[2024] KETAT 1029 (KLR)

Jey Oil Africa Limited v Commissioner of Investigation and Enforcement Department (Tax Appeal E569 of 2023) [2024] KETAT 1029 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1029 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E569 of 2023

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich & T Vikiru, Members

July 12, 2024

Between

Jey Oil Africa Limited

Appellant

and

Commissioner of Investigation and Enforcement Department

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya and is a registered taxpayer.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Respondent carried out investigations to check on the tax compliance of the Appellant, reviewing the Appellant's IT2c filings, VAT filings, and other documentation for the period 2016 to 2020.

4. The Respondent issued the Appellant with a Notice of Assessment of Tax dated 14th February 2023 for the periods June 2016 to December 2018 for Income tax and VAT amounting to Kshs 268,231,206. 41 and Kshs 273,450,342. 89, respectively.

5. The Appellant objected to the assessment vide a letter dated 20th March 2023.

6. The Respondent issued its objection decision on 24th July 2023.

7. The Appellant being dissatisfied with the Respondent’s objection decision lodged a Notice of Appeal at the Tribunal on 23rd August 2023

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 7th September 2023. i.That the Respondent erred in fact and law by bringing to charge non income items in the bank contrary to the provisions of the VAT Act 2013 and Income tax Act Cap 470ii.That the Respondent erred in fact and law by bringing to charge variances without any basis or explanations contrary to the provisions of the Tax Procedures Act 2015iii.That the Respondent erred in fact and law by charging VAT on exports contrary to the provisions of the VAT Act 2013. iv.That the Respondent erred in fact and law by issuing assessments in contravention of Section 31(8) (9) of the TPA 2015.

Appellant’s Case 9. The Appellant’s case is premised on the following documents before the Tribunal:-a.Its Statement of Facts dated and filed on 7th September 2023. b.Its Written Submissions filed on 9th March, 2024.

10. The Appellant averred that Section 31(6) of the TPA provides that the Commissioner may amend an assessment within five years of the date the Commissioner notified the taxpayer of the assessment. That the Commissioner did not notify the taxpayer, neither did he justify in any way the basis of going outside the five years.

11. The Appellant averred that the Respondent analyzed the bankings of all bank accounts, including all monies appearing as received into the bank, and brought to charge Kshs. 238,521,200. 00 as variance between bankings and declared sales for the year 2018 these included non-income items, which are clearly not chargeable.

12. The Appellant submitted that failure by the Respondent to consider the material placed before it by the Appellant to charge non-income items, contrary to the provisions of Article 47 of the Constitution as well as the Fair Administrative Action Act and went ahead and confirmed the assessment notwithstanding the obvious evidence adduced by the Appellant and clearly itemized in bank statements that the Respondent obtained directly from the banks.

13. The Appellant averred that the Respondent assessed Kshs. 149,271,199. 00 for Value Added Tax, and these are sales that were sold to a client overseas and used in another market and, therefore, were exports that were not subject to VAT. That further, the said amount falls beyond the five year period allowed by the TPA hence there was no lawful justification for charging VAT.

14. The Appellant relied on the case of Noor Maalim Hussein & 4 others vs. Minister of State for Planning, National Development and Vision 2030 and 2 others (2012) eKLR, where the court held as follows;“...if statutory power is exercised in a manner contrary to the drafters or against public interest, the power can be said to have been exercised capriciously, irrationally or unreasonably. Thus, irrationality and unreasonableness would play a major role and we shall as courts continue to assert our traditional duty and intervene in situations where authorities like ministers and such persons act in bad faith, abuse power, fail to take account relevant considerations or act contrary to legitimate expectations....”

15. The Appellant submitted that the Respondent's assessment thus violated the provisions of Section 3(2) of the Income Tax Act, which stipulates that Income tax is chargeable only on gains or profit from business.

16. The Appellant averred that the Respondent assessed Kshs. 3,606,190. 00 and Kshs. 3,416,075. 00 as omitted sales and understated sales, respectively, in the year 2016; on the same grounds, the Respondent further assessed Kshs. 191,372,316. 00 and Kshs. 46,346,688. 00 in the year 2017 and Kshs. 52,095,379. 00 and Kshs. 40,899,579. 00 in the year 2018. That these applied to both Income tax and VAT and is contrary to the provisions of the VAT Act 2013 and Income Tax Cap 470. That the Respondent did not explain the composition of these amounts nor provide any request for any specific invoices to help the company understand the genesis of the additional assessments.

17. The Appellant submitted that Section 31(8) of the Tax Procedures Act provides that where the Commissioner has made an amended assessment, he or she shall notify the taxpayer in writing of the amended assessment, and the Respondent did not communicate nor did he give information on the specifics of the assessment.

18. The Appellant submitted that the Respondent did not provide any explanation or proof as to why he brought those amounts to charge and did not consider the explanations and support documents as provided by the Appellant. The Appellant further relied on the case of National Social Security Fund Board of Trustees v Commissioner of Domestic Taxes, Kenya Revenue Authority [2016] eKLR where considered the issue, the Court stated as follows: -“There is a world of difference between an assertion and proof. That which a party states to be his case is an assertion. The party needs to adduce evidence to support his said assertion with a view to proving his case”

19. The Appellant averred that the Respondent penalized it for the omissions of other companies. The Appellant submitted that the invoices series being used do not belong to the Appellant's series, such as 'Various', 'DEL327', and 'DEL-0065', and that they do not exist in the Appellant’s database.

20. The Appellant averred that the Respondent ought to have contacted these companies to investigate why they claim to have bought goods from the Appellant.

21. The Appellant relied on the case of National Social Security Fund Board of Trustees vs Commissioner of Domestic Taxes, Kenya Revenue Authority {2016] eKLR stated above.

22. Therefore, the Appellant submitted that the onus is on the Respondent to demonstrate to the Tribunal why it disregarded the documents provided and why it has not followed up with the respective companies.

Appellant’s Prayers 23. The Appellant prayed the Tribunal that:a.To find that the confirmed assessments issued vide the objection decision dated 24th July 2023 are excessive, arbitrary, and flawed.b.To allow the Appeal as prayed with costs to the Appellant.

Respondent’s Case 24. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 6th October 2023 and filed on 9th October 2023. b.The Respondent’s Written Submissions dated 18th March 2024 and filed on 19th March 2024.

25. The Respondent averred that Section 3 of the Tax Appeals Tribunal Procedure Rules states that;“3. . Form and Filing of Appeal: A Notice of Appeal shall be-a.inform TAT-1 set out in the Schedule: andb.submitted electronically or physically to the clerk of the Tribunal within 30 days upon receipt of the decision of the Commissioner."

26. The Respondent averred that the Tribunal can only seize jurisdiction of a matter once the same is properly filed as provided for in Section 3 of the Tax Appeals Tribunal Act and Section 52 of the Tax Procedures Act, which states that:“(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).”

27. The Respondent relied on the case of Fair Logistics Agency Limited v Kenya Revenue Authority (2020) eKLR, where Justice P.J. Otieno held that,“The trite law in this country, and I think in common law jurisdictions generally, is that where a statute establishes a specific procedure for handling a particular issue, that procedure needs to be strictly followed and exhausted before a party comes to this Court and that the Court should let such other alternative dispute resolution mechanism operate freely without undue intrusion. It is called the doctrine of exhaustion of alternative or administrative remedies. The essence of that doctrine dictates that where the constitution or a statute confers a jurisdiction on the Court, Tribunal, person, body or authority, the jurisdiction must be exercised in accordance with the constitution or the statute conferring it''.

28. The Respondent submitted that the pleadings and documents availed to the Tribunal point to the fact the Appellant filed and served upon the Respondent a Notice of Withdrawal of the Notice of Appeal dated 7th September 2023 that withdrew the Notice of Appeal dated 23rd August 2023, thereby, in essence, there is no valid appeal before the Tribunal enabling it to exercise its jurisdiction.

29. The Respondent submitted that Section 31 (1) (c) of the TPA provides that:-“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure 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.”

30. The Respondent averred that once the Appellant receives the additional assessment, the burden of proof shifts to the Appellant to disprove the Respondent's position as provided for under Section 56(1) of the TPA, which provides as follows;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

31. The Respondent relied on the case of Grace Njeri Githua V Commissioner Of Investigations & Enforcement (TAT No. 102 Of 2018), where the Tribunal emphasized the fact that the burden is on the Appellant to prove the assessment was wrong by stating thus:“In this appeal, the Appellant has not provided the Tribunal enough evidence to show that the net income the Respondent has based on the tax assessment was not income or is subject to further cost deduction in arriving at a net profit. It is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is not due from her."

32. The Respondent further relied on the case of Mulherin vs Commissioner of Taxation [2013] FCAFC 115, where the Federal Court of Australia held that:-“in tax disputes, the taxpayer must satisfy the burden of proof to challenge corporation tax and VAT tax assessments successfully. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

33. The Respondent averred that for the Appellant to shift the burden of proof from itself to the Respondent, the Appellant was meant to raise an objection against the assessment as provided for under Section 51 of the Tax Procedures Act.

34. The Respondent submitted that Section 51 (3) of the Tax Procedures Act 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 or has applied for an extension of time to pay the tax not in dispute under section 33(1);c.and all the relevant documents relating to the objection have been submitted.”

35. The Respondent averred that Section 23 of the Tax Procedures Act, as read together with Section 59 of the Tax Procedures Act, mandates the Appellant to maintain documents required under any tax law and to provide the same upon request by the Respondent. Further, the Respondent submitted that the Appellant failed to provide the required documents for the objection application.

36. The Respondent placed reliance on Section 5 of the VAT Act with regard to the charge of tax and the Respondent’s mandate to charge the same and Section 17 of the VAT Act which sets out the criteria to be followed by a taxpayer in seeking for a refund of input VAT.

37. The Respondent relied on the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR where the Court noted that: -“... the tax Laws reverse the well-known principle of evidence of "he who alleges must proof'. In this regard, the tax authorities would assess what it considers to be the tax due from a taxpayer and the tax laws would burden the tax payer to disprove that the assessment or tax demanded is wrong or incorrect”

38. The Respondent further relied on the case of TAT No. 70 of 2017 Afya Xray Centre Limited vs Commissioner of Domestic Taxes in which it was held that:“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent's finding after the preliminary finding and after the confirmation of the assessment. Both are instances where the Appellant could have produced its books of accounts to counter the Respondent's assessment after all the Appellant by law bears the burden of proof…….”

39. The Respondent submitted that the Appellant has the burden of proof to outline the erroneous nature of the computed taxes. However, the Appellant failed to provide the required documentation leading to the Respondent issuing the objection decision.

Respondent’s Prayers 40. The Respondent prayed that the Tribunal;a.Uphold the Respondent's objection decision dated 24th July 2023. b.Finds in favor of the Respondent.c.Dismiss the Appeal with costs to the Respondent.

Issues For Determination 41. The Tribunal, having considered the pleadings and the submissions made by the parties, is of the considered view that the issues that crystalized for its determination were:i.Whether there was a valid Appeal before the Tribunal.ii.Whether the Respondent was justified in confirming the tax assessed upon the Appellant.

Analysis And Determination 42. The Tribunal having identified the issues that fell for its determination proceeded to analyse the same as hereunder.

i.Whether there was a valid Appeal before the Tribunal. 43. The disputed tax decision was issued on 24th July 2023, and the Appellant lodged its Appeal at the Tribunal on 23rd August 2024, within the 30-day statutory timeline for filing appeals to the Tribunal.

44. Section 13 of the Tax Appeals Tribunal Act provides as follows regarding the procedure of filing Appeals to the Tribunal;“Procedure for appeal1. 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.”

45. It was the Respondent’s contention that the Appeal before the Tribunal is incompetent for the reason that the Appellant filed and served upon the Respondent a Notice of Withdrawal of the Notice of Appeal dated 7th September 2023 that withdrew the Notice of Appeal dated 23rd August 2023.

46. The Respondent cited Section 52 (1) of the Tax Procedures Act in regard to filing a matter before this Tribunal. The Section states that:“A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act (Cap. 469A).”

47. The Tribunal gleaned through the documents presented by the parties and did not find any evidence to show that the Appellant filed and served upon the Respondent a Notice of Withdrawal of the Notice of Appeal dated 7th September 2023 as alleged by the Respondent.

48. Parties having adhered to the requisite procedure and timelines and in the absence of the alleged Notice of Withdrawal of the Notice of Appeal, the Tribunal finds that this Appeal is valid.

ii.Whether the Respondent was justified in confirming the tax assessed upon the Appellant. 49. The dispute arose from the Respondent’s confirmation of assessed principal taxes of Kshs. 288,287,208. 00 for VAT and Corporation tax upon the Appellant on the basis that the Appellant failed to provide sufficient documents to disprove the Commissioner’s assessments.

50. The Appellant averred that the Respondent did not give details of the assessments in its demand notice hence it was difficult to respond on specific items as demanded.

51. The Tribunal pored through the documents adduced by the parties and noted that the Respondent in its letter of tax investigation findings dated 22nd October 2022 clearly itemized the tax heads, the variances or gaps identified and the documents required to inform a review of the Respondent’s tax assessment.

52. The Respondent submitted that the Appellant had failed in discharging its burden of proof pursuant to Section 56 (1) of TPA and Section 30 of the TAT Act.

53. Section 56 (1) of TPA provides as follows with regard to burden of proof:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”While Section 30 of the TAT Act provides that:“Burden of proofIn a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

54. The Appellant contended that it had provided documents to disprove the Respondent’s assessments but the Respondent had failed to take into account the information and documents provided by the Appellant in support of its objection.

55. The Tribunal noted that during the investigation period, the Respondent requested the Appellant for the following documents:i.Sales ledger and Purchases ledgersii.Invoicesiii.Bank Statementsiv.Fixed Assets Schedulev.Payroll Schedulevi.Cash Bookvii.Audited Financial Statements for the period under review.

56. The Tribunal further noted that the Appellant in its response provided the underlisted documents to the Respondent, the same were also availed at the Appeal stage: -i.Financial statements for year 2016 & 2017ii.Bank Statementsiii.Bank reconciliations analysisiv.Summary of sales and sample invoicesv.Sales & Purchases ledger excerpts

57. The Respondent on the other hand insisted that the documents availed by the Appellant were not sufficient to warrant adjustments to the assessments.

58. Section 56 of the TPA and Section 30 of the TAT Act place the burden of proving the incorrectness of a tax decision squarely on the Appellant. However, the burden of proof is bound to shift upon production of evidence by the Appellant, once the Appellant provides any evidence, the Respondent is expected to bring its best Judgement to bear on the information so provided.

59. The Tribunal observed that the above listed documents provided by the Appellant were not a conclusive list of the documents that had been requested of it by the Respondent, however they formed a basis upon which the Respondent was expected to exercise its best judgement and arrive at the Appellant’s tax liability.

60. It was the Appellant’s contention that whereas the Respondent’s assessments were premised on allegedly understated and undeclared sales, the Respondent did not give a breakdown of the figures assessed neither did it specify which information was further required beyond what had been provided.

61. With regard to income tax assessments, the Tribunal noted that Appellant provided its bank statements, bank reconciliations, sales invoices and sales ledger excerpts however, there was no evidence to show that the Respondent considered the documents so provided as it did not point out any gaps, variances or inconsistencies, it only went ahead to confirm its assessments asserting that the documents were not sufficient. The Respondent has therefore not persuaded the Tribunal that it exercised its best judgement based on the information availed to it as required under Section 31(i) of the TPA which states that:“31. Amendment of assessments

(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period”

62. Further, as regards VAT, Section 17(3) of the VAT Act provides as follows regarding documentation for the claim of input tax;“The documentation for the purposes of subsection (2) shall be—(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under section 16(2); or(e)a debit note in the case of input tax deducted under section 16(5).”

63. The Appellant having provided the documentation listed herein above including sales invoices as required under Section 17(3)(a) of the VAT Act had discharged its burden of proof after which it was incumbent upon the Respondent to further justify its tax assessment.

64. Courts have long held that the burden of proof in tax disputes is not stationary, but shifts among the parties based on the weight of the evidence so provided. In the case of Mbuthia Macharia vs. Annah Mutua Ndwiga & Another Civil Appeal No. 297 of 2015 [2017] eKLR, the Court of Appeal when dealing with the issue of burden of proof observed as follows:“The legal burden is discharged by way of evidence, with the opposing party having a corresponding duty of adducing evidence in rebuttal. This constitutes evidential burden. Therefore, while both the legal and evidential burdens initially rested upon the Appellant, the evidential burden may shift in the course of trial, depending on the evidence adduced. As the weight of evidence given by either side during the trial varies, so will the evidential burden shift to the party who would fail without further evidence”.

65. This position was explained in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR, where Mativo J ( as he then was) adopted the doctrine in the Canadian Supreme Court case of Johnston v Minister of National Revenue where the court {1948} S.C.R. 486 where the court decided that:-“… the onus is on the taxpayer to “demolish the basic fact on which the taxation rested.” Again, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada which held that the onus is met when a Taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face.” To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.” (Emphasis added)

66. From the foregoing decision of the superior court, it is apparent that the Appellant was required to present a minimum amount of information necessary to support its position. This safety valve seems to place the burden of proof on the Appellant without completely relieving the Respondent of its fair share of the burden of proof. The bottom line is that once the Appellant has provided evidence that the Respondent’s assessment was wrong, then the Respondent must push back and show that its assessment was not arbitrary, capricious or imagined. The onus will then shift back to the Appellant once the Respondent has discharged its burden on a balance of convenience to discharge the prima facie case that has been presented by the Respondent.

67. This fact that the burden of proof in tax cases is not stationary was explained in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where Justice Majanja stated as thus:-“I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.”

68. The Tribunal holds the view that the Appellant having provided a number of the of the documents that were required of it to disprove the VAT and Corporate tax assessments, the Respondent was duty bound to review the documents so provided and make an informed decision on the Appellant’s tax liability rather than give a blanket dismissal of the evidence adduced on the ground that it was insufficient and proceed to confirm the tax assessments upon the Appellant.

69. The Tribunal therefore finds that having failed to consider evidence adduced by the Appellant, the Respondent was not justified in its confirmation of assessed taxes upon the Appellant.

Final Decision 70. Based on the foregoing analysis the Tribunal determined that the Appeal is merited. The Orders that accordingly recommend themselves are as follows:-i.The Appeal be and is hereby allowed.ii.The Respondent’s objection decision dated 24th July 2023 be and is hereby set aside.iii.Each party to bear its own costs.

71. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY, 2024ERIC NYONGESA WAFULA - CHAIRMANDR RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBER