[2025] KETAT 109 (KLR)

Kariuki v Commissioner for Domestic Taxes (Tax Appeal E178 of 2024) [2025] KETAT 109 (KLR) (7 February 2025) (Judgment)

Neutral citation: [2025] KETAT 109 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E178 of 2024

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

February 7, 2025

Between

James Maina Kariuki

Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Kenyan resident and runs a wholesale and retail business under the name Emirates Traders.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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. The Respondent carried out compliance check to determine whether the Appellant had declared all the incomes for the years 2018 to 2022. The Respondent then issued the Notice of Assessment dated 10th November 2023 seeking to recover Kshs 14,394,577 being income tax and VAT. The Appellant objected to the assessments on 6th December 2023.

4. After several meetings and correspondence, the Respondent issued an objection decision dated 31st January 2024.

5. Aggrieved by the Respondent’s decision, the Appellant lodged this appeal vide the Notice of Appeal dated 10th February 2024 and filed on 14th February 2024.

The Appeal 6. The Appellant filed its memorandum of appeal dated 10th February 2024 on 14th February 2024 wherein he raised the following grounds of appeal:a.That the Respondent erred in law and in fact by amending the appellant's self-assessed income tax and Value Added Tax returns through additional assessments on or about November 2023. b.That the additional assessments by the Respondent were done in bad faith and in contravention of the respective provisions of the law.c.That these additional assessments are fundamentally incorrect and have led to demand of unverified and non-existent taxes.d.That the assessments were highly erroneous and irredeemably excessive.e.That the Respondent erred in law and in fact by disallowing the Appellant's objections through the objection decision issued on 31st January 2024. f.That the Respondent issued a rushed objection decision without considering all the material information and facts of the tax dispute herein.g.That in particular, the Respondent unlawfully and erroneously introduced unsubstantiated figures in the taxpayer's accounts both in the income tax accounts and in the VAT accounts without elaborating the source of these alleged sales.h.That the averred purchase amounts utilized in the VAT assessments by the Respondent were unknown to the Appellant and they did not tally with the Appellant's records.i.That the averred turnover data employed by the Respondent was contrary to the Appellant's audited financial statements in the respective VAT and income tax accounts.j.That without prejudice to the above, it is a tax principle that the formula of taxable income is sales income less cost of goods sold which the Appellant herein was not even accorded by the respondent.k.That legitimately incurred and allowed expenses and overheads such as salaries, fuel, expenses, insurance, repairs and maintenance, security, motor vehicle running expenses among others were not taken into consideration when issuing the assessments therein.l.That the Appellant should have been accorded the opportunity to amend its nil income tax returns and adopt the financial statements thereof in line with the provisions of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).m.That the Appellant provided further documentation and reconciliations as requested by the Respondent for verification.n.That the Respondent failed in its duties of reasonableness by disregarding and failing to examine the Appellant's records availed so as to determine the correct tax position.o.That the Respondent did not carefully consider the above-stated facts before issuing the objection decision to disallow the objection applications thereof.p.That the Respondent applied wrong tax principles in issuing the additional assessments and the rushed objection decision.

Appellant’s Case 7. In support of the appeal, the Appellant filed its statement of facts dated 10th February 2024 on 14th February 2024.

8. The Appellant stated that he submitted all his income tax and Value Added Tax returns in the prescribed form and manner in respect of each tax period within the stipulated timelines. He stated that these returns were filed in accordance with the respective provisions of the law and they were consequently acknowledged and approved by the respondent. However, on or about November 2023 the respondent issued additional assessments seeking to recover Kshs 14,394,577. 00.

9. The Appellant stated that the Respondent amended these returns by arbitrarily adding unsubstantiated sales on the taxpayer's account both in the income tax account and the VAT Account. Nonetheless, the Appellant objected to the additional assessments on 4th December 2023 and acknowledged by the Respondent on 6th December 2023. In the objection, the Appellant indicated grounds of objection, amendments required thereto and provided the relevant evidence in accordance with Section 51 of the TPA.

10. The Appellant further noted that there were discrepancies in the figures in the additional assessment on i-TAX and the demand notice that was issued by the respondent. Further, the Appellant could not trace some of these additional assessments on the i-TAX platform as should be.

11. The Appellant averred that Respondent notwithstanding the substantive and valid objections done, issued an impugned objection decision dated 31st January 2024 without considering all the material information and facts of the tax dispute herein. The Appellant maintained that the Respondent arbitrarily disallowed the objection application and confirmed the additional assessments.

12. The Appellant alleged that he prepared and submitted all his income tax and VAT returns in the prescribed form and manner in respect of each tax period within the stipulated timelines. The Appellant asserted that he prepared books of accounts in accordance with the law and the international financial reporting standards for his business. He then declared the taxable income and computed the tax payable in accordance with the provisions of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”), Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) and the TPA.

13. The Appellant stated that the Respondent erred in law by arbitrarily amending his returns for the respective periods and that the Respondent did not bother to inform him or even accord him the opportunity to be aware of the basis of these additional assessments. The Appellant argued that he was not served with a pre-assessment notice or even some review findings that could have led to the issuance of these additional assessments.

14. The Appellant stated that in amending his returns, the Respondent added unsubstantiated sales on his account both in the income tax account and the VAT account with no basis whatsoever.

15. According to the Appellant, in the income tax assessments, the Respondent brought to charge the undeclared sales in the income tax account using the sales figure in the declared VAT turnover. However, the Respondent only considered the cost of sales (direct purchases) in deriving the taxable income and failed to take into account other administrative, financial, and operating expenses.

16. The Appellant stated that the Respondent did not accord him the expenses incurred in generating the said business income and that the Respondent should have allowed the Appellant to amend his income tax return and claim the necessary expenses incurred in generating the said business income.

17. The Appellant asserted that he legitimately incurred some expenses and overheads such as salaries, fuel, expenses, insurance, repairs and maintenance, security, motor vehicle running expenses among generating the said business income. According to the Appellant, the Respondent when issuing the assessments did not consider that these expenses were wholly and exclusively used and incurred in generating, his business income.

18. The Appellant noted that it is inevitable that expenses will be incurred in order to derive revenue. The expenses incurred reflect the true state of affairs of the Appellant's business in the sense that not all revenue generated is simply subject to tax but rather revenue that is net of expenses.

19. The Appellant cited Section 15 of the ITA sets out the criteria to be followed by a taxpayer in seeking to claim expenses incurred in generation of business income. He stated that the general principle in Kenya is that unless expressly provided otherwise, expenses are tax deductible if they are incurred wholly and exclusively to generate taxable income. The Appellant stated that an expense is a type of expenditure that flows through the income statement and is deducted from revenue to arrive at net income. He therefore argued that it is only deductible that the Respondent should have adopted the Appellant's financial statements that include expenses incurred in generating the taxable income to arrive at the factual taxable profit/loss.

20. The Appellant stated that the Respondent should have allowed him to amend his nil return for the periods that is income tax return for the year ending December 2020, income tax return for the year ending December 2021, and income tax return for the year ending December 2022. According to the Appellant, his financials reflect the true tax position that the Respondent can vouch for if necessary.

21. With regard to the VAT assessments, the Appellant averred that the Respondent utilized figures (claims by customers) which are unknown to the appellant and that the Respondent did not furnish the Appellant with the specific claims/figures so that a reconciliation of the same can be provided.

22. The Appellant cited section 17 of the VAT Act which provides that the purchaser bears the burden to prove that it actually purchased goods from the alleged supplier. The Appellant maintained that the Respondent needs to demonstrate that it extinguished this burden from the said customers (purchasers) before apportioning unsubstantiated sales of the Appellant.

23. The Appellant further noted that there is an inconsistency employed by the Respondent in determining the turnovers for the respective periods. He averred that it is expected that the turnovers would tally unless under specific instances. The Appellant stated that the Respondent’s figures indicated in the additional assessments issued did not tally.

24. Finally, the Appellant also noted that there were significant discrepancies in the figures in the additional assessment on i-TAX and the demand notice that was issued by the Respondent. He noted that for example, the assessment order issued on i-TAX reflected the principal tax demanded for the period year 2021 as Kshs 3,137,521. 00 while in the demand notice the principal figure was Kshs 3,097,021. 00. The Appellant stated that he could not trace some of these additional assessments on the i-TAX platform as should be.

Appellant’s Prayers 25. The Appellant made the following prayers:a.That the objection decision and the additional assessment be set aside;b.That the expenses as averred in the audited financial statements should be allowed and an amendment done in in line with section 31 of the TPA;c.That the Respondent be compelled to revise any penalties and interests' payable;d.That the Respondent set aside the demand of the taxes thereof; ande.That the cost of this Appeal is borne by the Respondent.

Respondent’s Case 26. In opposition to the Appeal, the Respondent filed its statement of facts dated 19th April 2024 on even date. The Respondent also filed written submissions on 2nd September 2024.

27. The Respondent stated that the additional assessment in dispute is based on the compliance check conducted by the Respondent with a view of determining whether the Appellant had declared all the incomes for the years 2018 to 2022. The Appellant had not declared income for the years 2020, 2021 and 2022. The Respondent then issued the notice of assessment dated 10th November 2023 to which the Appellant objected 4th December 2023 and acknowledged by the Respondent on 6th December 2023.

28. The Respondent stated that on 15th December 2023 the Appellant was advised to validate the objection by providing supporting documents. The Respondent and Appellant had a meeting on 18th December 2023 whereby the Appellant was granted until 4th January 2024 to provide records.

29. Between 22nd and 25th January 2024 parties had further deliberations on review objection documents. Consequently, the Respondent issued the objection decision on 31st January 2024 which moved the Appellant file this appeal. The Respondent averred that its actions are in line with Section 51 of the TPA.

30. According to the Respondent, the Appellant provided bank statements and audited financial statements. Upon review the Respondent noticed that the documents did not show correctness and completeness of the information declared. The Respondent asserted that the Appellant failed to provide an analysis reconciliation of invoices; the total sales as per VAT declarations did not match with audited; and that the Appellant failed to provide supporting evidence of the expenses claimed.

31. As to whether the Respondent failed to consider the Appellant's documents and explanations, the Respondent asserted that it is incumbent upon the Appellant to demonstrate which documents were not considered, the desired effect of documentation and logical conclusion that ought to have been arrived at. The Respondent stated that it enjoys presumption of correctness and the Appellant failed to discharge the evidentiary burden of demonstrating that the assessment is wrong.

32. On amendment of returns, the Respondent stated that the Appellant could not amend the returns since the additional assessment had already been issued. The Respondent cited the provisions of Section 31 of the TPA which govern the process of amendment of tax assessments by both the Taxpayer and the Commissioner.

33. In addition to the statement of facts, the Respondent filed its written submissions wherein it submitted that it did not err in raising the additional assessment against the Appellant.

34. The Respondent cited Section 28 of the TPA which provides as follows:A taxpayer who has submitted a self-assessment return in the prescribed form for a reporting period shall be treated as having made an assessment of the amount of tax payable (including a nil amount) for the reporting period to which the return relates being the amount set out in the return.’’It therefore submitted that the law demands that every taxpayer to file their returns as and when they are due and that the filing of returns required the Appellant to conduct a self-assessment of their tax obligations.

35. The Respondent relied on the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] EKLR where the court stated as follows:“This country operates under a self-assessment tax regime. Under this regime, the tax payer assesses self and declares what he considers to be taxable income on which he then pays tax to the authorities. For this reason, the tax laws are coached in a manner that gives the tax authorities wide powers and discretion in ascertaining ex-post facto, what taxable income is.’’

36. The Respondent submitted that its objection decision is proper in law and cited Section 24(2) of the TPA which exonerates it from being bound by a tax return or information provided by, or on behalf of, a taxpayer and that the Respondent may assess a taxpayer's tax liability using any information available to him. The Respondent further submitted that whereas section 23 [sic] requires the taxpayer to keep records, the Appellant failed to provide the records to aid in determining Appellant’s tax liability.

37. The Respondent relied on the case of Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2022] KEHC52 (KLR) (Commercial and Tax) where the High Court held as follows:“In line with section 56(1) of the TPA, the tax payer bears the burden of proving that assessment made by the Commissioner is incorrect... the burden imposed on the taxpayer does not exist in a vacuum, it also buttressed by the obligation on the taxpayer to maintain records.’’

38. Further, the Respondent relied on the case of Grace Njeri Githua v Commissioner of Investigations & Enforcement (Tat No. 102 of 2018) and Digital Box Limited v Commissioner of Investigations and Enforcement [2020] to submit that whereas the Appellant has a duty under section 56(1) of TPA that the Respondent’s tax decision is incorrect, the Appellant failed to do so. Therefore, the Respondent submitted that the Appellant’s appeal ought to be dismissed.

Respondent’s prayers 39. The Respondent prayed that the Tribunal be pleased to uuphold the Respondent's decision dated 31st January 2024 as proper and in conformity with the provisions of the Law; and dismiss the appeal with costs.

Issues for Determination 40. Having taken into consideration the parties’ pleadings, documents and the Respondent’s written submissions, the Tribunal is of the respectful view that the main issue that call for its determination is as hereunder:a.Whether the Appellant discharged his burden of proof.b.Whether the Respondent’s objection decision dated 31st January 2024 is justified.

Analysis and Findings 41. The Tribunal wishes to analyse the issues as hereinunder.a.Whether the Appellant discharged his burden of proof.

42. Whereas the Appellant argued that it provided documents to support its notice of objection, the Respondent submitted that Appellant failed to provide documents that would have enabled the Respondent to arrive at a different finding. It was upon the Appellant to prove that the objection decision dated 31st January 2024 is erroneous. This was so because section 56(1) of the TPA provides as follows:“(1)in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

43. Further to section 51(1) of the TPA, section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) provides as follows:“Burden of proofIn a proceeding before the Tribunal, the appellant has the burden of proving—(a)Where an appeal relates to an assessment, that the assessment is excessive; or(b)In any other case, that the tax decision should not have been made or should have been made differently.’’

44. Pursuant to section 56(1) of the TPA and section 30 of the TATA, the Appellant shoulders the burden of proving that the Respondent’s decision is erroneous. To discharge this burden, a taxpayer must adduce documentary evidence at both the objection and appellate stage. The Tribunal observes that section 23 of the TPA requires the taxpayer to keep records and in order to succeed under Section 15 of the ITA, the taxpayer must adduce documentary evidence to prove that it incurred deductible expenses.

45. The Tribunal examined the Appellant’s pleadings and noted that the Appellant has filed the objection decision, the assessment orders, and the objection application acknowledgement receipt but did not file documentary evidence in support of his case.

46. Section 13(2) of TATA provides as follows:“(2)The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)A memorandum of appeal;(b)Statements of facts;(c)The appealable decision; and(d)Such other documents as may be necessary to enable the Tribunal to make a decision on the appeal[emphasis ours]’’

47. Without documentary evidence, the Tribunal cannot make a determination on matters of fact. In addition, Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 has provisions on how a taxpayer is supposed to deal with an appeal before this Tribunal as far as documentary evidence is concerned. The Rule provides as follows:“(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence[emphasis ours] or other evidence which it is proposed to adduce at the hearing of the appeal.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact [emphasis].’’

48. The provisions of section 23 of the TPA, section 13(2) of TATA and Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 are necessary to assist taxpayer to discharge the burden of proof under section 56(1) of TPA and section 30 of TATA. In the case of Singapore Motors Limited v Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR) the High Court held as follows:“This Court has remained emphatic that under section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the Tax Procedures Act (TPA), the burden of proving that an assessment is wrong or excessive remains upon the taxpayer.’’

49. The Tribunal having examined the Appellant’s pleadings, finds that the Appeal falls short of the requirements of section 13(2) (d) of TATA and Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 therefore, the Appellant was unable to discharge the burden of proof under section 56(1) of TPA and section 30 of TATA.

50. Under the circumstances, the Tribunal finds and holds that the Appellant failed to demonstrate that the Respondent’s objection decision dated 31st January 2024 was erroneous.

Final Decision 51. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is devoid of merit and makes the following Orders:a.The Appeal be and is hereby dismissed;b.The Respondent’s objection decision dated 31st January 2024 be and is hereby upheld; andc.Each party to bear its own cost.

52. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 7TH DAY OF FEBRUARY, 2025. …………………………………CHRISTINE A. MUGA - CHAIRPERSON…………………………BONIFACE K. TERER - MEMBER…………………………ELISHAH N. NJERU - MEMBER…………………………EUNICE N. NG’ANG’A - MEMBER…………………………OLOLCHIKE S. SPENCER - MEMBER