[2024] KETAT 867 (KLR)

Idiama v Commissioner of Legal Services and Board Coordination (Tax Appeal E401 of 2023) [2024] KETAT 867 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 867 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E401 of 2023

CA Muga, Chair, BK Terer, D.K Ngala & SS Ololchike, Members

June 28, 2024

Between

Mary Wesonga Idiama

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

1. The Appellant is a taxpayer and an employee of the County Government of Busia.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. Under Section 5(1), the Respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5(2) with respect to the performance of its functions under subsection (1), the Respondent 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 a demand for additional tax for Kshs 3,634,313. 00 on 3rd February, 2023 being principal Income tax liability following a banking analysis of the Appellant’s bank statements.

4. The Appellant objected to the Respondent’s assessment on 10th March, 2023 and provided the following supporting documents: Bank statements for the period assessed.

Fire incident assessment report for Busia County head office.

Introduction letter as a signatory to Busia County bank account

Deployment letter to the accounts department in the governor’s office.

A letter authorizing the Appellant to manage office operations and other administrative costs in the office of the Governor.

5. The Respondent reviewed the availed documents and vide its letter dated 8th May, 2023 issued an objection decision confirming tax of Kshs 5,318,285. 64 which was inclusive of penalty and interest.

6. Aggrieved by the Respondent’s decision, the Appellant filed her Notice of Appeal on 7th July 2023.

The Appeal 7. The Appeal was premised on the following grounds of Appeal as stated in the Appellant’s undated Memorandum of Appeal which was filed on 21st July, 2023:a.That the Respondent erred in law by raising the additional income tax assessment on funds meant solely for the County office operations and administration costs.b.That the Respondent erred in law and principle by failing to regard the Appellant’s submitted documents and basing the objection decision on the document’s unavailability unsupported objection.c.That the Respondent erred in law by failing to adhere to the guidelines of section 51 (4) of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”).

The Appellant’s Case 8. The Appellant’s Memorandum of Appeal was supported by her Statement of Facts also filed on 21st July, 2023 where she averred that vide a letter dated 2nd April 2016, the County departmental accounts were closed and no transaction could take place and that being the Accountant at the time, the County authorized for the County funds meant for office operations to be channelled to her account. This authorization was done vide a letter dated 14th March 2016, hence the purported undeclared sales for the period was County’s office operations and administrative expenses funds.

9. She stated that in 2018, the County offices including archives were burnt down and that all accounting documents including those involved in running the departmental finances were destroyed.

10. The Appellant asserted that she had no existing business operation carried in her PIN other than the employment income and therefore should not be held liable for transactions that were carried out on behalf of the County Government of Busia as she was only acting as an agent. She submitted therefore that the Respondent erroneously posited that the monies received by her to and in the County office operations and administrative costs to run its affairs were taxable. She therefore averred that the Respondent erred in law by raising the additional income tax assessment on an approach that contravenes the applicable sections of the ITA, best practices and the laid-out laws jurisprudence.

11. The Appellant stated that subsequent to the assessment, she made an objection and provided the Respondent with documents including and not limited to her letter of deployment dated 29th February 2016, letter on closure of departmental accounts to Cooperative Bank of Kenya dated 2nd April 2016, letter authorizing the Appellant to manage office operations and other administrative costs dated 14th March 2016 and bank statements. She therefore faulted the Respondent’s assertion that she failed to provide the supporting documents and hinging the objection decision on the same.

12. The Appellant asserted that she discharged her burden of proof in availing the documents as per Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) and that having discharged her duty to the full extent, she submitted that the Respondent should have reviewed the documents provided and made a decision that lay within the confines of the provided laws, instead, the Respondent disclaimed the provided documents and faulted the Appellant with the unavailability of the purported documents.

13. She argued that when it comes to interpretation of tax legislation, the statute must be looked using slightly different lenses and that the language imposing the tax must receive a strict construction. She emphasised this argument by citing Judge Rowlett in his decision in Cape Brandy Syndicate vs. I.R Commissioner (1921) IKB where the judge expressed the common law position in this area when he stated:…”in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.

14. The Appellant further agreed with the case of Republic vs Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited (2014) eKLR where the Court held as follows:“In interpreting the tax laws, the plain language of Parliament should be adhered to lest the goods and services which Parliament did not want to tax are taxed as a consequence of the taxman’s misinterpretation of the laws. In order to achieve this purpose, tax statutes must be strictly interpreted”.

15. The Appellant emphasized further that the court was succinctly clear when it affirmed the position in the above case of Republic vs Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited (2014) eKLR wherein the learned Judge held as follows:“Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect upto the last coin that is due from a taxpayer”

16. It was the Appellant’s averment that the Respondent ought to have notified the Appellant within a period of fourteen days of the invalidity of her objection as required under Section 51(4) of the TPA to enable the Appellant to cure the same. She averred that the notice was never served and it can only be ascertained that the objection lodged was valid as per the law.

17. The Appellant argued that having complied with the law, she had a legitimate expectation that the Respondent would keenly review the objection and provide the Appellant with the review report prior to issuing the objection decision. It was her contention that by disregarding the documents in its possession, without citing and giving any legal, or accounting reason and proceeding to issue the objection decision without due regard or reference to documents in its possession, the Respondent acted unreasonably, unlawfully and the resultant assessments cannot therefore stand.

18. The Appellant contended that the Respondent in its objection decision indicated on incremental liability for the period of 2017 and 2018 amounting to Kshs 17,796,961. 00 contrary to the assessment issued, and further that the objected amount of Kshs 12,114,375. 00 which resulted to a tax liability of Kshs 3,634,313. 00 for the period of 2018, which depicts a high level of ineptitude. She therefore submitted that there is no undisputed tax payable.

19. The Appellant prayed that the Tribunal would:a.Set aside in its entirety the tax demanded by the Respondent and for the Tribunal to make its own finding on whether or not the Appellant has a tax liability; andb.Order that costs of this Appeal be borne by the Respondent together with interest thereon at such rates and for such period as the Tribunal may deem fit to grant.

Respondent’s Case 20. The Respondent addressed the Appellant’s grounds of Appeal through its Statement of Facts dated 18th August, 2023 and filed on 20th August, 2023.

21. The Respondent reiterated its position as stated in the objection decision and placed reliance to Sections 119 and 120 of the Public Finance Management Act, CAP 412A of Kenya’s Laws (hereinafter “PFMA”) which provides as follows:“119(1) The County Treasury is responsible for authorizing the opening, operating and closing of bank accounts for the County government and its entities, except as otherwise provided by other legislation and in accordance with regulations made under this Act.(2)As soon as practicable, each County Treasury shall establish a Treasury Single Account at the Central Bank of Kenya or a bank approved by the County Treasury through which payments of money to and by various county government entities are to be made.(3)The Treasury Single Account shall not be operated in a manner that prejudices any entity to which funds have been disbursed.(4)An accounting officer for a county government entity shall not cause a bank account of the entity to be overdrawn beyond the limit authorized by the County Treasury or a Board of a county government entity, if any(5)A County Treasury shall keep complete and current records of all bank accounts for which it is responsible under the Constitution, this Act or any other legislation.120(1) A County Treasury shall manage its cash within a framework established by the County assembly and by regulations.(2)Every county government entity shall submit an annual cash flow plan and forecasts to the County Treasury in a form and manner directed by County Treasury and shall send a copy to the controller of Budget.”

22. The Respondent buttressed the importance of maintaining and availing documents by relying on Sections 23 and 59(1) of the TPA. It further relied on Section 56(1) of the TPA and placed the burden of proof on the Appellant to prove that the Respondent’s tax decision was erroneous. It asserted that the Appellant failed to discharge this burden as she failed to provide evidence to show or demonstrate that the assessment was erroneous.

23. The Respondent stated that its actions were in line with Sections 51(3) and 51(4) of the TPA given that the Appellant’s objection, although invalid was considered and consequently invalidated in line with the relevant laws. It stated therefore that its Objection Decision issued on 8th June, 2023 was proper and that the Appellant failed to prove that the Assessment Order or the invalidation were excessive or issued outside the set tax statutes.

24. The Respondent therefore made the following prayers to the Tribunal:a.That the Respondent’s Objection Decision issued on 8th June 2023 be found to be proper in law and be upheld.b.That this Appeal be dismissed with costs to the Respondent as the same lacked merit.

Parties’ Submissions 25. The Appellant failed to file her Written Submissions and her appeal will be considered based on her pleadings. The Respondent on the other hand filed its Written Submissions dated 27th February, 2024 on even date wherein it raised two issues for determination:a.Whether the tax assessment raised by the Respondent was proper.1. The Respondent reiterated its reliance on Sections 119 and 120 of the PFMA and Section 23 of the TPA. It submitted that it was proper in exercising its best judgement in issuing the objection decision as the Appellant failed to provide the necessary documents and information to validate its objection as provided for under Section 51 of the TPA.

27. In elucidating on what constitutes Commissioner’s best judgement, the Respondent relied on the case of Commissioner for Her Majesty’s Revenue and Customs TC/2017/02292 Saima Khalid vs The Commissioner for Her Majesty Revenue & Customs where it was stated at paragraph 29 as follows:“...the very use of the word judgement” makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before them.Secondly, clearly there must be some material before the commissioners on which they can base their judgement. If there is no material at all, it would be impossible to form a judgement as to what tax is due.Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgement, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words “best of their judgement does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations .What the words “best of their judgement envisage, in my view, is that the commissioner will fairly consider all material placed before them and, on the material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them”(b)Whether the Respondent failed to consider the documentation provided by the Appellant.

28. The Respondent again relied on Section 23 of the TPA to espouse the need for the Appellant to keep records to enable the Respondent to ascertain the tax liability, and Section 59 of the TPA that requires the Appellant to produce these records/ documents when required to do so.

29. The Respondent relied on the decision in Kenya Revenue Authority vs Man Diesel & Turbo Se, Kenya (2020) eKLR where the court stated the following:“The shifting of the burden of proof in tax disputes flows from the presumption of correctness, which attaches to the Commissioners assessments or determinations of deficiency. The Commissioners determination of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

30. The Respondent also relied on the following cases: Pearson vs Belcher CH.M Inspector of Taxes

PZ Cussons East Africa Limited vs Kenya Revenue Authority (2013) eKLR

Primarosa Flowers Limited vs Commissioner of Domestic Taxes (2019) eKLR

Issues For Determination 31. Having considered the parties pleadings, documents and submissions, the Tribunal is of the view that this Appeal raises a sole issue for determination.

Whether the assessment was justified.Analysis And Findings 32. The Tribunal will proceed to analyse the issue identified for determination as hereinunder:

Whether the assessment was justified. 33. The Respondent raised the assessment on the Appellant based on information that the Appellant had failed to declare income despite receiving credits from Busia Country. In her objection, the Appellant stated that she was an employee of the Busia County Government and that she had the authority to receive funds through her account meant for office operations and administrative expenses.

34. The Tribunal notes that the Respondent requested the Appellant to provide supporting documents to which the Appellant provided the following documents which the Respondent acknowledged receiving:a.Bank statements for the period assessed.b.Fire Incident Assessment report.c.Introduction letter as a signatory to Busia County bank account.d.Deployment letter to the accounts department in the Governor’s office.e.A letter authorizing the Appellant to manage office operations and administrative costs in the office of the Governor.

35. In the objection decision dated 8th May, 2023 the Respondent had stated that it requested for a memo, minutes of meeting or any resolution from the County Government of Busia approving payment to the Appellant’s account. However, the Tribunal has not sighted the said communication to confirm that indeed the Respondent requested the said documents from the Appellant. Further, that the Respondent confirmed ascertaining that there was a time the departments accounts were closed in or about 2016 after the Appellant provided the fire incident assessment report for Busia County head office.

36. The Respondent had also linked the Appellant with a company known as Wintob Enterprises. However, the Appellant denied any association with the company. It would have helped if the Respondent had provided proof of this fact. The Respondent’s allegations therefore are unsubstantiated and therefore, remain mere averments.

37. It is the Tribunal’s considered view that the documentation provided by the Appellant were sufficient to discharge her burden of proof. From the bank statements provided, the Tribunal expected the Respondent to point out which of the amounts in the statement were unsubstantiated given that entries in a bank statement always have a narration of the entries and in cases of credits the source will be indicated.

38. The Tribunal has also sighted the letter dated 14th March 2016 authorizing the Appellant to manage funds passing through her bank accounts for office operations and other administrative costs and to appropriately account for these funds. The Respondent acknowledged receiving this letter together with other documentation and at no time did it doubt the authenticity of the document.

39. It is the Tribunal’s considered view that even with some documents lost in the fire, the documents the Appellant provided were sufficient to enable the Respondent determine the source of the funds in the Appellant’s bank accounts. It would therefore be safe to state that the Appellant having discharged her burden of proof the pendulum now shifted back to the Respondent.

40. The Tribunal reiterates its holding in the case of Commissioner of Domestic Taxes vs Trical and Hard Limited (Tax Appeal E146 OF 2020) (2022) KEHC 9927(KLR) which stated;“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden shifts to the Commissioner. I have emphasized and underlined “competence” and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and giving the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the taxpayer.”

41. The Tribunal is of the firm opinion the Appellant discharged her burden of proof and it was up to the Respondent to controvert this proof with facts of its own and it to do so.

42. Consequently, it is the Tribunal’s view that the Appellant adduced competent and relevant evidence that was uncontroverted by the Respondent and therefore finds that the assessment was not justified.

Final Decision 43. The upshot of the above is that the Appeal is meritorious and the Tribunal will proceed to make the following orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 8th May, 2023 be and is hereby set aside.c.Each party to bear its own costs.

44. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE, 2024. ....................................CHRISTINE A. MUGACHAIRPERSON……………………………. ……..............……………..BONIFACE K. TERER DELILAH K. NGALA MEMBER MEMBER………………………………OLOLCHIKE S, SPENCERMEMBER