent is a Principal Officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 and 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 issued an audit notification letter dated 23rd January 2023, for Corporation Tax and VAT for the period of 2017 to 2022. Subsequently, assessment notice dated 31st October 2023, for the years 2017-2022 in the sum of Kshs 26,310,401. 00 inclusive of penalties and interest.

4. The Appellant being dissatisfied with the said assessment, objected to the additional assessment on 29th November 2023. The Respondent considered the Appellant's objection and issued a decision on 23rd January 2024 where it confirmed the assessment of the sum of Kshs 30,888,792. 00 inclusive of penalties and interests.

5. Aggrieved by the Respondent’s findings, the Appellant filed the instant Appeal through a notice of appeal dated and filed on 21st February 2024.

The Appeal 6. In its Memorandum of Appeal dated and filed on 6th March 2024, the Appellant raised the following as its grounds of appeal:i.That the Respondent erred by including the disbursements incurred by the Appellant on behalf of their customers as part of income for corporate income tax purposes.ii.That the respondent erred in fact by failing to consider the filed income tax returns for the years 2019 to 2022 when computing the variances for the period.iii.That the Respondent erred in fact and in Law by failing to consider the Appellant's tax loss position when computing the Income Tax due.

Appellant’s Case 7. In support of the appeal, the Appellant relied on its statement of facts dated and filed on 6th March 2024.

8. The Appellant stated that it provides logistics and related taxable services to both local and international customers. The Appellant is part of the MSC group which shutdown business in 2022. The Appellant was deregistered in December 2022.

9. The Respondent issued to the Appellant an income tax assessment for the period January 2017 to December 2022 dated 31st October 2023. The assessment related to variances that the Respondent identified by comparing the Appellant's sales declarations in the income tax returns and the Sales declarations in the VAT returns. In the aforementioned assessment letter, the Respondent indicated that the Appellant had total principal income tax liability of Kshs 17,026,143. 00 The Respondent, subsequently issued the assessments on iTax on 14th November 2023. The Respondent also computed the resultant penalties and interest on the principal tax. The total tax assessed is Kshs 30,888,792. 00 inclusive of the penalties and interest. Consequently, the Appellant then filed its objection dated 29th November 2023.

10. The Appellant identified three issues for determination which it analyzed as hereinunder:

(a) Whether the disbursements incurred by the Appellant on behalf of their customers ought to have been included as part income for corporate income tax purposes. 11. The Appellant cited section 2 of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter "VAT Act") which defines a 'supply of services' to mean anything done that is not a supply of goods or money, including: the performance of services for another person; the grant, assignment, or surrender of any right; the making available of any facility or advantage or the toleration of any situation or the refraining from the doing of any act.

12. The Appellant relied on the provisions of Section 17(1) of the VAT Act to support its case. It stated that during the period under review, the Appellant procured certain services mainly consisting of transport services for and on behalf of its customers. For these services, the Company settled the vendor invoices that were ordinarily addressed in its name, claimed a deduction of input tax in its VAT returns and charged a corresponding output tax through a recharge to its customers. This output tax was also declared in the Company's VAT returns thereby offsetting the claimed input tax.

13. The Appellant stated that due to the very nature of disbursements, the Appellant asserted that it does not consider the recharges as a revenue item for financial reporting purposes. Consequently, they are not considered for the CIT sales declarations. The Appellant stated that it does not charge a markup on disbursement cost hence not gains or profits from business. It averred that declaring disbursements as revenue and at the same time cost is a zero-sum game as no taxable profit would arise.

14. According to the Appellant the recharges (reconciling items) are posted under the ledger Transport which is held under the code 250-01-0001. Therefore, the Appellant also urged the Tribunal to set aside the Respondent's decision.

(b) Whether the Respondent erred in fact by failing to consider the filed income tax returns for the years 2019 to 2022 when computing the variances for the period. 15. The Appellant stated that it inadvertently had not submitted the CIT returns at the time of the assessment. However, owing to the urgency of the assessment herein, the Appellant completed the filing of its CIT returns for the periods 2019 to 2022 on 28th October 2023 prior to filing the objection. This was done prior to the Respondent issuing the assessments on i-Tax on 14th November 2023.

16. The Appellant asserted that when confirming the assessment, the Respondent disregarded the revenue disclosed in the filed CIT returns when computing variances for the period. As a result, the variances against which income tax has been assessed are higher than they ought to be.

17. The Appellant argued it provided explanations on the reconciling items as follows:(a)Credit notes undeclared in the VAT returns- for the period 2019 and 2020 the Appellant had Kshs 602,280. 00 and Kshs 603,378. 00 relating to Credits notes. These credit notes were raised more than six months after the invoices had been raised and thus could not be used to offset against VAT liability. According to the Appellant, this was informed by Section 16(1) of the VAT Act that states that where goods are returned to the registered person or, for good and valid reason the registered person decides for business reasons, to reduce the value of a supply after the issue of a tax invoice, a credit note shall be issued for the amount of the reduction: provided that a credit note may be issued only within six months after the issue of the relevant tax invoice. The Appellant also stated that the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) does not bear a similar restriction, the Appellant was able to deduct the value of these credit notes against their revenue for the year when preparing the financial statements and subsequently the income tax returns.(b)JV-Miscellaneous income & Non-taxable income included in the VAT return.According to the Appellant, in 2019 it recorded income of Kshs 166,393. 00 that is not subject to VAT. This income would not be disclosed in the VAT return but would be declared in the income tax return and subjected to income tax. Additionally, the Appellant averred that it erroneously declared part of this income worth Kshs 40,000. 00 in the VAT returns and as a result overpaid VAT for the year.(c)Transportation to local omitted from CIT return - The Appellant noted that it inadvertently omitted local transport revenue from its Income Tax return for the year 2020 totaling to Kshs 1,927,558. 00. (d)Revenue relating to September 2021 VAT returns declared in March 2022 In 2022, the Appellant disclosed several invoices from 2021 in the March 2022 return. The Appellant did not make any supplies during the year and later shut down and was deregistered. The Appellant argued that this was within the six-month period stipulated under section 17 of the VAT Act.

18. According to the Appellant, it was unable to reconcile the variance arising from 2021 of Kshs 51,307. 00 It, therefore, requested that the Respondent offsets these amounts against the tax loss in each of these years. In light of the foregoing, the Appellant urged the Tribunal to set aside the Respondent’s decision.

(c) Whether the Respondent erred in fact and in law by failing to consider the Appellant's tax loss position when computing the income tax due. 19. The Appellant argued that it is in a tax loss for the period 2017 to 2022. It argued that it made loses as follows: in 2017, the loss was Kshs 5,481,380. 00; 2018 the loss was Kshs 5,336,391. 00; in 2019 the loss was Kshs 10,943,978. 00, 2020 the loss was Kshs 12,917,540. 00; 2021 the loss was Kshs 20,087,701 and for the year 2022, the loss was Kshs 19,373,398. 00.

20. The Appellant contended that the tax losses are sufficient to cover any unreconciled variances. It therefore, prayed that the Tribunal dismisses the Respondent's decision as any unreconciled variances can be offset against the existing tax losses

Appellant’s Prayers 21. The Appellant urged this Tribunal to set aside the Respondent’s objection decision. It also prayed that the costs of this appeal be awarded to the Appellant.

The Respondent’s Case 22. In response to the appeal, the Respondent lodged a Statement of Facts dated and filed on 16th April 2024.

23. The Respondent stated that it issued an audit notification letter dated 23rd January 2023, for corporation tax and VAT for the period of 2017 to 2022. The Appellant was further issued with a pre-assessment notice dated 18th October 2023 for the same duration. The Respondent averred that the Appellant was requested to avail books of accounts, records and other relevant documents for reconciliation but it failed to furnish the required documentation.

24. It stated that it compared the total sales declared in the Appellant's Income Tax returns and VAT returns and sought to bring the under declarations and non-declarations to charge as per Sections 29 and 31 of the Tax Procedures Act, CAP 469 of the Laws of Kenya (hereinafter “TPA”) by issuing an assessment notice dated 31st October 2023, for the years 2017-2022 in the sum of Kshs 26,310,401 inclusive of penalties and interest.

25. The Appellant was dissatisfied with the said assessment, and objected to the additional assessment on 29th November 2023. The Respondent considered the Appellant's objection and issued decision on 23rd January 2024 where it confirmed the assessment of the sum of Kshs 30,888,792. 00 inclusive of penalties and interest.

26. The Respondent stated that it exercised its best judgment in making the assessment in full consideration of the documentation and information available pursuant to Section 31 of the TPA. It stated that it conducted an audit on the Appellant's banking. Financial statements and returns for the period 2017 to 2022 and issued a notice of assessment based on variances noted in the Appellant's VAT returns vis a vis the income tax returns for the period.

27. Whereas the Appellant averred that the Respondent erred in including disbursements by the Appellant on behalf of their customers for income tax purposes, the Respondent contended that the Appellant failed to provide invoices and contractual agreements to support its claims on the variances.

28. It stated that the Appellant at the objection stage only provided a reconciliation schedule which did not adequately support the Appellant's position. The Respondent maintained that since the sales in question were declared in the VAT returns, they could not be deemed as disbursements on behalf of its customers. The Respondent therefore, argued that it was justified in the treatment of the sales.

29. Whereas the Appellant averred that the Respondent erred when computing the variances for the period of 2019-2022 by failing to consider the filed income returns, the Respondent contended that it established that the Appellant was a non-filer for the years of income in question despite having vatable sales as evidenced by the filed VAT returns.

30. The Respondent stated that the Appellant, despite not having provided documents during the audit, filed its income tax self-assessment returns after the Respondent had already issued the additional assessments.

31. The Respondent contended that the Appellant ought to have provided the filed self-assessment returns among the other requested documents at the time of the audit including the audited financial statements, contracts, sales and cost ledgers as well as the expenses in support of the figures in the income tax returns.

32. The Respondent maintained that the Appellant only produced bank statements alongside soft copies of the Debtors and Creditors ledgers. However, the Respondent averred that the review of the documents furnished could not adequately account for the variance noted.

33. The Respondent contended that it had several engagements with the Appellant and sought to be furnished with the full and complete records in line with Section 59 of the TPA. According to the Respondent, the Appellant's failure to furnish crucial information such as the audited financial statements, the invoices and expense documentation was the reason the Respondent could not verify and/or establish whether the Appellant was in a loss-making position for the years 2019 to 2022.

34. The Respondent stated that the Appellant has failed to discharge its burden to proof that the assessment was excessive or improper in line with the provisions of Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”).

35. Finally, The Respondent stated that this Appeal is unmeritorious because the assessment and the subsequent objection decision is proper and duly anchored in law.

Respondent’s prayers 36. The Respondent prayed that this Tribunal be pleased to uphold the Respondent's objection decision and dismiss the Appeal with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 37. Having examined the parties’ pleadings documentation and written submissions the Tribunal is of the view that the matter distils into two (2) issues for determination namely:i.Whether the assessments in respect to 2017 year of income were statutorily time barred; andii.Whether the Respondent erred in confirming the assessments.

Analysis And Findings 38. Having established two issues for determination the Tribunal will proceed to analyse them as follows;

i. Whether the assessments in respect to 2017 year of income were statutorily time barred. 39. The Respondent sought to recover taxes from the year 2017 to 2022 vide assessment notice dated 31st October 2023. Section 23 of the TPA provides for timelines for keeping records. In particular section 23(1) (c) of the said Act requires documents to be kept for five years or lesser period. It provides as follows:‘‘1)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 for a 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.’’

40. In relation to amendment of assessments, section 31(4) (b) of the TPA contains provisions on timeframe. It provides that as follows:‘‘The Commissioner may amend an assessment——(b)In any other case, within five years of—(i)For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)For any other assessment, the date the Commissioner notified the taxpayer of the assessment.’’

41. In addition to the above provisions of the TPA, Section 27 of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) provides that in relation income tax time starts running from 1st July of the year upon submitting a return on or before 30th day of June of the year. Section 52B of the ITA provides as follows regarding filing of returns and self assessment:‘‘52B.Final return with self-assessment(1)Notwithstanding any other provision of this Act—(a)every individual chargeable to tax under this Act shall for any year of income commencing with the year of income 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income.’’

42. The view of the Tribunal is that the Respondent can only issue assessments beyond five years after the self-assessment return is filed if the elements outlined in Section 31(4) (a) of the TPA are pleaded and proven. The said elements include gross or wilful neglect; evasion; or fraud by or on behalf of, the taxpayer.

43. In the case of Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) the High Court stated as follows regarding the issue on timeframe:‘‘In this regard, under section 31(4) of the Tax Procedures Act, an amendment outside the 5-year period can only be permitted if there is evidence of willful neglect, evasion, or fraud by or on behalf of the tax payer…The legal position is that, all assessments ought to be made within 5 years except when there is evidence of gross or willful neglect, evasion or fraud on the part of the taxpayer. This also goes hand in hand with the provisions of section 23 of the Tax Procedures Act, which requires a taxpayer to retain documents for the same period. The implication is that, after 5 years, since no assessment can be made, the taxpayer is absolved of his burden of maintaining such records.’’

44. The Tribunal also notes that in the case of Mburu v Commissioner of Domestic Taxes (Income Tax Appeal E064 of 2021) [2023] KEHC 2594 (KLR), the High Court agreed with the Tribunal’s finding that it was lawful for the Respondent to assess tax for the year 2013 as stipulated under Section 29(6) of the TPA because the Appellant failed to file returns. The view of the Tribunal is that in the instant appeal the Respondent did not support its assertion that the Appellant displayed gross or wilful neglect; evaded taxes or was fraudulent in its self-assessment of the amounts due. Accordingly, the Respondent did not justify why it proceeded to amend the returns in relation to the 2017 year of income. It is on that basis that the Tribunal finds that the Respondent’s attempt to recover 2017 taxes vide its assessment notice dated 31st October 2023 was unlawful.

45. Consequently, the Tribunal finds and holds that the assessments in respect to 2017 year of income were statutorily time barred and ought to have been excluded from the assessment.

ii. Whether the Respondent erred in confirming the assessments. 46. The Appellant averred that the Respondent unfairly rejected its notice of objection despite providing ledgers and reconciliations. On the other hand, the Respondent argued that the Appellant failed to provide invoices and contractual agreements to support its claims on the variances. The Respondent also stated that at the objection stage the Appellant only provided a reconciliation schedule which did not adequately support the Appellant's position.

47. The Tribunal examined the Appellant’s bundle of documents and noted the Appellant sought to rely on its ledgers. However, the Appellant did not file primary documents to support those ledgers; the primary or source documents being invoices, contractual agreements, bank statements and sale receipts among other source documents that would have supported the information in the ledgers. Other than the ledgers, the Tribunal did not sight other documentary evidence which it could have reviewed or examined to confirm the Respondent’s averment that its assessments were correct.

48. The Tribunal’s view is that a taxpayer has a duty in law to demonstrate that the Respondent’s decision is incorrect pursuant to the following provisions of section 56 (1) of the TPA:‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

49. The Tribunal is also cognizant of the following provisions of section 30 of the TATA:‘‘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; or(b)In any other case, that the tax decision should not have been made or should have been made differently.’’

50. In order for a taxpayer to discharge its burden of proving that the decision of the Commissioner is wrong, the taxpayer must adduce positive documentary evidence to support its case. In this regard, Section 23 (1)(b) of the TPA provides that, ‘‘a person shall— maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.’’ Further, section 53(3) (c) of the TPA provides that, ‘‘a notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—all the relevant documents relating to the objection have been submitted.’’

51. The Tribunal also notes the following provisions of Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 regarding documentary evidence:‘‘(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’

52. Courts in Kenya have affirmed that the taxpayer has a burden of proof and must prove that the Respondent’s decision is incorrect. In the case Singapore Motors Limited v Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR) the High Court held as follows:‘‘This Court has remained emphatic that under section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the Tax Procedures Act (TPA), the burden of proving that an assessment is wrong or excessive remains upon the taxpayer.’’

53. In Sagna Holding Ltdv Commissioner of Domestic Taxes (Appeal 266 of 2023) [2024] KETAT 606 (KLR) the Tribunal emphasized that the taxpayer has a duty to demonstrate that where an appeal relates to an assessment that the assessment is excessive; or in any other case that the tax decision should not have been made or should have been made differently.

54. The Tribunal is of the further view that the Appellant’s statement of facts fell short of the requirements under Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 in that the Appellant failed to file with it relevant documentary evidence to substantiate its case.

55. Consequently, the Tribunal finds and holds that the Appellant failed to demonstrate that the Respondent erred in confirming the assessments.

Final Decision 56. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal partially succeeds and makes the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 23rd January 2024 be and is hereby varied as follows:i.The corporate income tax assessments in respect of the 2017 year of income be and are hereby expunged;ii.The VAT assessments in respect to the period up to 31st January 2018 be and are hereby expunged;iii.The corporate income tax assessments in respect of the 2018 to 2022 be and are hereby upheld; andiv.The VAT assessments in respect to the period 1st February 2018 to December 2022 be and are hereby upheld.c.The Appellant to settle in the next 30 days, any penalties and interest for late filing of its 2017 and 2018 corporate income tax returns.d.Each party to bear its own cost.

57. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 31ST DAY OF JANUARY 2025. ………………………………….CHRISTINE A. MUGACHAIRPERSON………………………….. …………….……………..BONIFACE K. TERERMEMBER……….……..…………….OLOLCHIKE S. SPENCERMEMBER………………………….. …………….……………..EUNICE N. NG’ANG’AMEMBER