[2024] KETAT 713 (KLR)

Kahia v Commissioner of Legal Services & Board Co-ordination (Tax Appeal 37 of 2023) [2024] KETAT 713 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 713 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 37 of 2023

RM Mutuma, Chair, EN Njeru, M Makau, B Gitari & AM Diriye, Members

May 9, 2024

Between

Lucy Muthoni Kahia

Appellant

and

Commissioner of Legal Services & Board Co-ordination

Respondent

Judgment

Background 1. The Appellant is an individual born in Kenya and a registered taxpayer within the Republic of Kenya. She operates four businesses namely European Cables and Electricals, Micmar Limited, RIO - Valentines Limited and Pelvlms, which are all located at Chaka Place Hurlingham Nairobi.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent conducted tax investigations into the tax affairs of the Appellant for Income tax; VAT and Capital Gain Tax leading to issuance of a report on the same. The Appellant responded to the report vide a letter dated 20th May 2022 prompting the Respondent to re-compute the taxes arising from the net income.

4. The Respondent issued a notice of tax assessment dated 30th June 2022 amounting to Kshs. 47,488,730. 00 for Income tax and VAT for the period 2015 to 2020.

5. The Appellant objected to the tax assessments in totality vide a letter dated 29th July 2022. The Respondent vide a letter dated 4th August 2022 invalidated the Appellant’s Objection on grounds that the Objection failed to meet the requirements of Section 51 (3) of the Tax Procedures Act, 2015. The Appellant responded to the letter of invalidation vide the letter dated 16th August 2022 stating that the Objection decision was done in accordance with Section 51 of the Tax Procedures Act.

6. The Respondent then issued an Objection decision vide a letter dated 1st December 2022 confirming the principal taxes of Kshs. 47,488,730. 00. Dissatisfied with the Respondent’s Objection decision, the Appellant filed this appeal by lodging Notice of Appeal dated and filed on 30th December 2022.

The Appeal 7. The Appeal is based on the Memorandum of Appeal filed and dated on 13th January 2023 on following grounds:a.That the Respondent erred in law and in fact by arbitrarily increasing the sales figures in the Appellant’s VAT returns and erroneously assessing additional VAT.b.That the Respondent erred in law and in fact by disregarding all explanations and documentation provided by the Appellant in support of their Objection and proceeding to confirm the VAT assessments.c.That the Respondent erred in law and in facts by assessing additional VAT on the Appellant based on bank deposits while disregarding the actual sales made.d.That the Respondent erred in law and in fact by assessing VAT on non-revenue sales assumed from bank deposits in the accounts of the Appellant in the period under review.e.The Respondent erred in law and fact by disregarding the actual turnover realized, reported by the Appellant, and arbitrarily increased the Appellant’s turnover based on non-revenue bank deposits for the period under review and thereafter-assessed additional taxes, penalties and interest.f.The Respondent erred in law and in fact by disallowing some farming expenses incurred by the Appellant in the production of the taxable income during the period under review, thereby assessing additional taxes on account of the disallowed expenses.g.The Respondent erred in law and in fact by disregarding the express provisions of Sections 15 and 16 of the Income Tax Act which provide that all expenses incurred wholly and exclusively in the generation of income are tax deductible.

The Appellant’s Case 8. The Appellant relied on its Statement of Facts dated and filed on 13th January 2023 together with the documents attached thereto.

9. On Value Added Tax assessment, the Appellant stated that the Respondent, without conducting an audit or review of the Appellant’s books amended the Appellant’s VAT return for the months under review by increasing the sales values for the period. According to the Appellant, the Respondent also charged VAT on non-revenue related bank deposits made by the Appellant during the period under review.

10. It is the Appellant’s case that the Respondent disregarded all the facts in the documents presented in the financial statements and source documents, and overstated the sales in the period and erroneously made additional assessment.

11. With regard to Income tax assessment, the Appellant stated that that she duly filed her returns and paid all income tax due during the period under review.The Appellant argued that the Respondent, without any basis or justification adjusted the turnover of the Appellant upwards for the period under review and thereafter erroneously assessed additional taxes on the difference between the adjusted turnover and what the Appellant had declared.

12. Further, the Appellant stated that the Respondent disallowed some of the expenses, which were incurred by the Appellant in the generation of the taxable income.

13. Apart from the foregoing, the Appellant averred that inspite of providing all the information, explanations and documentation, the Respondent disregarded the information, explanations and documents and confirmed the assessment which had been erroneously based on the adjusted gross turnover.

14. In addition, the Appellant accused the Respondent of failing to deduct expenses. The Appellant averred that the Respondent failed to acknowledge some of the expenses incurred in the running of the farming business contrary to the provisions of the Income Tax Act, which provides that all expenses incurred in the generation of income are tax allowable. The Appellant stated that it is impossible to run a business without incurring expenses. The Appellant maintained that the Respondent did not allow some of the farming expenses claimed in its statement of income.

15. The Appellant also averred that the Respondent arbitrarily and without any justification adjusted her revenue upwards, thereby assessing more Income tax. This was inspite of providing the necessary documentation and analysis explaining various sources of bank deposit transactions.

16. Finally, the Appellant stated that the Respondent failed to understand the nature of her business and subjected disposal of property to income tax as opposed to Capital Gains Tax yet she is not in the business of buying and selling property.

17. In support of the Appeal, the Appellant filed written submissions dated and filed on 5th February 2024. The contents of the submissions are similar to the contents of the Statement of Facts.

18. On the issue of VAT, the Appellant submitted that the Respondent amended the Appellant’s VAT return for the months under review without conducting proper audit review to examine the true position. She also submitted that the Respondent charged VAT on non-revenue related bank deposits made by the Appellant in the period under review. Finally, the Appellant submitted that the Respondent overstated sales in the period under review disregarding facts in source documents and financial statements.

19. On the issue of Income tax assessment, the Appellant submitted that the Respondent adjusted the turnover of the Appellant upwards for the period under review, after which it erroneously assessed additional taxes on the difference between the declaration made by the Appellant and the adjusted turnover. She submitted that the Respondent disregarded supporting information provided by the Appellant which was material in tax assessment. Finally, the Appellant submitted that the Respondent failed to take into consideration farming business expenses as part of allowable deduction as envisaged in the income Tax Act

Appellant’s prayers 20. The Appellant’s prayers are as follows:a.The Appeal be allowed;b.The Respondent’s confirmed assessment be annulled;c.The case be reverted back to Alternative Dispute Resolution (ADR) since the allocated time had lapsed to be able to resolve the issue amicably as per the Defendant’s directive referenced KRA/TDR/ADR/3611; andd.Costs of the Appeal.

The Respondent’s Case 21. The Respondent’s case is premised on its Statement of Facts dated and filed on 10th day February 2023 together with the documents attached thereto.

22. In response to ground 1 of the Memorandum of Appeal, the Respondent stated that it relied on information derived from and analysis of the Appellant’s bank statements from her accounts held at Standard Bank, I&M Bank and Equity Bank where the Appellant had bank accounts. From the analysis of the statements, the Respondent established that the Appellant dealt with vatable products but failed to declare VAT on the said products and thus the Respondent subjected the net business income to VAT.

23. The Respondent averred that in charging the VAT, the Respondent acted in accordance with Section 5 (1) of the VAT Act 2013 which stipulates as follows:“A tax, to be known as Value Added Tax, shall be charged in accordance with the provisions of this Act on-a.A taxable supply made by a registered person in Kenya;b.The importation of taxable goods; andc.A supply of imported taxable services.’’

24. According to the Respondent, the Appellant contravened Section 19 of the VAT Act, 2013 as she failed to remit tax as required by law. Section 19 provides as follows:“Tax shall be due and payable at the time of supply. Notwithstanding the provision of subsection (1), a registered person may defer payment of tax due to a date not later than the twentieth day of the month succeeding that in which the tax became due.’’

25. The Respondent stated that Section 31(1) of the Tax Procedure Act 2015 grants it powers to amend an assessment by making alterations or additions from available information and to the best of the Commissioner’s judgement for a reporting period.

26. In response to ground 2 of the Memorandum of Appeal, the Respondent averred that the Appellant did not provide any documents or information in support of the objection to VAT assessments. The Respondent relied on Section 56 (1) of the Tax Procedures Act 2015 which provides that;“In any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

27. In response to ground 3 of the Memorandum of Appeal, the Respondent insisted that it computed VAT from the established net sales and put the Appellant to strict proof to confirm otherwise.

28. The Respondent relied on Section 31 (1) of the Tax Procedures Act 2015 which mandates the Respondent to amend and make alterations or additions to an assessment from the available information and to the best of the Commissioner’s judgment.

29. In response to ground 4 of the Memorandum of Appeal, the Respondent averred that the gross deposits were adjusted for non-revenue incomes. The Respondent also maintained that it did not make any other additional adjustments as requested by the Appellant as no evidence was provided to support the adjustments.

30With regard to use of banking analysis, The Respondent stated that all that it requires is some material that can form the basis of a default assessment based on the best Judgment principle. The Respondent relied on Digital Box Ltd vs. Commissioner of Investigations and Enforcement TAT No. 115 of 2017 wherein the Honorable Tribunal determined a dispute concerning analysis of bank statements.

31. According to the Respondent, the Tribunal relied on the case of Van Boeckel vs. C&B QB Dec 1980 [1981] STC 290 and Raghubar Mandal Harhar Mandal vs. the State of Bhar Air 1952 Pat 253 to determine what constitutes “best judgement” and the application thereof where it considered the banking analysis test from paragraph 107 of its judgement and observed as follows;“Further the courts have in the past observed that the banking analysis test (also known as the bank deposit test) is an acceptable method of arriving at an assessment. This was held to be so in the case of Bachmann V. The Queen, 2015 TCC 61 where the court stated that; “This Court has recognized that in an appropriate case, bank deposit analysis is an appropriate method to compute income”

32. The Respondent argued that the Appellant failed to discharge its burden of proof as required by Section 56 of the Tax Procedures Act. The Respondent also relied on Section 30 of the Tax Appeals Tribunal Act which provides:“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; orb.in any other case, that the tax decision should not have been made or should have been made differently.’

33. The Respondent cited the case of Digital Box Limited vs. Commissioner of Domestic Taxes (Tat No. 115 Of 2017), wherein the Tribunal held that the taxpayer bears the burden of proof and which burden is discharged by adducing evidence. The Tribunal relied on the decision in Alfred Kioko Muteti vs. Timothy Miheso & another [2015] eKLR where the court held that;“Thus, the burden of proof lies on the party who would fall if no evidence at all were given by either party...”.

34. The Respondent also relied on the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR where the court stated as follows with regard to Section 30: -“31. ... Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The tax payer must prove that the assessments are incorrect.’’

35. In support of its case, the Respondent relied on its written submissions dated 8th August 2023 and filed on 11th September 2023. The Tribunal notes that the contents of the Respondent’s Statement of Facts and written submissions are the same therefore, it will not dwell on it.

Respondent’s prayers 36. The Respondent prayed that this Honourable Tribunal finds that:a.That the Appeal be dismissed with costs to the Respondent as the same is devoid of merit.b.That the objection decision dated 1st December 2022 be upheld and the taxes be deemed due and collectible.

Issues for Determination 37. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of facts, and submissions, puts forth the following issues for determination:a.Whether part of the assessments are statutory time barred; andb.Whether the Respondent erred in confirming the assessments.

Analysis and Findings 38. The Tribunal wishes to analyse the issues as hereunder.

a. Whether part of the assessments are statutory time barred; 39. The Tribunal is examining this issue suo moto to ensure fidelity to the law.Determining this issue is relevant because the Respondent’s argument is anchored on the fact that the Appellant did not provide documentation to warrant vacation of the entire assessments.

40. With regard to the keeping of documents in order to provide the Commissioner with information necessary to arrive at an informed assessment, Section 23 (1) (c) of the Tax Procedures Act provides as follows:‘‘(1)A person shall—subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

41. In line with the above provision, the relevant tax law, with regard to the duration of an assessment is provided for under Section 29 (5) of the Tax Procedures Act that:‘‘Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’While Section 29 (6) provides that;‘‘Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.’’

42. This is further provided for under Section 31(4)(a) of the Tax Procedure Act which provides as follows:‘‘The Commissioner may amend an assessment—a.in the case of gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time.’’

43. The Respondent issued assessments from 2015 to 2020 vide assessment dated 30th June 2022.

44. By subjecting the Respondent’s assessments to the five-year rule means that the assessments for the years 2015, 2016 and 2017 are beyond five-year time frame by all standards be it under Section 29 or under Section 31 of the Tax Procedures Act.

45. The burden of proof is always upon the taxpayer to prove that a tax decision is wrong as provided for under Section 56 (1) of the Tax Procedures Act. The High Court in Tumaini Distributors Company (K) Limited vs. Commissioner of Domestic Taxes [2020] eKLR also emphasised that the taxpayer has the burden to prove that the tax decision is wrong.

46. Whereas the burden of proof is always upon the taxpayer to prove that a tax decision is wrong, there are instances wherein the burden of proof shift to the Respondent. Some of the instances where the burden shifts to the Respondent includes under the provisions of Section 29(6) or Section 31 (4) (a) of the Tax Procedures Act where the Respondent seeks to recover taxes beyond the five-year rule.

47. In Gitere Kahura Investments Limited vs. Commissioner of Domestic Taxes Tat No.16 of 2019-Judgement [2021] eKLR this Tribunal observed that the Respondent has the burden of proof pursuant to Sections 107 and 108 of the Evidence Act to prove that the Appellant is in breach of Section 29(6) of the Tax Procedures Act. The Tribunal noted that taxes that were for 2012-2013 being demanded in 2018 without the Respondent demonstrating gross or wilful neglect, evasion or fraudulent activities concerning taxes as provided for under Section 29(6) of the Act were time barred and ought to be expunged pursuant to Section 29(5) of the TPA.

48. In the instant case, for the Respondent to successfully claim the 2015, 2016, and 2017 assessments, it has to demonstrate gross or wilful neglect, evasion or fraudulent activities concerning taxes on the part of the Appellant. In this Appeal, the Respondent has not provided evidence be it under Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act to justify tax assessment for the years 2015, 2016, and 2017 beyond the five-year rule.

49. The assessment by the Respondent relates to both Income tax and VAT, as regard Income tax time on the 5 year rule would commence from the last return made, in the instance case the last return made on 30th June 2022 was for the year 2021. It follows that the Respondent is permitted by law to make an assessment up to and including the year 2017. Further, relating to VAT the Respondent would be permitted to make an assessment till May 2018.

50. Consequently, the Tribunal finds and holds that the tax assessments for the years 2015 and 2016 relating to Income tax and for the period prior to May 2018 relating to VAT are statutorily time barred and ought to be expunged from the assessments.

b. Whether the Respondent erred in confirming the assessments. 51. With the 2015 and 2016 assessment expunged, the Tribunal hereby determines whether the 2017, 2018, 2019 and 2020 assessments are valid.

52. The Tribunal has examined the Respondent’s letter dated 4th August 2022 wherein the Respondent invalidated the Appellant’s notice of objection on the grounds that the objection did not comply with the dictates of Section 51 (3) of the Tax Procedures Act 2015. In the said letter, the Appellant was given 7 days to provide necessary information and documents. The Appellant responded to the said notice through a letter dated 16th August 2022 giving reasons why the assessments should be vacated.

53. The Respondent’s Objection decision indicates that the Respondent rejected the objection on grounds that the Appellant did not adduce documentary evidence in supporting its objection. Whereas the Respondent acknowledged that the Appellant provided schedules of costs related to farming income, the Respondent was of the view that the schedules alone are not sufficient proof that the Appellant practices mixed farming.

54. On the other hand, the Appellant argued that the Respondent erred in law and fact by disregarding all explanations and documentation provided by the Appellant in support of the Objection.

55. The Tribunal has examined the documentary evidence that the Appellant filed in support of this Appeal. The Appellant filed the following documents: a letter dated 20th May 2022 being a response to investigation findings for the period January 2015 to December 2021; a letter dated 30th June 2022 being a notice of tax assessment for the period 2015 to 2021; a letter dated 29th July 2022 being a notice of objection; a letter dated 4th August 2022 being Objection Acknowledgement & Review; a letter dated 16th August 2022 being a response to Objection Acknowledgement & Review and finally, the Objection decision dated 1st December 2022. Apart from these correspondences which contain schedules, the Appellant did not file any other documentary evidence.

56. Section 13 (2) (b) of the Tax Appeals Tribunal Act requires an appellant to file a Statement of Facts. The Tribunal hastens to add that the statement of facts should support and expound the contents of the Memorandum of Appeal. The Statement of Facts should explain why and how the Respondent’s decision is incorrect. This is also captured under Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015.

57. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 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.’’

58. On the issue of keeping records and evidence, the court in Commissioner of Investigations and Enforcement vs. Evans Odhiambo Kidero Income Tax Appeal No. E028 of 2020 stated as follows:“The duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self- assessment. This system relies on the taxpayer making full and good faith disclosures in their tax declaration and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer. Whether the taxpayer has provided sufficient evidence to meet the threshold of proof required to discharge its burden must of course depend on the nature of the subject or transaction and the circumstances of the case bearing in mind the aforesaid duty placed on the taxpayer to keep records”.

59. A taxpayer is under statutory obligation to provide evidence to prove that a tax decision is incorrect. This is provided for under Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeal Tribunal Act. In Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR the Court observed that:“The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The Commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.

60. Whereas the Appellant alleged that the Respondent ignored documentation provided by the Appellant in support of its Objection, the Appellant did not file those documentations to support the Appeal. Whereas the Appellant alleged that the Respondent arbitrarily increased the Appellant’s turnover based on non- revenue bank deposits, the Appellant did not file bank statements for the Tribunal to examine them. Whereas the Appellant alleged that the Respondent erred in law and fact by disregarding the express provisions of Sections 15 and 16 of the Income Tax Act which provides that all expenses incurred wholly and exclusively in the generation of income are tax deductible, the Appellant did not produce a single documentary evidence to prove that it incurred expenses. The Appellant did not file documents such as invoices, receipts, bank statements, among other documents.

61. Whereas the correspondences that the Appellant exchanged with the Respondent contain schedules that attempt to explain what happened, the schedules on their own have little evidentiary value if source or primary documents are not provided.

62. The Tribunal finds that the Appellant did not file relevant evidence to support the Appeal. This is contrary to Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 which mandates the Appellant to file a statement of facts which must refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal; and the documentary evidence referred to in paragraph must be annexed to the statement of fact.

63. Under the circumstances, the Tribunal finds that the Appellant failed to discharge its burden of proof. Consequently, the Tribunal finds and holds that the Respondent did not err in confirming the assessments for the years 2018, 2019, and 2020.

Final Decision 64. The upshot to the foregoing is that the Appeal partially succeeds and the Tribunal consequently makes the following Orders; -a.The confirmed assessments for the years 2015 and 2016 relating to Income tax and for the period prior to May 2018 relating to VAT as set out in the Objection decision dated the 1st December 2022 are hereby set aside;b.The confirmed assessments for the years 2017, 2018, 2019 and 2020 as relates to Income tax and for the period beginning May 2018 to 2020 relating to VAT as set out in the Objection decision dated the 1st December 2022 are hereby upheld.b.The Respondent to recompute the taxes payable, inconsonance with the above orders, within Thirty (30) days of the date of delivery of this Judgment.b.Each party to bear its own cost.

65. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERMOHAMED A. DIRIYE - MEMBER