[2024] KETAT 707 (KLR)

Ikiara v Commissioner of Legal Services & Board Co-ordination (Tax Appeal E235 of 2023) [2024] KETAT 707 (KLR) (24 May 2024) (Judgment)

Neutral citation: [2024] KETAT 707 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E235 of 2023

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

May 24, 2024

Between

John Anampiu Ikiara

Appellant

and

Commissioner of Legal Services & Board Co-ordination

Respondent

Judgment

Background 1. The Appellant is an individual living in Kenya and a registered taxpayer within the Republic of Kenya whose principal activity is cargo handling.

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 Parts 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 investigated the case following receipt of intelligence from the Intelligence and Strategic Operations Department to the effect that the Appellant was under-declaring its income tax and VAT for the years 2016 to 2020. The investigations involved comparative analysis and examination of third-party records to establish the true income of the Appellant. Vide a letter dated 28th June 2022 the Respondent shared its findings with the Appellant. The Appellant responded to investigation findings through a letter dated 29th August 2022.

4. The Appellant objected to income tax additional assessments through the letter dated 27th January 2023. Upon review of the objection, the Respondent issued objection decision dated 6th April 2023. The Appellant being aggrieved by the above objection decision, lodged this Appeal having been granted leave to file by the Tribunal after its application dated 19th May 2023.

The Appeal 5. The Appeal was premised on the following grounds as outlined in its Memorandum of Appeal dated 15th May 2023 and filed on 19th May 2023:i.That Respondent erred in law and in fact by arbitrarily raising assessments based on gross deposits on the Appellant's bank accounts.ii.That the Respondent erred in law and in fact by disregarding all explanations and documentation provided by the Appellant in support of their objection and proceeding to confirm the income tax assessments.iii.The Respondent erred in law and in fact by assessing income tax on non-revenue sales assumed from bank deposits in the accounts of the Appellant in the period under review.

Appellant’s Case 6. In support of the Appeal, the Appellant lodged Statement of Facts dated 15th May 2023 and filed on 19th May 2023.

7. On income tax assessment, the Appellant stated that the Respondent brought to tax, credits in the bank statement and treated them as sales which does not reflect actual sales since the Appellant had borrowed severally from colleagues and relatives to meet cash flow challenges.

8. The Appellant also stated that the Respondent charged tax on undisclosed income. The Appellant argued that he had borrowed money to finance fundamental equipment needed by Joleen Traders to kick off the business.

9. Finally, the Appellant stated that the Respondent failed to consider information and documents provided. The Appellant averred that inspite of providing all the information, explanations and documentation, the Respondent went ahead to disregard the information, explanations and documents and confirmed the assessments.

Appellant’s Prayers 10. The Appellant prayed for the following orders:a.The Appeal be allowed;b.The Respondent’s confirmed assessment be annulled; andc.Costs of this Appeal be awarded to the Appellant.

Respondent’s Case 11. In response to the Appeal, the Respondent filed its Statement of Facts dated 24th August 2023 and filed on even date together with its written submissions dated 12th January 2024 and filed on even date.

12. The Respondent investigated the case following receipt of intelligence from the Intelligence and Strategic Operations Department (hereinafter ‘ISO’) to the effect that the Appellant was under-declaring its income tax and VAT for the years 2016 to 2020. The investigations involved comparative analysis and examination of third-party records to establish the true income of the Appellant. On 28th June 2022, the Respondent shared its findings with the Appellant and required the Appellant to review and respond.

13. It is the Respondent’s case that the Appellant replied vide letters dated 25th August 2022 and 29th August 2022 on behalf of the company and the director respectively and through an electronic mail dated 5th December 2022. The Respondent noted that the Appellant provided bank analysis for the Company together with transaction report of the three major customers and bank deposit analysis for the director.

14. The Respondent stated that the Appellant noted that there were some variances established between Respondent's gross banking and his own. The Respondent's gross banking was Kshs 313,489,920. 00 while the Appellant's was Kshs 309,848,703. 00 giving a variance of Kshs 3,641,217. 00.

15. The Appellant stated that the bank deposits were from three major customers who transacted with the Company during the period, namely WRC Safari Rally Kenya, Bollore Transport & Logistics Kenya Limited and Kuenhe & Nagel Limited. Apart from the above deposits they had other credits in their bank statements, which were non-business income. The non-business income deposits received in the bank were: mortgage loan, owner's cash, project cash/client account and reversals.

16. According to the Respondent, the Appellant claimed that the non-business incomes should be adjusted from the bank deposits hence not to be treated as business income. The Appellant also claimed that he received monies totalling to Kshs. 265,766,316. 20 from its three customers while Respondent stated that he received Kshs 186,858,852. 00.

17. The Respondent stated that the Appellant had indicated that he was indifferent as to whether to claim the input VAT arising from purchases of the client's projects materials or not. He said that the amount claimed was indeed less than the actual input VAT claimable which the direct costs of sales comprised of: project material costs including but not limited to stones, ballast, sand and water, labour costs for casual workers, loaders and drivers and fuel and electricity costs.

18. The Respondent averred that the Appellant stated that the director's bank deposit in his bank account (ABSA) was Kshs. 38,444,950. 00 while the Respondent stated it was Kshs. 38,576,061. 00 for the 2016 to 2020 years of income.

19. According to the Respondent, the Appellant stated that the bank deposits included money that should not have been subjected to tax i.e. employment income of Kshs 3,251,924. 00 and loan proceeds totalling Kshs. 17,528,435. 00. The Appellant also claimed that the Respondent treated Kshs 24,596,745. 00 as unsupported income because the director injected into the company Kshs 38,667,807. 00 into the company yet his total bank deposits were Kshs 14,071,062. 00 therefore, giving a rise to the variance of Kshs 24,596,745. 00.

20. The Respondent averred that the Appellant explained the variance of Kshs 24,596,745. 00 as money borrowed from personal friends as the nature of the business contracted by the Company, calls for cash transactions therefore, when there are liquidity challenges, he could not afford credit, therefore, relied on friendly loans from friends/colleagues. The Respondent also asserted that the Appellant claimed that when he had a deficit of funds, he borrowed from friends therefore the Respondent should not have subjected Kshs 5,234,774. 00 to tax.

21. The Respondent stated the Appellant admitted to omitting the car benefit in the director's returns, therefore, the same should be considered as admitted.

22. According to the Respondent, the documents in support of the objection were reviewed and contentions and information contained therein, taken into consideration in establishing the correct tax liability but did not warrant arriving at a different decision. The Respondent stated that the Appellant sought an extension to provide more documentation, which was allowed and he provided additional information at different dates. The Respondent then issued its objection decision on 6th April 2023 in which it upheld the tax assessment on the grounds of lack of supporting documentation by the Appellant to support its grounds of objection.

Respondent's Response to the Appeal 23. The Respondent relied on the provisions of Section 17 (1) of the Value Added Tax Act No. 35 of 2013 (hereinafter ‘VAT Act’) and Sections 29, 31 (1), 51 (3), 56 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’).

24. The Respondent also relied on Section 24 (2) of the TPA which provides as follows:“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."

25. In addition, the Respondent relied on Section 31 (1) of the TPA which allows it to amend an assessment by making alterations or additions from the available information and to the best of its judgement.

26. The Respondent argued that in exercise of its mandate within the law, it considered all the documents, breakdown of truces and reasons for objection provided by the Appellant and made an additional assessment to include the undeclared tax. The Respondent therefore argued that it acted within the law and cannot be faulted for exercising its mandate within the law.

27. The Respondent relied on the provisions of Section 31 (2) and Section 31 (4) (b) (i) of the TPA to argue that the said provisions allow the Appellant to make an application to amend a self-assessment. The Respondent maintained that as at the date of the additional assessment, the Appellant had not made such an application to amend the returns which is now the additional assessment in issue.

28. The Respondent also relied on Section 51 (3) (c) of the TPA to argue that the Appellant did not provide relevant documents to support its objection. Consequently, the Respondent argued that the Appellant failed to discharge the burden of proof under Section 56 (1) of the TPA.

29. Finally, the Respondent stated that it considered the documents, explanations and information available before issuing its objection decision but due to the lack of relevant and proper documents, the Respondent rejected the objection and confirmed the assessment. The Respondent therefore, argued that it did not disregard the explanations and documents provided by the Appellant.

30. In the submissions, the Respondent identified two issues for determination: Whether the Respondent's charge to tax on the Appellant was proper in law; and whether the Appellant discharged its burden of proving that the Respondent's decision was incorrect.

31. On whether the Respondent's charge to tax on the Appellant was proper in law, the Respondent relied on Section 17 (1) of the VAT Act to submit that the Appellant has obligation to deduct input tax on a taxable supply.

32. The Respondent submitted that it relied on by Section 31 of the TPA in raising assessments which allows that the Respondent to amend an assessment by making alterations or additions, from the available information and to the best of the Commissioner's Judgment. To explain what constitutes the Commissioner's best judgment, the Respondent relied on the case of Commissioner for her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid Appellant vs The Commissioners for Her Majesty's Respondents Revenue & Customs where it was held 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.Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment 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 judgment, is due. In the very nature of things frequently the relevant information 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 judgment' does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations. 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. 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 mm, not result in further material being placed before them."

33. The Respondent also submitted that the Appellant failed to file relevant documents to support the objection. The Respondent relied on TAT No. 70 of 2017 Afya X-Ray Centre vs. Commissioner of Domestic Taxes and TAT Appeal No. 538 Of 2021 Greenroad Kenya Limited vs Commissioner of Domestic Taxes to submit that the Appellant has a duty to provide relevant documents to support tax objection. The Respondent therefore submitted that since the Appellant failed to provide relevant documents to support the objection, the Respondent relied on available documents and best judgment to arrive at the objection decision.

34. On whether the Appellant discharged its burden of proving that the Respondent's decision was incorrect, the Respondent submitted that the Appellant failed to provide supporting documentation for its grounds of objection. The Respondent submitted that vide a letter dated 15th February 2023, the Respondent informed the Appellant to regularise its objection by providing relevant documents to comply with section 51(3) of the TPA but the Appellant failed to do so.

35. The Respondent submitted that it relied on documents provided by the Appellant on various dates after its objection as well as information available to the Respondent in determining the Appellant's correct tax liability.

36. The Respondent also submitted that it is empowered under Section 59 of the TPA to require production of such documents as deemed necessary in determination of a taxpayer's tax liability but on request, the Appellant failed to provide the documents.

37. Further, the Respondent relied on Section 56 (1) of the TPA to argue that the Appellant has failed to discharge the burden of proof. The Respondent relied on Pearson vs Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited Vs. Kenya Revenue Authority (2013) eKLR where the court stated as follows:“where there is an assessment made by the Additional Commissioner upon the Appellant; it is perfectly settled by cases such as Norm an vs Calder 267C 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs."57. ..the Appellant in the present appeal has manifestly failed to discharge such an onerous burden of proof placed squarely on it. "

38. Consequently, the Respondent submitted that the Appellant has failed to prove that the Respondent's tax decision was in any way inconsistent, based on extraneous factors, excessive or incorrect by failing to avail documents.

Respondent’s Prayers 39. The Respondent requested the Tribunal to uphold the Respondent’s objection decision dated 6th April 2023 and dismiss the Appeal with costs to the Respondent as the same lacks merit.

Issues for Determination 40. The Tribunal having considered the parties’ pleadings, documents and submissions, puts forth the following issue for determination:a.Whether part of the assessment was statutorily time barred; andb.Whether the Appellant discharged his burden of proof pursuant to Section 56(1) of the TPA and Section 30 of the TATA.

Analysis and Findings 41. The Tribunal will proceed to analyse the issues as hereinunder:-

a. Whether part of the assessment was statutorily time barred. 42. The Appellant did not plead that part of assessments are time barred. For the sake of justice and fidelity to the law the Tribunal will proceed to decide on this issue because the assessments were issued in 2022 and covered the period from 2016 to 2020. Therefore, the Tribunal seeks to determine whether the 2016 assessments are beyond statutory five-year limit.

43. Section 23 (1) (c) of the TPA provides as follows on the issue regarding record keeping:‘‘(1) A person shall—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.’’

44. In addition, Section 23 (3) of the TPA provides as follows:‘‘when, at the end of the period specified in subsection (1)(c), a document—(a)Relates to an amended assessment, the person shall retain the document until the period specified in section 31(7) has expired; or(b)is necessary for a proceeding commenced before the end of the five-year period, the person shall retain the document until all proceedings have been completed.’’

45. Section 29 (5) of the TPA provides as follows:“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’ While section 29 (6) provides that, ‘‘Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

46. Section 31(4) of the TPA provides as follows:“The Commissioner may amend an assessment—(a)In the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(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:Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

47. The running thread in the above provisions of the law point to one factor: time. Time is of essence in tax matters. Section 23 (1) (c), Section 29(5) and Section 31(4) (b) of the TPA expressly provide that the retention of records and how far back the Respondent can go in making an assessment are subject to a timeframe of five years. Application of the said provisions to this Appeal means that the 2016 assessments being assessed in 2022 are beyond the five-year limit.

48. The Tribunal notes that the burden of proving the incorrectness of a tax decision is always upon the taxpayer as provided for by Section 56(1) of the TPA. Whereas the burden of proof rests upon the taxpayer’s shoulders, there are instances wherein the burden of proof shifts to the Respondent. Pursuant to the provisions of Section 29(6) or Section 31 (4) (a) of the TPA, where the Respondent seeks to recover taxes beyond the five-year period as stipulated in by statute, the burden of proving why it would be justified in doing so rests on it as was held in Gitere Kahura Investments Ltd Appeal No. 16 of 2019.

49. The Tribunal further notes that pursuant to Sections 107 and 108 of the Evidence Act, CAP 80 of the laws of Kenya, the Respondent has the burden of proving that the Appellant is in breach of Section 29(6) or 31(4)(a) of the TPA. The Respondent has to rationalise why timelines under the provisions of Section 23 (1) (c), Section 29(5) and Section 31(4) (b) of the TPA should not apply in the instant Appeal.

50. The Tribunal finds that the Respondent did not adduce evidence to demonstrate that the Appellant breached Section 29 (6) or Section 31 (4) (a) of the TPA and thereby justify why it assessed the Appellant beyond the statutory limit of five years. Consequently, the Respondent cannot find refuge under Section 29 (6) or Section 31 (4) (a) of the TPA.

51. Under the circumstances, the Tribunal finds and holds that the tax assessment in respect of the 2016 year of income is statutorily time barred and consequently null and void ab initio. It ought to be expunged from the objection decision and is hereby expunged.

b. Whether the Appellant discharged his burden of proof pursuant to Section 56(1) of the TPA and Section 30 of the TATA. 52. The Appellant in the Memorandum of Appeal argued that Respondent erred in law and in fact by arbitrarily raising assessments based on gross deposits on the his bank accounts and that the Respondent erred in law and in fact by disregarding all explanations and documentation provided by it in support of his objection and proceeding to confirm the income tax assessments.

53. The Tribunal then sought to examine the documentation that the Respondent ignored and outlined what each proved as follows:a.A letter dated 28th June 2022 from the Respondent on preliminary tax investigation findings for the years 2016 to 2020- this document proves that the Respondent had made some preliminary findings of its investigation;b.A letter dated 29th August 2022 being a response to Respondent’s investigations findings for the period 2016 to 2020; notice of objection dated 27th January 2023- this document proves that the Appellant replied to the Respondent’s letter; andc.The objection decision dated 6th April 2023 – this document proves the compliance of the Appellant with Section 13 (2) of the Tax Appeals Tribunal Act no. 40 of 2013 (hereinafter ‘TATA’) as this is one of the documents that formed a record of the Appeal.1. The Appellant did not file any other document. The highlighted documents did not demonstrate that the Respondent’s decision was wrong. In short, the Appellant did not file sufficient documentary evidence to support his Appeal.2. Section 13(2) (b) of the ‘TATA required the Appellant to file a Statement of Facts. The Tribunal hastens to add that the Statement of Facts should support and expound the contents of the Memorandum of Appeal. The Statement of Facts should explain why and how the Respondent’s decision is incorrect and have attached to it, documentary evidence pursuant to Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 which provides as hereunder:“(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.” (Emphasis added)

56. The Tribunal notes that the Appellant did not file any other evidence to substantiate its claims and to support his Appeal. The Tribunal’s expectation would have been that the Appellant would have provided some financial statements, support documents such as ledgers, reconciliations and any other documents that would support the figures in the financial statements.

57. The Tribunal notes that the Appellant either thought it was inconvenient or simply did not bother to file a bank statement to support the transactions in his bank accounts. Coincidentally, the Tribunal is of the view that the Appellant satisfied the provisions of Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 to the effect that he provided documentary evidence. However, it also follows that such evidence ought to have discharged his burden of proving the incorrectness of the Respondent’s decision and it did not do so. It is therefore the view of the Tribunal that the documentary evidence provided was insufficient.

58. The Appellant herein has a statutory duty under Section 56(1) of the TPA and Section 30 of the TATA to prove that the Respondent’s decision is incorrect. The way to discharge this burden is to adduce sufficient documentary evidence. The Appellant has failed to discharge his burden of proof.

59. The Tribunal notes that it is settled law and it has been held, in numerous cases, that the taxpayer has the burden of proving that the Respondent’s decision is incorrect. This Tribunal, in the case of Digital Box Limited v Commissioner of domestic investigations and Enforcement [2020] affirmed that the burden of proving that the Commissioner’s decision was wrong fell on the taxpayer. In Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR and Darwine Wholesalers Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) it was held that the taxpayer has the burden of proving that the Respondent’s decision is wrong.

60. In the instant Appeal, the Tribunal finds and holds that the Appellant did not adduce sufficient evidence to support his assertions and therefore failed to discharge his burden of proof pursuant to Section 56(1) of the TPA and Section 30 of the TATA. Consequently, to the Tribunal the Respondent’s objection decision was justified.

Final Decision 61. The upshot to the foregoing analysis is that the Appeal partially succeeds. Consequently, the Tribunal makes the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 6th April, 2023 be and is hereby varied as follows:i.The tax assessment in respect of the 2016 year of income is hereby set aside.ii.The 2017, 2018, 2019 and 2020 tax assessments are hereby upheld.(c)Each party to bear its own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24THDAY OF MAY, 2024CHRISTINE A. MUGACHAIRPERSONBONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBERGEORGE KASHINDI SPENCER S. OLOLCHIKEMEMBER MEMBER