[2023] KETAT 932 (KLR)

Jakoline Enterprises Limited v Commissioner Domestic Taxes (Tax Appeal 1178 of 2022) [2023] KETAT 932 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 932 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1178 of 2022

RM Mutuma, Chair, W Ongeti, EN Njeru, M Makau & BK Terer, Members

November 10, 2023

Between

Jakoline Enterprises Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company duly incorporated and registered under the Companies Act within the Republic of Kenya. Its main form of business is in the wholesale of foodstuffs.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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 Part 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 assessment notices on Income tax and notice of tax assessment on VAT dated 11th May and 16th May 2022, respectively, for Kshs. 14,478,939. 00 and Kshs. 14,729,827. 00, respectively, for the period 2017 to 2020.

4. The Appellant objected to the tax assessments on 15th and 16th June 2022 which were approved as late Objection applications after the Respondent requested for documents supporting the same on 21st June 2022 and the same were provided.

5. The Respondent further requested documents for review in support of the objection on 4th August 2022 from the Appellant and through emails dated 4th and 8th August 2022 requested more information from the Appellant.

6. The Respondent issued an objection decision on 29th August 2022.

7. On receiving the objection decision and being aggrieved, the Appellant filed the current Appeal.

The Appeal 8. In its Memorandum of Appeal dated 11th October 2022 and filed on 12th October 2022, the Appellant premised its Appeal on the following grounds;a.The purchases as per VAT in the year 2017 were higher than those in the IT2C with a variance of Kshs. 115,049,988. 00. The Appellant has supported all the VAT purchases with suppliers’ invoices hence there was no loss of tax to the Respondent and provided a schedule of the purchase invoices declared through iTax.b.The sales in 2017 were declared and fully supported. The assumption that the variance in purchases of Kshs. 115,049,988. 00 would have generated certain sales as simulated with a percentage is against the business practice where sales are realized when actual sales are made. The Appellant never realized the assumed sales of Kshs. 123,444,193. 00 hence it is unfair to demand taxes based on assumptions against the actual trading practice.c.In normal business practice, to generate sales, the company does not only incur purchases of goods to be sold but there are also associated operational expenses. Hence the assumption that purchases are the only allowable expenses in determining the corporation tax is not correct.d.The gross profit margin used in simulating the expected sales is a weighted average of very many items sold in the year. This cannot be used to determine sales to be generated since the dynamics of the business environment keep on changing depending on many factors including competition and other market factors at play at the time of making the sale. It is worth noting at times goods are sold at a loss depending on the factors at play in the market. Other goods purchased for sale expire and are never sold.e.In 2018 purchases as per IT2C and VAT3 returns were reconciled. However, under the VAT 3 there were general expenses captured amounting to Kshs 8,648,494. 00. These general expenses were recorded as purchases in the financial statements. They were not over-claimed purchases hence they should be disallowed for corporation tax purposes.f.In 2019 purchases as per IT2C were higher than those in VAT 3 returns by Kshs. 20,095,790. 00 this variance relates to purchases that were zero-rated and thus were not included in the VAT 3 returns while filing the returns. The Appellant provided a schedule of Zero-rated purchases that were genuine and incurred in the normal course of business and generating income for the company. They were not overclaimed purchases hence they should not be disallowed for purposes of corporation tax.g.The 2020 purchases variance between VAT 3 returns and IT2C related to general expenses in the VAT 3 returns. The Appellant provided an analysis of these expenses.h.The sales for the years 2017 to 2020 are fully supported and declared in the financial statements filed through iTax.i.There is no loss of revenue to the Commissioner.j.Some 2017 to 2020 invoices had errors that occurred when entering the invoice numbers while filing the VAT returns. Copies of these invoices were provided together with bank statements as proof of payment.k.The Appellant deals with only vatable supplies, both at standard rate and zero rate and so the issue of apportionment does not arise.l.The asset additions of Kshs. 6,300,000. 00 and Kshs. 2,940,000. 00 in 2018 and 2019, respectively, on the wear and tear schedule were stated exclusive of VAT.

The Appellant’s Case 9. The Appellant set down its case in its:a.Statement of Facts dated 11th October 2022 and filed on 12th October 2022. b.Appellant's written Submissions dated on 8th May, 2023 and filed on 10th May 2023.

10. The Appellant stated that a valid objection was lodged in accordance with Section 51 of the Tax Procedures Act, 2015 on 15th June 2022 via a letter dated 13th June 2022.

11. It averred that all the documents have been provided in accordance with Section 59 (1) of the Tax Procedures Act 2015.

12. It stated that all taxes due have been paid in accordance with relevant tax laws.

13. It asserted that it has been cooperative by providing all the required accounting documents as demanded by the Respondent and has also either attended or sent representatives to all the meetings requested by the Respondent, responded to all correspondences, and provided all the requested documents and explanations.

14. In its submissions dated 8th May 2023 and filed on 9th May 2023, the Appellant reiterated verbatim the assertions it provided in the Memorandum of Appeal. The Tribunal will therefore make reference to the same to determine the totality of the Appellant’s case.

The Appellant’s Prayers 15. The Appellant prayed that the Tribunal directs the Respondent to:a.Allow the Appeal and the demand and/or assessment by the Respondent to re-examine the supporting documents provided by the Appellant to certify that the income has been declared correctly and is fully supported;b.Re-examine the supporting documents provided by the Appellant to certify that the purchases and expenses claimed are correct, fully supported, and incurred by the Company in the generation of the income declared.c.Amend the assessments as per returns submitted and taxes paid based on the grounds, facts, and others that may be adduced at the hearing.

The Respondent’s Case 16. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 11th November 2022. b.Respondent’s written Submissions dated and filed on 10th May 2022.

17. The Respondent stated that the assessment was valid because the Appellant failed to reconcile variances for the 4th and 22nd of August 2022 since the Appellant failed to provide the relevant information.

18. The Respondent cited Section 24 (2) of the Tax Procedures Act and averred that it is not bound by the Appellant’s returns or self-assessment and is empowered to vary the assessment using any available information in its possession.

19. The Respondent relied on Section 31 of the Tax Procedures Act and reiterated that the Appellant failed to discharge the burden of proof as provided by law.

20. The Respondent relied on Section 24 (2) of the Tax Procedures Act, 2015, and submitted that the Appellant filed an Objection to the assessments but failed to support its objection with evidence to counter the Respondent’s findings.

21. It cited Section 59 of the Tax Procedures Act and submitted that the Appellant was given an opportunity to come forth with any explanation or documents to counter the additional assessment but failed to do so and it was therefore legally justified in issuing additional assessments for Income Tax and VAT.

22. It reiterated that the taxes demanded are due and payable and the Appellant did not prove otherwise.

23. The Respondent relied on Sections 56 (1) and 30 of the Tax Procedures Act and the Tax Appeals Tribunal Act, respectively, and maintained that the Appellant failed to provide documents as required by law but also failed to discharge its burden of proving that the assessment as issued by the Respondent was incorrect or ought not to have been made or should have been made differently.

24. It cited the cases of Republic vs. Kenya Revenue Authority; Proto Energy Limited (Ex Parte) (Judicial Review Application E023 of 2021) [2022], Osho Drappers Limited vs. Commissioner of Domestic Taxes (Income Tax Appeal E147 of 2020) [2022] and Commissioner of Domestic Services vs. Galaxy Tools Limited [2021] eKLR and submitted that the Appellant did not discharge the burden of proving that the tax assessment was wrong or incorrect.

The Respondent’s prayers 25. The Respondent, therefore, prayed for the Tribunal to:a.Dismiss the Appeal with costs;b.Find that the assessment raised by the Respondent amounts to Kshs. 29,208,766. 00 inclusive of interest due and payable as per the objection decision rendered by the Respondent.

Issues For Determination 26. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal puts forth the following as the only issue for determination:Whether the Respondent’s Objection Decision dated 29th August 2022 was justified.

Analysis And Findings 27. The Tribunal wishes to analyze the issue as herein under;Whether the Respondent’s Objection Decision dated 29th August 2022 was justified.

28. The Respondent submitted that the Appellant failed to reconcile variances for 4th and 22nd August 2022 since the Appellant failed to provide the relevant information.

29. The Appellant averred that it provided a schedule of the purchase invoices for 2017 declared through iTax. It reiterated that the sales for 2017 were declared and fully supported adding that it never realized the assumed sales of Kshs. 123,144,193. 00 as the assumption that purchases are the only allowable expenses in determining the corporation tax is incorrect.

30. It asserted that the purchases per IT2C and VAT 3 returns for the year 2018 reconciled save for the fact that there were general expenses under the VAT 3 that were general expenses captured amounting to Kshs. 8,648,494. 00 which were general expenses recorded as purchases in the financial statements thus not over-claimed purchases and should not be disallowed for Corporation tax.

31. It further contended that the variances in the VAT 3 returns and IT2C for 2019 relate to purchases that were zero-rated and not included while filing the VAT 3 returns adding that it provided a schedule of the zero-rated purchasers.

32. The Appellant averred that variances between the VAT 3 returns and IT2C related to the general expenses in the VAT 3 returns and provided an analysis of these expenses.

33. Section 51 of the Tax Procedures Act provides that:-(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.(3)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; and(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 or has applied for an extension of time to pay the tax not in dispute under section 33(1).(c)All the relevant documents relating to the objection have been submitted.5)Where the tax decision to which a notice of objection relates is an amended assessment, the taxpayer may only object to the alterations and additions made to the original assessment.(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

34. While the Respondent alleges that the Appellant did not support its figures, The Tribunal noted the correspondence that existed between the Appellant and the Respondent. The Respondent indeed acknowledged receipt of the documents as requested. Gleaning through the documents and the earlier correspondences between the Respondent and the Appellant, it appears to the Tribunal that while the Appellant sought to discharge its burden of proof, the Respondent did not take time to review the documents.

35. The Appellant has demonstrated to the Tribunal that it had discharged its duty accordingly and it was incumbent upon the Respondent to review the documents and verify any such discrepancies.

36. In the circumstances the Tribunal finds that the Objection decision dated 29th August 2022 for Income tax and VAT was not justified.

Final Decision 37. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby allowed.b.The Objection decision dated 29th August 2022 be and is hereby set aside.c.Each Party to bear its own costs

38. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY NOVEMBER, 2023ROBERT M. MUTUMA - CHAIRPERSONDR. WALTER ONGETI - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONIFACE K. TERER - MEMBER