[2023] KETAT 353 (KLR)

Ingala Building and Construction Limited v Commissioner of Domestic Taxes (Appeal 627 of 2022) [2023] KETAT 353 (KLR) (9 June 2023) (Judgment)

Neutral citation: [2023] KETAT 353 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 627 of 2022

RM Mutuma, Chair, EN Njeru, D.K Ngala & RO Oluoch, Members

June 9, 2023

Between

Ingala Building and Construction Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated under the companies Act of the Laws of Kenya and is in the business of provision of construction services, mainly on civil engineering works.

2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act and is mandated as an agent of the Government of Kenya for the assessment, collection, receipting and accounting for all the tax revenue, and is also responsible for the administration and enforcement of the statutes set out under the schedule to the Act.

3. The Appellant was subjected to a returns review covering income tax and VAT declarations for the year 2017/2018, year 2018/2019 and year 2019/2020. The review was based on the IFMIS data availed to the Respondent for verification of taxes paid.

4. Following the review , the Respondent stated the findings as :-a.The Appellant had not declared supplies made to county Government of Meru and Kenya Rural Roads Authority ( KERRA) in the year 20187/2018 to year 2019/2020, in both VAT and Income Tax company returns .b.The Appellant is active in business but had filed NIL income returns for the year 2017/2018, 2018/2019, and 2019/2020.

5. The Appellant was served with a returns review letter by the Respondent on 10th November 2020, informing the Appellant of the inconsistencies and further requesting further documents .

6. Following further unresponded to reminders the Respondent issued additional VAT assessments on 15th January 2021, and also issued additional assessments in respect of income tax on 19th January 2021.

7. The Appellant lodged a notice of objection on 7th June 2021 against the additional assessments for VAT and Income tax. In the said objection, the Appellant sought leave from the Respondent, to file the objection outside the prescribed statutory timeline on account of illness and inability to appoint a tax agent.

8. The Respondent sought for further documents from 16thJune 2021 in support of the objection.

9. The Respondent issued its objection decision manually on 6th August 2021 covering all the periods in dispute, amounting to; Income Tax - Kshs 341,271. 65 and VAT Kshs 3,184,461,90.

10. The Respondent issued another objection decision on iTax computing the principal tax , penalties and interest amounting to; Income Tax – Kshs 292,388. 00. VAT – Kshs 4,223,279. 26, and consequently issued the comprehensive objection decision on 13th May 2022.

11. Dissatisfied with the Respondent’s objection decision, the Appellant preferred the Appeal herein at the Tribunal.

The Appeal 12. The Appellant filed its Memorandum of Appeal on 17th June 2022 and set out the following ground of Appeal;i.That the Commissioner erred in law and fact by disallowing duly filed purchases tax invoices. In order for taxpayer to be in position to claim input VAT under section 17 of the VAT Act , the supply in question must be taxable supply as defined under section 2 of the VAT Act.ii.The Appellant‘s purchases which the Appellant claimed input VAT was taxable supplies in accordance with Section 2 of the VAT Act, which is uncontroverted by the Respondent. The Commissioner therefore made a wrong decision of additional VAT assessment in respect of the Appellant.

13. By reason of the aforesaid ground, the Appellant prayed that its Appeal be allowed and the Respondent‘s objection decision be set aside.

The Appellant’s Case 14. The Appellant has set out its case in the Statement of Facts filed on 17th June 2022. There are no Written Submissions filed on behalf of the Appellant.

15. The Appellant stated that there were delays in sharing the documents /records with the Commissioner to support the objection application.

16. It stated that all the requested documents were shared and reviewed by the Commissioner, and believed the matter should not have gone the way it has.

17. The Appellant stated that it availed the documents requested by the Respondent through its email on 16th June 2021 , and the availed documents were ;a.Bank statements ,b.Documents to support expenses,c.purchase invoices ,d.medical documents.

18. The Appellant by reason of the foregoing prayed that the Respondent‘s VAT tax decision contained in the various amended notices dated 25th August 2021 making additional VAT assessment for the period July 2017, February 2019, May 2019, September 2019, February and March 2020 which was further confirmed vide Objection decision dated 13th May 2022 be set aside and the Appeal be allowed .

The Respondent’s Case 19. The Respondent has set out its case on the Statement of Facts filed on 20th July 2022 , and the Written Submissions filed on 10th January 2023.

20. The Respondent stated that the decision to issue the additional assessments was justified and had basis in law as required under the Tax Procedures Act. The Respondent submitted that the Appellant was issued with a returns review letter establishing inconsistencies in the Appellant’s tax returns.

21. The Respondent further stated that vide a letter dated 10th November 2020 requested the Appellant to provide certain documents to enable the Commissioner to ascertain the correctness of its tax declarations. The documents requested were as follows :-a.copies of audited financial statements for years 2017 -2020. b.Certified Company accounts statements for the year 2017- 2020. c.Documents to support expenses and purchase invoices claimed in the VAT returns for the year 2017 -2020. d.copy of con tracts for the years 2017 to 2020. e.Sales records for the year 2017 to 2020. f.Z – reports for the year 2017 to 2020.

22. The Respondent submitted that despite the Appellant being given sufficient opportunity, in excess of two months, the Appellant failed, refused, and or neglected to proffer any document to the Commissioner compelling the Respondent to issue additional assessments.

23. It was also a submission of the Respondent that the basis of the additional assessments was that the Appellant had declared NIL income earned in the years 2017 -2020. Further the Appellant had not declared VAT returns for the month of July 2017, February 2019, May 2019 , June 2019, September 2019, February 2020, April 2020, and May 2020, and had not proffered any document to challenge the Respondent’s findings.

24. The Respondent submitted that the additional assessments were anchored in law and that the same were factually and legally justified .

25. The Respondent also stated that the Appellant lodged a notice of objection on 7th June 2021 challenging the assessments in their entirety, after seeking leave to file out of the statutory prescribed timeline owing to ill health suffered by the Director rendering him incapable of appointing a tax agent.

26. The Respondent submitted that the Appellant’s Notice of Objection did not conform to the requirements set out under Section 51(3)(c) of the TPA , which provides that:-“(3)A notice of objection shall be treated as validly lodged by a taxpayer under section (2) if – (c ) all the relevant documents relating to the objection have been submitted .”

27. The Respondent averred that vide an email dated 16th June 2021, it sought that the Appellant do furnish it with documentary evidence in support of its objections, particularly ;a.Certified Bank statements from year 2018 to 2019,b.Audited books of accounts for the period under review ,c.Original purchase invoices as claimed in the VAT returns for the period 2018-2019,d.Documents to support the expenses claimed in the year 2018- 2019,e.Any other documents in support of the objection application .

28. The Respondent further averred that the Appellant av ailed some of the documents requested by the Respondent, amongst them the following:-a.Bank statements ,b.audited books of accounts ,c.Documents to support expenses ,d.purchase invoices ,e.Medical documents.

29. The Respondent stated that the review of the aforesaid documents is what formed the basis of the objection decision, particularly a review of the records availed in support of the purchase and expenses revealed that they were not adequate and did not entirely support the figures stated on the audited books of accounts.

30. The Respondent further stated that the purchase invoices provided , effectively justified the VAT inconsistencies for the months of July 2017, May 2019, September 2019, February 2020 and March 2020. That however , no invoices were provided in support of the inconsistencies in the periods February 2019 and April 2020, thus the assessments of Kshs 4,223,279. 26 were confirmed.

31. It was submission of the Respondent, that after perusal of the Appellant’s records amongst them the audited books of accounts, it necessitated the income tax assessments to be revised leaving a principal tax of Kshs 32,078. 50.

32. It was also a submission of the Respondent that it was not bound by the Appellant’s returns or self-assessment and it is empowered to vary the assessments using any available information in its possession, pursuant to Section 24(2) of the Tax Procedures Act which provides that:-“The Commissioner is not 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.”

33. The Respondent also submitted that Section 31 of the TPA empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner‘s best judgement.

34. The Respondent averred that it examined all the relevant information and records availed by the Appellant before arriving at the objection decision ,but the Appellant failed to provide all the requisite documents to support its objection contrary to Section 51(3)(c) of the TPA.

35. The Respondent also stated that it relied on Section 17 (2) (3) of the VAT Act which disallows the deduction of input tax without possession of documentation, which include an original invoice or certified copy, and further stated that the Appellant did not provide any records for the disallowed transactions .

36. To buttress its case, the Respondent relied on the case of Commissioner of Investigations and Enforcement -vs- SsangYong Enterprises (K) ltd (2022) eKLR , where the court held as follows:-“Section 17 provides the statutory basis to deduct and claim input VAT , a registered taxpayer is entitled to deduct input VAT on taxable purchases but that the same can only be allowed if the taxpayer holds such documentation, which documentation includes “ an original tax invoice issued for the supply or a certified copy .”

37. The Respondent also cited the cases of:-a.Commissioner of Domestic Taxes -vs- One stop Trading Ltd (2021) eKLR b) Ushindi Exporters Ltd -vs- Commissioner of Investigations and Enforcement ( TAT No. 7 of 2015) ,b.Commissioner of Domestic Taxes -vs- Metoxide Ltd (2021) eKLR ,c.Osho Drapers Ltd -vs- Commissioner of Domestic Taxes .

38. The Respondent submitted that despite requesting for additional documents from the Appellant, the Appellant failed to adequately provide all the requested documents to support the transactions claimed for input tax.

39. It was a further submission of the Respondent that where an Appellant makes an objection to assessments issued by the Commissioner , the Appellant is obligated to provide all the relevant documents it relied on in making the objection.

40It was also a submission of the Respondent that the Appellant has not discharged its burden of proof under Section 56(1) of the TPA and Section 30 of the TAT Act.

41. The Respondent relied on the case of Prima Rosa Flowers Ltd – vs- Commissioner of Domestic Taxes (2019)eKLR where the High Court relied on the case of Mulherin – vs- Commissioner of Taxation (2013) FCAFA 115 in which the Federal Court of Australia held that in tax disputes , the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence, which demonstrates the taxable income on which it ought to have been levied.

42. The Respondent submitted that the Appellant did not provide all the requisite documents to prove that the assessments made were erroneous and, in the circumstances, the partial acceptance/rejection of the objection application was merited.

43. In view of the foregoing submissions, the Respondent prayed that the Appellant’s Appeal be dismissed with costs, and the Respondent‘s objection decision be upheld.

Issues For Determination 44. The Tribunal having carefully reviewed the filings made by the parties as well as their submissions , is of the considered view that the Appeal herein distils into a single issue for determination being:-Whether the Respondent was justified in making the additional assessments for VAT and Income tax against the Appellant.

Analysis And Determination Whether the Respondent was justified in making the additional assessments for VAT and Income tax against the Appellant. 45. The issue in dispute herein arose out of the Respondent‘s decision to raise additional VAT and income tax assessments against the Appellant and the consequent demand for the sum of Kshs 4,223,279. 26 for VAT and Kshs 292,388. 00 for Income tax.

46. The Respondent contended that the basis of the additional assessments was that the Appellant had declared NIL income earned in the years 2017 – 2020, and further that the Appellant had not declared VAT returns for the months of July 2017, February 2019, May 2019, June 2019, September 2019 ,February 2020, April 2020, and May 2020 and had not proffered any documents to challenge the Respondent’s findings.

47. The Respondent averred that despite the Appellant being given sufficient opportunity, in excess of two months, the Appellant failed, refused and or neglected to provide any documents to the Commissioner compelling the Respondent to issue the additional assessments.

48. The Appellant contended that the purchases which it claimed input VAT was taxable supplies in accordance with the VAT Act, and it supported the same with the requested supporting documents for the objection, which were adequate to support its objection, and was uncontroverted by the Respondent. The Appellant therefore contended that the Respondent made a wrong decision on the additional VAT assessment.

49. The Respondent submitted that the Appellant’s notice of objection did not conform to the requirements set out in Section 51(3)(c) of the Tax Procedures Act.The said Section provides as follows:-“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if –a.–b.–c.All the relevant documents relating to the objection have been submitted.”

50. The Respondent had vide its email dated 16th June 2021 requested for specific documents from the Appellant, to wit;a.certified Bank statements from year 2018 – 2019,b.Audited books of accounts for the period under review,c.Original Purchase invoices as claimed in the VAT returns for the period 2018 -2019,d.Documents to support the expenses claimed in the year 2018-2019,e.And any other documents in support of the objection application .

51. The Appellant availed some of the documents requested by the Respondent, which the Respondent has acknowledged, to wit ;a.Bank statements ,b.audited books of accounts ,c.documents to support the expenses claimed ,d.purchase invoices as claimed in the VAT returns,e.medical records .

52. Gleaning through the list of documents requested by the Respondent and the list of the documents submitted to the Respondent by the Appellant clearly creates the impression that the said lists match, of course subject to the minute details of the actual documents. Given this scenario, the Appellant was justified in stating that given the documentation it submitted, the Respondent erred in arriving at the decision made.

53. The Respondent stated though, that the thorough review of the submitted documents is what formed the basis of the objection decision, particularly, a review of the records availed in support of the purchases and expenses which revealed that they were not adequate and did not entirely support the figures stated in the audited books of accounts.

54. In addition, it stated that the purchase invoices provided, justified the VAT inconsistencies for the months of July 2017, May 2019 ,June 2019, September 2019, February 2020 and March 2020. However, it noted that no invoice was produced in support of inconsistencies in the period February 2019 and April 2020 , thus the latter‘s assessment of Kshs 4,223,279. 26.

55. The Respondent further averred that after review of the Appellant’s records, among them the audited books of accounts, it necessitated the Income tax assessments to be revised leaving the principal tax of Kshs 32,078. 50.

56. Having taken in to account the contentions , averments and submissions of both parties , the Appellant’s notice of objection met the criteria set out under Section 51(3)(c) for a validly lodged objection notice . The Respondent did not therefore invalidate the Appellant‘s notice of objection. The same was therefore considered under Section 51(8) of the TPA.

57. The foregoing being the case, the issue in contention is whether the Appellant ‘s documents discharged its burden of proof.Section 56(1) of TPA provides that:“In any proceedings under this part , the burden shall be on the taxpayer to prove that the tax decision is incorrect.”

58. Further, 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.”

59. In the case of Commissioner of Domestic Taxes -vs- Metoxide Ltd (2021) , the court held 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 .”

60. In view of the aforesaid citations , though the Appellant provided the relevant records as requested by the Respondent, it was incumbent upon the Appellant to prove with those records or documents that the Respondent‘s additional assessment was incorrect or excessive.

61. The Respondent averred that its review of the submitted documents is what formed the basis of the objection decision, particularly the review of the records submitted in support of the purchases and expenses revealed that they were inadequate and did not entirely support the figures stated in Appellant’s books of accounts, amongst other findings from the review .

62. The Appellant has contended that the requested documents were submitted to the Respondent and reviewed and so the Respondent ought not to have arrived at the decision as it did.

63. However, the Appellant falls short of specifying the particulars of the documents and issues omitted by the Respondent or not considered, so as to prove the assessment and decision of the Respondent incorrect or excessive.

64. Having considered the averments and submissions made by the parties, the Tribunal is satisfied that the Appellant did not provide all the requisite records and information to prove that the additional assessment made by the Respondent was erroneous.

65. In light of the foregoing, the Tribunal finds and holds that the Appellant did not discharge its burden of proof as provided for under Section 56(1) of the Tax procedures Act , and Section 30 of the Tax Appeals Act in order to prove that the Respondent‘s assessment was incorrect or excessive, or ought to have been made differently.

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 13th May 2022 be and is hereby upheld.c.Each party to bear its own costs.

67. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF JUNE, 2023. .....................................ROBERT M. MUTUMACHAIRPERSON.....................................ELISHAH N. NJERU DELILAH K. NGALAMEMBER MEMBER.....................................RODNEY O. OLUOCHMEMBER