[2025] KETAT 225 (KLR)

Kamau v Commissioner of Domestic Taxes (Tax Appeal E1052 of 2024) [2025] KETAT 225 (KLR) (Commercial and Tax) (21 May 2025) (Judgment)

Neutral citation: [2025] KETAT 225 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E1052 of 2024

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

May 21, 2025

Between

John Wainaina Kamau

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an individual registered taxpayer and trading as Johnsmart who is a reseller/broker in the business of fuel purchase and re-selling.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “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. Following investigations and compliance checks on Appellant’s tax affairs for the years 2020 and 2021, the Respondent shared preliminary findings with the Appellant on 13th February 2024.

4. On 28th June 2024, the Respondent vide i-Tax issued assessments amounting to Kshs 27,906,937. 00 in relation to corporation tax and VAT for the 2020 and 2021 years of income.

5. The Appellant lodged a notice of objection against the assessments on 4th July 2024 which was invalidated by the Respondent in an email of 12th July 2024 pursuant to Section 51(3) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).

6. In a letter dated 18th July 2024, the Appellant responded to the invalidation seeking extension of time to validate the objection and was given seven days by the Respondent within which to respond vide the electronic mail of 22nd July 2024.

7. In a letter dated 29th July 2024, the Appellant provided grounds of objection. The Respondent sustained its objection decision dated 13th August 2024 and confirmed the principal taxes amounting to Kshs 27,906,937. 00.

8. Aggrieved by the Respondent’s objection decision dated 13th August 2024 the Appellant filed a notice of appeal dated 9th September 2024 on even date.

The Appeal. 9. The Appellant’s case was anchored upon a Memorandum of Appeal dated and filed on 23rd September 2024 wherein the Appellant raised the following grounds:a.The entire additional assessment and objection issued by the Respondent was punitive and in bad faith despite all the efforts and evidence presented to the Respondent.b.The Respondent failed to consider any of the Appellant’s supportive documents and a decision was issued without considering the evidence presented.c.The Respondent’s objection decision was not in good faith despite a series of meetings with the Respondent and the Appellant trying to support their arguments and case with supporting documentation.d.The Respondent misdirected itself by completely disregarding nature of business conducted by the Appellant and understanding that most of the business is purely a margin business and VAT can only be levied on the margins as opposed to the revenue generated.e.The Respondent was completely out of order to disallow all expenses even though they were incurred genuinely as revenue expenses directly related to income tax generation hence disregarding Section 15 of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) in respect of expenses wholly and exclusively incurred in the production of income.f.The Respondent contravened Article 47 of the Constitution of Kenya, 2010(hereinafter “the Constitution”) and the Section [sic] ,provisions of the Fair Administrative Action Act, CAP 7L of the Laws of Kenya (hereinafter “FAAA”) by failing to give reasons for its decisions, failing to hear the Appellant’s submissions and by denying the Appellant a fair administration action.

Appellant’s Case. 10. The Appellant’s statement of facts were dated and filed on 23rd September 2024.

11. The Appellant stated that he was issued assessments on his i-Tax system without any explanation or the basis for the assessments. That he was later on presented an electronic mail explaining the background and basis of the assessments wherein the Respondent erroneously relied on information from Kenya Pipeline Corporation (KPC) to arrive at the assessments and confirmed the same via the objection decision of 13th August 2024.

12. The Appellant stated that Oil Marketing Companies (OMCs) obtain their allocations from KPC on a monthly basis and where they are unable to utilize their allocations, in order to avoid incurring demurrage charges, OMCs opt to offload their excess allocations by engaging Independent Petroleum Products Agents (IPPAs) to sell the excess allocations to small petrol stations. This reselling to small petrol stations is done at a margin/commission which is the difference between the official selling price and the discounted OMCs prices. Thus, IPPAs like the Appellant, are the middle-men between the OMCs and the small petrol stations.

13. The Appellant fashioned the following four issues as being in contention;

i. Whether the sales by OMCs to small petrol stations should be considered as the Appellant’s sales. 14. That the entire assessment and objection decision as issued was punitive and in bad faith despite the efforts and evidence presented to the Respondent since they were issued without first confirming the nature of business conducted by the Appellant and how recognition of its income is undertaken. It was this overlook that led to the Respondent maliciously and capriciously considered the entire OMCs sales to small petrol stations as belonging to the Appellant and proceeded to impose income tax and VAT.

15. It was the Appellant’s case that it is a mere middle-man earning a small margin/commission from the difference between the official selling price to small petrol stations and OMCs discounted prices as evidenced by attached margin summaries. Accordingly, charging of OMCs sales on the Appellant would amount to double taxation and contravention of Article 201(b) of the Constitution as there was no evidence that indeed OMCs claimed input VAT on sales made by the Appellant.

ii.Whether the erroneous data from KPC should be relied upon to arrive at the Appellant’s revenue. 16. The Appellant stated that the Respondent in the electronic mail requested data from OMCs and KPC to confirm purchases the Appellant made from them in years 2020 and 2021 and was shocked and appalled by Respondent’s action of relying on the KPC data as it was misleading and incorrect as evidenced by the email communication from an OMC to KPC condemning their action of sharing misleading information with the Respondent that could lead to incorrect assessments as the Appellant deals only with OMCs and not directly with KPC.

17. The Appellant further averred that the Respondent arbitrarily assumed a profit margin of 1% of the volumes yet it was not based on any benchmarking study or any basis thus ought not to be relied upon. That this was even proved by the Respondent’s notice of findings where a comparison between KPCs data, banking’s and declared turnover found KPC data being erroneous and misleading.

18. The Appellant stated that the Respondent proceeded to consider the highest sales turnover from KPC data as the Appellant’s expected sales which was a clear indication of Respondent’s malice and failure to consider Appellant’s business economic reality yet its bankings were clearly lower than KPC data and wondered where the Respondent expected the Appellant to get income to pay the excess fabricated taxes from.

19. The Appellant asserted that it earned income based on margins as indicated in the in a series of meetings and documents produced which the Respondent failed to consider thus, the objection decision was issued in bad faith in contravention of Article 47 of the Constitution by failing to issue a decision that was efficient, lawful, reasonable and procedurally fair.

iii.Whether there is personal income taxable arising from the analysis of KPC data and declarations per the income tax annual returns. 20. It was the Appellant’s case that the Respondent proceeded to charge income tax on the variance arising from the difference between bankings and declarations as indicated in the annual income returns. That the Respondent issued a punitive objection decision in bad faith despite all efforts and evidence presented in the course of audit and without first confirming and understanding the Appellant’s nature of business which is purely based on margins as opposed to revenue generated. Further, that the corporation tax was incorrectly charged on variance without considering corresponding expenses incurred to generate income. Moreover, that data collected from KPC could not be relied on 100% as it had a lot of inconsistencies.

iv. Rejection of expenses wholly and exclusively incurred in generation of income. 21. That the Appellant was entitled to the expenses incurred in generating income which related to purchase of petroleum products, transportation and storage. Therefore, the Respondent’s attempt to charge corporation tax on Appellant’s income without considering the corresponding expenses was illegal and incorrect since Section 15(1) of the ITA provides as follows:“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income….”

Appellant’s Prayer. 21. The Appellant’s made the following prayers to the Tribunal:a.That the Appeal be allowed;b.The Respondent’s decision dated 28th June demanding KES 27,906,937. 00 be annulled; andc.Any other such orders as to costs or otherwise as may be just.

The Respondent’s Case. 21. The Respondent replied to the Appeal through its Statement of Facts dated 6th November 2024 and filed on 7th November 2024.

22. According to the Respondent, upon investigations and compliance checks on Appellant’s purchases from various OMC’s, the Appellant was requested to avail purchase data and where the same was lacking the Respondent obtained the OMCs purchase data from KPC. The data was compared and a broker mark-up from a profit margin of Kshs. 0. 5 per litre was calculated and the resulting mark-up was then used to determine expected sales. The resulting sales were compared with Appellant’s declared sales and corporation tax and VAT was charged for the 2020 and 2021 years of income resulting in a tax demand of Kshs 27,906,837. 00

23. It was the Respondent’s case that the Appellant failed to discharge its burden of proof as couched under Section 56(1) of the TPA by availing supporting documentation and evidence to counter the assessments. The Respondent buttressed its position by relying on the following case law: Alfred Kioko Muteti vs Timothy Miheso & Another [2016]eKLR

Mulherin v Commissioner of Taxation (2013) FCAFC 115.

27. The Respondent held that as a result of lack of supporting documents, it was constrained to confirm the assessments as provided for under Section 24 of the TPA.

28. The Respondent asserted that despite allowing the Appellant’s request for extension of time to file documents, the Appellant only adduced as evidence three documents i.e. a letter dated 18th July 2024 requesting extension time, objection decision letter dated 29th July 2024 and an electronic mail communication from an OMC indicating KPC data was incorrect, none of which supported the Appellant’s grounds of earning income margins from buying and reselling petroleum products from OMCs to various petrol stations. Thus, the Appellant failed to provide sufficient evidence to support grounds of objection contrary to the provisions of Section 56(1) of the TPA leading to confirmation of the assessments as evidence adduced was insufficient to controvert the Respondent’s position.

29. That contrary to the averment that the Respondent failed to understand the Appellant’s nature of business, it was the Appellant who failed to adduce documents to enable the Respondent understand the nature of Appellant’s business as no other documents were presented to support margins and income earned in that particular industry. Additionally, no documents were presented to the Respondent to indicate expenses incurred during the period under review that ought to be considered in computation of final taxes since Section 15 of the ITA require expenses wholly and exclusively incurred in production of income can only be considered upon provision of sufficient evidence.

30. That contrary to Appellant’s claim that the Respondent contravened Article 47 of the Constitution and the FAAA in rendering its decision, it was the Respondent’s case that it gave reasons for declining the notice of objection by addressing specifically all the grounds raised therein by the Appellant in addition to informing the Appellant the reason for confirmation of the assessment as being failure to avail documents in support of the objection. That pursuant to Section 31(1)(b) and Section 29 of the TPA, the Respondent is empowered to amend an assessment based on available information and in its best judgment where documents are not availed as it had requested documents pursuant to Section 59 of the TPA and the same were not provided by the Appellant and relied on Section 24 of the TPA to buttress the following position:“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.”

27. The Respondent asserted that its assessments were justified and had the backing of the law that it was the Appellant who failed to discharge its burden of proof in rebutting the Respondent’s assessments as provided for under Section 56(1) of the TPA which provides that;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

27. The Respondent made the following prayers:i.That the Tribunal upholds and finds the decision issued on 13th August 2024 as proper; andii.That the Tribunal dismiss the Appeal with costs for lack of merit.

Parties’ Written Submissions. 27. Whereas the Appellant’s written submissions were dated 23rd April 2024 and filed on 24th April 2025, the Respondent did not file its written submissions as directed by the Tribunal on 24th April 2025.

28. In its submissions, the Appellant identified four issues as falling for determination as hereunder;

a.Whether sales by OMCs to small petrol stations should be considered as Appellant’s sales 27. It was the Appellant’s case that the Respondent erred in fact by raising and issuing an assessment and objection decision without first confirming the Appellant’s nature of business or how income was recognized when it maliciously and capriciously took the entire sale of the OMCs to the small station to be the Appellant’s sales and subjected the same to VAT and income tax. That this was punitive and in bad faith despite all the efforts and evidence presented to the Respondent.

28. The Appellant held that he was a mere middle-man between the OMCs and small petrol stations wherein he earns a small margin/commission from the difference between the official selling price to small petrol stations and the OMCs’ discounted prices as evidenced by the end-to-end transaction where the Appellant obtained products from an OMC and sold the same product to a small petrol station. Accordingly, the charging of the OMCs’ sales on the Appellant was a case of double taxation and was in contravention of Article 201 (b) of the Constitution and that there was no evidence that indeed the OMCs claimed input VAT on alleged sales made to the Appellant.

b. Whether the erroneous data from KPC should be relied upon to arrive at the Appellant’s revenue 27. According to the Appellant, in an electronic mail, the Respondent requested for data from OMCs and KPC to confirm the purchases made by the Appellant for the years 2020 and 2021, but that the Appellant was shocked and appalled by the Respondent’s action of relying on KPC data since it was misleading and incorrect as even one OMC (Rubis) wrote to KPC to condemn their action of sharing the misleading information which could lead to incorrect assessments.

28. The Appellant insisted that he does not in any way deal with KPC but instead, deals with OMCs. That this was a fact proven by the Respondent’s own notice of findings comparison between the KPC’s data, bankings and declared turnover which was a clear indication that KPC data was erroneous and misleading but the Respondent’s malice meant that it failed to consider the economic reality of Appellant’s business and there was no way the Appellant would realistically pay taxes raised from the excess fabricated income.

29. That apart from using the erroneous data from KPC, the Respondent arbitrarily assumed the Appellant’s margin of 1% of the volumes it makes which was not based on any benchmarking study or any basis and it should not be relied upon. In evidence, the Appellant adduced a letter from Towba Petroleum Company Limited describing and detailing how it earns margins per volume of petroleum products sold.

30. The Appellant submitted that the Respondent erred in law and fact by failing to recognize and appreciate the Appellant’s explanations and documentation while issuing the objection decision in contravention of Article 47 of the Constitution.

c. Whether there is personal income tax payable arising from the analysis of KPC data and declarations per the income tax annual tax returns 27. The Appellant averred that data collected from KPC could not be relied on 100% due to inconsistences and that the Respondent raised and issued an assessment and objection decision that was punitive and in bad faith when it compared the value arising from the banking’s to the declarations per the income annual returns and charged income tax on the variance.

28. That all this was done without first confirming and understanding the nature of business conducted by the Appellant whose business is purely a margin business and VAT can only be levied on the margin as opposed to the revenue generated. Further, that corporation tax was levied on the variance without considering the corresponding expenses incurred to generate such income.

d.Rejection of expenses wholly and exclusively incurred in generation of income 27. It was the Appellant’s case that the Respondent illegally and incorrectly charged Income Tax on the income without considering the corresponding expenses incurred to generate the alleged income contrary to Section 15(1) of the ITA yet the Appellant is entitled to claim such expenses incurred in the production of the income.

Issues For Determination. 27. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions adduced before it notes that three issues distill for determination as follows;i.Whether OMCs sales can be construed to be Appellant’s sales.ii.Whether the Respondent erred by assigning a 1% margin on Appellant’s sales volume.iii.Whether the Respondent’s objection decision dated 13th August 2024 was justified

Analysis And Findings. 27. The Tribunal having established three issues for determination will proceed to analyze them as follows:

i.Whether OMCs sales can be construed to be Appellant’s sales. 27. The genesis of the instant dispute was a petroleum industry compliance check by the Respondent on the KPC, Nakuru where investigations against the Appellant’s corporation tax and VAT established that between 2020 and 2022 the Appellant drew fuel from KPC using the account of Johnsmart as a reseller/broker. The Appellant was required to avail purchase data for Johnsmart from various OMCs, thereafter he was issued with assessments on his iTax system without any explanation or the basis for the assessments.

28. The Tribunal notes that on one hand, the Appellant’s contention was that the Respondent erroneously relied on information from KPC to arrive at the assessments. On the other hand, the Respondent stated that upon investigations and compliance checks the Appellant was requested to avail purchase data from OMCs and where data was lacking, the Respondent used purchase data from KPC. That upon comparison of this data with Appellant's declared sales, corporation tax and VAT was charged for the 2020 and 2021 years of income after assigning a mark-up.

29. The Tribunal notes that while the Appellant held that as a mere middle-man earning a margin, it was wrong for the Respondent to consider the entire OMCs sales to small petrol stations as belonging to the Appellant and proceeding to impose income tax and VAT.

30. From the foregoing, the Tribunal observes that the Appellant as an IPPA gets allocation from OMCs who offload such excess allocations when unable to utilize them. It is IPPAs, such as the Appellant, who in turn resell the petroleum products to small petrol stations at a margin or commission. This margin or commission is the difference between the official selling price and the discounted OMCs prices.

31. The Tribunal finds and holds that OMCs sales are not construed to be the Appellant’s sales.

ii.Whether the Respondent erred by assigning a 1% margin on Appellant’s sales volume. 27. The Tribunal notes that the Appellant contested the Respondent’s action of relying on the KPC data stating that it was misleading and incorrect and that even an OMC(Rubis) agreed with the Appellant that the data could not relied upon to while making an assessment against the Appellant since the Appellant never directly bought petroleum products from KPC. Further, the Appellant stated that even his bankings were clearly lower than what KPC data. This was in contrast to the Respondent’s assertion that the Appellant failed to discharge its burden availing supporting documentation and evidence to counter the assessments.

28. The Tribunal notes the Appellant’s apprehension that the Respondent proceeded to charge income tax on the variance arising from the difference between bankings and declarations per annual income returns even without first confirming and understanding the Appellant’s nature of business which is purely based on margins as opposed to revenue generated. This was countered by the Respondent who stated that it was the Appellant who failed to adduce documents to enable the Respondent understand the nature of Appellant’s business as no other documents were presented to support margins and income earned in that particular industry.

29. The Tribunal notes that the Judge in the locus classicus case of Cape Brandy Syndicate vs Inland Revenue Commissioner (1920)1 KB held as follows:“In a taxing statute one has to look at merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.

27. Further in Republic -vs- KRA (exparte J. Mohamed) Civil Application Number 312 of 2011 the Courts held as follows:“Whereas this Court is not entitled to question the merits of the decision of the taxing authority, that authority must exercise its powers fairly and there ought to be a best exercise of such powers. A taxing Authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such an action be would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court intervening.”

27. The Tribunal reiterates that in taxing, the Respondent ought to explain and provide basis of assessments and while at it afford the Appellant an opportunity to explain their position. In the instant matter, the Respondent has not demonstrated to the Tribunal how it arrived at the mark-up used and why that particular mark-up and not any other. The moment the Appellant availed his mark-ups was the moment the pendulum swung in the Respondent’s direction to discredit why they were wrong.

28. The Tribunal notes the Appellant’s contention that the Respondent charged tax without factoring expenses wholly and exclusively incurred in generation of income yet the Appellant was entitled to the same by law. On its part, the Respondent held that the Appellant only adduced in evidence three documents despite being granted additional time to file additional documents. The Tribunal was not afforded cogent reasons why the Respondent would opt to charge tax without factoring in expenses incurred in production of that income.

29. Accordingly, the Tribunal finds that the Respondent erred in assigning a 1% margin of Appellant’s sales volumes.

iii.Whether the Respondent’s objection decision dated 13th August 2024 was justified. 27. Obtaining from the foregoing analysis, the Tribunal finds that the Respondent’s objection decision dated 13th August 2024 was not justified in the circumstances.

Final Decision. 27. The upshot of the foregoing is that the Appeal herein is meritorious and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 13th August 2024 be and is hereby set aside.c.Each party to bear its own costs.

It is so Ordered.DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF MAY 2025. CHRISTINE A. MUGA - CHAIRPERSONELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER