[2023] KETAT 582 (KLR)

Issack v Commissioner of Investigations & Enforcement (Appeal 295 of 2021) [2023] KETAT 582 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 582 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 295 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

June 29, 2023

Between

Abdullahi Ibrahim Issack

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a Kenya citizen whose principal activity is the wholesale of general household goods.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, which Authority’s mandate is the collection of revenue and the administration of tax laws within the Republic of Kenya.

3. On 3rd April, 2019, the Respondent sent a Notice of Tax Investigation to the Appellant.

4. Vide its letter dated 28th August, 2020, the Respondent wrote to the Appellant stating its findings from the tax investigation audit done by the Respondent.

5. Thereafter the Respondent issued its assessment orders on 31st August, 2020.

6. The Appellant submitted its objection on 30th September, 2020.

7. Vide its letter dated 25th November, 2020, the Appellant provided the Respondent with further detailed information to support its objection.

8. The Respondent issued its objection decision on 27th November, 2020.

9. Aggrieved by the Respondent’s decision, the Appellant thereafter filed a Notice of Appeal on 3rd December, 2020.

10. The matter went into Appeal and a judgement was issued by this Tribunal on 15th December 2021 directing, inter alia, the Respondent to consider documents supplied by the Appellant together with any other documents and render an objection decision within 60 days of the date of the judgement.

11. The Respondent upheld its earlier decision vide a letter dated 11th February, 2022.

12. The Appellant aggrieved by the Respondent’s decision filed a Statement of Facts dated 15th March, 2022.

The Appeal 13. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 15th March 2022: -a.That the Respondent erred in law in using erroneous records picked from Appellant's bank deposits and wrongly assuming the amounts to be Appellant's trade incomes which is not the case;b.That the Respondent erred in law and in fact in using an unfairly higher margin than that which is used in the normal course of the Appellant's business dealings in calculating the Appellant's taxes;c.That the Respondent erred in fact in not appreciating and considering the detailed proof documents sent to the Respondent by the Appellant to confirm the correct status of taxes pertaining to the Appellant; andd.That the Respondent erred in law in not applying principles of justice and fairness in its actions towards the Appellant by demanding taxes from the Appellant arbitrarily.

Appellant’s Case 14. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts filed on 15th March, 2022, together with the documents attached thereto and proceedings before the Tribunal.b.The Appellant’s written submissions dated and filed on 4th January, 2023, together with the authorities attached thereto.

15. That the Respondent disregarded the Appellant's letter dated 25th November, 2020, and without considering and reviewing the documents as presented by the Appellant. That the Respondent arbitrarily without due diligence, unfairly and contrary to rules of natural justice, issued its objection decision without reviewing the Appellant’s further submitted documents.

16. It is the Appellant's contention that the Respondent's demand letter did not consider any verifiable expenses and input VAT incurred in determining the Appellant's tax liability. Further, the Appellant submits that all the information pertaining to input taxes and all the deductible expenses were within the purview of the Respondent but it chose to ignore expense incurred to generate the business income in its computation contrary to Section 51(1) of the Income Tax Act therefore rendering the Respondent's Computation fatally defective and materially misstated.

17. That the taxes are excessive and punitive since the Respondent pegged its margins at 25% whereas the Appellant provided documents to cement its position that the allowable margins are between 5% to 8% in the years of income clearly proving that the assessment was not objectively arrived at.

18. That the Respondent was expected to use its best judgement when deciding to raise an assessment and instead relied on the use of third party documents and assumptions in its assessment. That the Respondent imposed figures without any reasonable justification. That it is now settled that the Respondent while demanding revenue should demonstrate sufficiently that a certain payment forms the basis of tax and refrain from plucking figures from the air to impose tax.

19. That in auditing the Appellant, the Respondent had a duty to properly consider the documentation provided and to understand the information. That it is not sufficient for the Respondent to merely request for information and then disregard it and proceed to issue an assessment as it sees fit.

20. The Appellant submitted that the Respondent misconstrued the Appellant's exact nature and model of business and this misconception led it to use bank deposits and the directors’ deposits as part of income derived and earned and proceeded to issue an assessment. That the reasons advanced in the Respondent's Statement of Facts that the "Appellant failed to provide documents" sounds attractive but failed to appreciate that indeed the same had been provided and acknowledged by the Respondent.

21. That the Respondent was not sure of the correct margin to apply therefore the Respondent's action contravened the principles of taxation in raising arbitrary taxes that lack certainty and reasonableness.

Appellant’s Prayers 22. The Appellant made the following prayers:a.That the Honourable Tribunal sets aside the assessment raised on the Appellant in the sum of tax amounting to Kshs. 87,444,128. 00 (Eighty-Seven Million Four hundred and Forty-Four Thousand One Hundred and Twenty-Eight Only), andb.That the costs of this appeal be borne by the Respondent.

The Respondent’s Case 23. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 11th August, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 14th December, 2022 and filed on 4th January, 2023 together with the legal authorities filed therewith.

24. That the Appellant was selected for investigations after it was realised that he was filing nil returns yet there was evidence that he was involved in business and earning money through the supply of cereals. That as such, the purpose of the investigations was to determine the taxable income earned by the Appellant and subject it to tax.

25. That it was found that the Appellant had transacted with Microbit Systems Limited where it was supplying beans. That it was further established that the Appellant was also receiving other deposits, which included cash deposits, cheque deposits and inward swift transfers.

26. That the Respondent further confirmed that the Appellant received a total of Kshs. 782,865,036. 00 through Gulf African Bank Account No. 0130163302.

27. That it was noted that the Appellant had under-declared its income for Corporation tax purposes and that total tax amounting to Kshs. 58,601,159. 00 was found to be due and payable.

28. That the Respondent in its response to the Appellant’s objection requested for the following documents vide a letter dated 2nd November, 2022:a.Bank depositsb.Profit marginsc.Director's depositsd.Source documents to confirm costs for consideration.

29. That the Appellant having failed to respond to the Respondent's letter dated 2nd November 2020, the Respondent sent a reminder vide a letter dated 20th November 2020 and advised the Appellant to provide the supporting documents noting the timelines for filing an objection. That the Respondent thereafter issued its objection decision.

30. That the Appellant being aggrieved by the decision of the Commissioner lodged an Appeal at the Tribunal being TAT Appeal No. 591 of 2020 (Abdullahi Ibrahim lssack vs. Commissioner Investigations and Enforcement).

31. That the matter proceeded for hearing and on 15th December, 2021, the Tribunal rendered its judgment, whereby it set aside the Respondent's objection decision dated 27th November, 2020, and directed the Respondent to consider the documents supplied by the Appellant and render a new objection decision within sixty (60) days of the date of the Judgment.

32. That flowing from the Tribunal's Judgement, the Respondent on 11th February, 2022, issued its objection decision confirming the assessment as had been raised in 2020 amounting to Kshs. 87,444,128. 00 as taxes payable.

33. The Respondent reiterated that it did not adjust its initial assessment in its objection decision as the Appellant failed to provide any additional documents even after multiple requests by the Respondent.

34. The Respondent stated that the documents which the Appellant had indicated during the hearing at the Tribunal, were not provided and the same position was also communicated to the Appellant. That the Appellant being aggrieved with the decision of the Respondent issued on 11th February, 2022, filed this Appeal before this Honourable Tax Appeals Tribunal on 8th July, 2022.

35. The Respondent stated that all the information used in the computation of the Appellant's tax liability was obtained from the Appellant's bank records and information received from third parties. That the information from the bank revealed that most of the deposits into the Appellant's bank account were payment for the supply of cereals from another company.

36. That upon being served with the investigation findings and assessment, the Appellant failed to provide supporting evidence to prove that the deposits were not income. That the Appellant was given a further opportunity by the Tribunal to support its case but failed to do so even after several prompts from the Respondent. The Respondent states that without the evidence to support its case, it was compelled to confirm the assessment for tax of Kshs. 87,444,128. 00 against the Appellant.

37. The Respondent stated that in computing income tax, it used an industry gross profit margin for companies that sell cereals to establish the cost of sales. That although the Appellant was granted numerous opportunities after lodging its notice of objection to provide supporting documents to support its case, the Appellant refused, neglected and did not comply.

38. The Respondent stated that the only document supplied by the Appellant was a table with a list of expenses allegedly incurred by the Appellant but the same did not have any documents to confirm that he had incurred them.

39. The Respondent stated that it is allowed to embrace a range of methods and techniques for determining and verifying a taxpayer's income. That in some instances, like in this case, detecting and deterring non-compliance requires more than an examination of a taxpayer's books and records and necessitates an analysis of the taxpayer's financial affairs to correctly assess tax liabilities.

40. That bank deposits and cash expenditure method (banking analysis test) is based on the premise that money received must either be deposited or spent. That this approach is particularly useful if an analysis of bank accounts and a taxpayer's cash expenditure indicates a likelihood of undeclared income and the taxpayer makes regular payments into bank accounts that appear to be from a taxable source.

41. That Section 29 of the Tax Procedures Act provides for circumstances under which the Commissioner may issue a default assessment as follows: -“(1)Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment") of-a.the amount of the deficit in the case of a deficit carried forward under the Income Tax Act (Cap. 470) for the period;b.the amount of the excess in the case of an excess of input tax carried forward under the Value Added Tax Act, 2013 (No. 35 of 2013) for the period; orc.the tax (including a nil amount) payable by the taxpayer for the period in any other case.”

42. That the aforesaid Section therefore gives power to the Respondent to use information as may be available to him in coming with default assessments when necessary. That this coupled with Part VI of the Tax Procedures Act which provides for enforcement, the Respondent was within the law in the use of the banking analysis test in coming up with the Appellant's tax liability herein.

43. The Respondent stated that lack of due diligence on the part of the Appellant and/or his agents should not be visited upon the Respondent at all as it followed due procedure in arriving at the tax assessment.

44. That allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

45. That for an objection to be considered as valid, a taxpayer ought to lodge a notice of objection within 30 days of receipt of an assessment as provided for in Section 51 of the Tax Procedures Act.

46. That in addition, the notice of objection to be valid, the taxpayer has to precisely state the grounds of objection, has to pay all the taxes not in dispute and provide all the relevant documents in support of the objection as provided for in Section 51(3) of the Tax Procedures Act.

47. That Section 51(3) of the Tax Procedures Act, 2015 provides that:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.In relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.c.All the relevant documents relating to the objection have been submitted.”

48. That although the Appellant provided its financial statements, the same were unsigned and unverified and hence could not be relied upon.

49. That from the foregoing, the Respondent submits that the Appellant's notice of objection was not compliant to the mandatory provisions of Section 51(3) of the Tax Procedures Act and was therefore invalid. That as such, the Appellant failed to prove that the Respondent's assessment was erroneous or excessive therefore ought to be set aside as prayed in the Appeal herein.

50. That in Pearson cs. 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 to the extent that:“where there is an assessment made by the Additional Commissioner upon the Appellant; it is perfectly settled by cases such as Norman Vs. Galder 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.”

51. That the Appellant having failed to lodge a valid objection pursuant to the provisions of Section 51(3) of the Tax Procedures Act and to prove that the assessment was erroneous, the Respondent stated that it was proper in determining that the Appellant's notice of objection was invalid and as such, the Respondent's Assessment Order remained valid and prayed to this Honourable Tribunal to uphold the same.

52. That Section 24 of the Tax Procedures Act, 2015 allows a taxpayer to submit returns in the approved form and manner prescribed by the Respondent but the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

53. The Respondent reiterated that the circumstances leading to the manner in which the audit subject to the dispute was conducted necessitated application of, inter alia, banking test analysis.

54. That Section 73 of the Income Tax Act empowers the Commissioner to make an assessment of a person considered to have income chargeable to tax, where they fail to deliver a return of income for a year.

55. That Section 73 of the Income Tax Act provides that:“Where a person has not delivered a return of income for a year of income, whether or not he has been required by the Commissioner so to do, the Commissioner considers that the person has income chargeable to tax for that year, he may, according to the best of his judgement, determine the amount of the income of that person and assess him accordingly; but the assessment shall not affect any liability otherwise incurred by that person under this Act in consequence of his failure to deliver the return.”

56. That the Court of Appeal In the case of Pili Management Consultants Ltd vs. Commissioner of Income Tax and Kenya Revenue Authority, Civil Appeal No.154 of 2007 noted as follows:“Pili, as we have seen, made a nil return of income for the year 2004. It alleged it was not trading for that year and therefore, could not have earned any income upon which tax could have been levied. But we know now, and the Commissioner came to know in May 2006 that around 8th December 2004 Pili had a large amount of money in its bank account with the Bank. It may well be that Pili did not trade in the year 2004 and the money in its bank account did not come from trading. It may be that the money did not accrue in and was not derived from Kenya. But the money was in a bank account in Kenya and it was in the account of Pili. Prima facie, it was Pili's money. Instead of declaring a nil return, why would Pili not declare the presence of that money and then explain to the Commissioner why tax was not payable on the money”

57. That additionally, Section 23(1) of the Tax Procedures Act mandates the Appellant to keep records to enable his tax liability to be readily ascertained. The Section states as follows: -“A person shall-(a)Maintain any document required under a tax law, in either of the official languages(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates to or such shorter period as may be prescribed in a tax law.”

58. That in buttressing this position, the Respondent relied on the case of Income Tax Appeal E028 of 2020, Commissioner of Investigations and Enforcement vs. Evans Kidero.

59. The Respondent further submitted that the Appellant having failed to lodge a valid objection to challenge the assessment order issued pursuant to the provisions of Section 51 of the Tax Procedure's Act, the Appellant failed to discharge its burden of proof as required by Section 56(1) of the Tax Procedures Act and prove that the Respondent's objection decision was incorrect.

60. The Respondent relied on the following cases to support its averments:a.Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya (2021) eKLR.b.Kilburn vs. Bedford (H. M. Inspector of Taxes) [3]c.Primarosa Flowers Ltd vs. Respondent of Domestic taxes [2019] eKLR

61. The Respondent submits that it has demonstrated before this Tribunal what was considered in arriving at the assessment and subsequently the objection decision which are within the law. Moreover, the Respondent has explained in detail reasons why and its findings and prays that the Tribunal upholds the objection decision.

62. That it is upon this backdrop that the Respondent submits that its assessment was hinged on the letter of the law. That it was upon the Appellant to provide evidence to support its assertions against the assessment at the objection stage; a fact which it admittedly did not consider.

Respondent’s Prayers 63. The Respondent prayed that the Tribunal:a.Upholds the decision of the Respondent issued on 11th February, 2022, and finds that the income tax assessment amounting to Kshs. 87,444,128. 00 for the period 2014 - 2018 be found to be due and payable.b.Dismisses this Appeal with costs to the Respondent as the same is devoid of any merit.

Issues For Determination 64. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises the following issues for its determination:a.Whether the appeal is validb.Whether the assessment is justified

Analysis And Determination 65. The Tribunal having established the issues for determination, proceeded to analyse them as hereunder.

a.Whether The Appeal Is Valid 66. The Tribunal reviewed the parties’ pleadings in detail and specifically the letter by the Respondent dated 11th February, 2022. The Tribunal noted that this letter upheld the Respondent’s decision and did not invalidate the Appellant’s objection. Further, the Respondent’s previous letter of 27th November, 2020, which the Respondent made reference to in its decision dated 11th February, 2022, did not invalidate the Appellant’s objection.

67. In this regard, the Appellant’s objection was not invalidated. The Commissioner upheld its decision instead.

68. The above notwithstanding, the Tribunal noted that this Appeal as lodged by the Appellant, did not have all the requisite documents of support. Specifically, the Appellant did not lodge a Notice of Appeal with the Tribunal prior to the filing of the Appeal. The Appellant at the instance of filing the present Appeal purported to rely on the Notice of Appeal dated 3rd December, 2020 that informed the filing of the previously determined Appeal in TAT No. 591 of 2020. The moment the previous Appeal was determined the Notice of Appeal dated 3rd December, 2020 was spent.

69. In this regard, the Tribunal notes that Section 12 and 13 of the Tax Appeals Tribunals Act (TATA) states as follows regarding the procedure for appeals to the Tribunal:“12A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law upon giving notice in writing to the Commissioner, appeal to the Tribunal.13(1)A notice of appeal to the Tribunal shall—(a)be in writing;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

70. It is the Tribunal’s considered opinion that Section 13 of the TATA is couched in mandatory terms and therefore a Notice of Appeal is a mandatory document that must be filed by any person seeking to make an Appeal to the Tribunal.

71. As a result of the foregoing, and the fact that the Appellant did not lodge a Notice of Appeal, the Tribunal finds that this Appeal is incompetent.

72. The Tribunal, having found the Appeal to be incompetent and unsustainable in law, did not delve into the other issue for determination, as it was rendered moot.

Final Decision 73. In view of the foregoing, the Tribunal finds that the Appeal is incompetent and accordingly makes the following Orders: -a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ..................................ERIC N. WAFULACHAIRMAN..................................CYNTHIA B. MAYAKAMEMBER..................................GRACE MUKUHAMEMBER..................................JEPHTHAH NJAGIMEMBER..................................ABRAHAM K. KIPROTICHMEMBER