[2024] KETAT 1233 (KLR)

Jasir Contractors Limited v Commissioner of Domestic Taxes (Appeal E475 of 2023) [2024] KETAT 1233 (KLR) (Civ) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1233 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal E475 of 2023

E.N Wafula, Chair & G Ogaga, Member

August 23, 2024

Between

Jasir Contractors Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act. Its principal activity is providing contracting services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. In a letter dated 15th February 2022, the Respondent wrote to the Appellant demanding immediate payment of additional VAT for the periods of January 2017 to September 2021.

4. The Respondent issued the Appellant with a VAT assessment order on 28th June 2022.

5. The Appellant filed a late objection on 23rd May 2023, and the Respondent allowed the Appellant to lodge its objection out of time in a letter dated 26th May 2023. In that letter, the Respondent stated that the effective date of the Appellant’s objection application was 25th May 2023.

6. The Respondent issued the Appellant with an objection decision dated 10th July 2023 partially allowing the Appellant’s objection.

7. Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal on 7th August 2023.

The Appeal 8. The Appeal is premised on the Memorandum of Appeal dated 9th August 2023 and filed on 14th August 2023 which raised the following grounds: -a.That the Commissioner fell into serious error of fact and law in purporting to issue the objection decision dated 10th July 2023 when the assessment was excessively high and unreasonable.b.That the Commissioner fell into serious error of fact and law in purporting to issue the objection decision dated 10th July 2023 and not considering the explanation and evidence adduced by the Appellant in its objection.c.That the Commissioner’s additional assessment and demand of Kshs. 12,140,000. 00 is erroneous and wrong as the supplies and services alleged to have been done to Meru County Investment and Development Corporation during the period of January 2017 to September 2021 did not take place since the company did not receive any payment and Meru County consolidated invoices confirm a different status for that period.d.That during the execution of the project that existed between the Meru County Investment and Development Corporation and the Appellant there was an attraction of 10% labour component in the actual figure made to pay casual labourers on a weekly basis and the same could not be subjected to PAYE.e.That the 5% component for some materials was not avertable as the same was from a quarry and did not have any invoices and receipts from the suppliers.f.That the Commissioner erred in fact and in law in finding that tax of Kshs. 4,242,531. 00 was due from and payable by the Appellant, which amount is not premised on any legal, logical or arithmetic correctness or precision.g.That the Commissioner predisposed itself to a position favourable to it in the decision appealed against herein resulting in a manifestly unfair, flawed and unbalanced decision.h.That in overall regard to the foregoing grounds. the decision of the Commissioner is unconstitutional, illegal, unreasonable, wrong in law and unjust in effect.

Appellant’s Case 9. The Appellant’s case is premised on the Appellant’s Statement of Facts dated 9th August 2023 and filed on 14th August 2023 and the documents attached to it.

10. The Appellant stated that on 10th July 2023 the Respondent issued an objection decision to the Appellant demanding a total tax amount of Kshs. 4,242,531. 00 for the period from 2018 to 2021.

11. The Appellant averred that by a letter dated 27th July 2022, it objected to the VAT assessment of the Respondent. That on 10th July 2023, the Respondent issued the Appellant with an objection decision rejecting the explanations and evidence adduced by the Appellant.

12. The Appellant further stated that by the same decision, the Respondent proceeded to wrongfully. unreasonably and unconstitutionally, demand from the Appellant the sum of Kshs. 4,242,531. 00, being the sum of VAT arrears purported to be due and owing to the Respondent.

13. The Appellant averred that the said principal tax of Kshs. 4,242,531. 00 demanded is illegal, since the Appellant provided all the supporting documents to the Respondent.

14. The Appellant added that it was very aggrieved by the Respondent’s objection decision and that the Respondent’s conduct aforesaid was extremely punitive and unreasonable.

Appellant’s prayers 15. The Appellant prayed for the following orders from the Tribunal: -a.That the Respondent’s objection decision dated 10th July 2023 be and is hereby set aside in its entirety.b.That an order be and is hereby issued restraining the Commissioner, its employees, agents, or other persons purporting to act on its behalf or under its instructions from enforcing and/or collecting the sum of Kshs. 4,242,531. 00 from the Appellantc.That the cost of this Appeal be borne by the Commissioner.d.That the Tribunal be at liberty to grant any other or further remedies that it deems just and reasonable to grant in the circumstances.

Respondent’s Case 16. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 14th September 2023 and the documents attached to it; andb.Its written submissions dated 1st March 2024 and filed on 4th March 2024.

17. The Respondent stated that from the data it extracted from withholding VAT certificates from the taxpayer’s PIN, it established that for the period January 2017 to September 2021, the Appellant offered services and made supplies to Meru County Investment and Development Corporation amounting to Kshs. 109,917,366. 00 and failed to account for the applicable taxes.

18. The Respondent issued the Appellant with a demand notice on 15th February 2022 demanding payment of the taxes within 7 days.

19. The Respondent raised a VAT assessment order Kshs. 15,352,946. 40 for the period of September 2021 on 28th June 2022, which the Appellant objected to on the KRA iTax portal on 23rd May 2023.

20. The Respondent stated that it extracted data from the Appellant on sales declared in the Appellant’s returns and purchases claimed by the Appellant for the years 2017 to 2021, which it further analysed and noted that there were under-declarations of sales relating to supplies made to Meru County even after reconciliation and factoring in the sales declared, input VAT claimed and the tax credits from withholding VAT in the period under review.

21. The Respondent averred that the Appellant failed to satisfactorily support its objection as required, resulting in the Respondent only partially accepting the objection for the period 2017 to 2021 and amending the VAT assessments to a total of Kshs. 4,242,531. 00, being Kshs. 521,513. 00 for 2018, Kshs. 1,499,263. 00 for 2019, Kshs. 279,355. 00 for 2020 and Kshs. 1,942,400. 00 for 2021 as presented in the objection decision rendered by the Respondent in a letter dated 10th July 2023.

22. Being dissatisfied with the objection decision, the Appellant filed an Appeal.

23. In response to the grounds of appeal, the Respondent relied on Section 5 of the Value Added Tax Act that provides for charge of tax.

24. The Respondent also relied on Section 17 of the Value Added Tax Act that provides for credit for input tax against output tax.

25. The Respondent referred to Section 59 of the Tax Procedures Act that empowers the Respondent to seek any information relating to the ascertaining of the correct tax liability of an Appellant.

26. The Respondent also relied on Section 51 of the Tax Procedures Act that provides for issuing of an objection decision and mandates the Respondent to issue the same.

27. The Respondent stated that the Appellant failed to provide the required documentation thus failed in discharging its burden of proof contrary to Section 56 of the Tax Procedures Act, leading to the Respondent issuing the objection decision.

28. The Respondent asserted that the law is very clear that the burden of proof is always on the taxpayer, and that in this case, the Appellant has not produce any evidence to support the averments contained in its statement of facts.

29. The Respondent finally submitted that until the burden of proof is discharged by the Appellant to the satisfaction of the Commissioner, this Appeal should be dismissed.

Respondent’s prayers 30. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s objection decision dated 10th July 2023 as proper and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs to the Respondent.

Issue for Determination 31. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:

Whether the Respondent was justified in issuing its Objection decision dated 10th July 2023. Analysis And Findings 32. The Tribunal analysed the issue that calls for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.

33. The Appellant disputed the Respondent’s additional assessments in the objection decision dated 10th July 2023 by averring the following:a.That the Respondent’s assessment and demand of Kshs. 12,140,000. 00 was erroneous as the Appellant did not provide services to Meru County Investment and Development Corporation and did not receive any payment. That the Meru County consolidated invoices confirm a different status for the period of January 2017 to September 2021. b.That during the execution of the project the Appellant undertook for the Meru County Investment and Development Corporation, there was an attraction of 10% labour component in the actual figure made to pay casual labourers on a weekly basis and the same could not be subjected PAYE.c.That the 5% component for some materials was not avertable as the same was from a quarry and did not have any invoices and receipts from the suppliers.d.That the tax of Kshs. 4,242,531. 00 assessed by the Respondent is not premised on any legal, logical or arithmetic correctness or precision, and is illegal, since the Appellant provided all the supporting documents to the Respondent.

34. The Respondent stated that from the data it extracted from withholding VAT certificates from the taxpayer’s PIN, it established that for the period January 2017 to September 2021, the Appellant offered services and made supplies to Meru County Investment and Development Corporation amounting to Kshs. 109,917,366. 00 and failed to account for the applicable taxes.

35. The Respondent issued the Appellant with a demand notice on 15th February 2022 demanding payment of the taxes within 7 days.

36. The Respondent raised a VAT assessment order of Kshs. 15,352,946. 40 for the period of September 2021 on 28th June 2022 which the Appellant objected to on the KRA iTax portal on 23rd May 2023.

37. The Respondent stated that it extracted data from the Appellant on sales declared in the Appellant’s returns and purchases claimed by the Appellant for the years 2017 to 2021, which it further analysed and noted there were under-declarations of sales relating to supplies made to Meru County even after reconciliation and factoring in the sales declared, input VAT claimed and the tax credits from Withholding VAT in the period under review, being years 2017 to 2021.

38. The Respondent stated that the Appellant failed to satisfactorily support its objection as required, resulting in the Respondent only partially accepting the objection for the period 2017 to 2021 and amending the VAT assessments to a total of Kshs. 4,242,531. 00, being Kshs. 521,513. 00 for 2018, Kshs. 1,499,263. 00 for 2019, Kshs. 279,355. 00 for 2020 and Kshs. 1,942,400. 00 for 2021 as presented in the objection decision rendered by the Respondent in a letter dated 10th July 2023.

39. The key issue in the present case is the question of documentation to substantiate that the Appellant accurately accounted for and remitted the tax on supplies that it made to Meru County Investment and Development Corporation. The parties had opposing arguments regarding the sufficiency of the documents that the Appellant provided in support of its case.

40. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal (TAT) Act place the burden of disproving the Commissioner upon the taxpayer. To satisfy this burden, a taxpayer ought to submit all the relevant evidentiary material in its possession.

41. The substantive law under which the Respondent assessed the Appellant is the VAT Act, which provides as follows in Section 62 of the Act regarding burden of proof in tax disputes: -“In any civil proceedings under this Act, the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax.”

42. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”

43. In the absence of relevant documentation to facilitate the assessment of a tax liability, the Respondent is empowered under Section 31(1) of the Tax Procedures Act (TPA) to use its best judgement in making its tax assessment.

44. The Tribunal notes that the Respondent extrapolated sales data in respect of supplies made by the Appellant to Meru County Investment and Development Corporation for the period under review from withholding tax certificates in the Appellant’s tax account, which sales data the Appellant corroborated as correct.

45. The Tribunal further observes that the Appellant only presented its email correspondences with the Respondent during the review of the Appellant’s objection as evidence for consideration in this Appeal. The Tribunal, therefore, considered only the documents that the Appellant furnished in the Appeal to establish if they were sufficient to persuade a reasonable person that the Respondent’s assessment of the Appellant’s tax liability was erroneous.

46. Section 43 of the VAT Act, 2013 which provides that: -“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial copies number order;(b)of all credit and debit notes issued, in chronological order;(c)…;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.envisions that a person carrying on a business must keep certain records and documents and avail the same to the Commissioner for inspection.

47. Section 23(1) of the Tax Procedures Act further provides that a taxpayer is required to keep records 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 or such shorter period as may be specified in a tax law.”

48. The Tribunal’s examination of the evidence presented by the Appellant in the Appeal reveals that the Appellant failed to adduce source documents required of it under Section 43 of the VAT Act and Section 23 of the Tax Procedures Act, including sales invoices, a VAT account, general ledgers, and other relevant records to support its averments on how it had accounted for and settled the VAT on the taxable value of its supplies to Meru County Investment and Development Corporation during the period of January 2017 to September 2021.

49. The Tribunal also notes that the Appellant failed to adduce its VAT returns and tax payment confirmations to demonstrate how it declared the said income and how it accounted for and remitted VAT on the taxable value of the supplies.

50. The Tribunal finds that despite the law under Section 62 of the VAT Act, Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly placing a burden on the Appellant as a taxpayer to prove its case, the Appellant instead opted to exercise excessive abbreviation in arguing its case by filing evidence that was not impactful in persuading the Tribunal to arrive at a determination different from that in the Respondent’s objection decision.

51. Due to the Appellant’s failure to provide critical transactional documents in support of its transactions with Meru County Investment and Development Corporation during the period of January 2017 to September 2021, the Tribunal was unable to ascertain the correctness of the Appellant’s assertions in this case.

52. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s additional assessment of VAT was incorrect or excessive as required under Section 62 of the VAT Act, Section 56(1) of the TPA and Section 30 of the TAT Act.

53. Consequently, the Tribunal finds that the Respondent was justified in issuing the objection decision dated 10th July 2023.

Final Decision 54. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 10th July 2023 be and is hereby upheld.c.Each party to bear its own costs.

55. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF AUGUST, 2024. ERIC NYONGESA WAFULACHAIRMANGLORIA A. OGAGA JEPHTHAH NJAGI MEMBER MEMBEREUNICE N. NG’ANG’AMEMBER