[2024] KETAT 1463 (KLR)

Langat v Commissioner Legal Services & Board Coordination (Tax Appeal E649 of 2023) [2024] KETAT 1463 (KLR) (11 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1463 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E649 of 2023

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

October 11, 2024

Between

Livingstone Kipsiele Langat

Appellant

and

Commissioner Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is an individual whose principal business activity is wholesale and retail trade and repair of motor vehicles.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent issued a notice of intention to audit dated 9th February 2023 requiring the Appellant to avail documentary evidence for verification of Income and expenditure as per financial reports and verification of sales and purchases as reported in his VAT i-Tax declarations for the period 1st January 2018 to 31st December 2022. Subsequently, the Respondent issued a notice of its findings and intention to issue additional assessment vide a letter dated 28th March 2023 requesting the Appellant to availed documentary evidence within 7 days.

4. The Appellant was issued with VAT and Income Tax – Resident individual assessment of Kshs 14,518,935. 56 on iTax on 24th April 2023 covering the periods 2018, 2019, 2020 and 2021.

5. The Appellant raised two objections to the assessment on 17th May 2023 and 23rd May 2023.

6. The Respondent issued its objection decision on 22nd August 2023 fully disallowing the Appellant's objection.

7. Aggrieved by the by the Respondent’s decision, the Appellant lodged its Notice of Appeal dated 19th September 2023 on 3rd October 2023.

The Appeal 8. In support of the Appeal, the Appellant filed a Memorandum of Appeal dated and filed on 3rd October 2023 wherein the following grounds were raised:a.That the Respondent erred in law and fact by overstating the Appellant's revenues for the periods in question based on erroneous summation of bank credits.b.That the Respondent erred in law and fact by charging income tax on banking credits that were not revenue in nature but rather loans and sole proprietor's capital injections.c.That the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant.d.The Respondent erred in lava and fact by disregarding all the reconciliations, explanations and documentation provided by the Appellant including financial statements and tax returns, and proceeded to confirm the erroneous tax assessments.

Appellant’s Case 9. The Appellant case was premised on its statement of facts dated and filed on 3rd October 2023 and written submissions dated 6th May 2024 and filed on 9th May 2024.

10. The Appellant’s case was that the Respondent disregarded the actual turnover realized by the Appellant in his financial statements and tax returns by arbitrary subjecting the Appellant to a bank analysis method that unjustly increased the Appellant's turnover.

11. The Appellant confirmed that prior to confirmation of the impugned assessments, the Respondent issued a notice of intention to audit requesting the Appellant to avail the documentary evidence for verification.

12. The Appellant contended that he complied with the Respondent's request and as such availed copies of his bank statements, financial statements, sales and purchases ledgers to the Respondent. Having provided the aforementioned documents to the Respondent, it was the Appellant’s position that the Respondent ought not to have used bank credits to assess taxes.

13. According to the Appellant, the Respondent deliberately ignored the documents he had provided. He maintained that the Respondent without any basis adjusted the turnover of the Appellant upwards for the periods under review by subjecting the Appellant's bank accounts to scrutiny on assumption that all bank credits were income.

14. The Appellant stated that the Respondent ought to have relied on availed documents and that the Respondent arbitrarily disregarded the documents provided in favour of banking analysis. He cited the case Republic vs Kenya Revenue Authority (Ex parte) Jaffer Mujtab Mohammed (2015) eKLR where the learned Judge held as follows:“a taxing authority is not entitled to pluck a figure from the air and impose it upon the taxpayer without some rational basis for arriving at the figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court intervening."

15. The Appellant alleged that the Respondent erred in law and fact by charging income tax on banking credits that were not revenue in nature but rather loans and sole proprietor's capital injections. He stated that the Respondent erred by subjecting bank credits that were not revenue in nature to tax even though the Appellant provided all necessary documents to the Respondent to facilitate making a just objection decision.

16. The Appellant contended that the documents that he availed demonstrated that the deposits in the Appellant's bank accounts included loans, contra entries, bounced cheques and sole proprietor's capital injections that could not constitute taxable income within the confines of section 3(2) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).

17. The Appellant stated that Respondent’s failure to take into consideration the documents provided during the periods in question was not only prejudicial but rendered assessed taxes excessive. He maintained that he provided a schedule of non-revenue bankings for the periods in question and from the bank descriptions that indicate that these transactions were direct deposits.

18. The Appellant further alleged that the Respondent erred in law and fact by disallowing deductible expenses. He contended that the objection decision is invalid having disallowed expenses on grounds that those expenses were not supported by any supporting evidence to verify the said amounts yet he availed the documents. The Appellant insisted that the Respondent acted contrary to the provisions of Section 3 of the ITA, which dictates that tax shall be paid on gains from business.

19. The Appellant observed that had the Respondent appreciated all explanations, documents and information provided, the Respondent would not have made the impugned decision.

20. The Appellant identified two issues for determination: first, whether the Respondent erred in law and fact by raising additional assessments by solely relying on bank analysis and a standard Gross Profit Margin; and second, whether the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant.

21. With regard to the first issue, the Appellant submitted that he supplied the Respondent with all relevant documentary evidence for review therefore; the Respondent ought not to have solely used bank credits to assess taxes. He submitted that the documents provided demonstrated that the deposits in the Appellant's bank accounts included loans, contra entries, bounced cheques and sole proprietor's capital injections that could not constitute taxable income within the confines of Section 3(2) of the ITA.

22. The Appellant relied on the case of Minazini Enterprises Limited v Commissioner of Domestic Taxes to submit that Respondent must always provide the rational and clarity while making or arriving at a determination and that the Respondent must not pluck figures from the air when making its decision.

23. The Appellant submitted that having provided the Respondent with material and factual evidence challenging its impugned and exaggerated Gross Profit Margin, the Respondent had then burden to challenge the evidence provided. The Appellant relied on the High Court decision in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya (2021) eKLR, where the Court held as follows:“Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed."

24. With regard to the second issue, the Appellant submitted the documentary evidence provided by the Appellant were sufficient evidence for the expenditure incurred for the periods in question and ought to have been allowed as legitimate business expenses to be factored on the calculation of taxable income.

25. The Appellant further submitted that he discharged the burden of proof as stated in the case of Afya X-ray Centre Limited v The Commissioner of Domestic Taxes and as provided for under section 56 (1) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”)

Appellant’s Prayers 26. The Appellant made the following prayers:a.This Appeal be allowed;b.The Respondent's decision dated 22nd August 2023 be set aside:c.The costs of and incidental to this appeal be awarded to the Appellant; andd.Any other orders the Tribunal may deem fit.

Respondent’s Case 27. The Respondent’s case was premised on its statement of facts dated 27th October 2023 and filed on 31st October 2023 and its written submissions dated on 15th May 2024 and filed on 29th May 2024.

28. The Respondent stated that whereas Section 24 of the TPA allows a taxpayer to submit tax returns in the approved form and manner, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

29. The Respondent stated that it did not overstate the Appellant's revenue but simply acted within its authority. It noted that the Appellant had previously done business with various government entities but had underdeclared its income and VAT sales.

30. The Respondent cited Section 27 of the TPA which states as follows:“A tax return purported to have been submitted by or on behalf of a taxpayer by another person shall be treated as having been submitted by the taxpayer or with the taxpayer's authority unless the contrary is proved.”

31. The Respondent claimed that it noted variances and requested the Appellant to provide documents to support his objection but the Appellant failed to do so. It asserted that it requested for a number of documents including, personal and business bank account statements for A/C Nos. xxxxxx, xxxxxx and xxxxxx; sales and purchases schedules for the years 2018-2021; sales invoices and contract documents with Bomet County Government; sales invoices and contract documents with Bomet County Government; purchases invoices and payment vouchers; evidence in support of the cost of sales expensed in you Financial statements for the year 2018 to 2021 including the relevant ledgers; evidence in support of expenses expensed in his accounts for the years 2018-2021; eexpense schedules and ledgers for the years 2018-2021 and proof of incurred expenses; reconciliation of the bank credits and declared income; reconciliation of the bank credits and VAT sales; and reconciliation of the variances between Income tax returns and VAT returns.

32. The Respondent averred that it was only able to review the documents that the Appellant provided which were, Bolila Autospares KCB bank statements for the period 2018-2021 for account xxxxxx; and financial statements for the years 2020 and 2021. It argued that the Appellant failed to provide documents as required under section 51(3) of the Tax Procedures Act 2015.

33. The Respondent asserted that in realizing the under-declaration and variance, it placed reliance on Section 31 of the TPA, which allows the Commissioner to amend an assessment by making alterations or additions, from the available information and to the best of his judgment.

34. The Respondent also cited the provision under Section 15 of the Income Tax Act CAP 470 of the Laws of Kenya (hereinafter “ITA”) which provides for deductions allowed with regards to expenses. The provision emphasizes that deductions allowed ought to have been wholly and exclusively incurred in the production of income but the Appellant failed to prove that the expenses claimed were wholly and exclusively used in the generation of the business income and hence the issuance of the assessment and objection decision.

35. The Respondent averred that Section 59 of the TPA requires the Appellant to provide records to enable it determine its tax liability. It is the Respondent’s case that the Appellant failed to provide sufficient supporting documents.

36. Consequently, the Respondent stated that the Appellant failed to discharge the burden of proof under section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”).

37. The Respondent further submitted that it identified two issues for determination: first, whether the Respondent's Assessment issued on 28th March 2023 was justified; and second, whether the Respondent lodged a valid objection.

38. With regard to the first issue, the Respondent submitted that the Appellant failed to co-operate with it at the Audit stage by failing to provide information to justify the income earned therefore, the Respondent was justified in using any information available to it and justified method in determining the Appellant's Income. The Respondent submitted that it is allowed to use direct and indirect methods to ascertain the taxable income.

39. The Respondent relied on the provisions of Section 29(1) of the TPA which gives power to the Respondent to use "information as may be available" to it in coming up with default assessments when necessary. The Respondent also relied on Part VI of the TPA and submitted that the Respondent was within the law in the use of the Banking analysis test in coming up with the Appellant's tax liability.

40. The Respondent relied on the United States case of Holland v United States 121 (1954) wherein the Supreme Court stated as follows:“to protect the revenue from those who do not render true accounts, the Government must be free to use all legal evidence available to it in determining whether the taxpayer's books and records accurately reflect his financial history."

41. The Respondent also relied on the case of Anne Wanjiku Kahwai v Kenya Revenue Authority & another (2019) eKLR to support the position that the Respondent can use available information to make a tax decision.

42. With regard to the second issue, the Respondent submitted that the Appellant failed to table documentary evidence to support its notice of objection, which was contrary to section 51(3) of the TPA. It submitted that the Appellant had a duty to provide documents which would have swayed the Respondent from using banking analysis method.

43. The Respondent submitted that the onus was on the Appellant to prove its averment that the banking analysis was misapplied in arriving at the assessment. It relied on the case of Hole v The Queen, 2016 TCC 55 where the court opined that, "There are two primary ways in which a taxpayer can challenge a bank deposit analysis. The first is to prove that his or her records were adequate and thus that his or her income should have been determined using those records. The second, and more common, method is to challenge the actual determination of income made by the Minister under the bank deposit analysis."

44. Regarding disallowed expenses, the Respondent submitted that for expenses to be allowed, the expenses should meet the threshold set in section 15 of the ITA in that they must have been incurred in the year of income and must be supported. It relied on the cases of Afya x-Ray Centre V Commissioner of Domestic Taxes Tat No, 70 of 2017; and GreenroadKenya Limited v Commissioner of Domestic Taxes TAT Appeal No. 538 of 2021 to submit that a taxpayer has a duty to adduce documents to support its notice of objection.

45. The Respondent further cited the cases of Pearson v Belcher CH.M Inspector of Taxes) Tax Cases Volume 38; PZ Cussons East Africa Limited v Kenya Revenue Authority (2013) eKLR; and Mulherin vs Respondent of Taxation [2013] FCAFC115 to support the position that the taxpayer has a duty to prove that the Respondent’s tax decision is incorrect. The Respondent submitted that the Appellant failed to discharge this burden.

Respondent’s Prayers 46. The Respondent made the following prayers:a.That its objection decision issued on 22nd August 2023 demanding for payment of taxes amounting to Kshs. 11,739,223. 00 being VAT and Kshs. 3,904,733. 88 being Income Tax be upheld; andb.That this Appeal be dismissed with costs to the Respondent for lack of merit.

Issues For Determination 47. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that a single issue calls for its determination, namely:Whether the Respondent’s objection decision dated 22nd August, 2023 was proper and in conformity with the provisions of the law .

Analysis And Findings 48. The Tribunal having determined a single issue falling for its determination proceeds to analyze the same as hereunder:Whether the Respondent’s objection decision dated 22nd August 2023 was proper and in conformity with the provisions of the law.

49. The crux of this matter was that the Respondent issued its objection decision on 22nd August 2023 fully disallowing the Appellant's objections dated 17th May 2023 and 23rd May 2023. The Tribunal observes that the Respondent issued its decision 90 days after objection which was beyond the statutory timelines pursuant to Section 51 of the TPA which provides as follows:11. The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

50. The Tribunal is further guided by the case of Republic-vs-Kenya Revenue Authority ex parte M-Kopa Kenya Limited [2018] eKLR where the High Court emphasized on the need for the Commissioner to communicate his decision within the timelines set out in Section 51 (11) of the TPA:“In my view since there is no format for making an objection, what is required is the substance rather than the form. What the law frowns at is an objection that is framed in such an ambiguous manner as not to be certain whether the tax payer is seeking further particulars or indulgence to enable it pay the taxes demanded. In this case the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under section 51(11) of the said Act. As the Respondent defaulted in making a termination thereon within the prescribed time, the said objection was deemed to have been allowed.”

51. Accordingly, the Tribunal finds that the Appellant’s objection was allowed by operation of the Law and accordingly, the Respondent’s objection decision dated 22nd August 2023 was neither proper nor in conformity with the provisions of the law.

Final Decision 52. The upshot to the foregoing is that the Appeal succeeds and accordingly the Tribunal proceeds to makes the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 22nd August 2023 be and is hereby set aside.c.Each party to bear its costs.

53. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF OCTOBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. N’GANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER