[2024] KETAT 332 (KLR)

Kiritu v Commissioner of Domestic Tax (Appeal 1558 of 2022) [2024] KETAT 332 (KLR) (Civ) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 332 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 1558 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, AM Diriye & B Gitari, Members

March 8, 2024

Between

Esther Njeri Kiritu

Appellant

and

The Commissioner Of Domestic Tax

Respondent

Judgment

1. The Appellant is resident individual and a registered taxpayer who was involved in the business of soda distribution at the time. She is registered for Value Added Tax (VAT), Income tax-Company and Income tax-PAYE.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. Under Section 5 (1) of the Act, the Respondent is an agency of the Government of Kenya mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 2 of the First Schedule of the Act, to assess, collect and account for all revenues per those laws.

3. Following a compliance audit, the Respondent on 18th March 2022 and 6th April 2022 issued the Appellant with a pre-assessment demand and on 18th May 2022 a credit return review.

4. On 30th June 2022 and 29th August 2022, the Respondent raised income tax and VAT additional assessments, respectively, on the Appellant’s iTax portal.

5. On 6th September 2022, the Appellant objected to the additional assessment to which the Respondent delivered its objection decision on 10th November 2022.

6. Consequently, the Appellant lodged this Appeal dated 22st December 2022 and filed on even date.

The Appeal 7. The Appeal as contained in the Memorandum of Appeal dated 21st December 2022 and filed on even date raised the following grounds of appeal, that:-i.The Respondent confirmed the assessments without due regard to all records/documents, explanations, and information provided.ii.The basis of the assessment claiming that the Appellant’s full purchase cost for the years under review is untrue.iii.The purchase cost claimed was the purchase invoice amount less the returned empty bottles amount of every delivery.iv.The Nairobi Bottlers Limited does not give discounts but the empty returned bottles amount is reduced from the invoice.v.The Respondent failed to distinguish between discounts and empty bottles returned credits.vi.The Respondent in raising the assessments overstated the Appellant’s sales amount.vii.The Respondent erred both in law and fact by disallowing the incurred input tax contrary to Section 17 of the VAT Act 2013 which allows a registered person to deduct input tax incurred by him/her.viii.The confirmed assessments are excessive and punitive and do not reflect reality.ix.The Respondent's arguments in the tax decision to the effect that the Appellant provided inadequate documentary evidence in support of the objection is not factual since relevant documents were availed.x.The based on the mentioned grounds, the Appellant appeals against the VAT and Income tax additional assessments done for the years 2016, 2018, 2019, 2020 & 2021 and the objection decision dated 10th November 2022.

The Appellant’s Case 8. The Appellant set out her case in her;a.Statement of Facts dated 21st December 2022 and filed on even date together with the documents attached thereto; andb.Written submissions dated 14th August 2023 and filed on 15th August 2023.

9. The Appellant averred that the Respondent raised an additional Income tax assessment of Kshs. 2,416,298. 00 on 30th June 2022 for the year 2016 in which the Respondent reduced the purchases claimed by the Appellant. The Respondent further raised Value Added Tax additional assessment of Kshs. 35,132,009. 00 for the months of December 2016, 2019, 2020, and 2021 in which the Respondent increased the amount of sales and in 2020 disallowed some of the purchases claimed by the Appellant.

10. The Appellant stated that the Respondent raised debit adjustment vouchers for the VAT additional assessment for the months of December 2020, December 2019, and December 2018.

11. The Appellant asserted that she had complied with tax laws by declaring input and output taxes as required by the law.

12. The Appellant contended that the assessments made by the Respondent were inconsistent with the grounds raised to the Appellant. That as per the provided supplier statement, purchases claimed are correctly stated and that no discount was offered by the supplier.

13. The Appellant stated that the Respondent via email dated on 31st October 2022 agreed to work with significant information covering the matter since some of the Appellant’s documents were destroyed and the business closed down. Subsequently, these documents were provided by the Appellant.

14. The Appellant stated that the pre-assessment notices and the credit review letter were sent to the Appellant’s email but was not able to access the emails for the period between February 2022 and July 2022 due to her ill health and therefore was not able to respond to the notices and the credit review letter within the stipulated time.

15. The Appellant claimed that the Respondent also engaged her through several emails and phone calls between the dates 28th September 2022 and 31st October 2022 whereby it provided the requested documents some of which were delivered physically to the Respondent’s offices.

16. The Appellant averred that the Respondent raised an additional income tax assessment of Kshs. 15,938,589. 00 on 30th June 2022 for the period 2016 to 2021 and an additional VAT assessment of Kshs. 35,132,009. 74 after disallowing some of its purchases. The Appellant submitted that these additional tax assessments raised are not in line with the pre-assessment notices and the credit review served.

17. The Appellant submitted that on 29th August, the Respondent issued a debit adjustment vouchers for the VAT additional assessment for the months December 2020, December 2019, and December 2019.

18. The Appellant averred that she sent her objection letter on 23rd September 2022 via email and the same was uploaded on her Itax platform on the same date.

19. The Appellant submitted that the Respondent failed to consider all the information and documents provided giving reasons contrary to facts that the documents provided were inadequate and that the Respondent failed to distinguish between discounts offered by the Nairobi Bottlers Limited and sales returns inform of empty bottles. That as per the provided supplier statement, purchases claimed are correctly stated and that no discount was offered by the supplier.

20. The Appellant stated that a registered person is allowed to claim input tax on the purchases and direct expenses incurred and that she declared correct purchases amount and sales.

21. That the Appellant having only one supplier (Nairobi Bottlers Limited) provided the supplier’s statement showing all purchases made, empty bottles returned and payments made for the period under review.

22. That by confirming the assessment, the Respondent failed to consider these provisions of TPA Section 31 (1) (c) which provides that;“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.”

23. That the Appellant being a senior citizen of the Country at the age of 93 and ailing belongs to the vulnerable groups within the society as provided by the Constitution and as such should be protected by the state.“(3) all state organs and all public offices have the duty to address the needs of vulnerable groups within society, including women, older members of the society, persons with disabilities, children, youth, members of minority or marginalised communities, and members of particular ethnic, religious or cultural communities.”

24. Further, that the Constitution protects the older members of the society against abuse and unfairness as follows:-“57. The state shall take measures to ensure the right of older personsa)to fully participate in the affairs of the societyb)to pursue their personal developmentc)to live in dignity and respect and be free from abused)to receive reasonable care and assistance from their family and state.

Appellant’s Prayers 25. The Appellant prayed that this Tribunal:-a.Allows this Appeal.b.Ensures that all supporting documents provided by the Appellant are reviewed.c.Annuls the additional assessments done on the Appellant based on the above grounds and upholds the Appellant’s notice of objection.

The Respondent’s Case 26. In opposing the Appeal, the Respondent set out its case in its;-a.Statement of Facts dated and filed on the 20th January 2023 and documents annexed thereto;

27. By Orders of this Tribunal issued on the 30th August 2023 and 27th September 2023, the Respondent’s case was directed to proceed on the basis of its Statement of Facts.

28. The Respondent averred it reviewed the Appellant’s tax affairs and amended the tax assessments as per Section 31 of the Tax Procedure Act (TPA) which reads;(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 judgment, 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 Tx 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 excesses 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.”

29. The Respondent averred that it established that the Appellant claimed the full purchases despite receiving rebates from Nairobi bottlers Ltd.

30. The Respondent stated that it disallowed the deductions at the full price pursuant to Section 16 (1) of the Income Tax Act, since the purchases claimed were not wholly and exclusively incurred by the Appellant in the production of the income. Section 16 (1) of the ITA, provides;“Save as otherwise expressly provided, for purposes of ascertaining the total income of a person for a year of income, no deduction shall be allowed in respect of –(a)expenditure or loss which is not wholly and exclusively incurred by him in the production of the income;(b)capital expenditure, or any loss, diminution or exhaustion of capital.”

31. The Respondent stated that the import of Section 16 (1) of the ITA (supra) is that the purchase price should have been reduced by the amounts of discounts (rebates) received. The Respondent submitted that the necessary adjustments have been done to add back rebates for the period 2017-2020.

32. It was the Respondent’s submission that the rebates disallowed in (30) above have also been withdrawn from the VAT account resulting in further adjustments.

33. The Respondent stated that the provisions of Section 31 of the Tax Procedures Act (TPA) on amendment of taxes, are complemented by Section 23 and 59 of the TPA that require taxpayers maintain proper records, and furnish information relating to their tax liability and avail any documents in the person’s custody or under the person’s control relating to the tax liability.

34. The Respondent submitted that in furtherance of its powers under Section 31 of the TPA, it requested the Appellant to adduce further particulars illuminating on its tax liability, requesting for the following:i.Purchase Ledgersii.Purchase invoices that relate to the discounts.iii.ETR receiptsiv.Delivery notes,v.Discount receipts including discount ledgersvi.Evidence of payments e.g bank and Mpesa statement indicating clearly the payment of specific invoice, and;vii.Brief summary on nature of your business.viii.Cash book and bank statements financial accounts

35. It was the Respondent’s position that the Appellant only provided the following documents;i.Audited financial statements for the years 2016, 2018, 2020 and 2021 and acknowledgement receiptsii.Monthly sales report that, an; photocopies of handwritten schedules of purchases

36. It was the Respondent’s submission that the documents provided by the Appellant were insufficient and did not render themselves to a conclusive finding as to whether the additional assessments were excessive or erroneous for the following reasons:a.The Appellant provided illegible sales reports which were not in the list of requested documents.b.The handwritten purchase schedules provided were not supported by primary documents e.g purchase invoices and ETR receipts.c.The Appellant failed to provide relevant documents such as purchase ledgers, purchase invoices, discounts receipts and proof of payment.d.The Appellant did not adequately support her grounds of objection with either computation or supporting documentation requested.

37. The Responded submitted that the Appellant’s claim for allowable deductions were unsubstantiated and unsupported by relevant documentation contrary to the Appellant’s burden of proof.

38. In conclusion, the Respondent stated that the additional income tax and VAT assessment were proper and should be upheld by this Tribunal.

Respondent’s Prayers 39. The Respondent prayed that this Honourable Tribunal;i.Upholds the Respondent’s objection decision as proper and in conformity with the provisions of the law.ii.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Issues For Determination 40. Gleaning through the Appeal and the various documentation submitted, the Tribunal finds that there is a single issue that calls for its determination:Whether the Respondent’s additional tax assessment on the Appellant was correct and proper in law.

Analysis And Findings 41. The dispute herein arose after the Respondent issued the Appellant with Income tax additional assessment for the year 2016 and Value Added Tax (VAT) additional assessment for the years 2016, 2018, 2019, 2020 and 2021 and a credit return review.

42. The Tribunal notes that the Appellant protested that the assessment was excessive and does not reflect the true state of affairs since she does not make such profits and the Respondent did not factor the losses brought forward from previous years.

43. The Tribunal notes that the Respondent disallowed the Appellant’s claim of deductions based on the original invoice of goods and instead reduced the amount of deductible input tax by the amount of credits received by Appellant.

44. The Tribunal notes that the Appellant’s main contention was the Respondent’s action of disallowing purchases which it wholly and executively incurred in the production of business income and allowable under the provisions of the Income Tax Act.

45. The Tribunal notes that the Respondent retorted that it established the Appellant claimed full purchases despite receiving rebates from Nairobi bottlers Ltd and therefore it disallowed the deductions at the full purchase price pursuant to Section 16 (1) of the Income Tax Act, since part of the purchases claimed were not wholly and exclusively incurred by the Appellant in the production of the income.

46. The Appellant stated that as a registered person she is allowed to claim input tax on the purchases and direct expenses incurred and argued that by confirming the assessment, the Respondent failed to consider the provisions of TPA Section 31 (1) (c) which provides that:-“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”

47. The Respondent submitted that it is empowered to amend tax assessments as per Section 31 (1) of the Tax Procedures Act which provides that: -“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 formation and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure.”

48. The Appellant argued that the Respondent declined to consider supplier statement from her only supplier, the Nairobi Bottlers Limited which she stated indicated purchases claimed were correctly stated and that no discount was offered by the supplier.

49. After having considered rival arguments the Tribunal established that upon purchase of the beverages (sodas), the Appellant incurred the cost of the beverage and the container which she claimed as her expense. Subsequently, her supplier issued her with a credit upon the return of the empty container, meaning that the containers were not sold and hence did not make up the income on which the full purchase invoice was being claimed. The purchase invoice ought to have reduced by the value of the returns credit.

50. The Tribunal is therefore satisfied that the Appellant has not demonstrated that the purchases claimed in her input tax and income tax computation were wholly and exclusively incurred for the generation of income for the years under review.

51. It is the view of the foregoing analysis, the Tribunal finds and holds that Appellant’s purchases were not wholly and exclusively incurred in the generation of income as provided for under Section 16 (1) of the ITA.

Final Decision 52. Consequently, the Respondent’s tax assessments on the Appellant were correct and proper in law. The Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders.i.The Appeal be and is hereby dismissed.ii.The Respondent’s objection decision dated 23rd September 2023 be and is hereby upheld.iii.Each party to bear its own costs.

53. It’s so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024ROBERT M. MUTUMACHAIRPERSONELISHAH N. NJERU MUTISO MAKAUMEMBER MEMBERMOHAMED A. DIRIYE BERNADETTE M. GITARIMEMBER MEMBER