[2023] KETAT 1385 (KLR)

Limuru Tea PLC v Commissioner of Domestic Taxes (Tax Appeal E566 of 2023) [2023] KETAT 1385 (KLR) (12 July 2023) (Judgment)

Neutral citation: [2023] KETAT 1385 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E566 of 2023

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

July 12, 2023

Between

Limuru Tea Plc

Appellant

and

The Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a public company listed on the Nairobi Stock Exchange registered in Kenya under the Kenyan Companies Act, 2015, whose principal business activity is growing green tea leaves.

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 Appellant lodged an application on iTax for refund of overpaid income tax of Kshs. 25,937,266. 00 for the years 2017, 2018, 2020 and 2021. The Respondent rejected the application via rejection notice lodged on iTax dated 4 May 2023 and requested the Appellant to resubmit a refund application on the conclusion of the audit.

4. The Appellant lodged a second application on iTax for refund of overpaid income tax on 13th June 2023 for the year 2017, 2018, 2020 and 2021 totaling to Kshs. 26,052,563. 50. The Respondent rejected this application through an order dated 24th July 2023.

5. Dissatisfied with the assessment, the Appellant filed this appeal vide a Notice of Appeal dated 23rd August 2023 and filed on 24th August 2023.

The Appeal 6. The Appellant lodged its Memorandum of Appeal dated 6th September 2023 and filed on 6th September 2023 raising the following grounds of appeal:a.That the Respondent erred in fact by rejecting the Appellant’s income tax refund claim on the basis that supporting documents/information were not provided to facilitate the audit; andb.That the Respondent erred in fact by failing to consider the supporting documents provided by the Appellant to verify the income tax refund claimed for the 2017, 2018, 2020 and 2021 years of income.

The Appellant’s Case 7. In support of the Appeal, the Appellant relied on its;a.Statement of Facts dated and filed on 6th September 2023 together with the documents attached thereto; and,b.Written submissions dated and filed on 5th March 2024.

8. The Appellant stated that it made an application for refund of overpaid income tax on 28th March 2023 of Kshs. 25,937,266. 00 for the 2017, 2018, 2020 and 2021 years of income. Consequently, the Respondent issued a letter dated 14th April 2023 notifying the Appellant of its intention to audit the tax refund claim as per provisions of Section 59 of the Tax Procedures Act, 2015.

9. According to the Appellant, the Respondent initiated the audit and requested the Appellant to provide audited financial statements, sales and purchase ledgers and corresponding invoices along with bank statements to verify the income tax refund claim by 21st April 2023. The Appellant requested for extension of time to provide the Respondent with the requested documents by 28th April 2023. The Respondent granted the Appellant’s request for additional time to provide the requested documents via email by 18th April 2023.

10. The Appellant and the Respondent held a virtual meeting on 28th April 2023 to discuss the audit process. Following the meeting, the Appellant alleged that it provided information requested by the Respondent via various emails dated 28th April 2023 in piecemeal due to size restrictions on email.

11. It is the Appellant’s case that the Respondent rejected the Appellant’s refund application through a rejection notice dated 4th May 2023 issued on iTax on the basis that the Respondent had commenced an audit of the said refund and requested the Appellant to resubmit the refund application once the audit was concluded.

12. The Respondent requested the Appellant to provide additional information via email dated 31st May 2023 prompting the Appellant to request for additional time to share the information requested by the Respondent by 13th June 2023. It is the Appellant’s case that it provided information requested to support the Appellant’s income statement for the 2017, 2018 and 2019 years of income and provided explanations for sales variances via email dated 13th June 2023. The Appellant further averred that it shared additional information requested by the Respondent relating to 2017 via email dated 23 June 2023 and additionally shared payroll information for the year 2021 via email dated 27th June 2023.

13. The Appellant made an application on iTax for refund of overpaid income tax dated 13th June 2023 of Kshs. 26,052,563. 50 for the years 2017, 2018, 2020 and 2021. Consequently, the Respondent issued an income tax claim rejection order dated 24th July 2023, rejecting the Appellant’s refund application on the ground that supporting information or documentation was not provided to the Respondent for review to facilitate an audit.

14. The Appellant submitted again an Objection Notice with the Respondent dated 23rd August 2023, via email, objecting the income tax claim rejection order issued by the Respondent. According to the Appellant, the Respondent in response to the objection notice, advised the Appellant to appeal the Respondent’s decision dated 24th July 2023 to the Tax Appeals Tribunal.

15. The Appellant stated that ccontrary to the Respondent’s position, it did not provide sufficient information to facilitate the audit, the Appellant further stated that it provided information to demonstrate that supporting documents were provided to the Respondent in soft copy on various dates between 28th April 2023 and 27th June 2023. The Appellant further averred that it provided the Respondent with requested information and documents during the refund claim verification process.

16. The Appellant asserted that based on its audited financial statements and filed tax returns for the years 2017, 2018, 2020 and 2021, the correct refund amount is Kshs. 33,687,914. 00. According to the Appellant, the refund claim rejected by the Respondent of Kshs. 26,052,563. 50 did not take into account the balance of tax paid for the year 2017 and 2018 paid after the Appellant filed its tax returns for the respective years, therefore the amounts were not picked on the Appellant’s iTax profile. Consequently, the Appellant insisted that the overpaid tax for years 2017, 2018, 2020 and 2021 is Kshs. 33,687,914. 00.

17. The Appellant claimed that it demonstrated that the Respondent’s rejection order dated 24th July 2023 is incorrect. Therefore, the Appellant asserted that it discharged its burden under Section 56 (1) of the Tax Procedures Act.

18. The Appellant relied on Commissioner of Domestic Taxes vs. Sony Holdings Limited [2021] eKLR High Court where the High Court upheld the Tribunal’s decision in Sony Holdings Limited vs. Commissioner of Domestic Taxes, Tax Appeal No. 376 of 2018 as follows;‘‘48. Having found that Tribunal correctly held the Respondent was not only entitled to the Refund but also entitled to carry the credit forward until it was resolved it follows that the Tax Rejection Orders could not stand. The Tribunal's decision is correct in that regard as the revocation of the Tax Rejection Order is a direct consequent of finding that the Refund was due to the Respondent.’’

19. The Appellant further stated that the Respondent’s rejection of income tax refund claim for the years 2017, 2018, 2020 and 2021 is arbitrary and highly prejudicial.

20. In its written Submissions, the Appellant identified two issues for determination.i.Whether the Respondent erred in fact by rejecting the Appellant’s income tax refund claim on the basis that supporting documents/information were not provided to facilitate the audit; and,ii.Whether the Respondent erred in fact by failing to consider the supporting documents provided by the Appellant to verify the income tax refund claimed for the 2017, 2018, 2020 and 2021 years of income.

21. On whether the Respondent erred by rejecting the Appellant’s income tax refund claim, the Appellant submitted that it provided the documents that the Respondent wanted but the Respondent still rejected the refund claim. It stated that it provided documents including, VAT and IT2C returns on iTax; Report on Withholding Certificates; Audited Financial Statements for the period 2017 to 2021; Sales ledger for the period 2017 to 2021; Bank statements for the period 2016 to 2021; and Journal Vouchers for the period 2017 to 2021.

22. On whether the Respondent erred by failing to consider the Appellant’s supporting documents, the Appellant submitted that it provided the Respondent with sufficient documentation supporting the variances and queries raised. The Appellant also submitted that the supply of unprocessed green tea is exempt from VAT under paragraph 44 of the First Schedule to the VAT Act, 2013.

23. Further, the Appellant submitted that the refund claimed which forms the basis of this dispute, is an income tax refund, not VAT. It added that the amendment of the VAT returns for the January 2017 to September 2018 would not result in undeclared VAT liability on the part of the Appellant therefore, the Appellant maintained that the Respondent will not suffer any loss in revenue due to non-declaration of VAT-exempt sales in the Appellant’s VAT returns for that period.

24. The Appellant submitted that pursuant to Section 47 (3) of the Tax Procedures Act, 2015, the Respondent is mandated to notify the Appellant of its decision within 90 days of receiving the application for a refund.

25. The Appellant stated that it made an application on iTax for refund of overpaid income tax dated 13th June 2023 and was rejected 42 days after application. The Appellant stated that the 90-day timeline for communication of the audit decision by the Respondent would have lapsed on 10th September 2023. Therefore, the Appellant submitted that there was ample time for the Respondent to request the Appellant to provide additional information between the date of last communication being 27th June 2023 and 24th July 2023 when the Respondent issued its decision.

Appellant’s Prayers 26. The Appellant prayed that the Tribunal:a.Set aside the Respondent’s income tax claim rejection order issued on 24th July 2023 rejecting the Appellant’s income tax refund claim of Kshs. 26,052,563. 50;b.Orders that the Appellant is entitled to an income tax refund of Kshs. 33,687,914. 00;c.Issues an order directing the Respondent to process the income tax refund due to the Appellant for the years 2017, 2018, 2020 and 2021 years of income;d.Allows the Appeal be allowed; and,e.Award the costs of and incidental to this appeal to the Appellant.

The Respondent’s Case 27. In opposing the Appeal, the Respondent relied on itsa.Statement of Facts dated and filed on 18th September 2023; and,b.Written submissions dated and filed on 18th March 2024.

28. The Respondent acknowledged that the Appellant applied for an Income Tax for the period January 2017 to December 2021. According to the Respondent, the income tax refund claim arose from withholding tax credits and credits special arrangement. The Respondent asserted that the application for refund is guided by Section 47 (1) of the Tax Procedures Act which provides as follows:‘‘47. Offset or refund of overpaid tax(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form-(a)To offset the overpaid tax against the taxpayer's future tax liabilities; or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.’’

29. The Respondent averred that since the Appellant applied for refund of income tax on 28th March 2023, it could only make an application for refund for any overpaid tax after 28th March 2018. The Respondent therefore, argued that the Appellant’s application for income tax refunds for the period between January 2017 to 28th March 2018 was time barred by operation of the law.

30. The Respondent asserted that the reason for the refund application was “credits arising from withholding/instalment tax payment during the year.” It is the Respondent’s case that on 13th April 2023, it requested the Appellant to provide supporting documents to support its refund claim but the Appellant provided some documents for analysis including VAT and IT2C returns on iTax; Report on Withholding Certificates; Audited financial statements year 2017 to 2021; Sales ledger years 2017 to 2021; KCB Bank account statements year 2016 to 2021; and Journal vouchers year 2018 to 2021.

31. The Respondent stated that the Appellant’s application/claim for income tax refund was rejected on 4th May 2023 as the Respondent was not able to determine whether it is payable owing to incomplete audit required under Section 47 (4) of the Tax Procedure Act, 2015. The Respondent then advised the Appellant to resubmit its refund application after completion of the audit.

32. After analysis of the availed documents, a reconciliation of findings request was made by the Respondent to the Appellant on 31st May 2023. The variances between the sales turnover in the VAT3 return and the turnover in the sales ledger were sent to the Appellant for reconciliation.

33. According to the Respondent, some of the expenses claimed in the IT2C return required further documentation which was communicated to the Appellant. The Appellant provided supporting documentation for some of the expenses but failed to provide sufficient evidence to support the some of the expenses. The Appellant replied on 5th June 2023 requesting for an extension of time to perform reconciliations. The request was granted and the Appellant gave its response to the Respondent’s queries on 13th June 2023. The Appellant also resubmitted an application for income tax refund on the same day and also sent an email to the Respondent stating that the year 2017 was beyond the scope of the audit and hence it did not avail the requested reconciliations. The Respondent informed the Appellant vide email dated 14th June 2023 that the 2017 refund claim will be rejected if supporting documentation is not availed.

34. The Respondent stated that refund audits are to be completed within tight statutory timelines for refund audits as provided under Section 47 (2), (3) and (4) of the Tax Procedures Act.

35. The Respondent averred that the Appellant was unable to provide proper explanations to variances between VAT turnover and Income Tax turnover of Kshs. 64,928,225. 00 in 2018 and Kshs. 21,606,473. 00 in 2019 and that the Appellant’s explanation given for the variances was that the VAT returns will be amended downwards. The Respondent averred that the said application for VAT return amendments was not filed for our review.

36. The Respondent averred that the Appellant did not provide further supporting documents in time for review for the following expenses claimed:a.Direct wages - The Appellant did not provide a. any documentation to support the expenses upon requisition;b.Direct expenses - The Appellant stated that these expenses related to management commissions. No further supporting evidence was provided, including the deduction and remittance of PAYE;c.Advertisement - Invoices to support the expense were not provided. The Appellant had also not claimed the expense in other years besides 2019;d.Audit expenses - Withholding taxes were not deducted on these expenses, and neither has the Appellant provided the evidence upon requisition;e.Other operating expenses - The Appellant stated that the expense relates to subscription and publications, but did not provide further support for the same;f.Gratuity and provision for variable pay - The Appellant only provided a summary, without further explanations or supporting evidence; and,g.Year 2017 expenses - The Appellant failed to provide supporting evidence for the expenses and stated that the year 2017 was beyond the scope of audit.

37. The Respondent asserted that the Appellant failed to provide supporting documentation for most of the variances/queries upon requisition and therefore its refund claim was rejected by the Respondent on 24th July 2023.

38. Further, the Respondent cited Article 47 of the Constitution and Section 51 of the Tax Procedures Act, to state that the Respondent engaged the Appellant at every stage of the process. The Appellant was notified of the gaps that were identified and requested to respond to the issues arising.

39. The Respondent also cited Section 59 of the Tax Procedures Act and section 30 of the Tax Appeals Tribunal Act to state that the onus to prove that the assessment is incorrect.

40. In its written Submissions, the Respondent submitted that it exercised its best judgment appropriately in the circumstances thereby arriving at the tax assessment it did. The Respondent relied upon the case of Family Signature Limited vs. the Commissioner of Investigations & Enforcement TAT No. 25 of 2016 where this Tribunal held that when the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high-income margin.

41. On the issue of burden of proof, the Respondent relied on the case of Joycott General Contractors Limited vs. Kenya Revenue Authority TAT No. 28 of 2018 wherein the Tribunal held that the taxpayer has to prove that the tax decisions is incorrect.

The Respondent’s prayers 42. The Respondent prayed for the Tribunal to make the following orders:a.The Appellant’s Appeal lacks merit and the same be dismissed;b.The income tax claim rejection order dated 24th July 2023 be upheld; and,c.The Respondent be awarded costs of the Appeal.

Issues For Determination 43. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth a single issue for determination:Whether the Respondent was justified in rejecting the Appellant’s income tax refund claim.

Analysis And Findings 44. The Tribunal shall to analyse the issues as hereunder.

45. The Respondent in opposition of the Appeal, stated that whereas the Appellant provided documents to support the claim, the documents were not enough to support the claim.

46. For the Appellant to succeed at this appellate stage, it has to discharge burden of proof by providing evidence to demonstrate that the Respondent’s decision is incorrect. In this regard, Section 30 of the Tax Appeals Tribunal Act 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; or(b)In any other case, that the tax decision should not have been made or should have been made differently.’’

47. Apart from the above, Section 56 (1) of the Tax Procedures Act provides:‘‘in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

48. The Appellant made an application for refund of overpaid income tax on 28th March 2023 of Kshs. 25,937,266. 00 for the years 2017, 2018, 2020 and 2021. Upon various correspondences with the Respondent, the Appellant made an application on iTax for refund of overpaid income tax dated 13th June 2023 amounting to Kshs. 26,052,563. 50 for the years 2017, 2018, 2020 and 2021. The Respondent through an order dated 24th July 2023, rejected the Appellant’s refund application for Kshs. 26,052,563. 50. However, the Appellant noted that based on its audited financial statements and filed tax returns for the years 2017, 2018, 2020 and 2021 that the correct refund amount is Kshs. 33,687,914. 00. One of the Appellant’s prayers is that the Tribunal be pleased to find that the Appellant is entitled to an income tax refund of Kshs. 33,687,914. 00. It then follows that the Appellant ought to table evidence to justify that the Respondent ought to have allowed this claim.

49. The Tribunal examined the Appellant’s pleadings to find out whether the Appellant was able to discharge its burden of proof. The Tribunal noted that whereas the Appellant alleged that it filed documentary evidence with the Respondent to support the claim, the said evidence is not on record. What the Appellant filed are copies of emails forwarding the evidence to the Respondent. The Appellant ought to have filed not only the email correspondences, but also the actual evidence for the Tribunal to examine to enable the Tribunal to make an informed decision. The Tribunal had no evidence to examine.

50. The Procedure for lodging Appeals to the Tribunal is well articulated under Section 13 of the Tax Appeals Tribunal Act. In particular, Section 13(2) of the Act provides as follows:‘‘(2)The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)A memorandum of appeal;(b)Statements of facts;(c)The appealable decision; and(d)Such other documents as may be necessary to enable the Tribunal to make a decision on the appeal.’’

51. Apart from the provisions of the Section 13 (2) Act, Tax Appeals Tribunal (Procedure) Rules, 2015 contains express provisions concerning statement of facts. To this end, Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 provides as hereunder:‘‘(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’

52. This Tribunal in Stephen Ogola T/A Tisa Suites & Lounge v Commissioner of Investigation & Enforcement (Tax Appeal E205 of 2023) held as follows:‘‘Section 13 (2) (b) of the TATA requires an Appellant to file Statement of Facts. The Statement of Facts should support and expound the contents of the Memorandum of Appeal. The Statement of Facts should explain why and how the Respondent’s decision is incorrect.’’

53. A careful examination of the Appellant’s pleadings leads us to a finding that the Appellant failed to comply with the provisions of Section 13 (2) of the Tax Appeals Tribunal Act and Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015. Failure to comply with these provisions means that the Appellant failed to discharge the burden of proof as provided for under Section 56 (1) of the Tax Procedures Act and under Section 30 of the Tax Procedures Act.

54. The High Court in Darwine Wholesalers Limited vs. Commissioner of Investigations and Enforcement (Income Tax Appeal E051 of 2021) [2023] KEHC 23537 (KLR) held as follows;“Under section 59 of the TPA and section 43 of the VAT Act the Commissioner is expressly empowered to ask for additional information to ascertain the tax chargeable. This legal position is in consonance with section 107 and 112 of the Evidence in that the balance of proof lies with the party with the knowledge of facts. Further section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the TPA imposes the burden of proof on the tax payer to prove that an assessment was wrong or that it was excessive.’

55. Based on the tabled facts and the foregoing reasons, the Tribunal finds and holds that the Respondent did not err in rejecting the Appellant’s income tax refund claim.

Determination 56. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is unmeritorious and consequently makes the following orders; -a.The Appeal be and is hereby dismissed;b.The Respondent’s income tax claim rejection order dated 24th July 2023 be and is hereby upheld; and,c.Each party to bear its own cost.

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY 2024ROBERT M. MUTUMACHAIRMANABDULLAHI DIRIYE MUTISO MAKAUMEMBER MEMBERBERNADETTE M. GITARI ELISHAH N. NJERUMEMBER MEMBER