[2023] KETAT 153 (KLR)

Kensionery Marketing and System Limited v Commissioner of Investigatios & Enforcement (Appeal 643 of 2021) [2023] KETAT 153 (KLR) (Civ) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 153 (KLR)

Republic of Kenya

In the Tax Appeals Tribunal

Civil

Appeal 643 of 2021

E.N Wafula, Chair, Robert M. Mutuma, Rodney Odhiambo Oluoch, J.K Wangari & Edwin K. Cheluget, Members

March 17, 2023

Between

Kensionery Marketing and System Limited

Appellant

and

Commissioner of Investigatios & Enforcement

Respondent

Judgment

Background 1. The Appellant is a registered company dealing in a number of businesses including supply of various goods and services including those exempt and those that are taxable. It is a registered taxpayer in Kenya and domiciled in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and Kenya Revenue Authority is mandated to administer and enforce tax laws as provided under Section 5 thereof.

3. The Respondent carried out a compliance check on the tax affairs of the Appellant for the period of 2015 to 2019 and discovered that the Appellant was not compliant and therefore issued an assessment. An exchange of correspondences between the parties resulted in the issuance of an additional assessment of Corporation tax and VAT on the 9th of February 2021 and a further additional assessment of Ksh15,156,766. 00 on both tax heads on the 14th June 2021.

4. Being dissatisfied with this assessment the Appellant filed an objection against it on the 13th July 2021. The Respondent issued its objection decision on the 10th of September 2021 confirming the assessment in the sum of Ksh 14,360,197. 00.

5. Dissatisfied with the objection decision the Appellant filed a Notice of Appeal dated 30th September, 2021 to the Tribunal.

The Appeal 6. The Appellant’s ground of appeal as contained in its Memorandum of Appeal dated 13th October, 2021 as against the said objection decision are as follows:-a.Failure to consider exempt income.b.Failure to consider costs on additional incomec.Erroneous tax computations.d.The Respondent failed to allow the Appellant a Net Profit Margin of 10% which was the profit margin within the industry for the year 2017. e.Based on the mentioned grounds, the Appellant appeals against the Additional assessment report dated 14th June 2021 and objection decision dated 10th September 2021 and further plea that correct basis for assessing taxable income be used as stipulated under Section 3(2) (a) (i) of the Income Tax Act.

The Appellant’s Case 7. The Appellant case is premised on the Statement of Facts dated 13th October, 2021 and written submissions dated 20th May, 2022.

8. The Appellant has stated that it paid all the taxes as per the law.

9. That the raising and assessment of taxes beyond the stipulated period of five years is contrary to Section 31(4) (b) of the Tax Procedure Act, 2015.

10. That the Respondent erred in taxing Vat exempt goods supplied to the Ministry of Health for the period of 2015 and attached an invoice to that effect. That the respondent erred in double taxing the income from CITAM which had already been taxed in their Respondent’s banking reconciliation being Kshs 2,008,739. 00 and Kshs 4,433,511. 00 for the years 2015 & 2017, respectively.

11. That the Respondent erred by taxing gross income and not considering the additional expenses provided by the Appellant during the objection. It also assumed that the company was operating a Net Profit Margin of 73% which is not realistic.

12. The Appellant contended that the Respondent did not consider tax paid under the WHT system when it ignored all the withholding tax certificates for the period between 2015 to 2018 and sales ledger for 2017 which were provided by the Respondent.

13. The Appellant stated that investigations into its affairs started in 2021 for the period between 2015 to 2019. That vide an assessment letter dated the 9th February 2021, the Respondent demanded the sum of Ksh 17,450,487. 00 in Income Tax and Value Added Tax from it for the stated period.

14. The Appellant stated that:a.the Respondent contravened Section 31(4) of the TPA by demanding for tax beyond the statutory limit of 5 years. It also relied on Section 23(1) of TPA and Section 43(1) of the VAT Act to support this argument.b.It was unlawful, unfair illegal and unjust for the Respondent to demand that it proves that supplies for the period of 2015 were not vatable.c.That Section 31(4) of TPA could not apply to it as it relates to a situation where issues of willfully neglect, evasion or fraud has been raised in regards to the affairs of a taxpayer, and that this was not the case in this appeal.1. It averred that at no time was the issues of fraud raised or established in regard to this assessment.

The Appellant’s Prayers 16. The Appellant’s payers were that:a.The punitive and illegal assessment by the Respondent be set aside by the Honourable Tribunal.b.The Respondent’s assessment beyond the statutory period be held to be illegal and bad in law.c.The objection decision be dismissed and parties take their own costs.d.The Appellant further prays that the assessment issued on 10th September 2021 of principal taxes of Ksh 14,360,197. 00 comprising of VAT of Ksh 6,142,991. 00 and corporation taxes of Ksh8,217,205. 00 be set aside.e.The objection decision be dismissed and parties the objection decision be dismissed and parties take their own costs.

The Respodnent’s Case 17. The Respondent in opposing the appeal filed a Statement of Facts dated 8th November 2021 with the annextures thereto and the submissions dated 28th February 2022.

18. The chronology of events and the exchanged correspondences between the parties are the same as stated by the Appellant and confirmed by the Statement of Facts by the Respondent.

19. At paragraph 11 of the Statement of Facts it stated as follows;“in response to the Appellant’s allegation that the Respondent failed to consider the grounds of the Appellant’s Objection in its Objection Decision, the Respondent confirms that its objection decision addressed each ground raised in the Appellant’s Objection. That all the issues were tackled and even concessions made where the Appellant had provided adequate evidence in support.’’

20. It asserted that the investigations against the Appellant revealed acts of tax evasion and fraud on the part of the Appellant in failing to account or under declaration of income it had received and therefore failing to pay the correct taxes. That Section 31(4) of TPA allows the Commissioner to amend an assessment in the case of gross or willful neglect, evasion or fraud by, or on behalf of, the taxpayer at any time.

21. That the supplies for 2015 to the Ministry of Health for smoker’s body poster under tariff 49. 11. 99. 10 were not VAT exempt. That some bank deposits of Ksh 53,782,373. 00 could be traced to specific entities such as Nairobi Pentecostal Church, CITAM, and ministry of health and KEMSA.

22. That there was no double taxation as regards income from CITAM as the Appellant had only declared in 2015 for Ksh 2,008,739. 00 for income tax but not VAT. Further that the income of 4,433,511. 00 for 2017 year declared in the sales ledger was not declared in the IT2C.

23. It stated that the Appellant did not provide any evidence of any extra costs incurred in the generation of the income to claim any input tax. That the burden of proof that the tax assessment by the Commissioner was erroneous lay on the tax payer under Section 30 of TAT Act and Section 56 of the TPA and that the Appellant had not discharged this burden.

24. The Respondent’s submissions dated 28th February 2022 reiterated the statement of facts. It averred that the Appellant had raised a new ground in the Appeal that was not in the original objection contrary to Section 56(3) of the TPA. That the ground has been added without leave of the Tribunal. That the additional assessment was done because the Appellant contravened Section 31(4) (b) of TPA.

25. The Respondent has relied on Section 52B (1) of the Income Tax Act and Section 31(1) of TPA to affirm that the Appellant had engaged in acts of fraud, tax evasion and under declaration of income.

26. The Respondent also stated that:a.There being no reason for under declaration and or non- declaration, the Respondent was right in applying Section 31(4) (a) of the TPA against the Appellant.b.The only year challenged under the Appellant was the 2015, the other years of 2016, 2017, 2018 and 2019 are therefore well within the 5-year mandatory period.c.In regards to claim of additional costs, the Appellant did not provide documents for the extra costs hence the claim was rejected. It relied on the Tribunal’s Judgment in TAT No. 125 of 2017;Ngurumani Traders Limited -Vs- Commissioner of Investigations and Enforcement.

Issues for Determination 27. Having highlighted both the Appellant’s and the Respondent’s cases as presented above, the following issues arise for determination;a.Whether the assessment by the Respondent of the tax liability of the Appellant between 2015 to 2019 is proper in law.b.Whether the Respondents Objection Decision dated 10th September 2021 demanding taxes in the sum of Ksh14,360,197. 00 is valid and justified.

Analysis and Findings a) Whether the assessment by the Respondent of the tax liability of the Appellant between 2015 to 2019 is proper in law. 28. The Value Added Tax Act at Sections 5(1) allows the charging of tax on taxable supplies, it provides that:“A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on—a.a taxable supply made by a registered person in Kenya;b.the importation of taxable goods; andc.a supply of imported taxable services.”

29. Section 3 of the Income Tax Act 3 provides for charging of Income tax for income accrued or derived from Kenya. Section 3 reads;(1)Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.(2)Subject to this Act, income upon which tax is chargeable under this Act is income in respect of—(a)gains or profits from—i.any business, for whatever period of time carried on;ii.any employment or services rendered;iii.any right granted to any other person for use or occupation of property”

30. From the pleadings of both parties it is not disputed that the Appellant was doing businesses that attracted both Income Tax and Value Added Tax. The Appellant had made self-assessments for both Income Tax and Value Added tax, but the Respondent was not satisfied with the assessment hence the reason for the issuance of the additional assessment for the period between 2015 to 2019.

31. The Appellant said that the Respondent acted unlawfully in demanding for taxes for a period beyond 5years as that was in contravention of Section 31 of the TPA. The year in contention is 2015. The Respondent on the other hand said it employed Section 31 of TPA to demand for tax for a period beyond the 5byaer limit period.

32. Section 31 of TPA provides as follows;1. Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—a.in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;b.in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.2. A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4)(b)(i), to make an amendment to the taxpayer's self-assessment.3. Where an application has been made under subsection (2), the Commissioner may—a.amend the self-assessment; orb.refuse the application, and the Commissioner shall notify the taxpayer in writing of the decision within thirty days of receiving the application.4. The Commissioner may amend an assessment—a.in the case of gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; orb.in any other case, within five years of—i.for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; orii.for any other assessment, the date the Commissioner notified the taxpayer of the assessment.”

33. Section 43(1) of the VAT Act also gives the statutory mandatory time line within which a tax payer should keep records. It states as thus;“A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—a.copies of all tax invoices and simplified tax invoices issued in serial number order;b.copies of all credit and debit notes issued, in chronological order;c.purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name”

34. It is the Appellant’s contention that no taxes can be raised beyond 5years because it is not obliged to keep records beyond the 5-year limit period. The requirement to defend and provide assessment for taxes beyond the 5 year Judgment- Tat No. 643 Of 2021— Kensionery Marketing And System Limited. –vs- Commissioner Of Investigations & Enforcments Page 10 Of limit period would thus prejudice it. It supported this assertion with Section 23(1) of the TPA which states that;“A person shall— ,a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andc.subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

35. It seems the only time Respondent can assess tax beyond the statutory 5year period is when Section 31(4) (a) TPA is being applied. This relevant part reads as follows“The Commissioner may amend an assessment—(a)in the case of gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time;’’

36. It is thus clear that the Commissioner cannot amend a taxpayer’s self- assessment except in cases where the taxpayer has been involved in fraud, willful neglect and or evasion. Whereas the Respondent has alleged that the Appellant was guilty of the acts stated in Section 31(4)(a) of the TPA, the Commissioner has not provided the specifics on the possible fraud, evasion and or gross/willful neglect that were committed by the Appellant. These accusations have simply been thrown at the Tribunal without any specific details.

37. The Tribunal is of the view that there must have been a basis and or a reason that led the Responded to make these allegations. It thus follows, that at the very least, the Respondent owed the Tribunal a duty to particularize these instances of fraud and evasions and thereafter proceed to share with the Tribunal the documents in its possession that made it arrive at that conclusion. This was not done and hence the reason why the Respondent’s attempt to make a tax assessment against the Appellant for a period that is in excess of 5 years must fail.

38. The Tribunal reiterates its holding in the previous decision in Income Tax appeal no. E097 of 2020, Commissioner of Domestic Taxes -Vs- Computech limited [2021] eKLR where the issues of fraud was raised before the Tribunal and the matter was appealed to the High Court. In making its Judgment by Justice A. Mbeya, the court associated itself with the decision of the court in Vijay Morjaria vs Nansingh Madhusingh Darbar & Another [2000] eKLR, where it was held: -“It is well established that fraud must be specifically pleaded and that particulars of the fraud alleged must be stated on the face of the pleading. The acts alleged to be fraudulent must, of course, be set out, and then it should be stated that these acts were done fraudulently. It is also settled law that fraudulent conduct must be distinctly alleged and distinctly proved, and it is not allowable to leave fraud to be inferred from the facts”.

39. The learned judge further stated in paragraph 24 of his judgment that;“I fully adopt the foregoing. The Appellant having alleged fraud on the part of the respondent, he bore the burden of proving that allegation. He failed to provide the specifics of the same as well as evidence to support the same. The Tribunal cannot be faulted on that ground also. The ground also fails.’’

40. The Tribunal therefore holds that Section 31(4 (a) of the TPA has not been properly invoked in this case and it cannot therefore come to the aid of the Respondent in making tax assessment for a period beyond the statutory limit of 5 years. The Tribunal thus hold and finds that the Respondent acted unlawfully in demanding for tax from the Appellant for the year 2015.

b) Whether the Respondent’s Objection Decision dated 10th September 2021 demanding taxes in the sum of Ksh 14,360,197 is valid and justified 41. As stated above, the assessment for the other periods other than 2015 were within the law. The question before the Tribunal is to answer whether the additional assessments were proper and justified.

42. The Appellant has stated that the Respondent:a.Used imaginary figures in arriving at the additional assessment.b.Stated the specific documents that it required from the Appellant to help it ascertain the tax liability of the Appellant. It however supplied the following documents to the Respondent withholding certificates, bank statements and ledgers.

43. The Respondent asserted that it settled on and used banking and withholding certificates to arrive at computation of the expected income and not banking and ledger as alleged by the Appellant. The Respondent did not also ask which specific documents it required from the Appellant to be able to ascertain the tax liability of the Appellant. It relied on its own documents obtained from the withholding certificates, bank statements and ledgers. It stated as thus at page 8 of its submissions, for the 2017 CITAM income……“the amount of Kshs 4,433,511 with regard to year 2017 was captured in the sales ledger but no corresponding declaration was made in the Appellants IT2C declaration.”

44. Page 8 of the Respondent’s submission further read as thus;“on the allegation that the respondent erred in using banking and ledger as basis of arriving at the taxable income creating double taxation for the period under review, the Respondent confirms that it settled on the use of bankings and withholding certificates to arrive at computation of the expected income and not banking and ledger as alleged by the Appellant.’’

45. The two statements by the Respondent as contained in Paragraphs 43 and 44 above are contradictory as to whether it used ledger or banking system. For that reason, the Tribunal holds that the basis of tax computation for the additional assessment for 2017 was not clear and is thus vacated. The Tribunal will, however, not interfere with the Respondent’s additional assessment in respect of tax periods of 2016, 2018 and 2019 for the reason the Appellant has failed to discharge its burden in demonstrating any error on the part of the Respondent arriving at the tax assessments for these specific years.

46. The Respondent has also stated that the Appellant has added new ground of Appeal contrary to Section 56(3) above quoted without leave. However, the Tribunal has looked at the pleadings and finds no new ground as the one relating to the five-year statutory period was all along pleaded by the Appellant at paragraph 4 in page 1 & 2 of its Notice of Objection dated 13th July 202.

Final Decision 47. On the basis of the foregoing analysis, the Tribunal makes the following final Orders:-i.The Appeal succeeds partially to the extent that the additional assessment in the Respondent’s Objection Decision dated 10th September 2021 in respect of the years 2015 and 2017 be and are hereby vacatedii.The Respondent’s additional assessment for the years 2016, 2018 and 2019 be and are hereby upheld.iii.Each party to bear its own costs

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. .....................................ERIC N. WAFULACHAIRMAN.....................................ROBERT M. MUTUMAMEMBER.....................................RODNEY O. OLUOCHMEMBER.....................................JOHN KINYUAMEMBER.....................................EDWIN K. CHELUGETMEMBER