[2022] KEHC 15353 (KLR)

Kinyua v Commissioner of Investigations & Enforcement (Tax Appeal E116 of 2021) [2022] KEHC 15353 (KLR) (Commercial and Tax) (11 November 2022) (Judgment)

Neutral citation: [2022] KEHC 15353 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Tax Appeal E116 of 2021

DAS Majanja, J

November 11, 2022

Between

Mary Wanjiru Kinyua

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

(Being an appeal against the Judgment of the Tax Appeals Tribunal at Nairobi dated 18th June 2021 in Tax Appeal No. 395 of 2019)

Judgment

Introduction and Background 1. The Appellant is a tax payer and was at the material time the Chief Executive Officer of Platinum Distillers Limited (“the Company”) which manufactures and distributes alcoholic beverages. Sometime in early 2019, the Respondent (“the Commissioner”) carried out contemporaneous investigations into the tax affairs of the Company and its directors including the Appellant.

2. By a letter dated April 18, 2019, the Commissioner notified the Appellant of additional assessments for the income years 2014-2017. In the letter, the Commissioner stated that the Appellant had been filling nil income tax returns for that period and that an analysis of her bank deposits at Equity Bank and KCB Bank and a joint account with one of the directors, OMM were adjusted to a total of Kshs 417,861,296. 00. In arriving at this sum, the Commissioner held that it made adjustments to the Appellant’s bank receipts including adjustments for bounced/unpaid cheques and that the net bankings in the joint account had been distributed equally between the Appellant and her co-director. As a result, the Commissioner assessed the Appellant’s tax liability inclusive of penalties and interest at Kshs 249,579,296. 00.

3. By a letter dated May 23, 2019, the Appellant lodged her Notice of Objection against the assessments. She faulted the Commissioner for not taking into account the loans and other personal bankings into the said accounts and the business expenses incurred in generating the incomes so subjected to tax as provided for under Income Tax Act (Chapter 470 of the Laws of the Kenya) (“the ITA”) and the Tax Procedure Act, 2015 (“the TPA”) She further stated that the Equity and KCB bank accounts do not belong to her and that the said PIN number identified and referred to by the Commissioner was also wrong hence the whole assessment was inaccurate. The Appellant then provided the Commissioner with a reconciliation for its reference and determination.

4. After considering the grounds provided in the objection, the Commissioner rendered its objection decision on July 22, 2019, (“the Objection Decision”). On the loans and other personal bankings, the Commissioner stated that it had considered the same together with related party transfers and contras and thus agreed to review and adjust the bankings to Kshs 413,544,539. 00. On expenses, the Commissioner stated that the Appellant had not provided any supporting documents. On the wrong bank account numbers, the Commissioner stated that despite being supplied with the correct bank accounts analysed, no reconciliations were provided. On the wrong PIN number, the Commissioner stated that the PIN number was the correct one as per its records. The Commissioner reviewed the Appellant’s tax liability inclusive of penalties and interest at Kshs 163,897,497. 00.

5. The Appellant proffered an appeal with the Tax Appeals Tribunal (“the Tribunal”) which after considering the parties’ pleadings, submissions and all documentation provided, rendered its judgment on June 18, 2021. In determining whether the assessments were justified, the Tribunal stated that even though the Appellant alleged that the amounts received in the accounts were payments for the Company, she did not demonstrate the same by producing receipts or any other relevant documents in support and that these being her personal accounts, prima facie, she received funds on her own behalf during the period. The Tribunal stated that the Appellant ought to have presented to the Tribunal a breakdown of what was received on her own behalf against the collections for the Company but that she did not endeavor to do that. Instead, the Appellant made a general claim that all the funds received were payments for the Company. The Tribunal held that the Appellant failed to demonstrate that indeed the funds received in her accounts were payments to the Company and that having failed to do so, the only cogent conclusion was that she was obliged to pay taxes. Consequently, the Tribunal held that the Appellant's claim on account of double taxation failed.

6. On the Appellant’s assertion that the personal loans were treated as income, the Tribunal found that the Appellant did not cite any single loan facility granted to her or produce any loan agreements that she was granted such facility hence in the absence of supporting evidence, this assertion equally failed. The Appellant complained that the Commissioner assessed individual taxes at the Corporate tax rate of 30% instead of the individual graduated rates. The Tribunal was persuaded with the Commissioner’s argument that the Appellant had not declared any income during the period despite the unexplained deposits in her account, as such, the Commissioner treated the deposits as business income and computed tax thereon accordingly at the rate of 30% using the mark up method having taken into account all the supported expenses. The Tribunal held that there being no evidence to the contrary, the deposits in the Appellant’s accounts could only qualify as business income and not employment income and thus, the graduated PAYE rate and the relief thereon could not apply at all. The Tribunal dismissed the Appellant’s appeal, upheld the Objection Decision thus confirming the assessment of Kshs 163,897,497. 00.

7. It is this decision that is the subject of the appeal before the court for determination, which appeal is grounded in the Memorandum of Appeal dated July 5, 2021. The appeal has been canvassed by way of written submissions where the parties have taken positions I have already outlined above and therefore do not need to rehash.

Analysis and Determination 8. In determining this appeal, I am cognizant of the fact that this court is exercising appellate jurisdiction that is circumscribed by section 56(2) of the TPA which provides that “An appeal to the High Court or to the Court of Appeal shall be on a question of law only”. The 11thEd of Black’s Law Dictionary defines a ‘matter of law’ to be “A matter involving a judicial inquiry into the applicable law.” Essentially, this means that an appeal limited to matters of law does not permit the appellate court to substitute the Tribunal’s decision with its own conclusions based on its own analysis and appreciation of the facts. What the court is to determine is whether the Tribunal arrived at a conclusion that was supported by the law and the evidence before it (See Bashir Haji Abdullahi v Adan Mohammed Nooru & 3 others NRB CA Civil Appeal No 300 of 2013 [2014] eKLR and John Munuve Mati v Returning Officer Mwingi North Constituency & 2 others [2018] eKLR).

9. Even though the Appellant’s Memorandum of Appeal raises 8 issues, her counsel has condensed them into four issues in her submissions which I have summarised and will determine as follows:i.Whether the Tribunal erred in its finding that the Appellant did not cite a single loan facility that was granted to her nor produce any loan agreements to prove the same.ii.Whether the Tribunal erred in its finding that the corporate tax rate was rightly applied by the Commissioner in its assessmentiii.Whether the Tribunal erred in finding that the payments made to the Appellant’s accounts belonged to the Companyiv.Whether the Tribunal erred in not adhering to its own precedent in Tax Appeal No 396 of 2019; Onesmus Muturi Mburu versus Commissioner of Investigations & Enforcement

Loan facilities 10. The Appellant contends that she received personal loans from the Company as its employee and Chief Executive Officer and also from WM for the purchase of a house in Kikuyu Gardens and that in her submissions before the Tribunal, she presented a table representation to demonstrate the loan amounts received in her account.

11. Every tax payer is required to maintain proper and relevant records and documents for purposes of ascertaining their tax liability and produce them when required by the Commissioner. This position reverberates throughout tax statutes including the TPA and the ITA. Section 59 (1) of the TPA provides that a tax payer shall produce records when required to do so by the Commissioner. Section 3(1) of the TPA provides that the documents a tax payer is expected to maintain include, ‘a book of account, record, paper, register, bank statement, receipt, invoice, voucher, contract or agreement, tax return, Customs declaration, or tax invoice; or any information or data stored on a mechanical or electronic data storage device’. In essence, a tax payer is supposed to maintain primary documents meaning a schedule or table summary of expenses and income cannot be deemed to be a document or record capable of ascertaining one’s tax liability (see Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2022] KEHC 52 (KLR) (Commercial and Tax) (4 February 2022) (Judgment)).

12. Since the Appellant did not produce any primary documents to prove that loans advanced to her, the Commissioner could not be faulted for concluding that the said sums constituted the Appellant’s income. This is against the backdrop of section 56 of the TPA which provides that it is the duty of the taxpayer to prove that the decision of the Commissioner is incorrect. The only way the Appellant could surmount or discharge that burden was if she produced primary documents and records to prove her case on the said loans. This she did not, meaning that the Commissioner’s position remained undisturbed and the Tribunal was right to conclude that the Appellant did not provide evidence of any loan facility granted to her or produce any loan agreements to prove her contention. In the absence of supporting evidence, her assertions that the said amounts in her accounts were loans could not suffice to dislodge the Commissioner’s conclusions.

Corporate tax rate applied by the Commissioner 13. The Appellant faults the Tribunal for agreeing with the Commissioner’s decision to tax her bankings at the corporate rate of 30% rather than the resident individual rate on a graduated scale. Under section 3 of the ITA, income tax is chargeable either on employment income or business income. The ITA further charges individuals and corporates at different tax rates and this is demonstrable from section 34 which provides in part as follows:34. Rates of tax(1)Subject to this section—(a)tax upon the total income of an individual, other than that part of the total income comprising wife’s employment income fringe benefits and the qualifying interest, shall be charged for a year of income at the individual rates for that year of income;…………………(e)tax upon the total income of a person other than an individual shall be charged at the corporation rate for that year of income; [Emphasis mine]

14. Under the Third Schedule of the ITA, a flat rate of 30% is applied to a corporate body’s taxable income in case the entity is a resident company while for individuals, the applicable rate is graduated from 10%, 25% upto a maximum rate of 30% for different income brackets and the taxpayer is also entitled to a personal relief from the tax payable.

15. In this case, the Commissioner was assessing the Appellant’s income and not the income of a resident corporation. It is the loans and money coming from other sources that was deemed to be her income hence there was no basis for the Commissioner to apply a corporate flat rate of 30% as opposed to the individual graduated rate. The ITA is emphatic that individuals are always charged according to an individual graduated tax rate and not the corporate flat rate of 30% in ascertaining their business and/or employment income.

16. I agree with the Appellant that the Tribunal erred in failing to find that the corporate tax rate should not have been applied to the Appellant in the Commissioner’s Objection Decision.Whether the payments to the Appellant’s accounts belonged to the Company

17. The Appellant contended that her personal account was being used as the Company’s collection account. In support of her claim she produced Company resolutions. The Tribunal rejected the resolutions stating that no CR12 form or any other documentation was produced by the Appellant to confirm that the signatory was indeed a director of the Company and that said resolution dated January 1, 2014 is general in nature and does not specify which personal account(s) were to be used in the revenue collection exercise.

18. The Tribunal further held that the Appellant did not support her claim of the deposits by way of documentation and a breakdown of what was received on her own behalf against the collections for the Company. The Commissioner agreed with the Tribunal.

19. The issue for consideration is whether the Appellant produced sufficient documentation to dislodge the Commissioner’s findings. I agree with the Tribunal and the Commissioner that the Company resolutions were not sufficient to demonstrate that the sums being received in the Appellant’s accounts were collections from the Company. Apart from them being general, the Appellant ought to have provided adequate documentation chain-linking the deposits in her accounts to the Company. This ground by the Appellant therefore fails.The principle of stare decisis and precedent and its application to Tribunals

20. The Appellant submitted that the Tribunal failed to apply the doctrine of horizontal stare decisis by adhering to its own precedent which it had delivered barely one month before the date of the impugned decision herein in Tax Appeal No 396 of 2019 - Onesmus Muturi Mburu v Commissioner of Investigations & Enforcement

21. The Black’s Law Dictionary (11thEd) defines ‘stare decisis’ as “The doctrine of precedent, under which a court must follow earlier judicial decisions when the same point arises again in litigation.” Whether a tribunal such as the Tax Appeals Tribunal is bound by its own decisions was discussed in detail by the Supreme Court in SGS Kenya Limited v Energy Regulatory Commission & 2 others SCK Petition No 2 of 2019 [2020] eKLR as follows:(41)So we turn to the single issue before us: are the Tribunals bound by the doctrine of stare decisis? The petitioner has contended that the Review Board failed to follow its own decision in Avante, without any explanation. According to the petitioners, stare decisis applies to quasi-judicial tribunals, to the intent that there be uniformity/consistency, predictability, and certainty in law, in general terms. The 1st respondent, quite to the contrary, has argued that tribunals are not bound by their previous decisions such being only persuasive; and that each tribunal-task is to be determined on the basis of the facts before it.(42)From the two contending propositions, it emerges, in our view, that tribunals, in their primary category, are specialized bodies charged with programming and regulatory tasks of the socio-economic, administrative and operational domains. Membership in such tribunals generally reflects the essential skills required for the specific tasks in view. The Public Procurement Administrative Review Board falls within this category. It is endowed with requisite experience from its membership, and has access to relevant information and expertise, to enable it to dispose of matters related to procurement. The question is: whether it is bound by its previous decision, as it taKshs decisions on different matters lately coming up.(43)Such a variegated range of implementation scenarios, it is apparent to us, calls for flexibility in the regulatory scheme. In principle, matters on the agenda of an administrative tribunal will merit determination on the basis of the claims of each case, and will depend on the special factual dynamics. The relevant factors of materiality, and of urgency, will require individualised response in many cases: and in these circumstances, a strict application of standard rules of procedure or evidence may negate the fundamental policy-object. On this account, the specialized tribunal should have the capacity to identify relevant factors of merit; be able to apply pertinent skills; and have the liberty to prescribe solutions, depending on the facts of each case. Such a tribunal should fully take into account any factors of change, in relation to different cases occurring at different times: without being bound by some particular determination of the past.(44)We would agree with the 1st respondent, that administrative decision-makers should have significant flexibility, in responding to changes that affect the subject-matter before them. Matters before an administrative tribunal should be determined on a case-to-case basis, depending on the facts in place.

22. In short, the Supreme Court held that tribunals are not bound by the strictures of stare decisis in far as it concerns decisions made by the tribunal itself as it is allowed flexibility in determining the different cases before them. In any case, while I agree with the Appellant that the two cases are related, a reading of the judgment in Tax Appeal No 396 of 2019 indicates that the issue for determination was different from what the Tribunal dealt with in this case. In Tax Appeal No 396 of 2019, the issue was whether the Commissioner conducted proper investigations into the appellant’s affairs. The Tribunal found that the investigations were not upto par for a number of reasons including the fact that the Commissioner did not request the Appellant to segregate his income by clearly demarcating the amount due from business income and those attributable to individual income. The Tribunal further lamented that there was no evidence before it to enable it make a reasonable and justifiable finding on the merits of that case and indeed, the Commissioner was ordered to conduct a proper reassessment of the appellant. In this case however, the Appellant neither challenged the propriety of the investigations carried out by the Commissioner nor was there any issue of evidence or lack thereof to enable the Tribunal make a finding. The record was complete and the Tribunal was able to make a conclusive findings based on the material before it. The Appellant was also given a chance to present her supporting evidence, which she largely failed to do.

23. It is for the above reasons that I find that the Tribunal was not bound to follow its own decision in Tax Appeal No 396 of 2019 as stated by the Supreme Court in SGS Kenya Limited v Energy Regulatory Commission & 2 others (Supra) and also for the reason that the Tribunal handled different issues in both cases.

Disposition 24. In conclusion, the Appellant’s appeal is largely unsuccessful save on the issue that the Commissioner failed to apply the correct tax rate in computing the Appellant’s income tax liability.

25. For the reasons I have set out above, I now issue the following orders:a.The Appeal is dismissed save that the Commissioner be and is hereby directed to review its Objection Decision July 22, 2019 by applying the correct individual graduated rate of tax to the Appellant’s income.b.Each party shall bear its own costs of this appeal.

SIGNED AT NAIROBID S MAJANJAJUDGEDATED and DELIVERED at NAIROBI this 11TH day of NOVEMBER 2022. A MABEYAJUDGECourt Assistant: Mr M Onyango.Mr Kabugu instructed by Kabugu and Company Advocates for the Appellant.Mr P Wairire instructed by the Kenya Revenue Authority for the Respondent.