[2024] KETAT 435 (KLR)

Kamkam Company Ltd v Commissioner of Domestic Taxes (Tax Appeal 20 of 2023) [2024] KETAT 435 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 435 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 20 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

March 22, 2024

Between

Kamkam Company Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal activity is general supplies.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. 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 function under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Respondent raised additional assessment to the Appellant on 13th March, 2021 for VAT for the month of June 2018 for Kshs 737,311. 11 inclusive of interest and penalties.

4. The Appellant lodged an objection on 7th April 2021 and 13th April 2021 through iTax.

5. The Respondent vide an email correspondence of 25th November, 2022 requested for additional documents to be provided by 6th December, 2022.

6. The Respondent then issued its objection decision vide its letter dated 7th December, 2022 confirming the assessment.

7. Aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal dated 6th January 2023 which was received on 10th January, 2023.

The Appeal 8. The Appellant is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 9th January, 2023 and filed on 10th January 2023:a.That the Respondent erred in its decision to issue the Appellant with an additional assessment in respect of VAT for the period June 2018. The assessment was based on a variance between income declared in respect of VAT and Corporation tax. The Appellant has always been under the impression that the accountant has been filing returns as required.b.That the Appellant’s accountant raised an objection after reconciliations and amending the Income tax return. The basis of the assessment was non-income and hence should not have been charged to VAT.

The Appellant’s Case 9. In its Statement of Facts dated 9th January, 2023 and filed on 10th January 2023, the Appellant stated that its directors learnt about the variances only after the assessment was raised. It therefore reviewed the assessment and carried out a reconciliation of the incomes and initiated amendment of the income tax return and thereafter objected to the assessment.

10. It stated that the income so charged was erroneously treated as business income and should not have been assessed as the reconciliation reduced the variance to NIL. It therefore prayed that the June 2018 VAT additional assessment be vacated in full.

The Respondent’s Case 11. The Respondent’s Statement of Facts dated 7th February, 2023 and filed on even date addressed the Appellant’s grounds of Appeal.

12. In response to ground (a) of the Appeal, the Respondent averred that assessments were correctly issued and conformed to the Value Added Tax ActNo. 35 of 2013 (hereinafter ‘VAT Act’) and that the Appellant failed to provide any evidence that would have altered the assessment. It argued that as per Section 56(1) of the Tax Procedures Act No. 29 of 2015 (hereinafter‘TPA’), the onus of proof in tax objections lies with the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

13. In further response to ground (a) of the Appeal, the Respondent asserted that the Appellant lodged the objection on iTax which the Respondent treated as invalidly lodged as it did not have grounds of objection. It further argued that it is empowered under the TPA to notify a party where an objection as lodged is invalid. It stated that it notified the Appellant and requested it to provide documents in support. However, the Appellant failed to provide the documents as requested contrary to Section 51(2) (3) of TPA.

14. In response to ground (b) of the Appeal and paragraphs 4 and 5 of the Appellant’s Statement of Facts, the Respondent stated that it requested the Appellant to file all necessary returns and pay what was due as per its self-assessment. However, it stated that the Appellant was uncooperative in the provisions of relevant records and failed to respond to request for documents hence no relevant documents or records were provided to support its objection. As a result, the Respondent arrived at the assessment amount based on available information and its best judgement.

15. It averred that it carried out an in- depth examination of records where it established inconsistencies in returns filed by suppliers and the invoices claimed by the Appellant which created a variance between the income tax returns and the VAT returns which the Appellant failed to explain hence the same was disallowed and additional assessments carried out.

16. The Respondent averred that the Appellant was identified for a return review following a variance from the analysis of its returns in VAT. It therefore disallowed the direct purchase amount in the Appellant’s income tax return and instead relied on the invoice value as used in determination of VAT payable as the true direct purchase cost. It stated that it provided a precise and clear breakdown in the objection of the decision of the working used to reach the assessment.

17. The Respondent contended that not all income earned by the Appellant was declared hence the variances were brought to charge. Further, that it is empowered under Section 31 of TPA to make alterations or additions to an original assessment and that Section 17 of the VAT Act also empowers it to disallow such input VAT where the necessary documents are not provided.

18. The Respondent asserted that an examination of the Appellant’s records established that the Appellant earned income from construction business during the period under audit, however these incomes were not declared for tax purposes for the year earned. The Respondent therefore, refuted the Appellant’s claim that it had paid all its tax dues and reiterated that because of its under declaration, the Appellant owed Kshs 737, 311. 11 in taxes.

19. The Respondent prayed that the Tribunal considers the case and find that;a.The its objection decision be upheld.b.The outstanding tax arrears of Kshs 737, 311. 11 are due and payable by the Appellant.c.The confirmed assessments dated 17th March, 2021 were proper in law.d.The Appeal herein be dismissed with costs to the Respondent.

Submissions Of The Parties 20. The Appellant’s Written Submissions dated 30th July 2023 raised the following two issues for determination which it chose to address in general:a.Whether the Respondent erred in confirming the assessment before consideration all information availed.b.Whether the Respondent erred by issuing the objection decision contrary to Section 51(II) of the TPA.

21. The Appellant submitted that there was no such variance in income tax returns and VAT returns as alleged by the Respondent and that its allegation that the Appellant did not provide documents was unreasonable. It submitted that as per Section 73(2) of the Income Tax Act, CAP 470 of the laws of Kenya (hereinafter ‘ITA’) the Respondent is required to act reasonably and to the best of its judgement; which it failed to do in this case. It therefore urged the Tribunal to find that the Respondent’s assessment offends the fundamental principle of certainty of tax statutes.

22. The Appellant relied on the decision of the Tribunal in the case of Tax Appeal No.136 of 2017 Dominion Petroleum Kenya Ltd vs Commissioner of Domestic taxes where the Tribunal acknowledged the importance of recognising the nature of a business transaction.

23. The Appellant submitted that the Respondent issued its objection decision outside the stipulated timeline contrary to Section 51(11) of the TPA hence the Appellant’s objection stood allowed by the operation of the law.

24. It submitted further that it had a right to be heard and given a chance to defend itself against the disputed demands raised by the Respondent and that it did so by lodging an objection as its first course of action. However, without recourse to the law and with apparent impunity, the Respondent flouted the provisions of the law by ignoring the proper procedure provided therein.

25. It submitted further that there was no explanation from the Respondent as to why it ignored the provisions of Section 51(II) of TPA and it urged the Tribunal to find that the Respondent’s actions were unjustified and improper in law.

26. The Appellant relied on the following cases that addressed the importance of respecting statute in as far as timelines are concerned: -a.Kenya Farmers Association Ltd vs Commissioner of Domestic Taxes – Tax Appeal No. 695 of 2022b.Holwadhe Investments Ltd vs Commissioner of Domestic Taxes Tax Appeal No 947 of 2022. c.Equity Holdings Ltd vs Commissioner of Domestic Taxes Civil Appeal E069 & E025 of 2020(2021) KEHC 25(KLR).d.Total Kenya Ltd vs Kenya Revenue Authority Barclays Bank of Kenya Ltd & 2 others (2020) Eklr.

27. It was the Appellant’s submission that it provided the Respondent with all the documents as requested and explanations as to its tax position which the Respondent neither disputed nor challenged the veracity of the documents it provided in support of its objection and the Appeal herein.

28. It asserted that it discharged its burden of proof as per Section 56(1) of the TPA by putting forth relevant facts, circumstances and documents in support of its objection and the Appeal herein and as such the burden shifted to the Respondent to rebut the evidence put forward by the Appellant.

29. The Appellant asserted that it provided sufficient evidence in form of documentation in support of its averments that the assessments were wrong. It therefore urged the Tribunal to find that the Respondent was not justified in confirming the assessments through its objection decision dated 7th December, 2022.

30. To buttress its arguments, the Appellant relied on the following cases;a.Traneshvi Ltd vs Commissioner of Domestic Taxes Tax Appeals No.499 of 2022. b.Viraj Development Ltd vs Commissioner of Investigations and enforcementb.Mbuthia Macharia vs Annah Mutua Ndwiga & Another civil Appeal No 297 of 2015 eKLR.

31. The Respondent’s Written Submissions dated and filed on 4th July 2023 raised three issues for determination which it submitted on in general:a.Whether the Respondent took consideration all additional information availed before making the decision.b.Whether the Respondent erred by raising an assessment for the period of VAT year June 2018. c.Whether the assessments issued were excessive.

32. The Respondent submitted that the assessments were correctly issued and conformed to the ITA and further that the TPA places the onus of proof in tax objections on the taxpayer pursuant to Section 56(1) of the TPA. It argued that in this case the Appellant failed to avail evidence that would have guided the Respondent at arriving at a different objection decision.

33. It averred that the assessments were issued and conform to the TPA as the Appellant’s objection which was lodged on iTax was received and acknowledged.

34. Further that it is empowered by statute to notify a party where an objection as lodged is invalid. It contended that the Appellant was notified via email and requested to provide documents arguing further that there was no evidence that was provided to address issues raised hence the said assessment was confirmed vide objection decision.

35. The Respondent submitted that all of the Appellant’s submissions in interviews, review meeting, site inspections, document verification meeting and documentations provided were taken into consideration before issuance of the objection decision.

36. It was the Respondent’s submission that the Appellant had underdeclared income earned by not disclosing all the income earned. It averred that the Appellant filed all necessary returns and paid what it had assessed itself to be payable.

37. It averred however, that the Appellant was uncooperative in the provisions of relevant records and failed to respond to request for documents hence no relevant documents or records were provided to support its objection. As such the assessments were made based on the only available information and based on the Respondent’s best judgement.

38. The Respondent asserted that it is empowered under Section 59(1) of the TPA to request for production of such documents through issuance of notice as deemed necessary in determination of tax liability.

39. The Respondent averred that the assessment was issued based on the information provided and in light of the inconsistencies within the

Appellant’s VAT ledgers. 40. It argued further that it is empowered under Section 31 of the TPA to make alterations or additions to an original assessment from available information for a reporting period based on its best judgement.

41. The Respondent submitted that the Appellant under declared the income for the period under review contrary to the provisions of the Section 54A(1) and 55(2) of the ITA which places the responsibility of any person carrying on business to maintain records of all transactions.

42. The Respondent asserted that an examination of the Appellant’s records established that the Appellant earned from supply business in the period under audit, however, these incomes were not declared for tax purposes for the year earned. It argued that this was in contravention of the TPA which required such documents to be maintained for purposes of taxation.

43. The Respondent contended that the alleged expenses made in cash could not be traced to any payments from the bank statements. Therefore, the Respondent concluded that the Appellant had over claimed expenses so that it can reduce tax payable. It argued that as per Section 97 of the TPA, providing false or misleading information during a tax period is an offence under the Act.

44. The Respondent asserted that the Appellant failed to provide signed financial statements and books of accounts to support its allegations. It therefore submitted that the Appellant knowingly and recklessly committed an offence as per Sections 94 and 95 of the TPA.

45. The Respondent asserted that the Appellant supplied insufficient documents and that in the self-assessment regime it facilitates taxpayers and only verifies information when in doubt of the declarations made in the tax returns. It argued further that it deals with each taxpayer’s matter independently and based on available information.

46. The Respondent submitted that Section 23(1) of the TPA obligates a taxpayer to maintain any document required under a tax law to enable the person’s tax liability to be readily ascertained. It averred that the Appellant’s objection was devoid of substance and failed to include any supporting records to validate the Appellant’s claim as required under Section 51 of the TPA. It was therefore left with no option but to issue an objection decision confirming the assessment pursuant to Section 51 (9) of the TPA in order to comply with the timelines.

47. The Respondent asserted that it is trite law that he who alleges must prove and the Appellant similarly failed to prove the expenses incurred thus rightfully disallowed by the Respondent. It reiterated that the Appellant failed to provide evidence to discredit the assessments by the Respondent and thus the same ought to be deemed correct and proper in law.

48. It was the Respondent's submission that in light of the various cases on the burden of proof, it averred that it did not err in invalidating the Appellant’s objection and issuing a decision as the Appellant had failed to discharge its burden of proof and challenge the Respondent’s assessment with unchallenged and contradicted evidence to prove the incorrectness of the tax assessments.

49. To buttress its arguments, the Respondent relied on the following cases:a.Monaco Company Ltd vs Commissioner of Domestic Tax-TAT Appeal No. 67 of 2017. b.Osho Drappers Ltd vs Commissioner of Domestic Taxes TAT No.159 of 2018. c.Ritz Enterprises ltd vs Commissioner of Investigations & Enforcement TAT No 227 of 2018. d.Kenya Revenue Authority vs Man Diesel & Turbo Se, Kenya (2021) eKLR.d.Janet Kaphiphe Ouma and another vs Marie Stopes International (Kenya) HCC No 68 of 2007. d.Dyer and Dyer Limited vs Commissioner of Domestic Taxes TAT 139 of 2020. d.Commissioner of Domestic Taxes vs Metoxide Ltd (2021).

Issues For Determination 50. The Tribunal has considered the parties pleadings, documentation availed and the submissions and is of the view that this Appeal raises two issues for determination as follows:a.Whether the Respondent’s objection decision dated 7th December, 2022 is valid.b.Whether the additional tax as assessed is due and payable.

Analysis And Findings 51. Having identified two (2) issues for determination, the Tribunal will proceed to analyse the same hereinunder.

Whether the Respondent’s objection decision dated 7th December, 2022 is valid. 52. The Appellant had argued that the Respondent had issued its objection decision outside the stipulated timeline contrary to Section 51(11) of the TPA hence its objection stood allowed by operation of the law. The Respondent did not rebut the Appellant’s assertion, however it argued that the Appellant failed to provide relevant documentation to support its objection.

53. From the documentation availed which the Tribunal has carefully perused, the Respondent raised an additional assessment on 13th March 2021 which the Appellant objected through its letter dated 7th April 2021, and also through iTax on 13th April, 2021 both dates within the statutory timelines as stipulated under Section 51(1) and (2) of the TPA which provides as follows:“(1)A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any written law.(2)A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, to the Commissioner within thirty days of being notified of the decision.”

54. The Respondent, vide an electronic mail of 25th November, 2022 referred to the Appellant’s objection and requested the Appellant to provide supporting documents in seven (7) days for review of the Appellant’s pending objection. The said documents were to be provided on or before 6th December, 2022. The Respondent then issued its objection decision on 7th December, 2022.

55. Section 51(11) of the TPA guides on the timelines within which the Respondent should make an objection decision. It provides as follows:“The Commissioner shall make the objections decision within sixty days from the date of receipt of -(a)a notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed”

56. The Tribunal notes that the time between the date of the Appellant’s notice of objection on 7th April 2021 and the next communication from the Respondent through an email of 7th November, 2022 asking for supporting documents was about nineteen (19) months which is unreasonably long and way outside the timelines provided for under Section 51 (11) of the TPA hence deemed allowed by operation of the law.

57. The Tribunal is guided by the holding in the case of Republic vs Commissioner for Domestic Taxes Judicial Review Application No.152 of 2019 Ex-parte Fluer Investments where Mativo J. held as thus: - “By virtue of the clear provisions of Section 51 (8) and (II) of the TPA, the Respondent is deemed to have allowed the Appellant’s objection. I find backing in Republic vs Commissioner of Customs Services Ex-parte Unilever Kenya Limited in which the court stated that if the Commissioner does not render a decision within the stipulated period, the objection is deemed allowed by operation of the law. The Act requires that where the Commissioner has not made an objection Decision within 60 days from the date the taxpayer lodged the Notice of objection, the objection shall be allowed. This means that the issue the taxpayer has raised in the notice of objection will be accepted. In the case of a tax assessment, it will be vacated. On this ground alone the applicant’s application succeeds.”

58. In view of the foregoing, the Tribunal finds that the Respondent’s objection decision dated 7th December, 2022 was issued outside the statutory timelines hence rendered invalid.

Whether the additional tax as assessed is due and payable. 59. Having determined that the Respondent’s objection decision was invalid, the Tribunal finds that the additional tax as assessed was not due and payable as the objection had been allowed by operation of the law.

Final Decision 60. The upshot of the above is that the Appeal is meritorious and the Tribunal proceeds to make the following final Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 7th December, 2022 be and is hereby set aside.c.Each party to bear its own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K NGALA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE - MEMBER