[2023] KETAT 552 (KLR)

Kutus Auto Hardware Limited v Commissioner of Domestic Taxes (Tax Appeal 1165 of 2022) [2023] KETAT 552 (KLR) (Civ) (1 September 2023) (Judgment)

Neutral citation: [2023] KETAT 552 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 1165 of 2022

RM Mutuma, Chair, W Ongeti, M Makau, EN Njeru & BK Terer, Members

September 1, 2023

Between

Kutus Auto Hardware Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly registered under the Companies Act and is a registered taxpayer. Its principal business is in the retail sale of construction materials in the form of a hardware shop in Kutus Town, Kirinyaga County.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the 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 issued VAT assessments on 15th November 2021 for the years 2018, 2019, and 2020 for a tax liability of Kshs. 9,810,267. 31 together with a demand letter.

4. The Appellant objected to the assessments vide a letter dated 19th November 2021 followed by another objection on 7th April 2022 in the iTax system.

5. The dispute went through the dispute resolution process after which the Respondent issued an objection decision on 29th August 2022 partially allowing the objection by confirming the principal tax for the years 2019 and 2020 and vacating the tax liability for 2018.

6. On receiving the decision, the Appellant filed a Notice of Appeal dated and filed on 27th September 2022.

The Appeal 7. The Appellant filed its Memorandum of Appeal dated and filed on 11th October 2022, and premised its Appeal on the following grounds; -a.That the Appellant was given an objection decision on 29th August 2022 at a time it had shown commitment to submit the amended returns upon the external audited accounts. There was also constant communication.b.That the Respondent demanded tax is unreasonable as the Appellant’s estimates for the two periods point to losses as evidenced by the 2018 accounts.c.That the death of the founding director of the Company, Mr. Rajnikant Patel in April 2021 as one of the unfortunate victims of COVID-19 affected the speed of processing and updating the company’s accounts as his untimely death robbed the company of a wealth of experience and valuable information having been the pillar behind the business for many years.d.That besides the passing of the founding director, the Appellant had notified the Respondent in writing of the loss of bookkeeping records relating to the periods 2018 and 2019 which delayed the submissions and amendments of the same and subsequent periods as the Appellant had rebuilt the data under challenging circumstances.

The Appellant’s Case 8. The Appellant set down its case premised on;a.The Appellant’s Statement of Facts dated and filed on 11th October 2022. b.The Appellant’s submissions dated 30th March 2023 and filed on the 31st March 2023.

9. The Appellant averred that it received an assessment and demand notice for the periods 2018, 2019, and 2020 on 15th November 2021 from its iTax manager in Nyeri Regional Offices of the Kenya Revenue Authority and objected in the letter dated 19th November 2021.

10. The Appellant stated that it made an online objection application and received an acknowledgment receipt adding that it received communications from the Tax Dispute Resolution Division Office in Nyeri relating to the tax objection application to comply with Section 51 (3) of the Tax Procedures Act 2015 on 13th and 27th April 2022.

11. The Appellant averred that after further communications with the Respondent a subsequent meeting on 25th May 2022, it finalized the audited accounts for the period of 2018 which was presented to the Respondent on 8th June 2022 and approved for amendment leaving the periods 2019 and 2020 for finalization and amendment.

12. The Appellant asserted that it received an objection decision for 2019 and 2020 for a total of Kshs 9,810,267. 31 on 29th August 2022 which it asserts surprised it as it was in constant communication with the Respondent until the August 9th general elections and had shown a commitment to finalize the 2018 period.

13. The Appellant in its written submissions identified two issues for determination by the Tribunal, namely;a.That the Appellant should be granted re-assessment of the Income Tax for the two periods 2019 and 2020. b.That the death of the founding director of the company affected the speed of processing and updating the Company’s accounts.

a. On whether the Appellant should be granted re-assessment for the Income Tax for the two periods 2019 and 2020 14. The Appellant submitted that the Alternative Dispute Resolution office cited in its letter dated 6th February 2023 that the time allowed for the parties to engage had lapsed thus closing the matter under the ADR process pending the receipt of the approved submissions but was advised by the Alternative Dispute Resolution office to continue engaging the Respondent on the pending issues and request the Tax Appeals Tribunal for additional time to engage in ADR.

15. It further submitted that it has demonstrated its commitment and on 20th March 2023 delivered to the Respondent copies of audited accounts for the two financial periods of 2019 and 2020 which was a date when movement was challenged due to political street demonstrations majorly in Nairobi.

b. On whether the death of the founding director of the company affected the speed of processing and updating the Company’s accounts. 16. The Appellant submitted that the founding director’s death robbed the Company of the wealth of experience and valuable information as he was the pillar behind the business for many years.

17. The Appellant contended that it managed to navigate this challenge following the death of the founding director and assemble the information which enabled the preparation of the accounts for the periods under this matter. It added that the fact that it took longer to prepare the accounts was a situation beyond its control.

The Appellant’s Prayers 18. Pursuant to the aforementioned the Appellant made the following prayers to the Tribunal, that;a.The Tribunal stops the Respondent from demanding or taking any further action or steps to ensure the recovery of the alleged principal tax, penalties, and interests;b.The Respondent (sic) be permitted to submit amended returns due to the circumstances mentioned;c.Any other remedies that this Tribunal may determine.

The Respondent’s Case 19. The Respondent’s case is premised on;a.The Respondent’s Statement of Facts dated and filed on 4th November 2022. b.The Respondent’s written submissions dated 5th April 2023 and filed on the 11th April 2023.

20. The Respondent cited Section 51 (3) of the Tax Procedures Act and stated that the Objection did not satisfy the statutory requirements necessary to make it valid.

21. The Respondent averred that the Appellant stated the ground of objection to be that the assessment is estimated and that it was ready to present self- assessment returns that reflect the true financial position.

22. The Respondent maintained that the Appellant filed NIL returns for the years 2018, 2019, and 2020 despite declaring substantial sales in the VAT returns showing that the income returns were false.

23. The Respondent asserted that the Appellant’s accountant visited its offices on 25th May 2022 promising to avail the duly signed financial statements and provided the 2018 financial statement on 6th June 2022 which depicted that the Appellant was trading at a loss of Kshs. 2,312,878. 00.

24. The Respondent stated that the Appellant’s accountant then submitted draft income statements for the years 2019 and 2020 on 30th June 2022 promising to avail the duly signed financial statements soon after which he failed to submit as at the date of the objection decision despite several reminders vide emails and phone calls.

25. The Respondent averred that it subsequently vacated the assessments for the 2018 year of income in favor of the Appellant’s self-assessment and financial statement and confirmed the additional assessments for the 2019 and 2020 years of income since the Appellant failed to support respective objection applications.

26. The Respondent cited Section 56 (1) of the Tax Procedures Act stating that it places the burden of proof on the Appellant and, by failing to produce the requisite documents showing the 2019 and 2020 accounts, the Respondent was unable to verify the correct tax position.

27. The Respondent asserted that it was working well within its mandate when it amended the assessment and demanded taxes because, at all relevant times, the Appellant had filed VAT returns stating that it had made some income but filed nil returns when it came to its income tax returns and quoted Section 31 of the Tax Procedures Act.

28. The Respondent in its written submissions identified one issue for determination by the Tribunal, namely;a.That the Respondent’s charge to tax of the Appellant on corporation tax is erroneous or excessive.b.On whether the Respondent’s charge to tax of the Appellant on corporation tax is erroneous or excessive.

29. The Respondent quoted Section 23 (1) of the Tax Procedures Act and Section 43 of the VAT Act submitting that the Appellant is mandated to maintain documents required under any tax law and provide the same upon request by the Respondent in order to ensure the taxpayer’s tax liabilities can be readily ascertained.

30. The Respondent further quoted Section 24 (2) of the Tax Procedures Act and submitted that it is not bound by the information provided by or on behalf of the taxpayer and can assess the taxpayer's tax liability using any information available adding that it relied on customs data to assess the Appellant for Income Tax and VAT.

31. It also relied on Section 31 (1) of the Tax Procedures Act and Section 73 (2) (b) of the Income Tax Act arguing that it is allowed to amend the taxpayer’s assessment. It also cited the case of Republic vs. Commissioner General, Kenya Revenue Authority & Another Ex-Parte Contact Network Ltd [2014] eKLR where the court held:―It is clear from a reading of the said provisions that the respondents are indeed clothed with powers to estimate taxes payable by a taxpayer in certain circumstances.

32. It maintained that Section 2 (a) (i) of the Income Tax Act charges income tax for gains from a business thus taxpayers should file returns pursuant to Section 28 of the Tax Procedures Act for the purposes of determining income tax based on sales. It added that Section 2 as read with Section 5 of the Value Added Tax Act imposes VAT on taxable supplies which is a supply in the course of or in the furtherance of a business carried on by the person.

33. The Respondent further maintained that the total sales reported in the Corporation tax returns are equal to the VAT returns reported by any taxpayer adding that for the periods under review, the Appellant filed VAT returns but filed nil Corporation tax returns therefore the Respondent adjusted the Appellant’s Corporation tax flowing from noted variances between sales as per the VAT returns and Income Tax returns.

34. The Respondent submitted that its amended assessment enjoys refuge under Section 56 (1) of the Tax Procedures Act positing that the burden shall be on the taxpayer to prove that a tax decision is incorrect which the Appellant has failed to do in the current Appeal.

35. It cited the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR where it was 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.

36. The Respondent further cited the case of Pearson vs. Belcher CH.M Inspector of Tax Cases Volume 38 which was referred to by Justice Majanja in PZ Cussons East Africa Limited vs. Kenya Revenue Authority (2013) eKLR when he stated:―...there is an assessment made by the Additional Commissioners upon the Appellant; it is perfectly clearly settled by cases such as Norman v Golder, 26 T.C. 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect; and ofcourse he has completely failed to do so. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs.

37. It relied on the case of Commissioner for Her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid vs. The Commissioners For Her Majesty's Revenue and Customs where it was held:―the very use of the word judgment makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them…Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is dueThirdly, it should be recognized particularly bearing in mind the primary obligation of the tax payer, to which I have made reference, of the tax payer to make a return himself, that the commissioners should not be required to do the work of the tax payer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain the information without carrying out exhaustive investigations. What the words best of their judgment envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due.‖

38. The Respondent reiterated that its charge to tax for additional income tax is premised on the Appellant’s returns and the identifiable sales as per the VAT returns together with the nil returns filed for corporation taxes, for the period under review and that the Appellant has not to date provided an alternative narrative in the form of reconciliation or annexed to its Appeal supporting documents for the grounds of appeal or contradicting the Respondent’s basis for taxation.

39. The Respondent concluded that its charge to corporation tax is in compliance with the applicable law and the Respondent was proper in charging additional corporation tax.

The Respondent’s prayers 40. The Respondent, therefore, prayed for the Tribunal to:a.Uphold its objection decision dated 29th August 2022 as proper and in conformity with the provisions of the law.b.Dismiss the Appeal with cost.

Issues for Determination 41. Having considered the Memorandum of Appeal, the parties’ Statements of Facts, and the parties’ respective submissions, the Tribunal is of the considered view that the Appeal herein distils into one issue for determination being:Whether the Objection Decision dated 29th August 2022 was proper in law

Analysis And Findings 42. The Tribunal proceeds to analyze the issue identified hereinunder.Whether the Objection Decision dated 29th August 2022 was proper in law.

43. The Appellant contended that the founding director’s death robbed the Company of the wealth of experience and valuable information as he was the pillar behind the business for many years.

44. The Appellant reiterated that it managed to navigate this challenge following the death of the founding director and assemble the information which enabled the preparation of the accounts for the periods under this matter. It added that the fact that it took longer to prepare the accounts was a situation beyond its control.

45. The Respondent argued that its charge to tax for additional income tax is premised on the Appellant’s returns and the identifiable sales as per the VAT returns together with the nil returns filed for Corporation taxes, for the period under review and that the Appellant has not to date provided an alternative narrative in the form of reconciliation or annexed to its Appeal supporting documents for the grounds of appeal or contradicting the Respondent’s basis for taxation.

46. The Tribunal notes that the Appellant finalized the audited accounts for the period of 2018 which it presented to the Respondent, basis whereof the assessment for 2018 was vacated leaving the periods 2019 and 2020 for finalization and amendment, however the Respondent proceeded to issue an amended assessment, which was subsequently confirmed in the objection decision.

47. In relation to the issuance of an amended assessment by the Respondent, Section 31 of the Tax Procedures Act 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 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 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.‖

48. The Tribunal observes that for the period under review the Appellant has not to date provided an alternative narrative in the form of reconciliation or annexed to its Appeal supporting documents for the grounds of appeal or contradicting the Respondent’s basis for taxation. Section 30 of the Tax Appeals Tribunal Act provides that:-―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.‖

49. Section 56 (1) of the Tax Procedures Act further provides that:-―In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.‖

50. Additionally, Section 38 (b) of the Tax Appeals Tribunal Act posits as thus:-―the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax;‖

51. The Tribunal is persuaded that the Respondent gave the Appellant indulgence and time through meetings, correspondences, and engagements so that the Appellant could discharge its burden of proof; an opportunity, the Appellant did not utilize.

52. It is, therefore, apparent to the Tribunal that the Respondent made the decision to the best of its judgment based on the information available to it.

53. Consequently, the Tribunal finds that the Respondent’s objection decision dated 29th August 2022 is proper in law.

Final Decision 54. The upshot of the foregoing is that the Appeal is unmerited and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby dismissed.b.The Objection decision dated 29th August 2022 be and is hereby upheld.c.Each party to bear its own costs.

55. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 1ST DAY OF SEPTEMBER, 2023ROBERT MUGAMBI - CHAIRPERSONDR. WALTER ONGETI - MEMBERMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERBONIFACE K. TERER - MEMBER