[2024] KETAT 1624 (KLR)

Kenstar Electricals and Hardware Limited v Commissioner Domestic Taxes (Tax Appeal E806 of 2023) [2024] KETAT 1624 (KLR) (11 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1624 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E806 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, G Ogaga & AK Kiprotich, Members

October 11, 2024

Between

Kenstar Electricals And Hardware Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya and incorporated under the Companies Act (Cap 486) and deals in sale and purchase of electronic appliances.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent carried out an audit on the tax affairs of the Appellant resulting in the issuance of additional assessment of Kshs 56,374,930. 49 vide a letter dated 7th June 2023.

4. The Appellant filed an application for leave to file its objection out of time vide a letter dated 28th June 2023.

5. An objection decision was eventually issued on 25th September 2023 confirming the assessment on both VAT and Corporation tax.

6. Aggrieved by the Respondent’s decision, the Appellant lodged at the Tribunal a Notice of Appeal dated and filed on 23rd October 2023.

The Appeal 7. The Appellant premised its Appeal on its Memorandum of Appeal dated 16th November 2023 and filed on the same date and which raised the following grounds of appeal:a.The Respondent erred in law and in fact by arriving at an additional assessment for reason of errors or mistake in the apportioning of liability.b.The Respondent erred in law and in fact by overlooking the fact that the invoices submitted by the Appellant in filing of VAT returns were similar in substance and content of the transactions reflected therein to those submitted by the Appellant’s supplier, despite the discrepancies in the invoice numbering and date of issuance.c.The Respondent erred in law and in fact by assuming that all deposits captured in the bank statements constituted total sales. Some deposits consist of capital injections from the Managing Director, which is evidenced by cheques deposits from his personal bank account to the Company’s bank account, these funds were from a loan advanced to the Managing Director by ABSA Bank, Embu Branch. Additional cheques and cash deposits were from related companies for the purpose of clearing overdraft facilities that were overdue.d.The Respondent erred in law and in fact by disregarding deductible inputs for non-vatable items used as raw materials in civil works, such items comprise of sand, building stones and dust used in construction, grading and gravelling of roads.e.The Respondent erred in law and in fact by mounting an additional tax assessment on the appellant without regard that its automated system did not reconcile and match the invoices produced by the Appellant and the Appellant’s suppliers, emanating from the same purchases.f.The Respondent erred in law and in fact when calculating the total sale amount. The Respondent assumed that the bounced cheques (cheques rejected due to insufficient funds in the Appellant’s bank account) and captured in the credit side of the Applicant’s bank statement were cheques deposits (income) and used to compute the total sale amount as undeclared sales.

Appellant’s Case 8. The Appellant set out its case in its Statement of Facts dated 16th November 2023.

9. The Appellant stated that it discharged its burden of proof under Section 56 of the TPA at the initial desk audit review when it submitted its invoices, receipts, bank statements, audited books and VAT returns.

10. The Appellant stated that the invoices it submitted at the time of filing of VAT returns were similar in substance and content to the transaction it had carried and the returns filed by its suppliers despite the discrepancies in the invoice numbering and dates of issuance.

11. That the Commissioner’s assumption that all the deposits captured in the bank statements constituted sales was erroneous because some of these deposits consisted capital injections from the Managing Director (MD) as evidenced by cheques deposits from the MD’s personal ABSA bank account to the Company’s bank account. That the MD also made additional cheque and cash deposits from related companies for the purpose of clearing overdraft facilities that were overdue.

12. It further stated that the Respondent had disregarded deductible inputs from non-vatable items used as raw materials in civil work such as sand, building stones and dust used in construction, grading and gravelling of roads.

13. That while calculating its total sales amount, the Respondent assumed that bounced cheques which were captured in the credit side of the Appellant’s bank statement were cheques deposits. That the Respondent subsequently applied these cheques as income and declared them as undeclared sale.

Appellant’s prayers 14. Flowing from the above submissions, the Appellant prayed to the Tribunal for orders that:a.The Appeal be allowed.b.The decision of the Responded to levy additional VAT assessment of Kshs 56,374,930. 49 against it be set aside.c.Each party to bear its own cost.d.Such other further orders or relief as the Honorable Tribunal may deem just and expedient.

Respondent’s Case 15. The Respondent’s case is premised on its Statement of Facts dated 28th December 2023 and Written Submissions dated 31st July 2024.

16. The Respondent stated that it carried out audit of the Appellant’s affairs to verify the sales figures as declared by the Appellant in its Income tax and VAT returns, purchases, expenses, input tax claims, usage of luxury motor vehicles and its different sources of income.

17. That it brought to charge the difference:a.In sales between the amount declared in profit and loss account and the amount computed from banking for the period 2019. b.Between figures declared for VAT and the sales declared in income Tax Return for the period 2019. c.Between closing stocks in 2019 and opening stock 2020 which was added back as inflated opening stock for 2020 while computing tax for the same period.

18. That based on the foregoing it issued an additional assessment to the Appellant for VAT for the year 2019-2020 vide a Notice dated 7th June 2023.

19. That the Appellant applied for extension of time to lodge late objection on 28th June 2023 citing sickness of its director and it was requested for documents supporting its objection on 9th August 2023 but the same was not provided and hence the assessment.

On Whether the Respondent lawfully raised the assessment 20. The Respondent stated that it’s empowered under Section 31(1) of the Tax Procedure Act, 2025 to issue amended assessment where it finds that the self-assessment by a taxpayer is inaccurate or information within its knowledge indicates that the taxpayer’s returns are less than accurate.

21. That in exercise of its mandate under Section 31(1) of the TPA, the Appellant’s self-assessments was reviewed and it was found that;a.There was a difference in sales between the amount declared in profit and loss account and amount computed from the Appellant’s banking for the period 2019. b.There was a difference between figures declared for VAT and the sales declared in the income tax return for the period 2019. c.There was a difference between closing stock in 2019 and opening stock in 2020. The difference was added back as inflated opening stock for 2020 while computing tax for the same period.d.Unsupported purchases emanating from difference in the actual invoices perused and purchases claimed in the income tax return.

23. The Respondent submitted that the banking analysis method is one of the recognized methods of tax administration and which can be used to determine taxes post facto in a self-assessment regime. That this position was given credence in the case of Digital Box Limited v Commissioner, investigations and Enforcement (tax Appeal Tribunal Act 115 of 2017).

24. That considering that banking analysis method is recognized as a means of determining the taxes due, the Appellant was left with only two ways of challenging the application of the banking method, viz: -i.Demonstrate entries in the bank that do not constitute income and support the same by way of supporting documentation; orii.In the alternative, demonstrate that it is in possession of documents required to be kept by the taxpayer in accordance with the provisions of Section 23 of the Tax Procedures Act, 2015 so as to render the application of the banking analysis inapplicable.

On Whether the Appellant has discharged his burden of proof. 25. The Respondent posited that it is trite law that the burden of proof lies with the taxpayer to demonstrate that its assessment is wrong since such an assessment enjoys the presumption of correctness. That the Appellant failed to discharge this burden and such the assessments stood. It supported this view with the cases of Commissioner Investigations and Enforcement v Kidero (Income tax Appeal E028 of 2020) [2022] KEHC 52 (KLR) (Commercial and Tax) (4 February 2022) (Judgment) and Leah Njeri Njiru vs. Commissioner of Investigations and Enforcement Kenya revenue Authority & Another [2021] eKLR.

26. That in the absence of sufficient supporting documents, it relied on the little available information and its best judgment to raise the assessment. It placed reliance on HCITA No. 121 of 2021: Commissioner of Domestic taxes vs. Metoxide Africa Ltd and Republic v Kenya Revenue Authority; Proto energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment).

Respondent’s Prayer 27. The Respondent prayed that this Tribunal finds:a.That the Respondent’s decision dated 25th September 2023 be upheld.b.The confirmed assessments raising VAT were proper in law.c.That the Appeal herein be dismissed with costs to the Respondent.

Issue for Determination 28. The Tribunal has evaluated the pleadings and documentation filed by both parties and is of the view that the singular issue for its determination is: Whether the Respondent’s objection decision was justified.

Analysis and Determination 29. The Tribunal having ascertained the issue falling for its determination as set out above proceeds to deal with the same as hereunder.

30. The Appellant’s argument was that it had provided sufficient documents to enable the Respondent fairly make a decision on its tax affairs. That these documents provided were ignored by the Respondent who opted to apply the banking analysis method to determine its tax liability. It asserted that the banking analysis method was applied in error as it included its bounced cheques which had not been cashed as part of its income.

31. The Respondent on its part argued that the Appellant had failed to supply it with documents that had been requested. It was thus left with no option other than to use the information available to it and to also apply its best judgment in determining the Appellant’s tax liability.

32. The Appellant was served with a notice of assessment on 7th June 2023. At this point the burden of proof that the tax assessed was not due and payable lay with it as is provided under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal (TAT) Act. It was hence required to provide relevant documents related to this assessment so as to satisfy this burden.

33. Section 56(1) of the Tax Procedures Act reads as follow regarding burden of proof: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

34. Additionally, Section 30 of the Tax Appeals Act provides as follows: -“In any proceeding before the Tribunal the Appellant has the burden of proving –a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

35. In any event the law under Section 54A of the ITA and Section 43 of the VAT Act requires the Appellant to keep records of its tax affairs. Section of the 54A (1) ITA provides as follows regarding keeping of records:-“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

36. Section 43 of the VAT Act provides as follows regarding keeping and availing of documents upon the request of the Commissioner:“(1)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 copies number order;(b)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;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;

37. In the instant case, the Appellant provided the following documents for the review of the Tribunal:a.Notice of assessment dated 7th June 2023b.Notice of late objection dated 28th June 2023c.Email correspondence of dated 9th August 2023d.Objection decision dated 25th September 2023.

38. The Tribunal is of the view that these documents were not relevant in helping the Appellant to dislodge the tax assessed against it. They were merely documents and correspondence which showed how the objection decision was arrived at.

39. More significantly, the Appellant has not tabled evidence to show that it provided the Respondent with further documents or information other than the 4 documents attached to its Statement of Facts.

40. The Appellant’s duty to provide relevant documents to discharge its burden of proof in a tax dispute was elucidated in the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.”

41. Accordingly, the Respondent did not fall into error when it opted to apply its best judgement and also use the information available to it as is envisaged in Section 31(1) of the TPA in determining the Appellant’s tax liability. The Respondent’s objection decision was thus justified.

Final Decision 42. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 25th September 2023 be and is hereby upheld.c.Each party to bear its own costs.

43. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF OCTOBER, 2024ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKAMEMBERDR. RODNEY O. OLUOCHMEMBERGLORIA A. OGAGAMEMBERABRAHAM K. KIPROTICHMEMBER