[2024] KETAT 417 (KLR)

Infama Limited v Commissioner for Legal Services & Board Coordination (Appeal 58 of 2023) [2024] KETAT 417 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 417 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 58 of 2023

RM Mutuma, Chair, B Gitari, M Makau, AM Diriye & EN Njeru, Members

March 22, 2024

Between

Infama Limited

Appellant

and

Commissioner for Legal Services & Board Coordination

Respondent

Judgment

BACKGROUND 1. The Appellant is a limited liability company registered under the Companies Act, No. 17 of 2015, and carries on business of insurance brokerage, road rescue services and other motor vehicle business support services.

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) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) of the Act with respect to the performance of its function 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 issued an additional assessment on the Appellant’s ValueAdded Tax for the year 2019, PAYE for the years 2017 to 2019 and Income tax for the years 2020 and 2021 amounting to Kshs. 88,109,225. 00

4. The Appellant objected to the assessment through a letter dated 14th October 2022 and the Respondent revised the assessment on 2nd December 2022 to Kshs. 68,502,739.

5. The Respondent consequently issued a demand for the revised amount of Kshs. 68,502,739. 00 including penalty of Kshs. 3,425,137. 25 and interest of Kshs. 29,223,016. 22. 00, all totaling Kshs. 101,150,893. 22.

6. Dissatisfied by the decision of the Respondent the Appellant filed a Notice of Appeal dated 14th January 2023 on 18th January 2023.

THE APPEAL 7. The Appellant in challenging the decision given by the Respondent framed the Appeal as follows in its Memorandum of Appeal dated 17th January, 2023 and filed on the 18th January, 2023:-i.The Respondent erred in arriving at the decision it did not consider the documents submitted by the Appellant.ii.The Respondent erred in finding that there was a disposal of trucks that were repossessed under a Hire Purchase Agreement and that VAT was applicable in that case.iii.The Respondent erred in finding that the Appellant claimed salaries and wages that had been outsourced by the Appellant from a third party (Infama Ogem Services Limited) and disregarded the Agreement between the Appellant and Infama Ogem.iv.The Respondent erred in confirming the Corporation tax assessment while the tax had not been raised because the assessment was not complete.v.The demand dated 2nd December 2022 is not legal and cannot be enforced. APPELLANT’S CASE

8. The Appellant’s case is premised on the following documents: -i.Statement of Facts dated 17th January 2023 and filed on 18th January 2023 together with the documents attached thereto; andii.Written submissions dated 7th August 2023 and filed on 10th August, 2023 together with the authorities attached thereto;

9. On the issue of VAT the Appellant relied on Section 5 (1) (a) of Value Added Tax Act to state that VAT was not payable on the motor vehicles taken on hire purchase as it was returned to the dealer.

10. The Appellant relied on the High Court case of Eunice Kanugu Kingori vs. NIC Bank Limited [2018] eKLR wherein the court held that hirer in a hire purchase agreement does not become owner of the goods.

11. That therefore, the Appellant submitted that the Respondent’s assessment ofVAT was improper and should not be allowed to stand.

12. On PAYE the Appellant argued that contrary to the Respondent’s assertions, it provided contract engagement, invoices from the supplier of employees and payroll billings to support the position that it has no PAYE obligations.

13. The Appellant urged the Tribunal to overturn the assessment on PAYE.

14. On Corporation tax the Appellant argued that Corporation tax is payable from a report on the profit or loss of an organisation.

15. That it gave reasons for the delay in its audit in its objection notice of the 14th October 2022 and urged the Tribunal to consider that this was a legitimate explanation more so against the background of the challenges demonstrated(the return and repossession of the motor vehicles to Simba Colt Motors) by the Appellant.

16. On the above outlined reasons, the Appellant urged the Tribunal to allow the Appeal and set aside the decision of the 2nd December 2022.

Appellant’s Prayers 17. The Appellant’s prayers as captured in the Memorandum of Appeal include:i.The tax demand of Kshs 101,150,893. 22 be quashed and set aside.

RESPONDENT’S CASE 18. The Respondent’s case is premised on the documents set out hereunder; -i.Statement of Facts dated 2nd February 2023 and filed on 3rd February 20203 and documents attached thereto; andii.Written submissions dated 10th August 2023 and filed on 14th August 2023.

19. The Respondent stated that in exercise of its powers conferred under Section 5(1) and (2) of the Kenya Revenue Authority Act, Cap 469 laws of Kenya as read with Sections 4 and 31 of the Tax Procedures Act, it conducted a compliance audit of the Appellant's affairs and notified the Appellant on 15th September 2022 with additional assessments for income tax, PAYE and VAT.

20. That on 14th October 2022, the Appellant lodged an objection to the additional assessment and on 2nd December 2022, the Respondent rendered an objection decision wherein it considered the Appellant's evidence and amended the additional assessment having considered the new information tendered.

21. That in the objection decision, it upheld the additional assessment on the various tax heads only amending the computation payable.

22. On additional VAT the Respondent stated that pursuant to Section 5 of the VAT Act, as read with Section 2 of the meaning of taxable supply, the Respondent charged VAT on the Appellant on the following grounds:i.From the Appellant's wear and tear schedule, the Respondent established the Appellant purchased trucks and claimed input VAT in its 2018 statements of accounts, valued at Kshs. 256,230,318. 00. ii.As per the Appellant's 2019 statement of accounts, after the sale, the Appellant made a loss of Kshs. 59,868,943. 00. iii.Evidently, from the foregoing, the Appellant having enjoyed input VAT from purchase of the trucks failed to fully account for the output VAT when filing for VAT in the year 2019 despite enjoying input claim in the year 2018. From the 2019 sale of trucks, the Appellant failed to declare VAT returns.iv.The Respondent pursuant to Section 13 of the VAT Act, computed the sale of the trucks by ascertaining the difference between the buying price and aggregated sale price and losses incurred selling the trucks. The Appellant having relied on a lower sell on value and thus paying lower VAT.

23. The Respondent submitted that Section 13 of the VAT Act reads:“Taxable value of supply 1. Subject to this Act, the taxable value of a supply, including a supply of imported services, shall be-

a.the consideration for the supply; orb.if the supplier and recipient are related, the open market value of the supply.”

24. On additional PAYE the Respondent stated that upon reviewing the income tax and PAYE returns filed by the Appellant, it was observed that the declarations revealed variances between amounts claimed as salaries and wages by the Respondent and its alleged supplier of outsourced employees (Infama Ogem Services Limited), contrary to Section 23 (1) of the Tax Procedures Act.

25. The Respondent stated that it noted variances in the Appellant's reported expense on salaries and wages for instance;-i.In 2017 the Appellant filed nil returns throughout the year but in its audited accounts reported expenses, salaries and wages of Kshs. 76,771,897. 00. ii.In 2018 the Appellant filed salaries and wages of Kshs. 5,902,128. 00 but in its audited accounts reported wages of Kshs. 40,751,068. 00. iii.In 2019 the Appellant, again, filed nil returns throughout the year but in its audited accounts reported salaries and wages of Kshs. 25,153,436. 00. The above variances had been brought to the attention of the taxpayer were requiring a reconciliation.

26. That in reviewing the Appellant's objection, it considered the Appellant’s response on outsourcing employment services, however, the Appellant failed to provide evidence of an engagement contract between itself and its supplier.

27. That in the absence of compelling evidence in support of the Appellant’s contention, the Respondent disallowed the deductions and charged PAYE on the variance identified pursuant to its powers to amend an assessment under Sections 31 (1) and (4) of the Tax Procedures Act, 2015.

28. On additional Corporation tax the Respondent stated that in 2020 and 2021, the Appellant is in breach of Section 28 of the Tax Procedures Act,2015, on self- assessment, defaulted on its filing of Corporate tax, income tax, chargeable under Section 3 of the Income Tax Act.

29. That in light of the irregularity the Respondent pursuant to Sections 29 issued a default assessment of the income tax deficit owed by the Appellant.

30. That in ascertaining the amount payable, in compliance with Section 29 (2) of the Tax Procedures Act, 2015 and to the best of its judgement and the information available to it assessed the Appellant’s tax by computing sales per the VAT returns as sales and expenses from the purchases claimed in VAT return.

31. That the Respondent urged the Tribunal to appreciate this fact and conclude that it was the duty of the Appellant to provide all the documents and that the Respondent was entitled to rely on the self-assessments and returns lodged by the Appellant in the absence of any other documents.

32. The Respondent stated that the additional assessment were pursuant to its powers under Section 31 of the Tax Procedures Act, 2015.

33. That this duty, is buttressed by Sections 58 and 59 of the Tax Procedures Act,2015 and Section 44 of the VAT Act require the production of documents and information to enable the Commissioner ascertain tax liability of a person.

34. That the Respondent further relied on Section 59 of the Tax Procedures Act that empowers it to seek any information relating to the ascertaining of the correct tax liability of an Appellant. The Section states:-“Section 59 Production of records 1. For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-

(a)produce for examination, at such time and place as may bespecified in the notice, any documents (including in electronic format) that are in the person’s custody or under the person 's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice;”

35. The Respondent stated that in addition, where an Appellant makes an objection to the assessments issued by the Respondent, the Appellant is obligated to provide all the relevant documentation it relies on in making the objection and in the instant case, this being a self-assessment the Appellant is not in a position to object to the same.

36. The Respondent maintained that in its objection decision, the Appellant was informed on the basis for which the assessment was issued and further, the Appellant was informed why/how the Respondent arrived at its decision as outlined in the objection decision and as such the objection decision is valid and issued according to the letter of the law.

37. In its submission on the following issues raised by the Appellant whether, the Respondent’s charge to Corporation, VAT and PAYE taxes of the Appellant are erroneous or excessive the Respondent submitted that Section 24 (2) of The Tax Procedures Act 2015 it is not bound by a tax return or information provided by, or on behalf of, a taxpayer and may assess a taxpayer's tax liability using any information available to it.

38. That in that regard, the Respondent relied on the Appellant returns of sales on VAT and income tax to issue amended income tax and VAT assessments.

39. That the assessment of the Appellant was conducted against the backdrop of Section 3 of the income tax Act, which provides for taxation of incomes derived from or accrued in Kenya and Section 5 of the Value Added Tax, which is the charging section for vatable supplies.

40. On Corporate income tax the Respondent submitted that it enjoys the power to issue assessments in the event a taxpayer defaults in filing returns for the relevant period and relied on Section 29 (1) (a) of the Tax Procedures Act.

41. That in exercise of the foregoing authority, the Respondent noted the Appellant was filing nil returns for Corporate income tax for the periods 2020 and 2021 and upon such discovery it issued notice of additional assessment as per Section 29 (2) of the Tax Procedure Act.

42. The Respondent submitted that it is noteworthy that as per the Appellant's objection dated 6th January 2022, the Appellant defaulted in filing its Corporation income tax returns is not contested. That it utilized the best data available to it, being the Appellant's VAT returns.

43. That it treated turnover per VAT returns as the turn over for income for tax purposes while purchases claimed in VAT returns were treated as the expenses incurred for generating taxable income.

44. On VAT the Respondent stated that as per Section 5 of the VAT Act, as read with Section 2 on the meaning of taxable supply, the Respondent charged VAT on the Appellant.

45. That the Appellant sought to enjoy deduction of input VAT under Section 17 of the VAT Act and from the Appellant’s wear and tear schedule, the Respondent established that the Appellant purchased trucks and claimed input VAT in its 2018 statements of accounts, valued at Kshs. 256,230,318. 00.

46. That by claiming input VAT the Appellant for all intents and purposes presented itself as one of the value-added individuals in the VAT related transaction and not the final consumer of the supplied (who ought to bear the tax burden/pay the taxes due).

47. That however, the Appellant while claiming input VAT did not satisfy the mandatory requirements under Section 17 (2) and (3) on allowable deductions as the Appellant’s documents available before the Respondent did not constitute any of the documents listed under Subsection 17(3) of the Act.

48. The Respondent relied on the case of Highlands Mineral Water Limited v The Commissioner of Domestic Taxes, Tax Appeal E026 of 2020 where the court set out the criteria for claiming input VAT under Section 17 of the Value Added Tax Act by stating that:“I agree with the Appellant and I hold that the plain and unambiguous language of Section 17 of the VAT Act is clear that the only conditions provided for a Taxpayer to qualify for input VAT are:That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period, That the input tax is deducted by a registered person on taxable supplies made by him; and That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred.”

49. The Respondent argued that in the absence of the documents listed under Subsection 17(3) of the Act, the Appellant is constrained in ascertaining its correct values of taxable supplies.

50. That at the same time, a review of the Appellant's VAT returns revealed the Appellant sold 23 vehicles to its supplier at a sale price of Kshs. 106,162,219. 40 but failed to account for the VAT liability subsuming within the subject transaction.

51. That in any event, the mandatory provisions of Section 16 of the VAT Act, provide for scenarios where commercial transactions subject to VAT that are further subjected to variation of the value of the taxable supply. Sections 16 (1),(2), (3), (4) and (5) provide issuance of credit and debit notes, respectively.

52. The Respondent argued that within the subject transaction, both the Appellant and its supplier failed to satisfy the provisions under Section 16 of the VAT Act as the Appellant did not reduce the amount of deductible input tax on receipt of a credit note nor did its supplier issue a credit note.

53. That the net consequence of the series of transactions engaged in by the Appellant is that the Respondent lost revenue and that as it were, both the Appellant and its supplier claimed input taxes at different stages of the transaction; in essence, meaning no party bore the VAT tax burden of the transaction.

54. That of more concern, failure to adhere to the requirements of Section 16, the Appellant failed to maintain proper records pursuant to Section 43 (2) (b) of the Valued Added Tax Act and Sections 23 and 59 of the Tax Procedures Act on maintenance and production of tax records.

55. The Respondent stated that Appellant's failure to maintain accurate records of the subject transaction concerning VAT is by no means benign. It possessed far reaching consequences, as it denies the Respondent the visibility of the Appellant's transactions since accurate record keeping is crucial for transparency, accountability and accurate tax assessment.

56. On PAYE the Respondent submitted that in the review of the Income tax and PAYE returns filed by the Appellant, it was observed that the declarations revealed variances between amounts claimed as salaries and wages by the Respondent and its alleged supplier of outsourced employees (Infama OgemServices Limited), contrary to Section 23(1) of the Tax Procedures Act.i.That the Respondent noted variances in the Appellant's reported expense on salaries and wages;ii.That in 2017 the Appellant filed nil returns throughout the year but in its audited accounts reported expenses, salaries and wages of Kshs. 76,771,897. 00. iii.That in 2018, the Appellant filed salaries and wages of Kshs. 5,902,128. 00 but in its audited accounts reported wages of Kshs. 40,751,068. 00. iv.That in 2019 the Appellant, again, filed nil returns throughout the year but in its audited accounts reported salaries and wages Kshs. 25,153,436. 00.

57. That the above variances that had been brought to the attention of the taxpayer were requiring a reconciliation.

58. That in addition, the Appellant failed to evidence an engagement contract between itself and its supplier contrary to Section 107, of the Evidence Act which mandates that he who alleges must prove.

59. That in the absence of compelling evidence in support of the Appellant's contention, the Respondent disallowed the deductions and charged PAYE on the variance identified pursuant to its powers to amend an assessment under Sections 31 (1) and (4) of the Tax Procedures Act, 2015.

60. The Respondent, in prosecution of its claim, places further reliance on Section 31 (c) of the Tax Procedures Act to the effect that: (c) in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.

61. The Respondent also cited the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021].

62. The Respondent submitted that in the instant case, the Appellant has failed to prove that the Respondent’s tax decision was in any way inconsistent, based on extraneous factors, excessive or incorrect.

63. That in addition, the Appellant has not disabused the Respondent’s computation of taxes chargeable.

64. The Respondent concluded by submitting its assessment of additional and default Income, VAT and PAYE was proper, being premised on the relevant charging clauses and supported by accurate computation of the taxes owing.

Respondent’s Prayers 65. The Respondent prayed that:a.The Tribunal upholds the Respondent's objection decision as proper and in conformity with the law.b.The Tribunal dismisses the Appeal with costs to the Respondent as the same is devoid any merit.

ISSUES FOR DETERMINATION 66. The Tribunal upon due consideration of the pleadings and submissions of the parties is of the considered view that the issue for determination is:

Whether the Respondent’s confirmed assessment was justifiedANALYSIS AND FINDINGS 67. The Appellant challenged the decision of the Respondent dated 2nd December 2022 wherein the Respondent revised down its assessment of 15th September 2022.

68. The Appellant stated that the Respondent disregarded the documents it submitted while considering its Objection.

69. The question that the Tribunal faces is whether the Appellant indeed discharged its burden in alleging that the Respondent erred in its decision and disregarded the documents it submitted.

70. Section 56 (1) of the Tax Procedure Act provides that;“In any proceedings under this part the burden shall be on the taxpayer to prove that the tax decision is incorrect”

71. Further on the discharge of burden of proof Section 30 of the Tax Appeals Tribunal Act provides that;“In proceedings before the Tribunal, the appellant has the burden of proving that;a.where an appeal relates to an assessment, the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.”

72. To satisfy the above duty, the taxpayer ought to submit all the relevant evidentiary material and demonstrate how the decision of the Respondent is in error.

73. The Tribunal made a similar observation in Tax Appeal Number 25 of 2021Mugo Macharia Kigo vs Commissioner of Investigations & Enforcement wherein it stated that a taxpayer is enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justified in the circumstances.

74. The Tribunal has also dealt with a similar matter in Tax Appeal Number 353 of 2018 Rumish Limited vs. Commissioner of Domestic Taxes, 23rd July 2021 at Paragraph 51, where the Tribunal stated as follows: -“Additionally, Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case...”

75. The Tribunal has further cited the case of Commissioner of Domestic Taxes -vs-Metoxide Ltd (2021) eKLR where Justice Mabeya stated that:“Section 56 (1) of the Tax Procedures Act provides that; a taxpayer has the burden of proving that a tax decision is incorrect. It is common knowledge that, the Kenyan system of taxation is based on self-assessment. The taxpayer assesses self and remits what he/it considers to be the tax due to the tax authorities. In this regard, the tax laws mandate the appellant to later on assess the taxpayer in order to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment is made years after the tax has fallen due and been paid on the economic activity or commercial transaction for which the tax arisen had been undertaken. It is for this reason that the tax laws in this country shoulder the taxpayer with the burden of disproving the correctness of the appellant’s tax decision.”

76. In other words, when a taxpayer challenges a tax decision, it is responsible for providing evidence that demonstrates the incorrectness of that decision.

77. The Tribunal notes that when the Appellant objected to the assessment on 14th October, 2022, the Respondent revised its assessment through its objection decision dated 2nd December 2022.

78. In that decision, the Respondent stated that it revised its assessment upon considering the documents submitted by the Appellant.

79. In its Appeal, it was incumbent upon the Appellant to demonstrate how the Respondent failed, ignored and/or neglected to consider the documents it submitted.

80. The Tribunal has perused the Appellant’s Memorandum of Appeal, Statement of Facts and its Submissions, and it is unable to discern how the Respondent disregarded the documents submitted by the Appellant.

81. It is noteworthy that no attempt has been made to demonstrate how the Respondent erred in its decision.

82. The Tribunal reiterates the holding in the High Court case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where the court pronounced itself on when a taxpayer is said to have discharged its burden of proof and the shifted it to the Respondent.

83. The Appellant did not explain what documents were disregarded or in what way the documents it submitted were disregarded by the Appellant in its Objection decision.

84. No attempt was made by the Appellant to explain how the documents it submitted should have affected the decision of the Respondent for the burden to shift to the Respondent to demonstrate otherwise.

85. The Tribunal find therefore that the Appellant failed in discharging its burden of proof as required by the afore-cited laws and the Respondent’s confirmed assessment issued on 2nd December 2022 was justified.

86. The upshot of the foregoing is that the Appeal is not merited and therefore fails.

FINAL DECISION 87. The Tribunal finds that the Appeal lacks merit and accordingly makes the following Orders:-a.The Appeal be and is hereby dismissed.b.The objection decision dated 2nd December, 2022 be and is hereby upheld.c.Each Party to bear its own costs.

88. It is so ordered.

DATED and DELIVERED at NAIROBI this 22nd day of March, 2024ROBERT M. MUTUMACHAIRPERSONBERNADETTE M. GITARIMEMBERMUTISO MAKAUMEMBERMOHAMED A. DIRIYEMEMBERELISHAH N. NJERUMEMBERJUDGMENT – TAT NO. 58 OF 2023 INFAMA LIMITED VS. COMMISSIONER FOR LEGAL SERVICES AND BOARD CORDINATIONPage 17