[2024] KETAT 32 (KLR)

Lasting Solutions Limited v Commissioner of Domestic Taxes (Tax Appeal 1378 of 2022) [2024] KETAT 32 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 32 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1378 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

January 26, 2024

Between

Lasting Solutions Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act, and with its main business being merchandising.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the said Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue.

3. The Respondent carried out an audit on the Appellant for the period 2017 – 2020 regarding income tax and VAT, and issued additional assessments of Kshs. 40,578,192 inclusive of interests and penalties on 19th April 2022.

4. The Appellant objected to the additional assessments by the Respondent, which was reviewed and the Respondent issued an objection decision on 29th August 2022 revising its assessments to Kshs. 24, 986, 314 as inclusive of penalties and interests.

5. Aggrieved by the Respondent’s objection decision, the Appellant lodged the instant Appeal via a Notice of Appeal filed on 28th September 2022.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated 30th October 2022, filed on 16th November 2022 stating the following grounds: -a.That as per Section 15 of the Income Tax Act, the Commissioner of Domestic Taxes has not considered some of the expenses which were necessary and wholly incurred for purpose of the business.b.That the Commissioner of Domestic Taxes did not consider that some sales were VAT exempt as per amendments to the VAT Act 2016. c.That under Section 24A of the VAT Act, the Commissioner may refund VAT already paid by a taxpayer but not collected from an insolvent taxpayer and therefore effecting a write-off. The Commissioner of Domestic Taxes has calculated VAT liability arising out of business from a failed taxpayer who did not pay the Appellant and is therefore a total loss of business.d.That the Commissioner of Domestic Taxes in the initial review granted reprieve on sales not made but used in calculating income tax. The same reprieve has not been extended to the Appellant in calculating VAT liability even though VAT was not realized.

The Appellant’s Case 7. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 31st October 2022 and filed on 16th November 2022, together with annexures thereto.b.Appellant’s Written Submissions filed on 22nd August 2023, together with the attachments thereto.

8. The Appellant averred that on 19th April 2022, the Respondent raised a demand of Kshs. 40,587,192. 00, which the Appellant objected to. Following the Appellant’s Objection, the Respondent revised the tax demand to Kshs. 24, 986, 314. 00.

9. The Appellant further averred that the Respondent’s revised tax demand of Kshs. 24, 986, 314. 00 is too high and based on error of both the law and fact.

10. The Appellant submitted that the Respondent, in arriving at the 2017 tax liability, erroneously omitted legitimate expenses of Kshs. 4,196, 281. 42 without explaining which expenses are being referred to as unsupported whilst also applying wrong currency in calculating expenses by using United States dollars instead of Pound Sterling, which is the currency of the invoice.

11. The Appellant further submitted that the Respondent, in arriving at the 2018 tax liability, erroneously omitted legitimate expenses of Kshs. 638, 671. 19 without explaining which expenses are being referred to as unsupported whilst also erroneously using incorrect amount to calculate withholding VAT as opposed to the amount captured in the iTax records.

12. The Appellant contended that the Respondent, in arriving at the 2019 tax liability, erroneously omitted legitimate expenses of Kshs. 302, 693. 00 without explaining which expenses are being referred to as unsupported whilst also erroneously including amounts claimed by a failed taxpayer for amount not invoiced by the Appellant but claimed by the said taxpayer without reference to the Appellant.

13. That the Respondent, in arriving at the 2020 tax liability, erroneously omitted legitimate expenses of Kshs. 5, 714, 959. 00 without explaining which expenses were being referred to as unsupported.

14. That the Respondent has erroneously declared VAT derived from withholding VAT certificates as Kshs. 20,494,958. 00 attributed to D. Light and Envirofit.

15. That the total of all withholding VAT certificates for the year 2017 was Kshs. 192, 896. 00 from sales of Kshs. 3,214,933. 33

16. That the tax liability with respect to Envirofit Kenya Limited and D. Light for 2017 as a result of withholding VAT has not been captured in the iTax records and therefore included by the Respondent in error as sales derived from withholding VAT certificate.

17. That the Respondent has not considered that products sold by Envirofit Kenya Limited are VAT exempt and so cannot be used to calculate VAT liability.

18. That the main clients of the Appellant were Nakumatt Holdings, Tuskys Supermarkets and Envirofit. Nakumatt’s collapse is in public domain and led to financial difficulties for Envirofit, who themselves collapsed without meeting their financial obligations to the Appellant. That the financial challenges of Tuskys are also in the public domain.

19. That non-payment of funds due to the Appellant by the three above-mentioned clients led to cash flow difficulties for the Appellant, which led to the Appellant being auctioned.

20. That the Respondent is aware that Nakumatt stopped meeting its financial obligations to creditors while at the same time making VAT input claims due to KRA and without reference to any creditor.

21. That tax records from Nakumatt Holding Limited should therefore be matched with actual payment to qualify as a legitimate source for calculating tax liability for the Appellant.

22. That Nakumatt used input tax generated from sales invoices from the Appellant, but paid none to the Appellant.

23. That sales model developed by the Appellant and its key client was sale by consignment, whereby only those items sold were put in an invoice.

Appellant’s prayers. 24. The Appellant prayed to the Tribunal for the following orders: -a.The Respondent revise the additional assessment to reflect the omission and errors made by the Respondent.b.The Respondent to take into consideration the full effect of the failure of Nakumatt, Tuskys and Envirofit on the tax portion of the Appellant.c.The Respondent should set aside all penalties and interest as the collapse of Nakumatt, Tuskys and Envirofit had major cash flow implications.

The Respondent’s Case 25. The Respondent’s case is premised on the following documents filed before the Tribunal: -a.The Respondent’s Statement of Facts dated 15th December 2022 and filed on the same date, together with the documents annexed thereto.b.The Respondent’s written submissions dated 10th July 2023 and filed on the same date.

26. The Respondent averred that it carried out an audit on the Appellant for the period 2017 - 2020, and issued additional assessments for VAT/corporation tax of Kshs. 40, 587, 192. 00

27. That the Appellant objected to the tax demand on several grounds and the Respondent issued an objection decision on 19th August 2022 revising the tax liability to Kshs. 24, 986, 314. 00 inclusive of penalties and interests.

28. That the Appellant, being aggrieved by the objection decision, filed the instant Appeal vide Memorandum of Appeal dated 16th November 2022.

29. That Section 24 of the Tax Procedures Act, 2015, allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent but the Respondent is not bound by the information provided therein and can assess additional taxes based on any other available information.

30. That with respect to income tax assessment, the Appellant had claimed expenses amounting to Kshs. 18,116, 021. 74 but only managed to support part of the claim prompting the amendment of the assessment to Kshs. 5,902, 586. 00 in line with provisions of the Income Tax Act.

31. That for expenses to be allowed, the same must have been incurred during such period and for this to be ascertained, the Appellant had to provide all the proof which it only partially demonstrated and hence unsupported expenses were disallowed.

32. That regarding exempted sales, the Appellant has neither indicated which goods were exempt nor which provision of the law makes them exempt, and as such the Respondent was justified in issuing its VAT assessment.

33. That regarding tax refunds claimed, the Appellant failed to provide sufficient proof to show it deserved refund, and in any case, it is its supplier who ought to seek its debts written off before the Appellant could seek refunds.

34. That the Appellant has failed to provide any proof to support its grounds of objection and as such the Respondent was proper in issuing the objection decision confirming VAT assessment and to amend the income tax.

35. The Respondent further averred that the burden of proof is on the Appellant to produce evidence challenging the Respondent’s decision to disallow VAT refund claim.

36. That the Appellant was given opportunity to present its case by way of documentary evidence which it squandered prior to the Respondent’s objection decision.

37. That input VAT claim was legally and procedurally rejected and the assessment legally and procedurally issued and that the Appellant’s objection was duly considered and objection decision made as per the law.

38. The Respondent maintained that the Appellant had not provided any additional evidence to show that the Respondent’s confirmed assessment is wrong and therefore the Appeal herein is devoid of any merits.

39. That the confirmed assessment is proper and should be upheld.

Respondent’s prayers. 40. The Respondent prayed to the Tribunal for the following orders: -a.That the Respondent’s objection decision issued on 29th August 2022 on VAT and income tax amounting to Kshs. 24, 986, 314. 00 is proper and be upheld.b.That the Appeal be dismissed with costs to the Respondent as the same lack merit.

Issue for Determination 41. The Tribunal, having carefully reviewed the pleadings made by the parties, the supporting documentation, and the submissions by both parties, is of the view that the following issue falls for its determination: -Whether the Respondent’s Additional Assessment of the Appellant is Justified and Proper in Law.

Analysis and Findings 42. The Tribunal noted that both the Appellant and the Respondent filed same set of documents regarding communication between the parties, especially the tax liability demand dated 19th April 2022 and objection decision dated 29th August 2022. The objection decision revised the Appellant’s tax liability downwards from Kshs. 40, 587, 192. 00 to Kshs. 24, 986, 314. 00

43. The Tribunal further noted that the Respondent justified revising tax liability downwards on the basis that the Appellant had provided partial documents to prove its expenses for the period under review, being 2017 - 2020.

44. The Appellant contested this position on several grounds and submitted that the additional assessment is improper and that the Respondent misapplied the law.

45. In particular, the Appellant submitted that the Respondent, in arriving at the 2019 tax liability, erroneously omitted legitimate expenses of Kshs. 302, 693. 00 without explaining which expenses are being referred to as unsupported whilst also erroneously including amounts claimed by a failed taxpayer for amount not invoiced by the Appellant but claimed by the said taxpayer without reference to the Appellant.

46. The Appellant further submitted that the Respondent, in arriving at the 2020 tax liability, erroneously omitted legitimate expenses of Kshs. 5, 714, 959. 00 without explaining which expenses are being referred to as unsupported.

47. It is the Appellant’s contention that the Respondent has erroneously declared VAT derived from withholding VAT certificates as Kshs. 20, 494, 958. 00 attributed to D. Light and Envirofit. The Appellant further submitted on this limb that the Respondent had not considered that the products sold by Envirofit Kenya Limited and D. Light were VAT exempt and could not be used to calculate VAT.

48. It is the Appellant’s submissions that Sections 65, 66 and 67 of Finance Act 2016 exempted the said products by Envirofit Kenya Limited and D. Light. In this regard, the Appellant annexed a copy of the said law and a letter from Clean Cookstoves Association of Kenya dated 10th October 2016 confirming tax exempt status.

49. The Appellant submitted to the Tribunal that its main clients were Nakumatt Holdings, Tuskys Supermarkets and Envirofit, which had all collapsed. In this regard, the Appellant submitted that the Respondent had not applied itself to erroneous input VAT claims that Nakumatt used to declare in the period preceding its collapse, and which the Appellant did not receive.

50. It was the Appellant’s submission that collection of withholding taxes is a two-pronged system where upon invoicing, one payment is made to a supplier upon deduction of VAT by the appointed agents and another made to Respondent by the said agents, and thus the assumption is that two payments were made.

51. That accordingly it is the mandate of the Respondent to follow up with the agents on remittance of withheld taxes, and failure of the VAT WHT agents to remit should not be meted against the Appellant. Accordingly, the Appellant submitted that from the outset, it was the mandate of the Respondent to follow up with Nakumatt Holdings Limited about remittance of withheld VAT taxes.

52. On its part, the Respondent relied extensively on its powers to conduct additional assessments based on information before it and best judgment of the Commissioner.

53. In particular, the Respondent relied on Sections 15 and 54 A (1) of the Income Tax Act; Sections 23(1), 24(2), 56(1) and 59 of the TPA, Section 43(1) of VAT Act, and Section 30 of the TAT Act.

54. In this regard, the Respondent submitted that it accorded the Appellant sufficient opportunity to produce additional documents, which the Appellant failed to seize, and that the burden of proof lies with the Appellant.

55. To buttress its case, the Respondent relied on amongst others the authorities in Metcash Trading Limited vs Commissioner for the South African Revenue Services & Another (Cast CCT 3/2000); Pearson vs Belcher CH.M Inspector of Taxes; and Primarosa Flowers Limited vs Commissioner of Domestic Taxes (2019) eKLR.

56. The Tribunal notes that the instant dispute raises fundamentally a question of burden of proof in tax matters. Since the dispute has already been filed before the Tribunal, the applicable law is Section 30 of the TAT Act which provides as follows:“In a 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.”

57. The issue of burden of proof in tax matters is now settled in law in Kenya as reiterated in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR 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. The other important issue to bear in mind is that under our system of self-reporting of tax liability, the taxpayer initially decides the extent and amount of his/her statutory obligation to pay tax. The taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case ... "

58. The Tribunal noted that despite referring to Finance Act 2016 and amendments introduced therein, the Appellant was not specific how it applied to it and the business it operated. Tax exemptions and exempt products cannot be generalized lest we open floodgates of uncertainties. In the instant case, the Appellant has not particularized them before the Tribunal and the Respondent to warrant sufficient determination as to the whether amendments to VAT effected through Finance Act 2016 applied.

59. The Tribunal also noted that the Appellant did not adduce any documentary evidence showing that the additional assessments by the Respondent were excessive or erroneous, and instead made general averments in its pleadings and submissions on unsupported expenses and its clients that had gone under.

60. Accordingly, the Tribunal holds that the Appellant has, in the circumstances, not sufficiently discharged its burden of proof in terms of Section 30 of the TAT and Section 56 of the TPA.

Final Decision 61. The upshot of the foregoing is that this Appeal fails and the Tribunal proceeds to make the following Orders: -a.This Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 29th August 2022 be and is hereby upheld.c.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA OGAGA - MEMBER