[2024] KETAT 1579 (KLR)

Kamunya v Commissioner of Domestic Taxes (Tax Appeal E865 of 2023) [2024] KETAT 1579 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1579 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E865 of 2023

Grace Mukuha, Chair, E Komolo, GA Kashindi & AM Diriye, Members

November 22, 2024

Between

Peter Waruinge Kamunya

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered resident taxpayer and carrying on business as a sole proprietor.

2. The Respondent is an officer appointed under Section 13 of the Kenya Revenue Authority Act (Cap. 469). Under Section 5 (1) of the said Act, the Respondent is an agency of the government for the collection and receipt of all revenue.

3. On 24th April, 2021, the Respondent issued assessment orders on account of outstanding income tax and VAT for the period 2018 to 2022 against the Appellant for Kshs. 41,917,540. 00 inclusive of penalties and interests.

4. On 5th September, 2023, the Appellant lodged late notices of objection against the Respondent’s assessment orders citing ground of sickness.

5. On 2nd November, 2023, the Respondent issued its Objection Decision and confirmed its assessments of the Appellant of Kshs. 39,871,122. 21 inclusive of penalties and interests.

6. Aggrieved, the Appellant lodged this appeal vide Notice of Appeal dated 16th November, 2023 and filed on 30th November, 2023.

The Appeal 7. The Appeal is premised on the Appellant’s Memorandum of Appeal filed on 4th December, 2023 stating the following grounds: -i.That the Respondent’s Objection Decision dated 2nd November, 2023 failed to take cognizance of the fact that the Appellant’s income was largely derived from farming activities, which are exempt services as per First Schedule to VAT Act No. 35 of 2013 (as revised in 2018).ii.That the Respondent’s Objection Decision failed to consider that income generated and evidenced by pay bill transactions were derived from multiple sources including exempt supplies, and it is thus unreasonable to deduce that gross receipts as per Mpesa statements were vatable at VAT rate of 16 per cent.iii.That the Respondent’s Objection Decision was made in haste and is doubtful as it exhibits disparity between number of years considered to arrive at the additional tax and VAT head and year 2022 was not factored in despite being objected to.iv.That the Respondent was unfair to decline to issue an amended Objection Decision based on factual and supportive documentation because of spelling error in the Appellant’s last name, as the first and second name are sufficient and reliable to identify the Appellant. Misspelling of a single letter in the Appellant’s name is not materially important to warrant disregarding that the Appellant is indeed in the business of farming.v.That it is a fallacy to issue an Objection Decision which is not consistent with the underlying documentation, Mpesa statements, farming invoices and audited financial statements.vi.That the Respondent’s initial assessment assumed that whatever transaction recorded in the credit entry in the Mpesa statement is vatable and chargeable as the relevant tax obligations.vii.That the Respondent’s Objection Decision did not take into consideration the fact that cash in and cash out in the certified Mpesa statement were variant.viii.That Respondent’s decision is unreasonable as it is based on estimated assessment to determine tax payable whilst giving generalized allowable expenses level of 70 per cent, which is not factual and reasonable.ix.That the Appellant is willing to pay principal tax of Kshs. 1,977,923. 00 under VAT tax head, which is not in dispute.x.That the Appellant is willing to pay tax not in dispute and which has been properly determined as per Income Tax Act.

The Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Appellant’s Statement of Facts dated 17th November, 2023.

9. The Appellant averred that the Respondent’s action to reject his objection is contrary to the First Schedule to VAT Act No. 35 of 2013 (as revised in 2018), as the Appellant is a farmer offering exempt business, which constitute 90 per cent of his business, the balance of which being distribution of beverages that is vatable at the rate of 16 percent.

10. The Appellant stated that the assumption by the Respondent that monies received and paid as per certified Mpesa statements for the period 2018 to 2022 is incorrect, as the same may not necessarily be considered as income without carrying out some adjustments that could be necessary.

11. The Appellant further averred that the Respondent failed to consider that in this era and especially Mpesa transactions have greatly diluted conventional use of physical supporting documentation or receipts, and thus the narrative and nature of business/payee is sufficient evidence as to the nature and reasons why payments are made.

12. The Appellant contended that Respondent’s decision is inaccurate and unreasonable as it is based on estimated income that are subjective and is thus a loose wild goose chase, and the same cannot be regarded as income in the strict sense of relevant provisions of the Income Tax Act.

13. It is the Appellant’s averment that the total taxable income used by the Respondent to compute tax payable did not take into consideration deductions allowed, which is contrary to Income Tax Act as the Appellant, upon receipt of the notification of additional tax, provided audited financial statements to authenticate both income earned and expenses that were wholly and exclusively incurred to generate such revenue. The Appellant has never received any other correspondences to suggest anything to the extent that the income/expenses so disclosed are not consistent with the nature of business or that they were not correct.

14. The Appellant contended that he filed nil returns due to some technical issue that occasioned the delays to finalize the conclusion of financial statements for the financial income under review. The Respondent then raised additional assessments, which inhibited the Appellant to file amended returns to his earlier nil returns, and the same was overtaken by the action of the Respondent when it rejected the Appellant’s objection and confirmed additional tax.

15. In conclusion, the Appellant averred that he had attached all necessary documentary evidence in support of his prayer and as a proof that the additional tax confirmed is excessive, punitive, and unreasonable as the same was determined using methodologies that are pegged on estimate and assumption that are highly subjective as no business could generate income without incurring costs incidental to the income.

Appellant’s Prayers 16. The Appellant prayed to the Tribunal for the following order(s): -a.That the Appeal be allowed.

The Respondent’s Case 17. The Respondent’s case is premised on the following document(s) filed before the Tribunal: -a.Respondent’s Statement of Facts dated 23rd April, 2024 and filed on 24th April, 2024. b.Respondent’s Written Submissions dated 15th July, 2024 and filed on 22nd July, 2024. c.Respondent’s Notice of Preliminary Objection dated 29th December, 2023 and filed on 2nd January, 2024.

18. The Respondent averred that on or about March 2023, it carried out an audit of the Appellant for the period 1st January, 2018 to 28th February, 2023 seeking to verify the correctness of reported values in light of completeness of income.

19. It is the Respondent’s contention that it did the audit based on intelligence report which indicated that: -a.The Appellant may be involved in smuggling and distribution of ethanol and counterfeit alcoholic beverages.b.The Appellant did not necessarily declare any income for the period under review since he was filing nil returns.c.In the period 2018 to 2022, there were variances between the turnover established as per the Appellant’s Mpesa statements on his registered mobile number and the two Safaricom till numbers registered to the Appellant’s business as compared to the income tax and VAT returns filed by the Appellant; andd.The estimated income was Kshs. 160, 897, 732 with possible tax liability of Kshs. 34,256,811 for both income tax and VAT.

20. The Respondent averred that to facilitate the audit, the Respondent requested the Appellant to provide documents for the period under review including bank statements, MPESA and till number statements, purchases data amongst other information.

21. The Respondent stated that it further carried out compliance checks on the Appellant with a view of establishing whether the Appellant was filing tax returns for income tax and VAT, declaring his income, and paying the resultant taxes therefrom.

22. The Respondent averred that in carrying out the audit, it did the following test and analysis: -a.Income Tax – The Respondent compared the income reported in the Appellant’s income tax returns with the deposits in the Appellant’s Mpesa statements and till number statements in the Respondent’s possession.b.VAT – The Respondent compared the sales reported in the VAT tax returns with the Appellant’s deposits in his Mpesa statements and till number statements in the Respondent’s possession.

23. It is the Respondent’s contention that despite several requests and reminders, the Appellant failed to provide necessary records for verification. Therefore, the Respondent proceeded to do audit based on the information available at its disposal including Safaricom mobile number +254 724807161 Mpesa statements, Safaricom till numbers 7415814 and 307883 Mpesa statements, data from Kenya Power and Lighting Company (KPLC), data from National Transport and Safety Authority (NTSA) and Appellant’s tax returns.

24. The Respondent stated that from the audit and verification of sales, it made the following findings: -a.The iTax System shows that the Appellant has been declaring no income in his income tax returns for the years 2018 to 2022 by filing nil income;b.The iTax System further showed that the Appellant has been declaring no sales in his VAT tax returns for the tax periods January 2020 to July 2022 by filing nil returns;c.The Appellant is not registered for Income Tax Pay as You Earn (PAYE);d.The KPLC data disclosed that the Appellant is registered with three meter numbers at Kianwe and Subukia Centre in Nakuru and its environs;e.The NTSA data and records show that the Appellant has five motor vehicles registered under his name comprising of two trucks, one pick-up truck, station wagon and a motor cycle;f.Despite having total deposits amounting to Kshs. 160,897,732. 00 in the period 2018 to 2022 in the Appellant’s Safaricom mobile phone number (+254724807161) Mpesa statements and Safaricom till numbers 7415814 and 307883 Mpesa statements, the Appellant declared nil income;g.The MPESA statements’ transactions were mainly credited through mobile money transfers, mobile money pay bill payments and cash deposits;h.The Respondent has good reasons to believe that these deposits are income derived from the Appellant’s businesses;i.The Appellant had unpaid tax arrears of Kshs. 1,000 and Kshs. 2,000 for tax periods 2015 and 2017 respectively; andj.The Respondent thus proposed to bring the underdeclared income to charge.

25. The Respondent stated that upon conclusion of the audit, it issued the Appellant with Preliminary Tax Findings Notice of Kshs. 53,445,745. 00 on 14th April, 2023 for both income tax and VAT for tax periods 2018 to 2023, and there was no further response from the Appellant.

26. The Respondent further stated that it gave the Appellant seven (7) days from the date of the Notice to respond to the tax findings and provide supporting documents, failure to which tax assessment will be raised, and the Appellant neither responded to the findings nor provided any document to support or dispute the Respondent’s findings.

27. It is the Respondent’s contention that it consequently issued the assessment on 24th April, 2023 as per preliminary findings and assessed the Appellant at Kshs. 41, 917, 540. 00 for the period 2018 to 2022 based on the information gathered and available at the Respondent’s possession.

28. The Respondent averred that the Appellant lodged late Notices of Objection, but did not state precise grounds of objection and proposed amendments to correct the Respondent’s decision, and that the objections were not accompanied by documents in support of the same.

29. That in subsequent correspondences and engagement with the Respondent, however, the Appellant provided documents including: -a.Mpesa income and expenses schedules;b.Expense receipts from various alcoholic beverage distributors;c.Financial statements for the years 2019, 2020, 2021 and 2022;d.Lease agreements;e.Copies of the IDs of casual labourers;f.Google farm coordinates of the leased plots; andg.Supplier statement and invoices from Plantech for seedlings and propagation services.

30. That the Respondent thus validated the Appellant’s Notice of Objection based on the documents provided. However, the Respondent noted that the records provided and information therein were not sufficient to address all the issues raised by the Respondent in the assessment. Consequently, the Respondent reviewed Appellant’s Notice of Objection and supporting documents and rendered its Objection Decision on 2nd November, 2023.

31. That the Appellant’s allegation that his income was largely from farming activities or that they were exempt services is not fully supported by evidence.

32. That the evidence provided information including Google farm coordinates of the leased plots and suppliers’ statements and invoices from Plantech for seedlings and propagation services did not sufficiently prove that the Appellant was solely engaged in farming activities. The Appellant was engaged in other businesses including sale of alcoholic drinks, which attracts both income tax and VAT.

33. That indeed the Respondent himself, during objection review, provided transaction documents including suppliers’ receipts for alcoholic and non-alcoholic beverages from various EABL distributors.

34. That the Appellant availed financial statements, but the statements were not supported by evidence to prove entries therein.

35. That while the financial statements allude to farming income as the sole source of the Mpesa credits, the purchase receipts provided support trading in both alcoholic and non-alcoholic beverages.

36. That in the absence of sufficient supporting documents, the Respondent was not in a position to demarcate with certainty how much was farming income or exempt services/income and other business income.

37. That the Respondent cannot be faulted for the Appellant’s failure to support his grounds with sufficient credible and reliable evidence to rebut the Respondent’s assessment.

38. That the Respondent is not bound by the Appellant’s tax returns or information provided by, or on behalf of the Appellant and the Respondent may assess the Appellant’s tax liability using any information available to Respondent.

39. That under Section 31(1) of the Tax Procedures Act, 2015, the Respondent may amend the Appellant’s tax assessment by making alterations or additions based on the available information and to the best of her judgment to ensure that the Appellant is liable for the correct amount of tax payable.

40. That the Respondent requested the Appellant to provide eleven (11) sets of documents on 17th March, 2023, which the Appellant did not provide even at the appeal stage. The documents requested and not provided include: -a.Sales and purchases invoices and payment vouchers.b.Sales and purchases schedules.c.VAT register/spreadsheets.d.VAT control account.e.ETR-Z reports.f.Asset schedule.g.Bank accounts statements, andh.Cash books and petty cash books.

41. That the Respondent further requested these documentations under Section 59 of the Tax Procedures Act, 2015, a law which obligates the Appellant to provide the documents to aid the Respondent’s tax audit.

42. That under Section 43 of Value Added Tax Act 2013 and Section 23 of the Tax Procedures Act, 2015, the Appellant is required to maintain and keep the requested records and avail them to the Respondent whenever required.

43. That the Appellant failed to provide these documentations and he not only failed to discharge his statutory obligations but also limited the information and documentation which the Respondent would have relied on in determining his tax liability.

44. That it is for this reason that the Respondent exercised its discretion, invoked the provisions of Section 31(1) of the Tax Procedures Act, 2015, by making use of the available information and the best of its judgement to determine the Appellant’s tax liability.

45. That the information and documents the Respondent considered and used to assess the Appellant’s tax liability include the following: -a.The banking information sought from the Appellant’s bankers.b.The Appellant’s filed tax returns.c.The Appellant’s MPESA till number and mobile phone number statements; andd.Documents provided by the Appellant.

46. That the documents provided by the Appellant were insufficient and incomplete to the extent that they did not enable the Respondent to consider reviewing the objected assessments. Indeed, it was the Respondent’s finding that the documents presented by the Appellant did not support the objection in question.

47. That the Appellant did not and has not been able to quantify the alleged exempt supplies by providing the relevant tax invoices and linking them to the entries in the Appellant’s transactions in MPESA statements.

48. Accordingly, the Respondent invited the Honorable Tribunal to note that the Appellant has not placed before the Honorable Tribunal any shred of evidence to show how much money in its statements accounted for exempt services/supplies.

49. The Respondent further stated it analyzed information available and noted that: -a.The bulk of Mpesa payments for the period 2018 to 2022 went to the Appellant’s personal accounts in Equity Bank Limited, and no bank statements were provided to demonstrate how the funds were utilized in farming.b.The other payments were to EABL distributors and individuals in the liquor business.c.The bulk of the Mpesa receipts for the period 2018 – 2022 are from Mitch Wholesalers and CIick pub whose principal activity is the sale of alcoholic and non-alcoholic beverages.d.Mitch wholesalers, being a business registered under the Appellant’s KRA PIN, there is no evidence that the credits were declared for both VAT/income tax purposes.e.Additionally, during the review, the Appellant did not and has not demonstrated that the credits were largely drawn from farming activities.f.During the period under review, Mitch wholesalers did not file any VAT/income tax returns despite sending the Appellant credits amounting to Kshs. 123,377,213. 00g.From the foregoing, the transaction documents provided were at variance with the financial statements and the tax returns.h.The Appellant thus did not demonstrate through documentary proof that the supplies were exclusively exempt hence not chargeable to VAT.i.The Appellant despite several requests for documentations and information to support his allegations and objection failed to respond to the Respondent’s request and thus the Respondent was justified to rely on the information at its disposal to assess the Appellant’s tax liability.j.Further, the Appellant did not prove the alleged expenses and neither were the alleged expenses supported with primary transaction documents such as copies of invoices, ETR receipts and proof of purchase of the same.k.In light of this, the Respondent cannot be faulted for using the information available at its disposal and its best judgment to assess the Appellant’s tax liability; andl.Therefore, the grounds set out in the Appellant’s Memorandum of Appeal are without any merit.

50. It is the Respondent’s contention that there is no disparity that exist between the number of years considered to arrive at the additional tax and VAT tax head. For the year 2022, the Respondent issued no income tax assessment against the Appellant. There was only VAT assessment issued which was factored in the decision.

51. The Respondent stated that whereas the Appellant provided a few invoices for farming activity, the Respondent note that they belong to Peter Kamunya Waituge, and not Peter Wairunge Kamunya, the Appellant herein.

52. The Respondent further stated that apart from making wild allegations, the Appellant failed to prove that these invoices belonged to the same person despite variances in the names or provide any form of documentation or evidence linking the two names to the Appellant.

53. The Respondent averred that the official middle name of the Appellant as seen in the Respondent’s iTax system screenshots records is ‘Wairuge’ and not ‘Waituge.’

54. That therefore “Waituge” could have been and is a separate individual under any other circumstances, and a foreign person in this case. The Respondent was thus justified do disallow the invoices which were not linked to the Appellant, and the grounds set out therein are thus unmerited and the same should be dismissed.

55. On the issue of settling the Appeal through Alternative Dispute Resolution Mechanism, the Respondent averred that it is amenable to an out-of-the-tribunal settlement, and will be available to engage the Appellant pursuant to Section 28 of the Tax Appeals Tribunal Act, 2013 and Section 55 of the Tax Procedures Act, 2015.

56. The Respondent also stated that there is nothing barring the Appellant from paying and thus should proceed and pay the undisputed principal tax of Kshs. 1,977,923. 00 as admitted in the Memorandum of Appeal and the Statement of Facts, and should the Appellant still be dissatisfied with the remainder of the disputed taxes, the same can be heard and determined by this Honorable Tribunal.

57. Additionally, the Respondent contended that the Appeal is incompetent on the following grounds: -a.It is based on an invalid Notice of Appeal.b.The Appellant has not complied with the provisions of Section 52(2) of the Tax Procedures Act, 2015 by making payment of taxes (Kshs. 1,977,923. 00) not in dispute, as per his admission in the Appeal herein or by entering an arrangement with the Commissioner to pay the taxes not in dispute; andc.There is no appealable decision that can be entertained by this Honourable Tribunal since the Appellant’s appeal is grounded on an invalid Notice of Appeal as the Appellant has not settled the undisputed taxes.

58. The Respondent averred that, in the circumstances, the Appellant has not discharged his burden of proof as per Section 56(1) of the Tax Procedures Act, 2015, Section 30 of the Tax Appeals Tribunal Act, 2013 and Section 107 of the Evidence Act (Cap. 80) Laws of Kenya. Therefore, the Respondent’s decision is valid in law, as the Appellant has failed to prove that the same is incorrect.

59. That it is, therefore, without doubt that the Respondent’s assessment and decision enjoys the presumption of correctness as provided for under Section 50(1)(a) of the Tax Procedures Act, 2015.

60. In conclusion, the Respondent reiterated that the additional assessments of 24th April, 2023, as confirmed in the Objection Decision of 2nd November, 2023, is valid and correct as they are grounded in law.

Respondent’s Prayers 61. The Respondent prayed to the Tribunal for the following orders: -a.That the Tribunal upholds the additional assessments of 24th April, 2023 as confirmed in the Decision of 2nd November, 2023 as valid and in conformity with the provisions of the law.b.That the Appeal herein is without merit and be dismissed with costs to the Respondent.

Issues For Determination 62. Having carefully reviewed the pleadings and submissions by both parties together with annexures thereto, the Tribunal is of the considered view that the following issues fall for its determination: -a.Whether the Appellant’s Notice of Appeal dated 16th November, 2023 is Valid.b.Whether the Respondent’s Objection Decision dated 2nd November, 2023 is Justified and Proper in Law.

Analysis And Findings 63. Having identified the issues for its determination, the Tribunal proceeds to analyze them as hereunder.

a. Whether the Appellant’s Notice of Appeal dated 16th November, 2023 is Valid. 64. The Tribunal noted that the Respondent raised a preliminary objection vide Notice of Preliminary Objection dated 29th December, 2023. The preliminary objection is based on the ground that the instant Appeal is fatally defective for being filed contrary to Section 52 of the Tax Procedures Act as read with Section 12 of the Tax Appeals Tribunal Act, and the same should be struck out with costs.

65. The Tribunal further noted that it is now settled practice that preliminary objections ought to be based on points of law that, if determined, will likely dispense of an Appeal or suit at the preliminary stage. Thus, preliminary objections ought not be based on facts that can only be tested at the hearing.

66. The instant preliminary objection is based on Sections 52 of the Tax Procedures Act, 2015 (TPA) and Section 12 of the Tax Appeals Tribunal Act, 2013 (TAT). These provisions confer jurisdiction, which is a question of law, on the Tribunal to hear and determine tax disputes in the following terms: -TPA “52(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013)(2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.” (emphasis added)TAT Act“12A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal.”

67. From our understanding, the plain meaning and express import of the above provisions is that the Tribunal assumes jurisdiction upon the Appellant filing a valid Notice of Appeal. The validity of the Notice of Appeal, however, is expressly conditional on, amongst others, the intended Appellant paying undisputed taxes or entering an arrangement or payment plan with the Respondent.

68. In both its Memorandum of Appeal (paragraph 10) and Statement of Facts (paragraph 16) on record, the Tribunal noted that the Appellant expressly admitted to undisputed tax of Kshs. 1,977,923. 00 on account of VAT and expressed willingness to pay the same. However, there is nothing on record before the Tribunal to show that the Appellant has either paid the said undisputed tax or entered into payment plan with the Respondent.

69. In the circumstances, the Tribunal is constrained to find that the Notice of Appeal, as presently filed, has not met the validity test envisaged under Section 52 of the Tax Procedures Act and read with Section 12 of the Tax Appeals Tribunal Act. The consequence of this finding is that the Respondent’s preliminary objection is allowed, as the Tribunal’s jurisdiction has not been properly invoked.

b. Whether the Respondent’s Objection Decision dated 2nd November, 2023 is Justified and Proper in Law. 70. Having found that the Tribunal lacks jurisdiction to entertain the instant appeal, the second issue for determination has been accordingly rendered moot at this stage.

Final Determination 71. The upshot of the foregoing is that the Appeal is incompetent and Tribunal will proceed to issue the following orders: -a.The Appeal be and is hereby struck out.b.No orders as to costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER 2024. ...............GRACE MUKUHACHAIRPERSON……………………………DR. ERICK KOMOLOMEMBER……………………………………….GEORGE A. KASHINDIMEMBER……………………………………….ABDULLAHI DIRIYEMEMBER