[2025] KETAT 189 (KLR)

Jiangxi Jing Tai Water Conservancy Ltd (JJT) v Commissioner Investigation & Enforcement Department (Tax Appeal E364 of 2024) [2025] KETAT 189 (KLR) (14 March 2025) (Judgment)

Neutral citation: [2025] KETAT 189 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E364 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members

March 14, 2025

Between

Jiangxi Jing Tai Water Conservancy Ltd (JJT)

Appellant

and

Commissioner Investigation & Enforcement Department

Respondent

Judgment

1. The Appellant is a limited liability company duly incorporated in Kenya under the Companies Act, Chapter 486 of the Laws of Kenya. Its principal activity is the provision of civil engineering works.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 Parts 1 and 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 investigated the Appellant's financial and accounting records for the period 2018 to 2022 with a view to ascertain its compliance with the applicable tax legislation. It subsequently issued its additional assessment on the i-Tax platform on 30th November 2023 demanding tax totalling Kshs 340,909,856. 00.

4. The Appellant filed an objection via the i-Tax platform on the 20th December 2023.

5. The Respondent confirmed the assessment vide confirmation of the assessment letter dated 15th February 2024 wherein it fully rejected the objection and demanded the Appellant to pay Kshs 340,909,85. 00

6. Aggrieved with the Respondent’s decision, the Appellant lodged a Notice of Appeal dated 15th March 2024.

The Appeal 7. The Appellant’s Memorandum of Appeal dated 28th March 2024 raised the following grounds of appeal:a.That the Respondent erred in law and fact in its analysis of the Appellant's bank statement by misapplying the banking analysis test to establish the Appellant's income for the period under review consequently arriving at an incorrect and exaggerated figure of taxable income.b.That the Respondent erred in law and fact by failing to consider the accounting principles that relate to how contract revenues and expenses are recognised.c.That the Respondent's claim of VAT on reclassified exempt sales to general is excessive and contrary to Section 13 (3) of the VAT Act (VATA) since the amount declared was inclusive of VAT.d.That the Respondent erred in fact and law by disallowing input tax contrary to the provisions of the VATA.e.That the Respondent erred in fact and law by disallowing expenditure/expenses contrary to Section 15 of the Icome Tax Act (ITA).f.That the Respondent erred in fact and law by failing to take into consideration the loss carried forward from the prior year 2018 when arriving at his additional corporate Income tax assessment contrary to Section 15 of ITA.g.That this Honourable Tribunal has the jurisdiction to hear this Appeal.

Appellant’s Case 8. The Appellant laid out its Appeal in its Statement of Facts filed and dated 28th March 2023 and filed on the even date.

9. The Appellant stated that the Respondent erred in law and fact in its analysis of the Appellant's bank statement by misapplying the banking analysis test to establish its income for the period under review consequently arriving at an incorrect and exaggerated figure of taxable income. In support of this issue, the Appellant opined that the Respondent failed to take into consideration all the amounts relating to interbank transfers.

10. According to the Appellant, interbank transfers are not revenue or trading income to the Appellant and that they are normal movements of money from one bank to the other where the Appellant is an account holder in both banks. It argued that interbank transfers are not revenue or income accrued or derived from Kenya and therefore should not be subjected to Income Tax or VAT as done by the Respondent.

11. The Appellant argued that the Respondent failed to take the director's capital injection which was made as deposits into the Appellant's bank into consideration. It asserted that the amounts injected/deposited in the bank are not income accrued in or derived by the business but rather director investment and advancements to the company.

12. On whether the Respondent erred in law and fact by failing to consider the accounting principles that relate to how contract revenues and expenses are recognised, the Appellant stated that contract revenues and expenses are recognised by reference to the stage/percentage of completion of contract activity where the outcome of the construction contract can be estimated reliably. That revenue is recognised only to the extent of recoverable contract costs incurred.

13. The Appellant noted that the advance payment of Kshs 186,489,872. 03 it received on 18th October 2019 was not an income but rather an initial payment for procuring machinery and materials.

14. In addition, it averred that IFRS 15 requires that revenue is recognised when a performance obligation is satisfied by transferring a promised good or service to a customer which is when the customer obtains control of that good or service. The Appellant contended that a performance obligation may be satisfied at a point in time typically for promises to transfer goods to a customer. It added that for a performance obligation satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied.

15. The Appellant also argued that advance payments are a common practice in the industry, where the contractor is paid a percentage of the contract value before any work is done to assist the contractors finance their projects and get started with the work.

16. It also stated that the advance payment related to the contract should not be transferred to the revenue statement since it relates to unfinished works of the project work in progress and cannot be regarded as revenue subject to Income tax in the year received.

17. It added that the banking approach is not the ideal approach for the Respondent to use to determine the income accrued in a year for tax purposes. The Appellant argued that the use of the banking approach by the Respondent is misleading and not acceptable in this kind of industry that the Appellant was engaged in.

18. On whether the Respondent's claim of VAT on reclassified exempt sales to general is excessive and contrary to Section 13 (3) of the VATA since the amount declared was inclusive of VAT. The Appellant faulted the Respondent’s decision to charge VAT on the sales it declared in its VAT return and disputed the approach the Respondent used to arrive at the VAT amount. It stated that the Respondent categorically stated that the amounts paid by Lake Victoria South Water Services Board to the Appellant were inclusive of VAT but failed to compute tax by working the amounts backwards to determine the taxable amount.

19. The Appellant stated that the Respondent subjected this amount that was already inclusive of VAT to VAT which amounted to double taxation. It relied on the provisions of Section 13(3) (c) of the VATA to support its case.

20. On whether the Respondent erred in fact and law by disallowing input tax contrary to the provisions of the VATA, the Appellant averred that it is beyond its ability to determine and compel the suppliers it trades with to declare the invoices as required by the law and as stated by the Respondent in its assessment. The Appellant argued that by the Respondent stating that the suppliers did not declare the same, the Respondent implied that it was its responsibility to ensure that the supplier declared the invoices.

21. That it was not right for the Respondent to abrogate its responsibility of tax compliance to the Appellant who is not mandated to do so and neither does the Appellant have the capacity to do so.

22. The Appellant contended that the Respondent's attempt to attribute non-compliance of the listed suppliers to it was not a basis for disallowing input tax as provided for under Section 17 of the VATA or any other law of Kenya.

23. It asserted that it met the threshold set out under Section 17 of the VATA and Regulations thereof and failure by the Respondent to allow the same is arbitrary, illegal and in violation of its right to a fair administrative action protected under Article 47(1) of the Constitution of Kenya 2010.

24. On whether the Respondent erred in fact and law by disallowing expenditure/expenses contrary to Sections 15 and 16 of the ITA. The Appellant contended that the Respondent erred in fact and law by disallowing expenses contrary to Sections 15 and 16 of the ITA because the expenses it incurred on the subcontractor, operations and auto truck were business-related and were wholly and exclusively incurred in the production of the revenue.

25. The Appellant averred that the Respondent erred in fact by disallowing Kshs 14,866,046. 00 relating to the auto truck by alleging that the same was at risk of double claim without necessarily proving and demonstrating that the taxpayer double claimed those expenses.

26. The Appellant also posited that the Respondent's i-Tax platform and Excel IT2C do not provide all the expense lines required by the Appellant when filing the Income tax return. That it was hence left with no option other than to either consolidate or merge certain expenses to have the correct self-assessed tax declared.

27. The Appellant contended that the Respondent failed to take into consideration the breakdown it provided during the fieldwork.

28. On whether the Respondent erred in fact and law by failing to take into consideration the loss carried forward from the prior year 2018 when arriving at his additional Corporate Income tax assessment contrary to Section 15 of the ITA, the Appellant averred that the Respondent should have been guided by the provision of the law as stated in the ITA and should not have applied the law where it fits its needs and requirements or in a manner that it achieves a certain objective.

29. The Appellant was of the view that in determining additional Corporate Income tax, the Respondent ought to have taken into consideration the tax loss in the year 2018. In particular, the Appellant averred that the Respondent failed to take into consideration the loss for the year 2018 as required by Section 15 (4) of the ITA. It thus maintained that by failing to do so the Respondent arrived at erroneous additional taxes in its assessment.

30. On whether the Appellant cannot produce new documents at the Tax Appeals Tribunal stage, the Appellant stated that notwithstanding Section 13(6) of the Tax Appeals Tribunal Act (TATA), Section 13 (2) of the TATA allows the taxpayer to produce any other document as may be necessary to enable the Tribunal to make a decision. The Appellant therefore, argued that failure by the Tribunal to allow the Appellant to furnish all the necessary documents in the Appeal may limit the Appellant’s access to fair administrative action as envisaged in the Constitution of Kenya 2010 and limit access to fair trial.

31. The Appellant averred that the banking method and the input-outputs method used by the Respondent in raising Additional Assessments were erroneous, bad in law and unjustified. It cited the case of Afya-X-Ray Centre Ltd v Commissioner of Domestic Taxes [2019] eKLR to support the position that every deposit in an account is not necessarily income to the account owner.

32. The Appellant submitted that the Respondent erred in law and fact by subjecting income that had already been audited and taxed to further taxation thereby infringing on the Appellant's legitimate expectation. In this regard, the Appellant relied on the case of Kenya Revenue Authority, Commissioner Customs Services & Julius Musyoki v Darasa Investments Limited [2018] eKLR to support its position that legitimate expectation is a principle of good administration or administrative fairness and that an administrative body has to adhere to fair administrative action.

Appellant’s Prayers 33. Subsequent to the foregoing, the Appellant prayed to the Tribunal for the following orders:a.The notice of objection be upheld;b.The Respondent's confirmation of assessment dated 15 February 2024 be set aside with costs to the Appellant; and,c.Any other orders that the Tribunal deems fit and reasonable.

Respondent’s Case 34. In response to the Appeal, the Respondent relied on its Statements of Facts dated 13th May 2024 and filed on the even date and the written submissions dated 14th October 2024 and filed on 26th October 2024.

35. The Respondent stated that it carried out an investigation focussing on Corporation tax (T2C) from January 2018 to December 2022; VAT from January 2018 to December 2022; and PAYE from January 2018 to December 2022. The investigation mainly centred on the review and analysis of financial records and related data for the Appellant. That the records reviewed included, data from internal databases, including iTax and third-party data including from the Appellant's bankers among others.

36. The Respondent stated that the Appellant filed income tax returns for the years of income 2018 through 2021 on iTax. That over the period, the Appellant was in a loss position except for 2021 when it declared taxable income of zero and also filed all its VAT returns where he was in a constant credit position as a result of classifying sales under the exempt category. With regards to PAYE, the Respondent asserted that the Appellant had filed all PAYE returns since the iTax rollout to date.

37. That it applied the banking analysis method where it analysed the banking credits in accounts held at Sidian, KCB and SCB Banks in establishing the taxable income. That this analysis confirmed its suspicion that the Appellant had been misclassifying sales as exempt instead of classifying the sales as general rated.

38. That it then proceeded to make adjustments for non-trade deposits such as interbank transfers, loans/capital injection, reversals and unpaid cheques in order to come up with the net banking’s expected income. That it established trade income banked as Kshs 1,248,634,554. 00.

39. That the established income from banking was compared with the income declared by the Appellant to establish whether the Appellant had declared all the income. That the test revealed an undeclared income of Kshs 413,889,388. 00 between 2019 and 2022.

40. The Respondent stated regarding VAT that its analysis of VAT declarations revealed that the Appellant had declared VAT-exempt sales amounting to Kshs 687,391,442. 00, for the years 2020, 2021 and 2022 earned from Lake Victoria South Water Services Board.

41. Regarding expenditures, the Respondent stated that it analysed the expenditure claimed by the Appellant by carrying out tests to determine the deductible input tax. The Respondent disallowed sub-contractors expenses, operating expenses and auto & truck expenses for lack of supporting documentation. It then proceeded to make adjustments and compute the taxes.

42. The Respondent stated that it invalidated the Appelant’s objection vide a letter dated 12th January 2024. That it reminded the Appellant to validate its objection via email on 12th January 2024 but the Appellant failed to do so and hence its confirmed assessment on 15th February 2024.

43. The Respondent posited that the use of banking analysis/deposit method in determining the taxes due is a method that is recognised in most jurisdictions as was stated in the case of Digital Box Limited v Commissioner of Investigations and Enforcement-TAT Appeal No. of 2017.

44. The Respondent alleged that it made adjustments at the assessment stage for non-trade deposits that is interbank transfers, loans/capital injection, reversals and unpaid cheques that were supported. It added that at the time of the objection, the Appellant failed to provide further documentation in support of the adjustments claimed not to have been made.

45. The Respondent maintained that the burden of proof lies on the Appellant to prove its case by providing documents but it failed to do so.

46. The Respondent asserted that for the year 2020, VAT on all misclassified sales was computed at 14% since the income had been earned in the months of May, August and November. That the remainder of the sales was taxed at the rate of 16%.

47. In response to the fourth, fifth and sixth grounds of Appeal, the Respondent averred that the Appellant’s allegations are not supported by the requisite documentation and sufficient clarity to shift the burden to it. It argued that from the record of the Appeal, the Appellant has not pointed out any documentation that it could accuse the Respondent of having ignored or not taken into consideration in determining the taxes due.

48. The Respondent maintained that after several requests to the Appellant to validate its objection, the Appellant failed to do so. That its allegations are thus baseless since the burden of proof lies with it.

49. The Respondent cited the following provisions of law to support its case: Sections 23, 29, 34(4)(b)(1). 51(1), and 97 of the TPA, Sections 13 and 30 of the Tax Appeals Tribunal Act, No. 40 of 2013 (TATA): Section 5 of the VATA: and Sections 3 and 34 of the ITA.

Respondent’s Prayer 50. Consequently, the Respondent urged the Tribunal to uphold its Objection decision and dismiss the Appeal with costs for lack of merit.

Issues for Determination 51. The Tribunal has identified the following as the issues for determination in this Appeal: -a.Whether the Respondent was justified to invalidate the Appellant’s Objection.b.Whether the Respondent erred in its application of the bank analysis method to determine the Appellant’s tax liability.c.Whether the Respondent's claim of VAT on reclassified exempt sales to general is excessive and contrary to Section 13 (3) of the VATA;d.Whether the Respondent erred by disallowing the Respondent’s input tax; ande.Whether the Respondent erred in disallowing expenses incurred and losses carried forward.

Analysis and Findings 52. It is to these issues that the Tribunal will in turn determine in a sequential manner as follows: -

a. Whether the Respondent was justified to invalidate the Appellant’s Objection. 53. The issue in dispute in this Appeal arises out of the Respondent’s invalidation of the Appellant’s objection and the subsequent confirmation of its assessment thereof.

54. The discernible common facts in this Appeal are as follows:a.The Respondent issued assessments on 30th November 2023. b.The Appellant lodged its objection thereof on 29th December 2023c.The Respondent invalidated the said objection for lack of documents on 12th January 2024 and directed the Appellant to validate its objection within 7 days.d.The Respondent confirmed the assessments vide a letter dated 15th February 2024

55. The Respondent submitted that it invalidated the Appellant’s objection and requested it to provide the requisite supporting documents but it failed to do so. It thereafter confirmed the assessment.

56. The Appellant argued that it is entitled to further produce documents which it may not have been aware of and which are important at the Appeal stage before the Tribunal. That an action that would deny it this right would limit its access to fair administrative actions and fair trial as envisaged in the Constitution.

57. As it is, the Appellant admits that it never provided all the documents requested or needed to enable the Respondent to make a fair assessment of its tax liabilities. It nevertheless argued that it now has the right to provide such documents, which were never sighted by the Respondent for consideration before the Tribunal. That this action would make it possible for the Tribunal to dispense justice fairly

58. The Respondent’s right to invalidate an objection is espoused under Section 51 (4) of the Tax Procedures Act, which provides as follows:“(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

59. The invalidation in this case was issued within 14 days of receipt of the objection. It thus met the immediacy test as espoused in Section 51(4) of the TPA.

60. Crucially the law as it is, under Section 51(8) of the TPA envisages that the Commissioner can only issue a valid objection decision if the objection lodged by the taxpayer is valid. It provides as follows:“(8)Where a notice of objection has been validly lodged within time, the The commissioner shall consider the objection and decide either to allow the objection in whole or in part or disallow it, and the Commissioner's decision shall be referred to as an "objection decision".

61. It is thus clear that the Respondent can only issue an Objection decision if the Appellant’s objection is valid. In cases where there is no valid objection, like it is in this Appeal then the Respondent is merely required to confirm its assessment and is not at all obliged to issue an Objection decision thereof.

62. The Tribunal is an Appelllate Tribunal. It is hence required to re-consider and determine if the Respondent’s decision was made in error. To do so, it can only look at and see what the Respondent saw, looked at or considered when it was making its decision.

63. The Tribunal cannot therefore allow a party who never sought its leave to admit new documents to proceed and do so at the Appeal stage. It cannot also proceed to consider and make its decisions based on documents that the Respondent never saw. To do so would amount to turning itself into a Tribunal of original jurisdiction contrary to Section 12 of the TAT Act that created it as an appellate Tribunal the said Section 12 of the TAT Act provides as follows:“A 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”

64. Similarly, such an act of considering documents like a Tribunal of original jurisdiction would also amount to usurping the powers conferred on the Respondent by Statute of determining tax liabilities of taxpayers. An action where it confers itself the power to consider the Appellant’s documents and thereafter proceed to determine its tax liabilities based on documents that the Respondent never saw would also be ultra vires.

65. Whichever way one looks at it, the Appellant spelt its own death knell when it failed to validate its objection. Its attempts to Constitutionalise its actions using general arguments of fairness cannot aid its failures. As it is, the law is that an invalidation implies that the Respondent’s tax assessment has not been objected to. The absence of an objection thus entitles the Respondent to confirm its assessment, at which point all the assessed taxes become due and enforceable.

66. Similarly, an invalidation also disentitles a taxpayer from relying on any document that was not shared with the Respondent to support its cause in contesting the Respondent’s assessment.

67. The outcome of an invalidation decision was discussed in Shah v Commissioner of Domestic Taxes [2023] KETAT 324 (KLR), where the Tribunal held as follows regarding a justified invalidation:“Accordingly, the Tribunal finds that the Respondent was justified in confirming the income tax assessments on the Appellant.”

68. The Tribunal also dismissed an appeal in African Banking Corporation Ltd v Commissioner of Domestic Taxes [2023] KETAT 890 (KLR) where it found that an objection was not validly issued and thereafter proceeded to dismiss the Appeal without delving into the remainder of the issues.

69. Flowing from the above analysis and case laws; and considering that the Appellant has not provided any reason why it did not validate its objection, the Tribunal finds that the Respondent was justified to invalidate the the Appellant’s objection.

70. The Respondent’s assessment which is often presumed to be correct in the absence of any objection or contradicting evidence was thus justifiable and confirmed as was stated 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 the High Court stated thus“A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.”

71. In this Appeal, the taxpayer never came forward with evidence to dispute the Respondent’s assessment, it did not also file a valid objection capable of explaining why, where or how the Respondent’s assessment could have been issued in error. In the circumstances, the Respondent was thus justified to invalidate the Appellant’s objection and to confirm its assessed taxes vide its letter dated 15th February 2024.

72. Having determined the first issue and having found that the Respondent correctly invalidated the objection, the Tribunal will not delve into the other issues that fell for determination as the same have been rendered moot.

Final Decision 73. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal lacks merit and consequently makes the following Orders; -a.The Appeal be and is hereby dismissed.d.The Respondent’s confirmation of assessment dated 15th February 2024 be and is hereby upheld.e.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 14TH DAY OF MARCH, 2025ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBER