[2023] KETAT 900 (KLR)

IDB Capital Limited v Commissioner of Domestic Taxes (Appeal 1065 of 2022) [2023] KETAT 900 (KLR) (Commercial and Tax) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 900 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 1065 of 2022

E.N Wafula, Chair, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

December 20, 2023

Between

Idb Capital Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Government owned limited liability company and a registered taxpayer whose core business is to further economic development of Kenya through assisting in the promotion, establishment, expansion and modernization of medium and large-scale industrial enterprises through offering competitive financial services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. 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. The Respondent conducted tax audit on the Appellant’s business following an application dated 12th September 2018 by the Appellant for extension of period for utilization of accumulated losses pursuant to Section 15(5) of Income Tax Act (ITA).

4. Consequently, on 28th February 2022, the Respondent issued the Appellant with preliminary audit findings to which the Appellant objected on 14th March 2022 citing various grounds.

5. On 31st March 2022, the Respondent issued the Appellant with a notice of assessment for Corporation tax, PAYE, VAT and Withholding tax amounting to Ksh 24,540,730. 00 that was inclusive of penalties and interest. The assessment was occasioned by variances noted by the Respondent between amount in the ledgers and the amount claimed in the Appellant’s financial statements.

6. On 26th April 2022, the Appellant filed its notice of objection contesting the entire assessment on various grounds.

7. On 21st June 2022, the Appellant availed documents in support of the objection via email following the Respondent’s request of 16th June 2022 for additional documents to support the objection.

8. The Respondent issued its Objection decision confirming the assessment of Ksh 24,540,730. 00 on 19th August 2022 with respect to Corporation tax, PAYE, VAT and Withholding tax. The amount was inclusive of penalties and interest.

9. Aggrieved by the Respondent’s Objection decision, the Appellant filed its Notice of Appeal on 14th September 2022.

THE APPEAL 10. The Appellant’s Appeal is premised on the following grounds as laid out in its Memorandum of Appeal dated 27th September 2022 and filed on even date;a.That the Respondent erred in material facts by disallowing travelling and entertainment, advertisements, repairs and maintenance only on the basis of variances identified between expenses reported in financial statements and balances appearing in the Appellant’s specific ledgers and accounts without considering the explanations and documents provided.b.That the Respondent erred by subjecting PAYE on the variances noted between the staff costs claimed in the financial statements and the staff costs declared in the monthly PAYE returns without taking into account the fact that for presentation purposes, staff costs disclosed in the financial statements include other staff related expense items such as staff uniforms, recruitment expenses, pension contributions, staff welfare amongst others that are not subject to PAYE.c.That the Respondent did not consider all material facts provided by the Appellant in respect to withholding VAT and seeks to charge additional tax on the variances identified between VAT declarations and expenses claimed in financial statements without factoring in timing differences given the Appellant’s financial year cut off, exempt supplies and other casual purchases made during the period.

Appellant’s Case 11. The Appellant’s case is anchored on its Memorandum of Appeal together with its Statement of Facts dated and filed on 27th September 2022.

12. The Appellant averred that it is a registered taxpayer and a Government owned limited liability company with its principal place of business in Nairobi, Kenya; The Appellant further stated that its principal activity is to further economic development of Kenya through assisting in the promotion, establishment, expansion and modernization of medium and large-scale industrial enterprises, through offering competitive financial services.

13. The Appellant averred that the Respondent issued an additional assessment on 31st March 2022 disallowing expenses amounting to Kshs. 16,839,615. 00 claimed in respect to travelling and entertainment, advertisement and repairs and maintenance; on the basis that there were variances between the amount in the ledger and the amount claimed in the company’s financial statements.

14. The Appellant contended that the Respondent failed to consider all explanations and reconciliations provided in this respect yet the said variances were due to classification of expenses while preparing financial statements whereby some of the expenses were consolidated for ease of reporting. The Appellant asserted the claimed expenses were valid business expenditure in accordance with the provisions of Section 15(1) of the ITA.

15. The Appellant claimed that the Respondent issued additional assessment subjecting PAYE on variance noted between staff costs claimed in the financial- statements and staff costs declared in the monthly PAYE returns for the years 2016 to 2020 resulting in a tax amount of Kshs. 22,5634,777. 00 inclusive of penalties and interest.

16. The Appellant contended that the Respondent failed to consider that staff costs reported in the financial statements included other staff related costs that are not subject to PAYE such as pension, medical, staff uniforms, recruitment expenses amongst others.

17. The Appellant averred that the Respondent sought to charge additional tax in respect to withholding VAT on variances identified in regards to expenses claimed in the financial statements and payments made in respect to withholding VAT yet the Appellant provided responses to the findings and the Respondent failed to consider them.

18. The Appellant maintained that the Respondent’s basis in arriving at the variances between the amount in the ledgers and the amount claimed in the company’s financial statements was erroneous and not backed by actual facts as the Appellant fully complied with the Respondent’s request for documents which were shared on email on 21st June 2022.

Appellant’s Prayer 19. The Appellant prays that the Tribunal do allow the Appeal, do set aside the Respondent’s Objection decision and the assessed amount therein.

The Respondent’s Case 20. The Respondent replied to the Appeal vide its Statement of Facts dated 25th October 2022 and filed on even date.

21. The Respondent averred that following the Appellant’s request for utilization of accumulated losses pursuant to Section 15(5) of the ITA, the Respondent conducted tax audit of the Appellant’s operations.

22. The Respondent averred that it analyzed the availed records which included financial statements, trial balances, ledgers, provision movements, client loan documents and agreements.

23. The Respondent averred that based on the foregoing, it established that there had been omissions or underpayment of tax by the Appellant and this was communicated in the Respondent’s letter of audit findings dated 28th February 2022.

24. The Respondent averred that it reviewed the Appellant’s notice of objection of 14th March 2022 and the same was found to be of no probative value thus, it based its additional assessment on;a.Disallowed loss of rental income;b.Disallowed provisions of bad debts;c.Variances from a comparison of expenses in the IT2C returns relating to employees and directors were compared with declarations made through PAYE returns;d.Variance from comparison of the expenses in the ledgers with expenses claimed by the company in the IT2C returns; ande.Variance from comparison of expenses in the IT2C that attract withholding VAT with the withholding tax already remitted.

25. The Respondent averred that after it issued the notice of assessment and the Appellant objected to the same, it wrote emails to the Appellant requesting to be furnished with documents to support the objection, to which the Appellant provided the said documents vide email on 16th June 2022.

26. The Responded stated that after it reviewed the availed documents, on 20th June 2022 vide email, requested the following additional documents from the Appellant;a.A reconciliation of the list of expenses explaining the variance;b.A reconciliation of staff costs which are subject to PAYE or otherwise; andc.Proper reconciliation and supporting documents to explain the variance as per the Respondent’s letter of 28th February 2022.

27. The Respondent claimed that Section 15 of the ITA allows the Appellant to deduct from income only expenditure wholly and exclusively incurred by it in the production of that income. Further, that Section 15 (2)(a) of the ITA stipulates how to provide and account for bad and doubtful debts; the Respondent claimed that the Appellant failed to demonstrate the existence of doubtful debts to satisfy the criterion as laid out in law.

28. The Respondent alleged that the Appellant failed, refused or neglected to provide documents or reconciliations to support variances noted from comparison of expenses in its ledgers and financial statements with those found in its income tax returns.

29. The Respondent averred that contrary to Section 56 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’), the Appellant failed to discharge its burden of proof as required under Section 109 of the Evidence Act, Cap 80 of the laws of Kenya which provides as follows:“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.”

30. The Respondent averred that following the application of 12th September 2018 to carry forward losses made in 2010 in accordance with Section 15(5) of ITA it allowed the Appellant to do so in line with Section 15(4) of the ITA that provides for losses to be carried forward for ten years. However, advertisement, repairs and maintenance, travelling and accommodation expenses were accordingly disallowed due to absence of documents and or reconciliations to support the variances established between the ledgers and financial statements as well as in the Appellant’s iTax returns (IT2C).

31. Similarly, the Respondent disallowed PAYE claims due to variance between expenses in the income tax returns relating to employees’ expenses and declarations made through the PAYE returns and the Appellant’s lack of supporting documents.

32. The Respondent stated that the Appellant was an appointed withholding VAT agent and had been withholding and remitting withholding VAT as required; however, the withholding VAT on expenses in the financial statements varied with withholding VAT remitted leading to a withholding VAT liability of Kshs. 335,953. 00 inclusive of penalties and interest for 2017, 2019 and 2020 review period.

33. The Respondent averred that the Appellant being a registered VAT institution failed to file monthly VAT returns as per Section 44(1) of the VAT Act resulting in non-filler VAT penalties of Kshs. 1,570,000. 00 for January 2009 to March 2022 review period.

34. The Respondent averred that it took consideration of the information, explanations and documents provided during site visits and electronic mail correspondences in establishing tax liability of the Appellant.

The Respondent’s Prayers 35. The Respondent’s prayed:a.That the Tribunal upholds the objection decision dated 19th August, 2022 since the same is regular and issued in accordance with the law.b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Parties Submissions 36. In the Appellant’s written submissions dated 2nd May,2023 and filed on 3rd May, 2023, it submitted as hereunder on three issues:a.That the Respondent erred in disallowing travelling, entertainment, advertisement, repairs and maintenance expenses on the basis of the variances identified between the expenses reported in the financial statements and specific ledger accounts.

37. The Appellant contended that variances noted were as a result of classification of expenses while preparing financial statements where some expenses were consolidated for ease of reporting with ledger sub-account like overseas travel and local travel being combined while reporting in financial statements as travelling expenses to avoid having numerous expense items in the financial statements.

38. The Appellant averred that it provided all relevant documents and reconciliations in line with Section 51(3) of the TPA but the Respondent failed to consider them hence making an invalid decision based on mere assumption.

39. The Appellant averred that in disallowing costs incurred by the Appellant, there was no equity and fairness in revenue collection by the Respondent as the Appellant was denied expenses incurred wholly and exclusively in generating taxable income pursuant to Section 15 of the ITA.b.That the Respondent erred in rejecting PAYE on variances noted between staff costs claimed in the financial statements and staff costs declared in the monthly PAYE returns.

40. The Appellant averred that the Respondent failed to appreciate that not all costs are subject to tax. That the Respondent disallowed staff costs on the basis that salaries declared in the monthly PAYE returns did not reconcile with staff costs claimed in the income tax return without consideration that staff costs disclosed in the financial statements include other related costs such as pension, staff uniforms, staff welfare among others that are not subject to PAYE.c.That the Respondent erred in charging withholding VAT on the variances identified between VAT declarations and the expenses claimed in the financial statements.

41. The Appellant averred that the basis of charging withholding VAT on expenses claimed in the financial statements was erroneous and not backed by actual facts. Further, the Appellant claimed that the Respondent failed to consider all factors that resulted in the variances between the expenses claimed in the financial statements and the actual withholding VAT withheld such as timing differences and purchases made in cash.

42. The Appellant asserted that it maintained proper records of every transaction undertaken pursuant to Section 23 of the TPA and complied with the Respondent’s request for documents.

43. Further, the Appellant asserted that the assessment therein had no basis as the Respondent disregarded information provided and did not accord the Appellant the chance to explain areas that were not clear before issuance of the objection decision. The Appellant contended that the Respondent did not take into account the explanations and schedules provided during review stage.

44. The Appellant submitted that in total contravention of Article 47 of the Constitution of Kenya, 2010 [hereinafter ‘the Constitution’], the Respondent failed to accord the Appellant a chance to be heard before or prepare defenses of the taxes wrongly assessed.

45. To buttress its position, the Appellant relied on the case of Republic V Kenya Revenue Authority & 4 Others: New Flamingo Hardware & 22 Others ex parte [2020] eKLR that;“The right to be heard, which is significant requirement, can be met in various ways. In the case of an amended assessment issued by the Commissioner, that right is exercised by the taxpayer through the filing of an objection to the amended assessment. The right is curtailed where the Commissioner shortens the notice period provided by statute. It is clear from the evidence and arguments put before me that the applicants were not afforded an opportunity to be heard or to prepare defenses. I concur with the applicants that the respondents failed to afford them an opportunity to be heard thus violating the right to fair administrative action.”

46. In the Respondent’s written submissions dated 3rd April 2023 and filed 4th April 2023 it stated that the Appellant failed to substantiate the narrative that variances noted in the ledgers were occasioned by classification of expenses while preparing financial statements; and that some expenses were combined for ease of reporting. The Respondent averred that the Appellant did not discharge the burden of proof for the allegations even though the onus was on them.

47. The Respondent cited Section 30 of Tax Appeal Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’) and the Court’s holding in the case of Kenya Revenue Authority V Man Diesel & Turbo SE, Kenya [2021]eKLR that: -“The import of the above provisions is that the party with the obligation of persuasion is said to bear the burden of proof. The flipside of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her.”

48. The Respondent averred that the Appellant did not discharge its burden of proof and therefore the Respondent was justified in disallowing the provision made for bad and doubtful debts as espoused in Section 56 of the TPA. The Respondent further argued that the Appellant failed to demonstrate the existence of doubtful debts to the satisfaction of the Respondent in order to qualify for deduction as per Section 15(2)(a) of the ITA as read with Legal Notice No. 37 of 2011, Guideline 1 and 2 on allowability of bad debts that provide;“A debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it.”

49. To buttress its position, the Respondent cited the case of Equity Bank Kenya Limited v Commissioner of Domestic Taxes [2021]eKLR where the court held that;“I agree with the test for what is reasonable propounded by the Court of Appeal and applied by the Tribunal as for the reasonableness is the objective standard for review upon which the Commissioner’s discretion must be measured. I would also add that in order to benefit from a tax deduction on account of a bad debt, the taxpayer need only establish one of the grounds set out in paragraph 2 of the Guidelines.”

50. The Respondent alleged that the Appellant was ordinarily in possession of documents and bore the responsibility of producing them to enable the Respondent ascertain tax liability. The Respondent further alleged that the failure by the Appellant to provide reconciliations despite multiple requests constrained the Respondent to sustain its assessment. To buttress this position, the Respondent relied on Section 23 of the TPA as read in tandem with Section 30 of TAT Act.

51. The Respondent asserted that the Appellant failed to comply with Section 54 (A) of ITA regarding proper keeping of records by a person carrying out a business thus, failed to discharge its burden of proof when it failed to provide documentary evidence. The Respondent relied on Section 30 of the TAT Act, Section 56 of the TPA and Section 109 of the Evidence Act, CAP 80 of the laws of Kenya in placing the burden of proof upon the Appellant.

Issues for Determination 52. Having carefully read and ploughed through the parties’ pleadings, documentation and submissions, the Tribunal is of the view that the issue that calls for its determination distills into a singular issue;Whether the Tax Assessment as contained in the Objection Decision of 19th August 2022 was proper.

Analysis and Determination 53. Having established a single issue for determination , the Tribunal proceeds to analyze the issue as here under;

54. The Tribunal notes that the Appellant’s assessed and confirmed amount of Kshs.24,540,730. 00 relating to Corporation tax, PAYE, VAT and Withholding tax emanated from a tax audit that according to the Respondent led to the discovery of variances in the Appellant’s ledgers and the amount claimed in the financial statements.

55. The Respondent contested the Appellant’s supportive evidence in its notice of objection as not being sufficient despite the Appellant’s insistence that it had supplied all the requested documents and information. The Respondent was adamant that the Appellant failed to discharge its burden by adducing uncontested evidence inspite of the several reminders requesting the same as indicated in their varied correspondences attached in the pleadings.

56. The Tribunal notes that neither of the parties has contested nor disputed that the Appellant it is a withholding tax agent of the Respondent.

57. The Tribunal is guided by Section 15(1) of the ITA and Section 17(2) of the VAT Act that allow claims so long as they are wholly and exclusively incurred in the generation of business income for tax purposes. Equally, the Tribunal is guided by the contents of Section 28 of the TPA regarding self-assessment by a registered taxpayer.

58. The Tribunal notes that in deducting the claims, there should be corroborated proof of purchase as couched in Section 43 of the VAT Act. Similarly, deduction of provisions made must be substantiated and proven; this was upheld in the case of Equity Bank Limited vs Commissioner of Domestic Taxes, TAT 161 of 2017 as thus:-“…a bad debt is allowable as long as the lender provides a reasonable explanation of the action taken to recover the debt...”

59. The Tribunal in similar fashion is guided by Section 30 of TAT Act and Section 56 of the TPA both of which place the burden of proof in tax disputes upon the Appellant. Further the Tribunal relies on the High Court’s holding in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021]eKLR that;“…Section 56 of the TPA in peremptory terms places the burden of proof in tax cases on the taxpayer.”

60. The Tribunal notes that Section 23 of the TPA and Section 54(A) of the ITA as read with Section 17(3) of the VAT Act provide that any person carrying on business in Kenya is required to keep documents and records that enable tax liability to be readily ascertained. The Tribunal is guided by the decision in the case of Tumaini Distributors Company Limited V Commissioner of Domestic Taxes [2020] eKLR where the court held that;“The Commissioner clearly explained that it based its decision on the statement of accounts and returns the company had filed. The Tribunal appreciated this fact when it concluded that it was the duty of the company to provide all the documents and that the Commissioner was entitled to rely on the self-assessment and returns lodged by the company in the absence of any other documents.”

61. The Tribunal finds the assertions by the Appellant that it was not afforded time to explain its position as misplaced since the Appellant had an opportunity to counter the Respondent’s finding after the preliminary audit finding and after the confirmation of the assessment. At both levels, the Appellant could have produced documents and information to counter the Respondent’s assessment. The Tribunal also notes the contents of Section 24(2) of the TPA which states 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.”

62. To buttress this position, the Tribunal is guided by Section 31 of the TPA which provides as follows;“…the Commissioner may amend an 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…”.

63. The Tribunal having perused through the documentation adduced herein has noted that the Appellant did not attach the supportive documents and schedules as requested by the Respondent even at the Appeal stage. The Appellant sneaked in the schedules and reconciliations in its submissions which the Tribunal consider new evidence in an ongoing matter. The said schedules and reconciliations are thus inadmissible by dint of time and were never served upon the Respondent at the review stage.

64. The Tribunal notes the advice extended to the Appellant by the Respondent in its objection decision that it should apply for VAT deregistration upon payment of penalties or approval of waiver of the penalties

65. From the foregoing, the Tribunal is satisfied that the Respondent’s tax assessment as confirmed in the objection decision of 19th August 2022 was proper.

Final Decision 66. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 19th August, 2022 be and is hereby upheld.c.Each party to bear its own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 20TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI MOHAMED A. DIRIYEMEMBER MEMBERSPENCER S. OLOLCHIKEMEMBER