[2024] KETAT 937 (KLR)

Kamau v Commissioner of Domestic Taxes (Tax Appeal E914 of 2023) [2024] KETAT 937 (KLR) (Civ) (19 July 2024) (Judgment)

Neutral citation: [2024] KETAT 937 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E914 of 2023

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

July 19, 2024

Between

Francis Mugwi Kamau

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a resident of Nairobi County, a Kenyan citizen and a registered taxpayer.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act and mandated with the Responsibility for the assessment, collection and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration of all statutes set out under the schedule to the said Act.

3. The Appellant was issued with additional income tax assessments for the years of income 2017 – 2021 on 31st August 2023 for the sum of Kshs. 40,380,182. 00, following a returns and tax payments review for income tax and PAYE for the period which was undertaken on 23rd January 2023.

4. The Appellant objected to the said additional assessment on 27th September 2023 and submitted the relevant supporting documents.

5. The Respondent issued its Objection Decision on 23rd November 2023 wherein it rejected the Appellant’s objection in entirety and confirmed its assessment of the principal tax with penalties and interest amounting to Kshs. 40,380,182. 00.

6. The Appellant dissatisfied with the Respondent’s decision lodged his Notice of Appeal dated and filed on 13th December 2023.

The Appeal 7. The Appellant filed his Memorandum of Appeal dated and filed on 19th December 2023 and set out the following grounds of appeal;a.That contrary to the provisions of the Tax Procedures Act, the Commissioner erred in law and fact and misdirected himself in issuing tax assessments relating to period beyond the statutory five years.b.That the Commissioner erred in law and fact in demanding income tax of Kshs. 40,380,182. 00 for the years of income 2017 – 2021 and the said demand is excessive, punitive and is not based on law and any material facts that have been provided by the Appellant.c.That the Commissioner erred in law and fact in using erroneous figures as the Appellant’s bank deposits and wrongly assuming the amounts to be the Appellant’s taxable income and blatantly disregarding the actual figures as contained in the Appellant’s bank statements that have been provided by the Appellant.d.That the Commissioner erred in law and fact in its decision to bring to charge all bank deposit entries appearing in the Appellant’s bank statements as taxable income of the Appellant as against the law, ignoring the nature of the Appellant’s transactions, the material facts and supporting evidence that have been provided by the Appellant.e.That the Commissioner erred in law and fact in failing to exercise its best judgement and using the Appellant’s industry average margin to determine the Appellant’s taxable income as opposed to merely using the bank deposits as taxable income and subjecting the same to an unfairly higher margin than that which is used in the normal cause of the Appellant’s business dealings in determining the Appellant’s income tax.f.That the Commissioner erred in law and fact by failing to take into account the expenses were incurred in the production of income and should be allowable deductions when arriving at the taxable income of the Appellant in accordance with Section 15 of the Income Tax Act.g.That the Commissioner erred in law and fact in blatantly disregarding and ignoring the evidence, explanations and supporting documentation provided by the Appellant and proceeding to issue its Objection Decision dated 23rd November 2023. `

The Appellant’s Case 8. The Appellant’s case is set out in its;a.Statement of Facts dated and filed on 19th December 2023 together with the documents thereto; and,b.Written submissions dated 26th March 2024 and filed on 27th March 2024.

9. On Income Tax, the Appellant stated that the Respondent issued an assessment that was beyond the statutory period of five years, and more particularly the assessment for the year 2017, and thus the Respondent acted beyond the powers conferred on it by law.

10. The Appellant further stated that the Respondent’s Objection Decision on the income tax variances was not rationally connected to the information he provided because it disregarded the bank statements and reconciliation in arriving at the income tax variances, and proceeded to use erroneous figures as demonstrated hereunder;i.For the year 2019, the Respondent without any empirical justification used the figure of Kshs. 74,870,912. 00 as the bank credits of his account No. 0660191635788. The Respondent disregarded the actual figures in the Appellant’s bank statements and reconciliation for the year 2019 being the sum of Kshs. 52,3224,236. 00. ii.For the year 2020, the Respondent without any empirical justification used the figure of Kshs. 73,163,694. 00 as the bank credit of the Appellant’s account No. 0660191635788 disregarding the actual figures in the Appellant ‘s bank statements and reconciliation for the year 2020 being the sum of Kshs. 37,794,834. 00. iii.For the year 2019, the Respondent without any empirical justification used the figure of Kshs 1,643,025. 00 as the bank credit on the Appellant’s account No. 0870179322624 disregarding the actual figure of in his bank account statement being the sum of Kshs 1,057,375. 00. iv.For the year 2020, again the Respondent without any empirical justification used the figure of Kshs 10,857,000. 00 as the bank credits of the Appellant’s account No. 0870179322624 disregarding the actual credits of his in his bank statements for the year 2020 being the sum of Kshs 6,259,330. 00.

11. The Respondent also stated that in arriving at its income tax variances for the 2017 -2021 , the Respondent’s decision was not rationally connected to the information provided to it because the Respondent failed to take into consideration and blatantly ignored evidence , documentation and explanations provided in the objection on his deposits that do not fall within the definition of taxable income as stipulated in the ITA and therefore ought not to be subjected to income tax as demonstrated .

12. On Campaign Funding, the Appellant averred that he was among the candidates who vied for the Gatundu South parliamentary seat for the year 2022. He stated that during the campaign period in the years 2020 – 2021 he received donations and voluntary contributions from supporters, family members, friends and well-wishers, and other undisclosed principles to fund the campaign. The said campaign funds were deposited in his personal account No. 0660191635788, which he used to pay for campaign expenses such as printing campaign flyers, calendars, reflectors, footballs, football uniforms /jerseys, hiring campaign trucks, making donations to churches, weddings, funerals, and fundraisings for medical expenses, education, schools e.t.c.

13. It was further averred by the Appellant that the said campaign funds were wholly expended for campaign purposes, and did not form part of his taxable income and therefore not chargeable to tax under Section 3 (2) of the Income Tax Act.

14. He stated that through his tax agents he demonstrated to the Respondent the movement of cash transactions in his bank account through his objection dated 27th September 2023 , which demonstrated that the bulk of the cash deposits were between 2020 – 2021 during the campaign and election season in Kenya , and that the trend in statements show that cash deposited in his account was immediately withdrawn or paid out to other parties , and that he did not retain any personal benefit from the campaign funding to constitute profits or gains that would be subject to income tax .

15. The Appellant also averred that he received funding from undisclosed principals with specific instructions on the use of the funds and therefore retained no benefit.

16. The Appellant also stated that, in the alternative, if he had retained any benefit from the funding from the undisclosed principals, which benefit he did not retain, then such benefit would have been an agency fee for acting as an agent of the undisclosed principals and industrial margins of 17. 09 % ought to have applied to determine the taxable income rather than the topline of 30% on the said bank deposits.

17. The Appellant further stated that it is erroneous for the Respondent to disregard the totality of the transactions by failing to recognize that he was an agent of the undisclosed principals whose portion of income from the transaction is an agency fee. He stated that in such situations, the Respondent should determine income using industry average depending on the nature and type of the business as determined by the Tribunal in the case of Moses Kiarie Kuria vCommissioner of Domestic Taxes TAT 508 of 2021, which the Respondent negligently failed to do.

18. On Dowry Donations for his Traditional Wedding, the Appellant averred that he held his traditional wedding on 20th November 2021 and he received dowry contributions from his friends, relatives and well-wishers. He averred that the said traditional wedding was attended by over 2,000 people, who contributed funds totaling the sum of Kshs 8,000,000. 00, which he deposited in his personal account in the year 2021. He contended that the Respondent erroneously subjected deposits from dowry contributions to income tax and that the same does not amount to income that should be subjected to income tax pursuant to Section 3(2) of the Income Tax Act.

19. The Appellant further stated that through his agents, he demonstrated to the Respondent that the deposits were from dowry donations, and attached screen shots of a WhatsApp group of 35 friends who had contributed a sum of Kshs. 4,500,000. 00 towards the traditional wedding, which funds he deposited in his personal account.

20. He also stated that he demonstrated that some friends made direct deposits to his personal account and even attached RTGS of an amount totaling Kshs. 650,000. 00, and further provided a book of contributions which evidence was not controverted or taken into consideration in the Respondent’s Objection Decision, in determining whether the said funds of Kshs 8,000,000. 00 being dowry contributions constitute profits or gains that would be subject to income tax.

21. On Deposits by Ann Gathoni, the Appellant stated that the Respondent misapprehended the nature of the relationship between him and his wife, Ann Gathoni in concluding that the deposits made by his wife in his personal account all totaling the sum of Kshs 10,610,000. 00 was income that should be subjected to income tax.

22. He averred that the said deposits were merely soft loans, financial assistance and funding made by his wife and the same cannot be said to be income. He stated that the Respondent disregarded and ignored the evidence and explanations and purported to allege that he had not provided a sworn statement to confirm the averments, which had not been requested, but was availed.

23. On Deposits by corporates and individuals for obtaining construction materials, the Appellant stated that he is involved in the construction industry, and that he sources and obtains construction materials on behalf of companies, invoices the companies for the materials sought and retain a percentage as commission for the obtaining and delivering the construction materials.

24. He stated that part of the deposits made in his personal account, being self-deposits and deposits from corporations are not profits as envisaged under Section 3 (2) of the ITA, and charging to tax the entire amount deposited by companies and self-deposits for purposes of securing construction material is punitive, excessive, legally unjustified and contrary to accounting principles as the said deposits are not profits or gain which made in the course of doing business.

25. The Appellant also stated that he demonstrated to the Respondent the movement of cash transactions in his bank account through his objection dated 27th September 2023, which showed that cash deposits in his account were immediately paid out to suppliers, and that based on payments made to suppliers, he did not make any gains or profits from the business. He also stated that the Respondent failed to deduct any expenses in determining the taxable income as required under Section 15 of the ITA.

26. The Appellant asserted that in such circumstances, it is advisable that the Respondent determines the alleged income using industry margin depending on the nature of and type of the business as determined by the TAT in the case of Afya X-Ray Center Ltd vs. Commissioner of Domestic Taxes TAT No,70 of 2017.

27. On Deposits by corporates and individuals for sale of pigs, the Appellant averred that he is also in the business of selling pigs and has been supplying the same to Farmers Choice Company and Sky Foods Ltd, who then credited his bank account for the purchases.

28. He stated that part of the deposits made in his personal account being self deposits and deposits from companies are not profits or gains as envisaged under Section 3 (2) of the ITA, and the taxation of entire amounts deposited by companies, and self-deposits made is erroneous and contrary to accounting principles and the said deposits are not profits or gains made in the course of business.

29. The Appellant averred that he demonstrated to the Respondent that he did not make any gain or profits from the business, but the Respondent failed to deduct any relevant expenses in determining the taxable income as required under Section 15 of the Income Tax Act.

30. He further stated that in such circumstances the Respondent determines any alleged income using industry margin depending on the nature and type of the business as determined by the Tribunal in the case of Afya X-Ray Center Ltd v Commissioner of Domestic Taxes TAT 70 of 2017 and in the case of Moses Kiarie Kuria vs. Commissioner (supra).

31. On Deposits by Homegrown Millers Ltd and Francis Mwirigi Mwangi, the Appellant stated that he entered into a sale agreement with George Kamau Wanyoike and Francis Mwirigi Mwangi for the sale of motor vehicles registration number KBL 507A and KBN 492A for the sum of Kshs. 1,300,000. 00 and Kshs. 2,400,000. 00 and the said sums were paid directly and credited to his personal account.

32. He stated that he provided proof of the said agreements but the Respondent elected to disregard the evidence and explanation as to the source of the funds in its objection decision and erroneously held that the said amounts were profits or gains as envisaged under Section 3 (2) of the Income Tax Act, and charged the said amounts to tax.

33. On Loans credited to Appellant’s account by the Bank, the Appellant stated that on several occasions he obtained loans from the Equity Bank Ltd, and the said loans were credited to his personal bank account to the tune of Kshs. 21,194,000. 00 for the period 2018 - 2022. He stated that the said loans were clearly demonstrated in the objection notice application dated 27th September 2023, his bank statements and further through the banking analysis that the said amounts were not income, but loans credited to his account by the bank.

34. He stated that the said explanations and analysis shared were not considered by the Respondent in arriving at its objection decision, but instead the Respondent contended that he did not submit the loan agreements, which documents it did not request.

35. On Banking book transactions and reversals on credited amounts, the Appellant stated that he had a balance of Kshs. 2,816,352. 00 in his bank account 0660191635788 and on the same day the sum of Kshs. 2,816,352. 00 was debited on his bank account then credited back to his same bank account. He stated that the same was not a credit on his bank account as there was no money coming in from external sources, but merely his balance being debited then credited again.

36. The Appellant averred that he clearly demonstrated the transaction to the Respondent but the Respondent opted to disregard the said explanation and evidence as shown in his bank statements and proceeded to allege that he did not explain the said transactions.

37. He further stated that from the credits made in his said personal account, reversals in the total sum of Kshs. 2,654,010. 00 were made. The said reversals were demonstrated by the tax agent through a bank analysis which showed the exact transactions and date of reversals. The Respondent however opted to disregard the said demonstration and evidence shown in the bank statements in its objection decision and proceeded to allege that he did not demonstrate the said transactions, the Appellant averred.

38. The Appellant stated that he did not make any gains or profits capable of being subjected to taxation under Section 3 (2) of the ITA, and had discharged his burden of proof by availing to the Respondent all the documents that it had requested for, but the Respondent chose to disregard the said documents and explanations in its objection decision.

39. He stated that this is evidenced by the fact that the parties (Appellant & Respondent) held a meeting, and he was given ten days to provide further documentation. However, before the lapse of the ten days, the Respondent wrote to him indicating that it intended to disallow the objection and confirm the assessment as issued, and advised him to pursue the matter for settlement at TAT/ADR after availing the said requested documents.

40. The Appellant further contended that the decision taken by the Respondent is not rationally connected to all the information provided to the Respondent and violates his legitimate expectation. He asserted that the decision issued by the Respondent is contra statute, punitive, unreasonable and unfair and the same should be vacated in its entirety.

41. In his submissions, the Appellant submitted that the basis of the Respondent’s assessment was that the Respondent- conducted an audit on the Appellant for the years of income 2017 – 2021 and averred that the comparison between the income declared in the income tax returns and the income computed from banking revealed variances deemed to be underdeclared income.

42. He submitted that the Respondent had contended that his two accounts had credits for the two years as follows:a.A/C NO. 0660191635788 – 2020 – Kshs. 73,163,694 .00-2019 - Kshs. 74,870,912. 00b.A/C NO.0870179322624 -2020 - Kshs. 10,857,000. 00-2019 - Kshs. 1,643,025. 00.

43. The Appellant submitted that the said figures presented as his taxable income were erroneous and he objected to the same, and provided the Respondent with the bank statements for the aforementioned accounts which demonstrated the actual and correct figures of the deposits in the accounts for the two years as follows.i.A/C NO.0660191635788 - 2020 – Kshs. 37,794,834. 60-2019 - Kshs. 52,224,236. 00ii.A/C No. 0870179322624 -2020 – Kshs. 6,259,330 .00-2019 - Kshs. 1,057,375 ,00.

44. The Respondent submitted that he provided the Respondent with the bank statements and bank analysis demonstrating the true and accurate figures as set out hereinabove and in the annexures to the Statement of Facts.

45. The Respondent further submitted that the Respondent has not demonstrated to the Tribunal where its incorrect, erroneous, excessive and exaggerated figures were derived from, and the Respondent cannot purport to pluck figures from the air and proceed to assess and demand income tax based on such figures.

46. He submitted that Section 3 (1) of the ITA provides as follows:“3 (1) Subject to, and in accordance with this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which was accrued in or was derived from Kenya.”

47. The Appellant cited the case of Kenya Revenue Authority & 2 others v King Bird (Kenya) Ltd [2017] eKLR, where the court held;“The explanation given by the appellants before us in their submissions is that, “the figure of Kshs 2,966,079 was arrived at hurriedly to facilitate the issue of leave and giving out conditional stay”, but surely that figure had to come from some place and needed to have a basis , None seems to have been given and therefore we cannot fault the learned judges for following this line of reasoning without a reasonable explanation being given on the different figures, the only conclusion is that the Respondent does not know what is due from the Appellant. What the Respondents are doing is plucking figures from the air and inserting them on their documents. Their alleged assessment of extra duty from the appellant has not been done in accordance with the law.”

48. The Appellant submitted that the Respondent plucked figures from the air, and purported to assess and demand taxes based on the fabricated figures, which was not done in accordance with the law.

49. The Appellant further submitted that the Respondent has not even attempted to demonstrate to the Tribunal, the source of the figures it used in its assessment, and neither did the Respondent refute the figures provided by the Appellant, which are derived from the Appellant’s bank statements.

50. The Appellant also submitted that, regarding the issue of campaign funds for MP Gatundu south in 2022, the Appellant submitted that he demonstrated to the Respondent the movement of cash transactions in his bank accounts and demonstrated that the bulk of the cash deposits were between 2020 – 2021 during the campaigns and election season in Kenya. He submitted that according to his evidence in his demonstration, the trend in the statements demonstrated that cash deposited in the Appellant’s account was immediately withdrawn and paid out to other parties.

51. He further submitted that he did not retain any personal benefit from the campaign funding to constitute profits or gains that would be subject to income tax. He asserted that the said campaign funding is therefore not gains or profits that should be subjected to income tax and buttressed it submission with the case of, Pili Management Consultants Ltd v Commissioner of Income Tax & Kenya Revenue Authority [2020] eKLR.

52. The Appellant submitted that through its objection decision dated 27th September 2023, the bank statements and bank statement analysis annexed to his statement of facts, he demonstrated that;a.The bulk of the cash transactions took place in 2020 and 2021 during the campaigns and election season in Kenya.b.The Appellant did not retain any personal gain from the campaign funding.c.The Appellant was only an agent in these transactions and did not retain a benefit.d.The Appellant demonstrated that the trend in the bank statements was that the cash deposited into the Appellant’s bank account was immediately withdrawn or paid out to other parties.

53. The Appellant relied on the case of Moses Kiarie Kuria vs.Commissioner of Domestic Taxes TAT 508 of 2021, where it was stated;“The principles regarding what constitutes best judgement were clearly set out in the benchmark decision pin Van Boeckel v C& E QB [1981] STC 290, where it was established, ‘The Respondent, is not required to do the work of the taxpayer; must perform its duties honestly and above board; must fairly consider all material facts before it and based on that material make a decision that is reasonable and not arbitrary; must be in possession of some material upon which it can base its best judgement.’ In the instant case, it is the Appellant’s case that the monies were received from certain unnamed principals and that the same were then spent leaving him with a commission. He argued that the commission could be estimated at an industrial margin estimate of 17. 09 %. To this argument, the Tribunal has not found a rebuttal by the Respondent.”

54. The Appellant thus submitted that akin to the foregoing finding, he received monies from undisclosed principals. The monies were spent on campaigns and the Appellant was only left with a commission which could be estimated at an industrial margin of 17. 09%.

55. The Appellant also submitted that he demonstrated to the Respondent that the contributions by his relatives, friends and well-wishers towards his traditional wedding on 20th November 2021 to the tune of Kshs. 8,000,000. 00 was deposited in his personal bank account, by providing evidence of the contributions, and that the same did not constitute taxable income subject to tax.

56. He further submitted that he demonstrated to the Respondent through an affidavit sworn by Ann Gathoni that she had made deposits amounting to Kshs. 10,610,000. 00 as loans and financial assistance to him as her husband, and that the funds were not taxable income. He cited the case of Pili Management Ltd v Commissioner of Income Tax & Anor (supra) where it was stated;“Income tax, if I may pardon for saying so, is a tax on income. It is not meant to be a tax on anything else.”

57. The Appellant also submitted that, on loans credited to his bank account by the bank totaling Kshs. 10,194,000. 00, he demonstrated and provided evidence highlighting to the Respondent that the specific amounts in loans disbursed from the bank. He cited the case of Usafi Services Ltd v Commissioner of Domestic Taxes TAT 1094 of 2022, where it was held;“However, the above listed documents have been provided by the Appellant to support its averments that the non-income items were part of its bankings and should not be treated as income for corporation tax purposes…The Appellant, having provided documents to support its averments, discharged its burden of proof and the onus lies on the Respondent to review documents provided in making a decision as to what tax liability sits with the Appellant. Due to the foregoing, it is clear to the Tribunal that the income computed by the Respondent in establishing the Appellant’s corporation tax liability should be adjusted to exclude non-income amounts.”

58. The Appellant submitted that being in the business of sourcing and obtaining construction materials on behalf of third parties, he invoices the third parties for the materials sought and retains a percentage as his profit for sourcing and delivery of the construction materials. He submitted that the deposits paid by the third-party procuring entities are not taxable income. He stated that he demonstrated to the Respondent the movement of the cash transactions in the bank account as credits to the bank account and debits to the suppliers of construction materials, and therefore it was erroneous, unfair and unjust for the Respondent to subject the entire deposits as income.

59. The Appellant submitted that the Respondent in its assessment and objection decision, erred in law and fact in failing to exercise its best judgement to determine the Appellant’s taxable income, and erroneously brought to tax all cash deposits into the Appellant’s bank account without taking into consideration the totality of the transactions.

60. The Appellant cited Section 29 (1) of the Tax Procedures Act, which provides;“29 (1) Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the commissioner may, based on such information as may be available and to the best of his or her judgement , make an assessment (referred to as “ default assessment”) of the tax (including a nil amount) payable by the taxpayer for the period in any other case.”

61. The Appellant buttressed its submission with the case of Moses Kiarie Kuria vs. Commissioner of Domestic Taxes (supra), where it was held;“Where the Respondent has relied on the banking analysis method, it is obliged to exercise best judgement to ensure that the taxpayer is liable for the correct amount of tax. The question before this Tribunal is whether the Respondent’s assessment was a product of best judgement. 122. The Respondent solely relied on the Appellant’s bank statements to determine the income and that the documents provided were irrelevant in its own independent judgement. This would have therefore been an appropriate case for the Respondent to apply the industry’s profit margin to determine the Appellant’s profit. A similar view was held in Afya X-Ray Center Ltd -vs-Commissioner of Domestic Taxes TAT No, 70 of 2017, where the Tribunal stated, “section 29(1) of the TPA provides that the Respondent should base the assessments on the available information and to make the assessment to the best of his judgement. The Respondent however failed to comply with this.”

62. It was further submitted that in Cusses vs. Revenue and Customs Commissioners, the case of Homsub v HMRC (TC/2017/00168) was cited where the tribunal held that;“in addition to the factors mentioned above, any assessment said to be to best judgement will, of necessity, have to be methodologically sound, or at least, not methodologically flawed.”

63. It was further submitted that the Respondent’s assessment on cash deposits were not reasonable, against best judgement, in breach of basic accounting principles and not based on the information available to the Respondent in accordance with Section 29 (1) of the TPA, because;a.Bank credit entries do not qualify as income and or gains or profits from a business chargeable to tax under Section 3 (2) (a) (i) of the ITA.b.The Respondent’s action of taking all the Appellant’s cash credit entries as income does not allow the deduction of the expenditure incurred by the Appellant in the production of income in accordance with Section 15 (1) of the ITA.

64. The Appellant submitted that it would have been more prudent with the information available and given, with reasonable judgement to use the industry profit margin, depending on the nature and type of the Appellant’s business, as opposed to bringing all the cash deposits into the Appellant’s bank accounts to tax charge without considering the totality of the transactions. He cited the case of Afya x-Ray Centre Ltd v Commissioner of Domestic Taxes (supra), where the Tribunal held;“However, we would be remiss if we did not point out this conduct of the Respondent relying solely on bank statements is likely to cause prejudice of untold proportions to all taxpayers.The Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit is not necessarily income to the account owner. The Respondent in this case could have used industry margins to determine the Appellant’s profits and then subject that figure to the 30 % rate for corporate tax, rather than a topline 30 % on bank deposits. That being the case, we find that the assessment as it currently stands is in breach of basic accounting principles that if allowed will be prejudicial to the Appellant.”

65. The Appellant also cited the following cases of Republic v Kenya Revenue Authority JR MISC CA 478/2014; Republic v Kenya Revenue Authority ex parte Aberdare Freight Services Ltd [2004] eKLR; Republic v Commissioner of co-operatives ex-parte Kirinyaga Tea Growers C-operative Savings and Credit Society Ltd [1999] EA 245 (CAK); and, Keroche Industries Ltd v Kenya Revenue Authority [2007] eKLR, in which the courts emphasized that statutory powers can only be exercised validly if they are exercised reasonably , rationally and properly , and that no statute ever allows any public officer to statutory power that is arbitrary or capricious. Nyamu, J. (as he then was) stating in the Aberdare case;“It is now an accepted principle in this field of law that statutory powers and duty must be exercised and performed reasonably.”

66. The Appellant therefore submitted that the Respondent’s action of subjecting to tax charge deposits credits to the Appellant’s bank accounts is unreasonable and within the ambit of wednesbury’s unreasonableness, which equates to a decision that is so outrageous in its defiance of logic that no sensible person applying their mind to the question to be decided would have arrived at it.

Appellant’s Prayers 67. By reason of the foregoing the Appellant prayed that;a.The Respondent’s audit findings dated 27th March 2023, demand dated 31st August 2023 and Objection Decision dated 23rd November 2023 for the years of income 2017 - 2021 be struck out in its entirety.b.The Respondent’s actions to demand for additional taxes be declared arbitrary, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of a taxpayer;c.The Respondents, its employees, servants or agents or other person purporting to act on its behalf be barred, restrained, or estopped from demanding or taking any further actions towards enforcement or recovery of principal tax, penalties and interest on the Respondent’s demand as stipulated above.d.The costs of this Appeal; and,e.Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent’s Case 68. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 29th December 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 2nd April 2024.

69. The Respondent stated that it issued the respondent with an additional tax assessment for the years 2017 – 2021 on 31st August 2023, which the Appellant objected to on 27th September 2023, and the Respondent issued its Objection Decision thereto on 23rd November 2023.

70. It was the Respondent’s contention that based on Section 31 (6) (a) of the ITA, the Respondent did not amend the assessment beyond the stipulated period of five years. It stated that pursuant to Section 31 (4) (a) of the TPA, it is permitted to amend an assessment at any time on the basis of gross or willful neglect, evasion or fraud by or on behalf of the Appellant.

71. The Respondent further stated that it was guided by Section 3 of the ITA when raising additional assessments for income tax resident individual on 31st August 2023 as follows: - Year 2017 – Kshs 575,212. 00

Year 2018 – Kshs 1,425,167. 00

Year 2019 – Kshs 13,380,167. 00

Year 2020 – Kshs 11,682,118. 00

Year 2021 – Kshs 13,317,518. 00

Total - Kshs. 40,380,182. 00

72. The Respondent also stated that it noted that the Appellant had declared some sources of income from employment and renting property and considered when raising the additional assessment.

73. The Respondent stated that the Appellant availed; bank statements for the period 2017 - 2021, excel analysis, campaign photography, screen shots of WhatsApp group, sales invoices etc.

74. The Respondent also stated that it held an objection review meeting on 30th October 2023 with the Appellant wherein the Appellant reiterated the grounds raised in the objection notice. Thereafter the Respondent requested the Appellant for additional documents.

75. It was further stated by the Respondent that the Appellant adduced several justifications why some of the credits and deposits in the bank statements should not be subjected to income tax.

76. On Campaign funding, dowry payments and deposits by Ann Gathoni, the Respondent stated that the Appellant did not provide evidence in support such as sworn statements and affirmations by the financiers, well-wishers, financiers, donors or loan agreements /loan statements to support the loans.

77. It stated that in addition, the receipt of political campaign funds and their use is within the Appellant’s peculiar knowledge hence under section 112 of the Evidence Act, the Appellant bears the burden of proving that the receipts are not taxable income. The Respondent cited the case of William O’Dweyer v Commissioner of Internal Revenue 266 F.2d 575, where it was stated;“However, the evidence strongly supports the view that Crane intended the payment as a political or campaign contribution. If it were such and were in fact used for such purposes, then it would not constitute taxable income. On the other hand, if petitioner retained the money or diverted it to his own personal use, it would be taxable income to him…petitioner himself was the one person who could throw the lightest on this matter.”

78. The Respondent also cited the case of Commissioner of Investigations and Enforcement v Evans Kidero ITA E028/2020 [2022] KEHC 52 (KLR), where it was held;“Failure to show that political campaign contributions were expended for campaign purposes leads to the contributions being considered as income and thereby chargeable to tax.”

79. It was also stated by the Respondent that it expected and requested the Respondent to provide evidence on how the deposits made for procuring construction materials and pig supplies was declared and further provide the Respondent with financial statements if any. The Appellant had not assessed himself in relation to these specific incomes, therefore the Respondent used its best judgement and issued assessments on the same.

80. The Respondent stated that on credits made by Gatundu Water and Sanitation and Kiambu County being proceeds of employment income which had already been deducted PAYE, had already been taken into account and deducted salaries earned as declared in the Appellant’s income tax returns.

81. The Respondent also stated that it could not trace credits made by Homegrown Millers and Francis Mwirigi Mwangi in the bank accounts.

82. The Respondent further stated that on credits being loan advances made on diverse dates, the Appellant did not provide application form/loan agreement/loan disbursement order/loan statement or confirmation from the said financial institution to support the justification that the credits therein are loans and not incomes.

83. It also stated that on credits being reversals and book transactions, the Appellant did not provide corroborative evidence from the respective financial institution to support the averments.

84. It was stated that Section 56 (1) of the TPA provides that;“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

85. The case of Mulheim vs. Commissioner of Taxation [2013] FCAFC, was also cited, whereon the court stated;“a taxpayer must satisfy the burden of proof to successfully challenge tax assessments. The onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

86. It was further stated by the Respondent that the banking analysis test (banking deposit analysis) is an acceptable method of arriving at an assessment. In the case of Bachman vs. The Queen [2015] TCC 51, it was stated;“This court has recognized that in an appropriate case a bank deposit analysis is an acceptable method to compute income.”

87. The Respondent also stated that Kenya’s tax system is a self-assessment system where a taxpayer assesses himself and makes payments to the revenue authority. All one requires to do is acquire a PIN and access the iTax system for one to file their tax returns.

88. It stated that in the instant case, the Respondent proceeded under Section 31 of the TPA to issue additional assessments.

89. It was further stated that pursuant to Article 47 of the Constitution of Kenya, and Section 51 of the TPA, the Respondent engaged the Appellant at every stage of the process up to when the objection decision was issued.

90. The Respondent posited that according to Section 59 of the TPA, the onus is on the Appellant to produce records for purposes of obtaining full information in respect of the Appellant’s tax liability. Further, Section 30 of the TAT Act and Section 56 of the TPA impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect.

91. The Respondent in its submissions, reiterated that Section 24 (2) of the TPA provides that,“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.”

92. Section 31 (1) of the TPA states;“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)…the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

93. The Respondent submitted that failed to provide the required documents as requested, and therefore the Respondent issued the Appellant with the Objection Decision confirming the assessments for failure to provide sufficient documents in support.

94. The Respondent reiterated the case of Commissioner of I & E vs. Evan Kidero (supra), where the court stated;“Failure to show that political campaign contributions were expended for campaign purposes leads to the contributions being considered as income and thereby chargeable to tax.”

95. The Respondent also submitted that the Appellant has failed to discharge its evidential burden of proof under Section 107 (1) of the Evidence Act in demonstrating that the assessments by the Respondent was in any reasonable manner incorrect or excessive.

96. The Respondent posited that in the case of Family Signature Ltd vs. Commissioner of I & E TAT No.25 of 2016, the Tribunal held that;“when the Commissioner is prompted to resort to an alternative method of determining income and in assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in manner result in a ridiculously high-income margin.”

97. The Respondent submitted that that it exercised its best judgement appropriately in the circumstances by arriving at the tax assessment as it did. It cited the case of Joycott General Contractors Ltd vs. Kenya Revenue Authority TAT 028 of 2018, where the Tribunal held;“We find that the Appellant seems to forget that it bears the burden of proof in law, to demonstrate to tis Tribunal that the Respondent’s assessment was wrong. Especially with regard to the under declarations and variances in respect of VAT and income sales. On the contrary, the Appellant has not bothered to substantially traverse the assessment raised. All it has done is to make sweeping and expansive accusations without substantial support.”

Respondent’s Prayers 98. By reason of the foregoing, the Respondent prays that this Honourable Tribunal finds that:a.The Appellant’s Appeal lacks merit and ought to be dismissed;b.The Objection Decision dated 23rd November 2023 be upheld; and,c.The Respondent be awarded costs of the Appeal.

Issues for Determination 99. The Tribunal having carefully considered the pleadings and filings make by the parties is of the considered view that the Appeal distils into one issue for determination as follows;

Whether the Respondent’s Objection Decision dated 23rd November 2023 confirming its assessments on the Appellant was justified. Analysis And Determination 100. The issue giving rise to the dispute subject of this Appeal arose from the compliance audit conducted by the Respondent on the Appellant for the period 2017 to 2021, whereon the Respondent indicated that it had noted variances between income in the Appellant’s tax returns and the income in the Appellant’s bank accounts. The Respondent therefore raised additional income tax assessments pursuant to Section 24 (2) and 31 (1) of the Tax Procedures Act, which empowers the Respondent to amend tax returns filed by taxpayers and assess the taxpayer using other available information.

101. The Respondent stated that it applied the banking deposits analysis method to arrive at the taxable income, and used the Respondent’s best judgement to arrive at the assessment as provided for under Section 29 (1) of the TPA.

102. The Respondent averred that it was guided by Section 3 of the Income Tax Act when raising the additional assessments for income tax resident individual against the Appellant for the sum of Kshs. 40,380,182. 00.

103. The Respondent also averred that the Appellant during the objection review meeting availed bank statements for the period 2017 - 2021, bank statement excel analysis, sales invoices, campaign photography, screen shots of WhatsApp group among other information. It also averred that the Appellant adduced justification why the bank credits and deposits in the bank statements should not be treated as taxable income. The Respondent also averred that the Appellant had declared some sources of income as rental and employment income, which the Respondent considered and took account of.

104. The Respondent also averred that as regards campaign funding, dowry contributions deposits from relatives, friends, donors, well-wishers, and deposits by Ann Gathoni and financiers, the Appellant did not provide satisfactory supporting evidence.

105. The Respondent also averred that it sought information from the Appellant on how the deposits made for procuring construction material on behalf of third parties, and pig supplies were declared. On this the Respondent used the commissioner’s best judgement to assess.

106. It was further stated by the Respondent that the Appellant did not provide satisfactory support for the bank loans credited to his accounts, and the credits being reversals and book entries as averred.

107. The Respondent stated that the Appellant had the burden of proving the receipts were not taxable income.

108. On his part, the Appellant averred that the Respondent issued its assessment beyond the allowed period of five years, particularly the assessment for the year 2017, and therefore acted beyond the powers conferred by law.

109. The Appellant averred that the Respondent in arriving at the income tax variances for 2017 -2021, failed to consider and disregarded the information, documents, and explanations provided and subjected deposits which do not fall within the definition of taxable income and charged the same to tax. The Appellant averred that he provided the Respondent with his bank statements and analysis, and demonstrated the actual and correct deposits in the accounts, confirming that the Respondent’s figures were incorrect, excessive, exaggerated.

110. The Appellant also averred that the Respondent has not demonstrated to the Tribunal where its erroneous figures were derived from, and therefore cannot purport to pluck figures from the air and proceed to base a tax assessment on the said figures. He cited the case of KRA & 2 Others v King Bird (Kenya) Ltd (supra), where the court held;“What the Respondents are doing is plucking figures from the air and inserting them on their documents. Their alleged assessment of extra duty from the Appellant has not been done in accordance with the law.”

111. The Appellant also stated that, in regard to the issue of campaign donations deposits for his Gatundu South MP 2022 campaign, he demonstrated to the Respondent the movement of the cash transactions in his bank accounts between 2020 - 2021 during the campaigns, and election season in Kenya. He averred that his bank statements and information he availed demonstrated the trends that cash deposited in the accounts was immediately withdrawn and paid out to other parties.

112. He also demonstrated the actual campaign operations through photography, showing how the funds being expended in campaign expenses such as sponsorship of football tournaments, buying footballs, football uniforms, jerseys, hiring campaign trucks for roadshows, printing campaign flyers, calendars reflectors, making donations to churches, weddings, funerals, and other fundraisings such as for medical expenses, schools, education etc.

113. The Appellant averred that the campaign fund donations were wholly expended for campaign purposes, and did not form part of his income so as to be chargeable to tax.

114. The Appellant averred that he held his traditional wedding on 20th November 2021, and to host the said wedding he received wedding preparation and dowry contributions from his friends, relatives and well-wishers. He averred that the traditional wedding was attended by over 2,000 people, who contributed funds for the said purpose totaling Kshs. 8,000,000. 00, which were deposited in his personal accounts.

115. He submitted that during the objection review he demonstrated to the Respondent that the deposits were from dowry donations, and attached evidence of contributions book, WhatsApp group contributions, and deposits through RTGS from friends.

116. The Appellant submitted that the Respondent erroneously subjected the traditional wedding contributions deposited in his accounts to income tax without controverting the same, whereas the same did not amount to income as it was wholly expended in the traditional wedding.

117. The Appellant averred that his wife Ann Gathoni on diverse dates made deposits into his bank accounts totaling Kshs. 10,610,000. 00, which was funding in form of soft loans and financial assistance. He stated that the Respondent misapprehended the nature the relationship between him and his wife, and misapprehended the said financial assistance as taxable income.

118. He averred that he availed evidence including a sworn affidavit, and explanations to the Respondent demonstrating the said deposits made by his wife were soft loan loans and financial assistance, but the Respondent disregarded and ignored the evidence and explanations, and charged the entire deposits to income tax contrary to the provisions of ITA.

119. The Appellant also averred that as he is involved in the construction industry, he sources and obtains construction materials on behalf of companies as their agent (commonly known as broker), invoices the companies for the materials sought and retains a percentage as commission for the sourcing and delivery of the construction materials to the principals.

120. He stated that demonstrated to the Respondent the movement of the cash transactions in his bank account, which showed the that the cash deposits in his account were immediately paid out to the construction materials suppliers, and he was only left with a small margin as his commission. The amounts deposited were therefore not gains or profits made in the course of doing a business.

121. The Appellant averred that the deposits made by third parties for him to source building materials, being self-deposits are not are not profits or taxable income as envisaged under Section 3 (2) of the ITA, so as to be subjected to a charge to tax.

122. The Appellant submitted that in such circumstances, it would have been reasonable or advisable that the Respondent determines the alleged income using industry margin depending on the type and the nature of the business as determined in the case of Afya X-Ray Center Ltd vs. Commissioner of Domestic Services TAT No.70 of 2017.

123. The Appellant also stated that as he is in the business of selling pigs and has been supplying the same to Farmers Choice Company and Sky Foods Ltd, part of the deposits made in his personal account were credits and self-deposits made by the buyers for whom he sourced and supplied the pigs.

124. He stated that he demonstrated to the Respondent that he did not make any gain or profit from the deposits, but the Respondent failed to adjust the relevant expenses so as to determine the taxable income. He stated that in the circumstances, the Respondent ought to have determined any alleged income based on the relevant industry margin as determined in Afya X-Ray Center Ltd case.

125. The Appellant also averred that he entered into agreement for sale of two vehicles KBL 507A and KBN 492A with George Kamau Wanyoike and Francis Mwirigi Mwangi for the sum of Kshs. 1,300,000. 00 and Kshs. 2,400,000. 00 respectively, who paid the said sums directly and credited to his personal account.

126. He stated that he provided proof of the said agreements but the Respondent elected to disregard the evidence and explanations as to the source of the funds, thus erroneously holding the said funds to be gains or profits and subjecting the same to a charge for income tax.

127. He further averred that on several occasions he obtained loan advances from Equity Bank Ltd, and the said loans were credited to his bank account on diverse dates to the tune of Kshs. 21,194,000. 00 for the period 2018 - 2022. He averred that he clearly demonstrated to the Respondent through his bank statements and the banking analysis that the said amounts were loans credited to his accounts by the bank and not income, but the Respondent disregarded the said explanations and evidence, including loan agreements, and proceeded to charge the said amounts to income tax.

128. He also averred that he had banking book transactions and reversals on credited amounts, with a balance of Kshs. 2,816,352. 00, which was debited on his account and credited on the same day. He averred that the debit/credit was not a funds deposit/credit as there was no money coming into his account from an external source, but merely his balance debited and credited back.

129. He averred that he clearly demonstrated to the Respondent the transaction through his bank statements and analysis, but the Respondent opted to disregard the evidence and explanation, and indicated that he did not explain the transaction.

130. The Appellant averred that the bank account reversals were clearly explained, and that he did not make any gain or profit from the said reversals to qualify as a taxable income and therefore the Respondent erred in subjecting the same to charge to income tax.

131. The Appellant submitted that in all the aforecited transactions he did not make any gains or profits capable of being subjected to a charge of income tax under Section 3 (2) of the ITA. He submitted that he discharged his burden of proof by availing the explanations, information and relevant documents the Respondent requested in evidence.

132. The Tribunal has carefully reviewed and analyzed the supporting documents submitted in support and opposition to the Appeal.

133. It is noteworthy that the Respondent solely relied on the Appellant’s bank accounts information to determine the taxable income and in its own judgement thus disregarded the bulk of the information, explanations and documents submitted by the Appellant.

134. The Tribunal has in detail rehashed the averments of the parties in order to bring out clearly the contentions and the manner in which they were traversed. The Appellant took the opportunity provided by the Respondent and provided both documentary, accounting and explanatory evidence on the how and why the monies it his bank accounts were deposited, and how they were utilized, in order to demonstrate that these deposits were not gains or profits from a business, capable of being classified as taxable income and subject to a charge in income tax.

135. In the case of Usafi Services Ltd v Commissioner of Domestic Taxes TAT 1094 of 2022, it was held;“However, the above listed documents have been provided by the Appellant to support its averments that the non-income items were part of its banking, and should not be treated as income for corporation tax purposes …The Appellant having documents to support its averments, discharged its burden of proof, and the onus lies on the Respondent to review the documents provided in making a decision as to what tax liability sits with the Appellant. Due to the foregoing, it is clear to the Tribunal that the income computed by the Respondent in establishing the Appellant’s corporation tax liability should be adjusted to exclude non-income amounts.”

136. Guided by the aforesaid decision, the Tribunal takes note that the Respondent did not utilize the said information provided to adjust, but made the assessments based on its best judgement.

137. Suffice it to state that the threshold of the evidentially burden of proof required in such cases is on a balance of probability, and not beyond reasonable doubt as alluded to by the Respondent. The Respondent therefore stretched the legal and evidentially burden of proof too far, and unnecessarily ignored and disregarded the Appellant’s evidence.

138. Where the Respondent has relied on Banking analysis method, it is obliged to exercise best judgement to ensure that the taxpayer is liable for the correct amount of tax.

139. In the TAT Appeal No. 508 of 2021 Moses Kiarie Kuria v Commissioner of Domestic Taxes (supra), the principles regarding what constitutes best judgement were clearly set out in the decision in Van Boeckel v C&E QB (1981) STC 290; VAEC1420;“The Respondent is not required to do the work of the taxpayer; must perform its duties honesty and above board; must consider all material facts put before it and based on that material make a decision that is reasonable and not arbitrary; must be in possession of some material upon which it can base its best judgement.”

140. In the case of Cussens vs. Revenue and Customs Commissioners, where the case of Homsub v HMRC (TC/2017/00168) was cited, where it was held;“In addition to the factors above, any assessment said to be to the in best judgement, will of necessity, have to be methodologically sound, or at least, not methodologically flawed”.

141. The Tribunal also reiterates the afore cited case of Pili Management Ltd vs. Commissioner of Income tax and another (supra) where it was stated;“Income tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else.”

142. The Tribunal also reiterates that whereas in the case of Bachman v Queen (supra) the court recognized that in an appropriate case a bank deposit analysis is an acceptable method to compute income, in instances where the best judgement is to be applied, the principles set out in the Van Boeckel v C& E QB (supra) shall apply.

143. In the instant Appeal, the Appellant has asserted monies were deposited into his accounts by different third parties on diverse occasions for differing reasons. He has explained all the deposits, segregating those which were solely non-income and how they were expended, and those were he acted as an agent (commonly known as “broker”) for principals, for whom he undertook various sourcing with the monies deposited leaving himself with a small commission as his profit, and suggested that in such instance the Respondent would have been prudent if it applied the relevant industry profit margin, rather than applying the topline 30 % on all the banking deposits.

144. In the Tribunal’s view this would have been an appropriate case for the Respondent to apply industry profit margin to determine the Appellant’s profit, hence the proper taxable income.

145. The Tribunal held the same view in Afya X-Ray Center Ltd v Commissioner of Domestic Taxes (supra), where it was held;“the Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner. The Respondent in this case could have used industry margins to determine the Appellant ‘s profits and subject that figure to the 30% and 16% taxes rather a topline of 30% and 16% on the bank deposits.”

146. In the case of Moses Kiarie Kuria v Commissioner (supra), the same holding was upheld.

147. The Tribunal guided by the aforecited cases has no reason to depart from the same in arriving at its decision, as the Respondent’s confirmed assessment heavily relied only on bank statements and disregarded the Appellant’s explanations and evidence on the respective credits, treating all the deposits and credits as taxable income. The consequence of the Respondent’s conduct would result in it collecting more than is due from the Appellant, which is an outcome the Tribunal does not want to perpetuate.

148. Accordingly, the Tribunal finds and holds that the Respondent was in error when estimating the Appellant’s taxable income and the resultant income tax on the Appellant, and thus not justified in confirming the assessments in its Objection Decision dated 23rd November 2023.

149. The upshot of the foregoing is that the Appellant’s Appeal is merited and hereby succeeds.

Final Determination 150. The Appellant’s Appeal having succeeded the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby allowed;b.The Respondent’s Objection Decision dated 23rd November 2023 be and is hereby set aside; and,c.Each party to bear their own costs.

151. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF JULY 2024ROBERT M. MUTUMACHAIRPERSONELISHAH N. NJERU MUTISO MAKAUMEMBER MEMBERBERNADETTE M. GITARI ABDULLAHI M. DIRIYEMEMBER MEMBER