[2024] KETAT 423 (KLR)

Kasema v Commissioner of Domestic Taxes (Tax Appeal E191 of 2023) [2024] KETAT 423 (KLR) (22 March 2024) (Judgment)

Neutral citation: [2024] KETAT 423 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E191 of 2023

Grace Mukuha, Chair, W Ongeti, Jephthah Njagi, G Ogaga & E Komolo, Members

March 22, 2024

Between

Roy Kasema

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer in Kenya.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent undertook an audit of the Appellant's tax affairs for the period between 2015 to 2017 and determined that the Appellant earned income but did not declare the income in his returns.

4. That the Respondent analyzed bank statements held by the Appellant at the Cooperative bank and local purchase orders and invoices received from Kirinyaga County Government to determine the income earned.

5. On 7th November 2022, the Respondent issued the Appellant with a notice of assessment demanding payment for the tax due for the period under review and the Appellant being dissatisfied with the assessment, lodged an objection dated 29th November 2022.

6. The Respondent vide a letter dated 16th December 2022 invalidated the objection and on 23rd January 2023, the Appellant provided a payment plan, which was subsequently approved by the Respondent on 30th January 2023. The payment plan covered the Appellant’s self-assessed tax liability.

7. That in the absence of any further supporting documents requested from the Appellant, the Respondent issued an objection decision dated 20th March 2023 rejecting the Appellant's objection and confirming the assessments of Kshs. 5,817,305. 00 and the Appellant being dissatisfied with the decision filed its Appeal on 19th April 2023.

The Appeal 8. The Appeal is premised on the Memorandum of Appeal dated and filed on 3rda.That the Respondent erred in law and in fact by disregarding the Appellant's submission that the business in question was opened under the false and fraudulent behest of Shawn Mwangi t/a Jewel Enterprises and confirmed in its Objection decision, an assessment arising from corporation tax for the years 2016 and 2017 amounting to Kshs. 5,817,305. 00b.That the Respondent erred in law and fact by issuing the assessment without clarity on the rightful culprit as the assessment was generic and lacked the requisite details in support of the assessed incomesc.That the Respondent violated the Appellant’s right to fair administrative action by ignoring the criminal elements of the case as presented and unfairly subjecting the Appellant to taxes due from a third party.

The Appellant’s Case. 9. The Appellant’s case also premised on the following documents:a.Statement of Facts dated and filed on 3rd May 2023 together with the attachments thereto.b.ii. The Written Submissions dated 5th February 2024 and filed on 6th February 2024.

10. The Appellant in response to the Appellant’s arguments reiterated its arguments proffered in its notice of objection dated 29th November 2022 and also maintained that he registered the business name and bank account under the false and fraudulent behest of his sister's estranged husband, Shawn Mwangi Mwachofi (Shawn) trading as Jewel Enterprises.

11. The Appellant further submitted that Jewel Enterprises was the actual owner of the tenders nominally contracted by Kirinyaga County and it was in full control of his bank accounts.

12. The Appellant submitted further that payments were made into his respective bank accounts and the funds were immediately transferred to Jewel Enterprises or the individual accounts or business accounts of Shawn for ease of withdrawing the funds.

13. The Appellant submitted that although he willingly provided his company details to enable the trade with Kirinyaga County for tenders to supply materials, Jewel Enterprises operated in bad faith and with the intention to defraud the Appellant.

14. The Appellant submitted that he took all necessary steps in trying to mitigate the assessment by holding consultative forums with the Respondent's team with a view to directing the assessment to the rightful culprit and as a sign of goodwill undertook to carry out a review of the bank statements and to determine their rightful share of benefit arising from the payments amounting to Kshs. 1,373,306. 00.

15. That in arriving at the self-assessed tax liability, the Appellant was cognisant that there were no supporting documents available and as such the Appellant carried out the computation in good faith on the basis of the gross income received as per the available bank statements.

16. That the Respondent acknowledged the self-assessed tax and further approved a payment plan for the settlement of the self-assessed liability upon the request of the Appellant. That the Respondent further issued the payment registration numbers (PRNs) to enable the Appellant to settle the first instalment, for which payments were made. That he was not issued with additional PRNs to enable him to make subsequent instalment payments despite reminders to share the same.

17. That based on the above, the assessment ought to have provided the basis for the assessed full liability without taking into consideration the facts of the case as mentioned above, and the self-assessed liability for which a payment plan had already been entered into and part payments made.

18. That the Appellant had a legitimate expectation that the acceptance of the payment plan and the facts provided on the criminal intent to defraud the Appellant were taken into consideration and that the Respondent would not come back and alter the position and avoid charging the liability on the right person.

19. The Appellant also averred that the assessments were issued in contravention of the right to fair administrative action as per the provisions of Article 47 (1) of the Constitution of Kenya.

20. The Appellant in support of his case relied on the holdings in the cases of Keroche Breweries Ltd v A.G. & 10 Others [2016],R v Institute of Certified Public Accountants of Kenya ex parte Vipichandra Bhatt T/A J V Bhatt & Company Nairobi HCMA No. 285 of 2006 and R v Commissioner of Domestic Taxes ex parte Barclays Bank of Kenya Ltd (Misc. Application No. 12223 of 2007) amongst others.

Appellant’s prayers. 21. The Appellant prayed to the Tribunal to:a.Set aside the Respondent’s confirmed assessmentb.Award the costs of the appeal to the Appellant

The Respondent’s Case 22. The Respondent premised its case on the following documents:-a.Statement of Facts dated 2nd June 2023 and filed on the same date.b.The Written Submissions dated 2nd October 2023 and filed on 4th October 2023.

23. The Respondent submitted that in response to the Appellant’s allegation that the assessment issued by the Respondent in computation of the tax liability did not take into account the expenditures incurred by the Appellant, the Respondent stated that it at all material times indulged the Appellant and sought for documentation to support the expenditure(s) incurred.

24. The Respondent averred that the Appellant failed to avail the documents in support of the alleged costs and the Respondent issued the assessment on the basis of the available information at the time of the assessment.

25. The Respondent averred that save for the bank statement, no other document was adduced in support of the allegation by the Appellant thus disregarding the provisions of Section 23(b) of the Tax Procedures Act 2015 which provides that taxpayers should maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.

26. The Respondent stated that the Appellant did not provide all the requisite documents and therefore failed to validate his objection pursuant to Section 51 of the Tax Procedures Act 2015 and therefore the additional assessments were accordingly confirmed and objection decision issued.

27. The Respondent submitted that Section 24 of the Tax Procedures Act (TPA) allows a taxpayer to submit tax returns in the approved form and manner prescribed by the law but the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information and to the best of the Commissioner's judgement.

28. The Respondent further stated that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate that he has discharged his tax liability and the Respondent stated that this burden was never discharged as no documentary evidence of probative value was availed to the Respondent to enable it render a meritorious decision in the circumstances.

29. The Respondent also submitted that the Appellant’s assertions that the assessments were from a fraudulent business and that the Respondent violated his rights to fair administration are incorrect and misleading.

30. The Respondent in support of its case relied on the cases of Hancock v General Reversionary and Investment Company, Mars Logistics Ltd v Commissioner of Domestic Taxes [2021] Eklr and Commissioner for Inland Revenue v Genn & Co. (Pty) Ltd amongst others.

Respondent’s prayers. 31. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s objection decision dated 20th March 2023b.Dismisses the Appeal with costs as the same is devoid of any merit.

Issue For Determination 32. The Tribunal, having reviewed the pleadings before it and the written submissions, identified one issue for determination as laid out hereunder:Whether the Respondent erred in assessing the Appellant for income tax liability

Analysis And Findings 33. The genesis of the dispute before the Tribunal is the confirmation by the Respondent of the tax liability in income tax as per the objection decision dated 20th March 2023 and the consequential demand notice based on the same.

34. The matter emanated with the assessment against the Appellant for income tax liability communicated to the Appellant vide a letter dated 7th November 2022. The tax amount assessed covered the period 2015,2016 and 2017.

35. The Appellant objected to the same and in the objection notice mainly blamed the assessment on the fraudulent activities of a third party who is not a part of the proceedings before the Tribunal. The Appellant also argued in his pleadings that the Respondent failed in its computation of the tax liability to provide for the expenses incurred by the Appellant in the running of the business thereby making the wrong assesssments.

36. The Respondent on its part argued that the Appellant failed to provide any documents to demonstrate the expenses in issue and also to show that the computation was wrong. The Tribunal noted that the Appellant at the objection stage and even before the Tribunal through the Appeal has not produced any documents.

37. The law requires the taxpayer to keep records necessary for use in determining the taxpayer’s tax liability and which requirement the Appellant had not adhered to. This is provided for in Section 23 (b) of the TPA which provides as follows:“A person shall-(a).....(b)maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained”

38. The law also allows the Respondent to use the information within its reach to compute the tax liability of taxpayers as per Section 31 of the TPA. The Respondent used the information it had in its possession to determine the assessments in issue and in the circumstances, it was in order. Section 31(1)provides as follows:“Subject to this section, the Commissioner may amend an assessment (referred to this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner’s judgement………….”

39. The Tribunal has also taken into consideration the legal provisions of Sections 56 of the TPA and 30 of the Tax Appeals Tribunal Act which state very clearly that in all circumstances the burden of proof lies on the Appellant to demonstrate that they have discharged their tax liability.

40. Section 56 (1) provides as follows:“In any proceedings under this Part, the burden shall be on the tax payer to prove that a tax decision is incorrect” while Section 30 goes on to provide as follows:“In any proceedings 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”.

41. Similarly, the holding in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR in reference to the issue of the burden of proof in tax disputes the court held as follows:"The shifting of the burden of proof in tax disputes flows from the presumption of correctness, which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.

42. The income tax assessment covered the period 2015, 2016 and 2017 and the assessments were issued to the Appellant on 7th November 2022. The period of years 2015 and 2016 is without the statutory provisions within which the Respondent ought to have assessed the Appellant.

43. The Tribunal finds that the Appellant has not discharged its burden of proof and which discharge would have triggered the Respondent to compute the tax assessments differently. However, the applicable and proper tax assessment in the circumstances is only for the year 2017 as per the applicable law.

44. Consequently, the Appeal partly succeeds and the orders that render themselves in the circumstances are as laid out hereunder.

Final Decision 45. The Tribunal makes the following Orders: -a.The Appeal be and is hereby partly allowedb.That the assessments for the period 2015 and 2016 in reference to income tax are hereby set aside and the assessment for the year 2017 is hereby upheldc.Each party to bear its own costs.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF MARCH, 2024GRACE MUKUHA - CHAIRPERSONDR. WALTER ONGETI - MEMBERJEPHTHAH NJAGI - MEMBERGLORIA A. OGAGA - MEMBERDR.ERICK KOMOLO - MEMBER