[2024] KETAT 550 (KLR)

J&K Investments Limited v Commissioner of Investigation and Enforcement (Appeal 961 of 2022) [2024] KETAT 550 (KLR) (Civ) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 550 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 961 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 22, 2024

Between

J&K Investments Limited

Appellant

and

Commissioner Of Investigation And Enforcement

Respondent

Judgment

1. The Appellant is a limited liability company whose core business is in the construction and steel door production sector. In addition, i-Tax data indicates that the company is also involved in machinery.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 Laws of Kenya. Under Section 5(1) of the Act, the Respondent 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 Respondent 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. Following an audit investigation exercise by the Respondent and whose findings were communicated to the Appellant on 17th March 2022, the Appellant was served with an additional assessment for VAT amounting to Kshs. 156,001,89. 00 and Corporation tax of Kshs. 215,719,131. 00 on 8th March 2022.

4. The Appellant lodged a notice of objection to the additional assessment issued on 8th April 2022. The Respondent requested supporting documentation through a letter dated 11th April, 2022. The Respondent subsequently confirmed the assessment and invalidated the Appellant’s objection through a letter dated 22nd July, 2022.

4. Being aggrieved by the Respondent’s decision, the Appellant lodged its Notice of Appeal dated 19th August, 2022 with the Tribunal on even date.

The Appeal 6. The Appellant’s Appeal is contained in the Memorandum of Appeal filed on 6th September, 2022 and was based on the following grounds:a.That the Respondent misdirected itself in both law and facts by failing to take in to account the explanation and submission of the taxpayer, that the purchases disallowed by the Respondent were allowable, legitimate and claimed timely as per Value Added Tax Act No. 35 of 2013 (hereinafter ‘VAT Act’) deduction of input Tax Part IV Section 17(2) and Sec 15 of the Income Tax Act Cap 470 of Kenya’s Laws (hereinafter ‘ITA’).b.That the Respondent erred in law and facts by finding that the taxpayer claimed input tax from supply invoices with no corresponding declaration. Since the assessment were conducted prior to the amendments of the VAT Act in the 2020 Finance Act. This Act places an illegal obligation to the taxpayer. Thus, the terms used by the Respondent “unsupported purchases” is not only erroneous but illegal.c.That the Respondent erred in law by disallowing the purchases claims on the basis that the taxpayer failed to provide proof of payments for purchases, this would amount to an imposing a requirement foreign to Section 17 of VAT Act which outlines qualification for input tax claim. The tax payer provided all the supporting documents for the purposes.d.That the Respondent erred in failing to take the taxpayer explanations and the analysis on the deposits, by disregarding the account pacification, the Respondent issued an assessment containing non-income figures thus it is an illegality as it stands.d.That the Respondent erred in practice by electing to use the banking approach rather than use the direct method as provided in Sections 31,58 and 59 of the Tax Procedures Act No 29 of 2015 (hereinafter‘TPA’), this would have ensured that only income would have been considered for taxation. This method led to the Respondent treating non-income deposits as incomes and charging tax on the same in clear violation of Section 3 of the ITA.d.That the Respondent erred in law and facts by failing to carry out an investigation into the Appellant’s accounts to distinguish income and non-income deposits to ensure that only the incomes were brought to taxation, this being compliance with Section 5 of VAT Act and Section 3 of ITA.d.That the Respondent erred in law and fact by disregarding the VAT exemptions certificates and the undertaking by the National Treasury concerning SGR project exemption from VAT, by doing so, the Respondent negated from his own undertaking.d.That the Respondent in clear violation of the provisions of Section 23(c) and 31 (6) of the TPA demanded from the taxpayer documents for years past the set Five (5) years. The Respondent went ahead to include in his assessment amounts past the 5 years from the date of self-assessment filing and the date of investigation in clear disregard of the law.i.That the Respondent erred in law and fact by failing to include a statement of findings on the material facts and the reasons for the decision as is required by Section 51(10) of the TPA.

Appellant’s Case 7. The Appellant’s case is captured in its Statement of Facts dated and filed on 6th September 2022:

8. The Appellant stated that it made purchases and claimed all the purchases procedurally and legally as per Section 17 of the VAT Act and claimed the same as allowable expenses as per Section 15 of the ITA.

9. That the Appellant was exempted from VAT for the period under review as it was involved in the SGR project which was exempted for purposes of VAT pursuant to the exemption certificates it provided. As such VAT could not be claimed by the Respondent from the said sales.

10. That the Appellant complied with Section 23 and 59 of TPA in record keeping and production of documents for verification.

11. The Appellant stated that the tax assessment as issued by the Respondent was unlawful as it contained non-income amounts treated as incomes and tax charged on thereafter contrary to the provisions of Section 3 of the ITA which provides for incomes qualifying as taxable incomes.

12. That the Respondent erred in law by requiring the Appellant to produce documents and records which were past 5 years from the date of issuing the notice of assessment as this was clear violation of Section 23 (c) of TPA and evasion.

13. That the Respondent erred in law by including in its assessment amounts relating to periods 5 years after the date of filing self-assessment and the date of notice to audit in clear violation of Section 31(6) of TPA.

14. That the Respondent failed to adhere to provisions of Section 47(1) of the Fair Administrative Action Act, No. 4 of 2015 (FAA) which provides as follows:“Every person has the right to administrative action which is expeditious, efficient, lawful, reasonable and procedurally fair.”

15. The Respondent failed by using documents past the stipulated time period to raise the assessment.

Appellant’s Prayers 16. The Appellant’s Prayers to the Tribunal were for orders:a.To set aside the Respondent’s decision confirming the additional assessment issued on 22nd July 2022, in other words rule in favor of the Appellant.b.To set aside the Respondent’s decision to disallow purchases as claimed, this is because the same were verified and claimed procedurally as per the law.c.To set aside the Respondent’s decision treating all the bank deposits as incomes in disregard of Section 3 of the ITA, rather adopt the Appellant’s detailed investigations report carried out to determine income deposits from the non-income depositd.To make a finding that the Respondent violated Sections 23 (c) and 31 (6) of the TPA by including in the assessment amounts related to period past 5 years from the date on notice to audit.

The Respondent’s Case 17. The Respondent replied to the Appellant’s Appeal through its statement of facts filed on 7th October, 2022.

18. On grounds (a), (c) and (e) of the Appeal the Respondent stated that the purchases claimed by the Appellant did not reflect as sales on the part of the suppliers and the Appellant did not support the said purchases. The Respondent contended that to qualify for deduction of input tax as claimed by the Appellant, a taxpayer ought to satisfy the conditions outlined under Section 17 of the VAT Act, which provides as follows:-“(1)Subject to the provisions of this Act and the Regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.2. If, at the time when a deduction for input tax would otherwise be allowable under subsection (1) –a.the person does not hold the documentation referred to in subsection (3), orb.the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation…..”Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

19. The Respondent submitted that with the above provision in mind, the Appellant though claimed input VAT failed to provide documentation in support of the same as provided for under Section 17(2)(a) of the VAT Act and in the alternative, in line with Section 17(2)(b) of the VAT Act, no registered supplier has declared invoices reflecting the Appellant's alleged purchases.

20. In view of this, the Respondent argued that the Appellant did not qualify for the input VAT. Additionally, the Respondent reiterated that the lack of evidence of purchases pointed to the fact that the purchases by the Appellant were fictitious, and further added that these purchases had been claimed as expenses under the tax head of Corporate income tax in line with the provisions of Section 15 of the ITA. The Respondent reiterated that these purchases had not been properly proved as such they were fictitious and could not be claimed under deductible allowances as expenses.

21. On grounds (b), (d) and (f) the Respondent averred that it used available information to come to the tax liability of the Appellant. The Respondent pointed out that its mandate is to assess and collect tax on behalf of the Government, and thus in collecting taxes, it has the power to amend assessments to ensure that the taxpayer has paid the tax owed by him, further referring to Section 31 of the TPA which provides as follows:“(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 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.”

22. The Respondent further buttressed its argument by citing Section 24(2) of the TPA which states:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

23. The Respondent reiterated that no error was committed in using the banking method approach to come to the tax liability of the Appellant and the Appellant did not adduced any evidence of misapplication of the banking methodology.

24. On ground (g) of the Appeal, the Respondent submitted that the Appellant erred in its understanding that exemptions were not factored when computing tax liability. The same were done as stated in paragraph 11 of the Memorandum of Appeal. The Respondent reiterated that taxes due were less the VAT exemption arising from the Nairobi-Naivasha Standard Gauge Railway Project and that in calculating the tax liability due from the Appellant, the correct tax position was arrived at and all factors considered, the computation was done correctly. The Respondent argued further that the burden was on the Appellant to demonstrate that the assessment was erroneous/ incorrect.

25. On ground (i) of the Appeal, the Respondent asserted that it is permitted to amend an assessment outside the five-year period in certainJUDGMENT APPEAL NO. 961 OF 2022- J&K INVESTMENTS LIMITED VS COMMISSIONER OF INVESTIGATION &ENFORCEMENT Page 8circumstances. The Respondent referred to Section 31(4) of the TPA which provides that;“(4)The Commissioner may amend an assessment-(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of-i.for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or (ii) for any other assessment, the date the Commissioner notified the taxpayer of the assessment.”

26. The Respondent averred that in this particular matter, the Appellant had been fraudulent thus satisfying the condition as outlined in Section 31(4)a.of the TPA prompting the Respondent to request for documentation past the five-year period and that the Respondent's action was in contravention of the law, saying that the same was set out in a letter shared with the Appellant.

27. Moreover, the Respondent averred that the Appellant committed the following offences: preparation and maintenance of false documents contrary to Section 93(2) of the TPA, failure to submit tax returns as required by law contrary to Section 94(1) of the TPA and failure to pay tax contrary to Section 95 of the TPA. The Respondent argued that it asked for documentation outside the five-year period because it suspected an offence was committed.

28. On ground (i), the Respondent stated that the basis of the Respondent’s appealable decision was premised on the Appellant's failure to lodge a valid objection. With no proper/valid objection, the decision challenged was not an objection decision requiring inclusion of statement of findings on the material facts.

29. The Respondent averred and reiterated that having derived income chargeable to income tax from business operations, and supplies subject to VAT, the Appellant was required to declare the same to ensure that the correct amount of tax is paid.

30. The Respondent submitted that the Appellant's grounds for appeal were not sufficient. From the facts of the case, the Appellant did not provide any evidence contrary to the basis of Respondent's assessment. The Respondent further added that the Appellant had failed to show that it had not committed an offence.

Respondent’s Prayers 31. The Respondent prays that this Tribunal:a.Uphold the Respondent's decision as proper in law and in conformity with the provisions of the Law; andb.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Submissions Of The Parties 32. The Appellant submitted as follows through its written submissions which were filed on 12th April 2023:

33. That the main disputed issues included non-income deposits in the assessment, disallowing of purchases claimed and VAT input tax claimed by the Appellant and charging of VAT on exempt transactions.

34. It was the submission of the Appellant that the Respondent’s decision to use the banking approach to determine taxable income led to an illegality of bringing non-income deposits and non-income inflows to taxation.

35. The Appellant averred that during the objection and ADR process, the Respondent was supplied with bank analysis showing non-income deposits and other directors’ cash injection which ought not to be taxed, but the Respondent ignored the analysis, further adding that the confirmed assessment contained bank inflows and amounts such as bank transfers, invoice discounting proceeds, directors’ loans and other non-income deposits. The Appellant stressed that proceeds from invoice discounting and inter-bank transfers were not incomes as envisaged by Section 3(2) of the ITA, thus subjecting the same to tax was an illegality.

36. That during the period 2015-2017, the Appellant was involved in building the SGR project which was tax exempt. However, the Respondent failed to take this into account and proceeded to charge VAT on the proceeds of the SGR project which is a contravention of the VAT Act as well as the VAT Regulations and is in breach of the MOU signed with China Road and Bridges Corporation (CBRC) Company that implemented the SGR project.

37. That since the Appellant did not charge VAT to its customer, the China Road and Bridges Corporation (CBRC), there was no way it could be expected to account for the same.

38. The Appellant submitted that instead of using the provisions of Section 17 of the VAT Act and VAT regulations, the Respondent disallowed all the purchases and claimed Input tax in totality, stressing that this was not only illegal but shows the haphazard and casual way the Respondent handled the assessment.

39. The Appellant, in buttressing its case, particularly the centrality of the right to claim Input tax in a VAT tax system, relied on the authority in the case of Optigen Ltd (C-352/03), Fulcrum Electronics Ltd (C-355/03) and Bond Systems Ltd (C-484/03) v Commissioners of Customs & Excise where it was held as follows:-“As the Court had repeatedly held, the right to deduct provided for in Article 17 et seq of the sixth directive is an integral part of the VAT scheme and in principle may not be limited. It must be exercised immediately in respect of all the taxes charged on transactions relating to inputs.”This case indicated that there must be enough and justifiable reason for the authority to take such an action to deny claim of input tax to a taxpayer. The Appellant submitted that throughout the engagement process, the Respondent did not give any reasons for denying its input tax claims.

40. The Appellant went further to submit that the Respondent’s decision to disallow all the purchases, expenses and VAT input tax claims while comfortable with output tax paid is not only gross misrepresentation of laws and practice but also went out of legitimate expectation of both VAT Act and ITA. This erroneous computation failed the Cohen rule.

41. In its Submissions dated 27th April, 2023 and filed on even date, the Respondent submitted on a single issue it had identified for determination namely:

Whether the Respondent’s decision dated 22nd July, 2022 was valid 42. The Respondent submitted that its decision dated 22nd July, 2022 subject to this Appeal was an invalidation of the Appellant’s objection dated 8th April, 2022 and was a decision made pursuant to Section 51(4) of the TPA, where a taxpayer fails to lodge a valid objection as required under Section 51(3) of the TPA. As such, any appeal therefrom can only be limited to the basis of the decision as the Appeal cannot extend to interrogating the substantive taxes as issued in the assessment.

43. The Respondent asserted that the Appellant’s Appeal and subsequent submissions were misconceived and fatally defective to the extent that it purported to invite the Tribunal to interrogate the substantive issues in the assessment, which could only be done where there was proper objection.

44. The Respondent submitted that it considered the Appellant’s response to the preliminary findings and that the assessment that was subsequently issued was therefore refined having taken into consideration all issues raised by the Appellant, including issues on VAT exempt on CRBC project.The Appellant’s attempt to resurrect issues that were well considered by the Respondent prior to issuance of a formal assessment is thus erroneous.

45. The Respondent asserted that the Appellant lodged an online objection on 8th, April, 2022 which did not in any way meet the requirements of Section 51(3) of the TPA. The failure to meet the requirements of the law prompted the Respondent in various correspondence to request the Appellant to validate the objection by providing necessary information/documents to support the objection. Further, the Appellant failed to provide documents to support its objection hence the Respondent’s invalidation decision dated 22nd July,2022.

46. It was the Respondent’s submission that the Appellant’s claim of providing documents was erroneous and that instead of providing certified copies of bank statements, it only provided its own analysis of the bank statements. It was therefore upon the Appellant to discharge its burden of proof by providing copies of the bank statements to demonstrate that the assessment as issued was erroneous and/ excessive. It further averred that it considered all the documents provided to the Tribunal by the Appellant and that the Appellant’s attempt to again produce the same documents is mischievous and an attempt to mislead the Tribunal.

47. To buttress its argument, the Respondent relied on several cases some of which are stated below:a.Commissioner of Domestic Taxes v Galaxy Tools Ltd [2021] eKLR (Income Tax Appeal No. E. 088 OF 2020).b.Osho Drapers Limited v Commissioner of Domestic Taxes [2022] eKLR ( Income Tax Appeal No. E 147 of 2020).c.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eklr

Issues For Determination 48. Having gleaned through the submissions, pleadings and documents submitted by both parties, the Tribunal finds that the singular issue that calls for its determination is:

Whether the Appellant’s Notice of Objection was validly lodged. Analysis And Findings 49. The Tribunal will now proceed to analysze this single issue as hereunder.

50. The Tribunal finds that after receiving an additional assessment on 8th March, 2022 in respect of VAT (Kshs 156,001,879. 00) and Corporation tax (Kshs. 215,719,131. 00), the Appellant lodged an objection on 8th April 2022. The Respondent wrote to the Appellant on 11th April, 2022 to request documents. The Tribunal further, finds that since the Appellant failed to provide documents to support its objection despite the Respondent’s request thereby necessitating the Respondent’s invalidation decision on 22nd July, 2022. 51. An invalidation decision by the Respondent is made pursuant to

Section 51(3) of the TPA, where a taxpayer fails to lodge a valid

objection. The Section provides as follows:-

“A notice of objection s ha ll be treated as validly lodged by a

taxpayer u n d e r subsection ( 2) if-

(a) the notice of o b je c t io n states precisely the grounds of

o bj e ct ion , the amendments required to be made to correct the

decision, and the reasons for the amendments;

(b) in relation t o an objection t o an assessment, the taxpayer h a s

paid t h e entire amount o f tax due under the assessment t h a t is

not in dispute or has applied for an extension o f time to pay the

tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection h a v e been submitted.”

52. The Tribunal finds that the onus of providing documents to support theobjection lay with the Appellant. However, the Appellant failed t o d o s o .

53. In addition, the Tribunal notes that the Appellant failed to provide any documents before the Tribunal and could not therefore contend that the Respondent rejected its documents or denied it an opportunity to provide the documents.

54. The Tribunal reiterates its findings in Kenya Cuttings vs Commissioner of Domestic Taxes [Appeal No. 378 of 2021] where the Tribunal pronounced itself as follows in paragraph 34 of its Judgement;“…The Tribunal therefore, finds no evidence adduced by the Appellant to extricate itself from the Respondent’s assertions regarding absence of a valid objection in line with Section 51(2) of the TPA………”

55. From the foregoing, it is clear that the Appellants notice of objection was not validly lodged.

DIVISION - Final Decision 56. The upshot of the foregoing analysis is that this Appeal fails and the Tribunal proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s invalidation decision dated 22nd July 2022 be and is hereby upheld.c.Each party to bear its own costs.

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. ERIC NYONGESA WAFULACHAIRMANDELILAH K NGALAMEMBERCHRISTINE A. MUGAMEMBERGEORGE KASHINDIMEMBERMOHAMED A. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER