[2024] KETAT 1656 (KLR)

Kahawa Sukari Hardware Limited v Commissioner of Domestic Taxes (Tax Appeal E797 of 2023) [2024] KETAT 1656 (KLR) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1656 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E797 of 2023

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

November 21, 2024

Between

Kahawa Sukari Hardware Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered private company incorporated in Kenya and whose principal activity is sale of sand and hardware materials.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter referred to as “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 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 carried out a returns review on the Appellant whereby it noted the Appellant had variances leading to issuance notice of assessment dated 29th May 2023 on undeclared sales as indicated by the variances noted. Further, the Respondent on 30th June 2023 raised additional assessment with respect to income tax for the year 2019.

4. The Appellant being aggrieved with the assessment lodged a late objection on 10th August 2023. Thereafter, the Respondent vide a letter dated 6th October 2023 issued its objection decision upholding the assessment and hence confirming the taxes and demanding the Appellant to pay a total of Kshs 24,586,114. 27.

5. Dissatisfied by the decision, the Appellant lodged the Appeal herein vide its notice of appeal dated 1st November 2023 and filed on 15th November 2023.

The Appeal 6. The Appellant lodged its Memorandum of Appeal dated 10th November 2023 on 15th November 2023 raising the following grounds of Appeal:a.That the Respondent erred in law and fact by disallowing expenses and subjecting them to additional income tax at the standard rate.b.That the Respondent erred in law and fact by not considering the total expenses incurred in running the business.c.That the Respondent erred in law and fact by including and subjecting sales that were derived from purchases claimed by clients of the Appellant whereof this was not the case.

Appellant’s Case 7. The Appellant filed its Statement of Facts on 15th November 2023 wherein it stated that it deals in supply of building materials such as sand, cement, ballast and transportation services for heavy construction machineries such as graders, wheel loaders and excavators.

8. The Appellant’s case was that on 29th May 2023, the Respondents raised and sent a notice of assessment for corporation tax and VAT amounting to Kshs 38,729,553. 85. Further, default assessment was issued on 30th June 2023 for income tax for the period 1st January to 31st December 2019 amounting to Kshs. 24,920,619. 00.

9. The Appellant stated it did not receive the notice of assessment and default assessment because the electronic mail in which the Respondent sent the correspondence was irretrievably inaccessible. It argued that it learnt of the notice of assessment on 29th June 2023 when an Agency Notice was issued on its bank account at KCB Bank Kenya Limited for an amount of Kshs 9,359,606. 71.

10. On 4th July 2023 the Appellant lodged an objection application on i-Tax portal which the Respondent acknowledged but noted that the objection had not been validly lodged vide an electronic mail dated 12th July 2023 wherein the Respondent wrote to the Appellant requesting it to provide grounds of objection, reasons in support for the grounds of objection. It was the Appellant’s case that it provided the required documents.

11. The Appellant stated that it wrote to the Respondent requesting for a payment plan to clear the VAT liability that was confirmed to be an amount of Kshs 1,272,872. It was the Appellant’s case that the Agency notice on its bank accounts were uplifted on 13th July 2023.

12. It was the Appellant’s case that on 10th August 2023, it lodged an objection on i-Tax system which the Respondent rejected on 14th August 2023 on grounds that the Appellant had not validly lodged the objection. The Appellant averred that the Respondent allowed it to lodge a valid objection by 17th August 2023.

13. It stated that on 23rd August 2023, the Appellant wrote a letter to the Respondent requesting to be allowed to file an objection for income tax for the year 2019, out of time. The Respondent allowed the Application on 25th August 2023 but required the Appellant to provide documents within 5 days.

14. On 4th September 2023, the Appellant requested for the basis of assessment to be provided, which the Respondent shared on the same day. It also stated that on 12th September 2023, the Respondent sent an electronic mail reminding the Appellant to provide supporting documents for the objection by 14th September 2023. The Appellant stated that on 12th September 2023 it replied requesting for an additional one week to finalised reconciliations that were relevant to the tax issues which request was granted. The Appellant argued that it provided the required information, reconciliations and explanations to the Respondent.

15. It was the Appellant’s case; the Respondent issued an objection decision dated 6th October 2023 demanding Corporation Tax amounting to Kshs 24,586,114. 00 totally disregarding all the evidence adduced and the grounds given for the Objection. It stated the owing amount has now increased to Kshs 24,752,235. 00 as at 13th November 2023 due to penalties and interests thereon.

16. The Appellant then appointed Messrs Jeff Mwangangi and Company as their tax consultants vide an appointment letter dated 25th October 2023.

17. The Appellant argued that the Respondent acted in total disregard of the Provisions of Section 31(1) of the TPA which states 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 Respondent's judgement, to the original assessment of a taxpayer for a reporting period to ensure that.”

18. That while Section 31 (1) of the TPA allows the Respondent to raise amended assessments, this ought to have been done using available information to the best of the Respondent's judgement in assessing the Appellant since the Appellant had filed all the tax returns.

19. The Appellant cited Article 47 of the Constitution of Kenya 2010 (hereinafter “the Constitution”) which guarantees the Appellant’s right to fair administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair. It stated that the right to a fair administrative action entails taking into consideration explanations and information availed by the party against whom an assessment is made.

20. The Appellant relied on the case of Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] eKLR wherein the High Court held that failure to consider material facts presented by a party against whom an assessment had been raised amounts to an abuse of legislative provisions and such an assessment cannot be acted upon.

21. Finally, the Appellant premised its appeal on the case of Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR where the High Court held as follows:“Further an administrative action cannot be said to be procedurally fair where a decision is arrived at based on an opinion formed as a result of the consideration of the version of only one side since by a consideration of one side one cannot be said to have felt certain about the truth of the matter in dispute."

Appellant’s Prayers 22. The Appellant prayed for the following reliefs:i.That this Appeal be allowed;ii.That this Tribunal be pleased to set aside the objection decision dated 6th October 2022;iii.That this Tribunal be pleased to direct the Respondent to consider all the material facts presented before it to determine correct tax position;iv.That this Tribunal be pleased to order the Respondent to stay the enforcement of assessed taxes until the matter is conclusively determined.

Respondent’s Case 23. In response to the Appeal, the Respondent filed its Statement of facts dated 5th December 2023 on even date. The Respondent also filed its written submissions dated 19th July 2024 on even date and the same were adopted by the Tribunal during the hearing on 11th September, 2024.

24. The Respondent averred that the assessments were based on variances which were charged to income tax. The Respondent added that the Appellant was to reconcile variances in their returns but it failed to do so and that the Appellant also failed to provide the requisite documents in support of their objection for review.

25. The Respondent posited that it is allowed by Section 24(2) of the TPA to assess a taxpayer's liability using any information available. It averred that Section 31 of the TPA allows it to make additional assessments based on the available information to the best of their judgment.

26. In addition to the above, the Respondent stated that under Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”), the Appellant herein bears the burden of demonstrating that it has discharged a tax liability. The Respondent maintained that the Appellant failed to discharge this burden.

27. In further opposition to the Appeal, the Respondent relied on its written submissions wherein it submitted that it made its decision based on the available information and to the best of the its judgement. It relied on the case of Digital Box Limited v Commissioner of Domestic Taxes Tat Appeal No. 115 of 2017 where it was held that ‘best of judgment’ entails the commissioners’ fair consideration of all material placed before them and on that material, come to a decision which is one that is reasonable.

28. The Respondent further submitted that the Appellant failed to provide documentary evidence to support its notice of objection. The Respondent argued that this was against the provisions of Section 51(3) of the TPA which mandates the taxpayer to provide documentary evidence in support of the notice of objection. It therefore, submitted that the Appellant failed to discharge its burden of proof under Section 56(1) of the TPA and Section 30 of the TATA.

29. The Respondent relied on the case of Boleyn International Ltd v Commissioner of Investigations and Enforcement Nairobi TAT Appeal No. 55 of 2018 where it was stated as follows:“We find that the Appellant at all times bore the burden of proving that the Respondent's decisions and investigations were wrong. The Tribunal is guided by the provisions of Section 56(1) of the TPA, 2015 which states: In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

Respondent’s prayers 30. The Respondent prayed for the following reliefs:i.That the Tribunal be pleased to uphold the objection decision dated 6th October 2023. ii.That this Appeal be dismissed with costs to the Respondent as the same was devoid of any merit

Issues For Determination 31. The Tribunal having considered the parties’ pleadings, documents and written submissions puts forth the following single issue for determination:Whether the Respondent erred in confirming the tax assessment.

Analysis And Findings 32. The Tribunal wishes to analyze the issue as hereunder.

Whether the Respondents erred in confirming the tax assessment. 33. The Tribunal notes the Appellant’s averment that the Respondent failed to consider its documents supporting its notice of objection. On the other hand, the Respondent asserted that it confirmed the assessments since the Appellant failed to provide documentary evidence to support the objection decision.

34. The Tribunal notes that the Appellant conceded in its pleadings that the Respondent requested for additional documents. More particularly, the Appellant in its statement of facts alleged that it provided documents in support of the objection. However, the said documents are not on record and the Tribunal is unable to verify the Appellant’s averment that, ‘‘the Respondent disregarded the responses and the information we shared vide the detailed Letter of Objection.’’

35. Section 13 (2) (b) of the TATA requires a taxpayer to file statement of facts. The Tribunal adds that the statement of facts should speak to the memorandum of appeal. It ought to explain why and how the Respondent’s decision is incorrect. In addition, Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 provides further guidance on how a taxpayer should handle an Appeal. The said Rule 5 provides as hereunder:‘‘(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’

36. Upon perusing the Appellant’s statement of facts, the Tribunal established that the Appellant’s pleadings do not comply with the provisions of Rule 5 since documentary evidence that the Appellant alleged to have availed to the Respondent was not filed to support this appeal. As such, the Tribunal has nothing to examine to determine whether the Respondent mishandled the Appellant’s notice of objection together with supporting documents. Failure to provide documentary evidence means that the provisions of section 30 of the TATA come alive with regards to the issue of discharging the burden of proof. Section 30 of the TATA provides as follows:‘‘In 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.’’

37. The Tribunal further notes the following provisions of Section 56 (1) of the TPA:‘‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

38. In Singapore Motors Limited v Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR) the High Court held as follows:‘‘This Court has remained emphatic that under section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the Tax Procedures Act (TPA), the burden of proving that an assessment is wrong or excessive remains upon the taxpayer.’’

39. It then follows that pursuant to section 56(1) of the TPA and section 30 of the TATA, the Appellant herein had a duty to demonstrate that the Respondent erred in arriving at its final decision. However, the Tribunal’s view is that the Appellant has not discharged this burden.

40. Consequently, the Tribunal finds and holds that Appellant has been unable to demonstrate that the Respondent erred in confirming the tax assessment.

FINAL DECISION 41. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The objection decision dated 6th October 2023 be and is hereby upheld.c.Each party to bear its own cost.

42. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. ………………………………….CHRISTINE A. MUGACHAIRPERSON………………………….. …………….……………..BONIFACE K. TERER ELISHAH N. NJERUMEMBER MEMBER…………..……………… ……………..…………….EUNICE N. NG’ANG’A OLOLCHIKE S. SPENCERMEMBER MEMBER