[2023] KETAT 859 (KLR)

Lucky Distributors, Limited v Commissioner of Domestic Taxes (Appeal 824 of 2022) [2023] KETAT 859 (KLR) (Commercial and Tax) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 859 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 824 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, SS Ololchike & AM Diriye, Members

November 24, 2023

Between

Lucky Distributors, Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background. 1. The Appellant is a private limited company incorporated under the Companies Act No. 17 of 2015.

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

3. Investigations into the tax affairs of the Appellant arose from the Ethics and Anti-corruption Commission and a report to the effect that :-a.The Appellant was evading tax by raising ETR receipts for amounts less than the actual sales.b.The Appellant had changed its name to Lucky Iron Mongers to evade payment of taxes.c.The Appellant had not filed Corporation tax returns since 2009 and PAYE since April 2012.

4. The Respondent demanded tax vide its letter dated 10th April 2017 which the Appellant objected to on 15th May, 2017.

5. On 16th May, 2017 the Respondent informed the Appellant that its objection did not meet the requirements of a validly lodged objection. The Respondent then issued a tax demand on 29th June 2017 for Kshs 99,721,190. 00.

6. Being dissatisfied with the decision, the Appellant filed an appeal at the Tribunal.

7. The Tribunal rendered its Judgement on 14th April 2022 setting aside the Respondent’s Objection decision dated 29th June 2017 and requiring the Appellant to lodge a notice of objection with the Respondent within fourteen (14) days from the date of delivery of the Judgement.

8. The Appellant vide a letter dated 27th April 2022, served its notice of objection against the tax demand of Kshs 99,585,446. 00 in respect of Corporation tax, VAT and PAYE.

9. The Respondent then issued its Objection decision on 24th June 2022 confirming the tax assessment of Kshs 98,746, 741. 00.

10. Aggrieved by the Respondent’s decision the Appellant filed its Notice of Appeal dated 22nd July, 2022 and filed on the same day.

THE APPEAL 11. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 4th August 2022 and filed on 8th August 2022:a.That the Respondent erred in law and fact by confirming an assessment that did not adhere to the strict requirements under Section 29(2)(e) of the Tax Procedures Act,2015 (hereinafter ‘TPA’). The said assessment did not stipulate the due date for payment of the assessed tax. Moreover, it only availed 7 days to the Appellant to pay any taxes due as opposed to the mandatory minimum 30 days.b.The Respondent erred in law and fact by alleging that it had latitude to expand the five year timelines contrary to Section 29(8) of the TPA due to the wilful neglect, evasion or fraud of the Appellant. The fraud alleged has not been proved. As such the burden of proof to the allegation lies with the Respondent, who has not dispensed such burden to justify the glaring over assessment.c.The Respondent erred in law and fact by disallowing expenses that were incurred wholly in generating income earned by the Appellant contrary to Section 15(1) of the Income Tax Act, CAP 470 (hereinafter ‘ITA’) .The basis of disallowing the expenses is inherently erroneous as it is based on fictitious income as opposed to the actual income earned.d.That the Respondent erred in law and fact by demanding tax from a deceased director of the Appellant contrary to Section 48 of the TPA.The Respondent was well aware of the deteriorating health and subsequent death of the said director, and yet proceeded to confirm the said assessment.e.That the Respondent erred in law and fact by taxing a benefit that is apparently acquired by the company on the directors. The benefit in question is a house that is solely owned and used by the company through a loan facility and no benefit has ever accrued to any of its directors.f.That the Respondent erred in law and fact in finding that the Appellant failed to provide the requisite documentation and evidence to support its objection to the assessment, when all the required documents were submitted.

THE APPELLANT’S CASE 12. In its Statement of Facts filed on 8th August 2022, the Appellant reiterated the chronology of events leading to the Respondent’s Objection decision of 24th June 2022.

13. It stated that contrary to the Respondent’s allegations it had duly paid all the taxes due for the financial years in issue and the Respondent’s decision to demand the said amounts was arbitrary and irrational. It argued that it was improper, unfair and unprocedural for the Respondent to arbitrarily demand taxes without any legal basis.

14. The Appellant therefore prayed that:a.The Respondent’s demand for Corporation tax for the year 2008/2009 be struck out and/or set aside in its entirety.b.The Respondent’s demand for PAYE for the years 2013/2014, 2014/2015, 2015/2016 and 2016/2017 be struck out and/or set aside in its entirety.c.The Respondent’s demand for Corporation tax, VAT, PAYE and Withholding tax amounting to Kshs 98,746,741. 00 be struck out and/ or set aside in its entirety.d.The Respondent, its employees, agents/ other persons purporting to act on its behalf be barred and/or stoped from demanding or taking away any further steps towards enforcement or recovery of principal tax, penalties and interest on the Respondent’s demand as stipulated above.e.The costs of the Appeal

THE RESPONDENT’S CASE 15. The Respondent addressed the Appellant’s grounds of Appeal, through its Statement of Facts dated 2nd September, 2022 and filed on even date.

16. On ground a, the Respondent confirmed that it adhered to Section 29(2) of the TPA by informing the Appellant of the assessment and the same was served through one of the Appellant’s directors, Sanjay Chunilal on 11th April 2017.

17. On ground b, the Respondent stated that its position is that Section 15 of the ITA provides for allowable expenses and that it is a general accounting principle that expenditures must be supported with evidence to ensure they are available. It stated further that Section 54 (1) of the ITA provides that a taxpayer shall keep a record of expenses, goods purchased and sold accounts, books, deeds and contact and vouchers which in its opinion are adequate for the purpose of computing tax. It stated that the Appellant failed to furnish the Respondent with documents to support their costs and expenses as claimed. It therefore was left with no alternative but to disallow the same and confirm the assessment.

18. On the ground that the Respondent erred in demanding tax from the deceased director, the Respondent confirmed that the Appellant did not avail any documents in support of the assertion and as such it did not make any adjustments to the tax computation.

19. On the Appellant’s ground that the Respondent erred by taxing a benefit that was apparently acquired by the company on the directors, the Respondent averred that the Appellant did not provide any evidence to support its claim hence no adjustments were made to the tax computation.

20. In response to ground f of the Appellant’s ground of Appeal, the Respondent averred that it gave the Appellant adequate time, notice and opportunity to present all the documents in support of its case. Further that the Appellant had the benefit of time from 2017 to 2022 when the case was reviewed again to present new and additional information, however, the Appellant failed to do so. Further that all the documents submitted by the Appellant in support of its case were analysed before the Respondent issued its Objection decision.

21. The Respondent therefore prayed that the Tribunal finds that:-a.The Appeal lacks merit and ought to be dismissed.b.The Respondent is entitled to the costs of the Appeal.

PARTIES SUBMISSIONS 22. In its Written Submissions dated 20th September, 2023 the Appellant has submitted on four issues as outlined below:-

Validity of the timelines to which the assessment relates 23. The Appellant relied on Section 29 (5) of the TPA which mandates the Respondent not to make an assessment after 5 years immediately following the last date of the reporting period to which the assessment relates. It submitted that under Corporation tax, the Respondent assessed tax payable from the year 2008 to 2013 which places the last reporting period in this case at 2013. It argued therefore that the sum of Kshs 3,792,774. 00 should not be part of the assessment.

24. Under the tax head of PAYE the Appellant argued that the Respondent’s assessment is for the period 2008 to 2017 which is a total of ten (10) years hence the total sum of Kshs 15,168,449. 00 exclusive of penalties and interest ought not to have been charged as a tax in this matter.

25. On the tax head of VAT, the Appellant submitted that the assessment related to the period 2008 to 2012 which ought not to be charged hence the total sum of Kshs 4,637,447. 00 ought not to have been charged as tax in this matter. The Appellant relied on the case of Commissioner of Domestic Taxes vs Unga Limited (2021) eKLR where Majanja J observed that Section 29(5) of the TPA places an expectation upon the Respondent to move in haste when issuing a default assessment before the statutory timeline expires.The Appellant contended that the Respondent tactfully avoided indicating the specific timelines in its objection decision dated 24th June, 2022 to mask the rather apparent procedural impropriety.

ii. Failure to adhere to strict requirements of a tax assessment 26. The Appellant submitted that the assessment failed to strictly adhere to the requirement of an assessment as provided under Section 29(2) of the TPA by failing to include the due date for payment of the assessed tax which goes to the corner of the right to fair hearing under Article 47 of the Constitution.The Appellant relied on the case of Anne Wanjiku Kahwai & another vs.Kenya Revenue Authority and another (2019) eKLR where the court noted the following;“It is clear, however, that the Respondent made an assessment but did not strictly comply with Section 29 (e) and (f) of the Tax Procedures Acts”.

iii.Allegation of tax evasion 27. It was the Appellant’s averment that the cardinal rule of law is that he who alleges must prove. It therefore argued that the Respondent needed to prove the case of tax evasion before issuing an assessment of enforcement. Further that in this case, the allegation has not been particularized and proven and as such, the notice of assessment suffers from legal infirmity and must be set aside as the same remains an allegation. It asserted that the Respondent ought to have furnished the Appellant with the investigation reports, if any, in order to prove that, indeed, there was any investigation. The Appellant relied on the case of Commissioner of Domestic Taxes vs Shaulesh Jagjiren Datteri (2021) to argue that the onus lay with the Respondent to prove the tax evasion.

iv.Whether the Appellant is liable to pay any Corporation tax, Value Added Tax, PAYE and Withholding tax. 28. The Appellant submitted that the Respondent assessed taxes on the directors for property bought by the company as no benefit occurred to the directors from the said property and that it acquired the property through a bank loan.

29. On the issue relating to its deceased director, it submitted that it submitted a copy of the deceased director’s death certificate and it therefore defeats logic for the Respondent to issue an assessment against a deceased person as they are nowhere near the definition of a tax person. It argued further that the Income Tax Act has express provision on the treatment of the income of a deceased person.

30. The Appellant therefore submitted that from the above analysis the Respondent failed the test of strict adherence to the relevant laws by its conduct, consequently the Respondent’s assessments are therefore void ab initio.

31. In its Written Submissions dated 20th September, 2022(sic) and filed on 20th September 2023, the Respondent raised seven issues for determination as follows:

i. Whether the notice of objection was valid 32. The Respondent submitted that the Appellant filed its notice of objection where it raised several grounds of objection, however it did not contain accompanying documents supporting the grounds it raised. The Respondent cited Section 56(1) of the TPA to place the burden of proof on the Appellant to prove that the tax decision was incorrect. It further relied on Section 23 of the TPA and argued that the Appellant was obligated to maintain and provide all material documents required by the Respondent in order to ascertain that taxes were due and payable by the Appellant who ought to have been paying taxes for the years under review.

33. The Respondent therefore asserted that in the absence of supporting documents from the Appellant, the Objection decision it issued dated 24th June, 2022 was valid as it provided a response to the grounds raised by the Appellant pursuant to Section 51 of the TPA.

SUBDIVISION - ii.Whether the Respondent erred by confirming an Assessment without adhering to Section 29(2) of the TPA. 34. The Respondent confirmed that it adhered to Section 29(2) of the TPA by informing the Appellant of the assessment which was served through one of its directors, Sanjay Chunilal on 11th April 2017. It submitted that a look at the assessments issued, gave the Appellant 30 days in line with Section 51 of the TPA. It argued therefore that the Appellant’s allegations that the period was not as per statutory requirement are meant to deceive the Tribunal.

35. The Respondent argued further that the said director acknowledged receipt of the assessment as seen on the first page of the assessment and that the elements as provided under Section 29(2) of the TPA were all reached within the assessment. It therefore submitted that the Appellant failed to show that the assessment did not meet the threshold under Section 29(2) of the TPA.

iii. Whether the Respondent erred in alleging that it had latitude to expand the five-year timelines contrary to section 29(5) of the TPA. 36. On this issue the Respondent submitted that there was wilful neglect on the part of the Appellant therefore it assessed the tax beyond 5 years based on the intelligence reports and as per Section 31 (4) of the Tax Procedures Act where wilful neglect is alleged. The Respondent relied on the holding in the case in Miscellaneous Suit No. 285 of 2015. Kenya Revenue Authority vs Jimmy Mutuku Kiamba (2015) eKLR where the Court implied that where there is a basis for assessment of taxes beyond 5 years currently allowed by the laws, the Respondent has the mandate to assess the said taxes.

37. The Respondent submitted that the Objection decision is based on a civil liability drawn from evidence available to the Respondent not on a criminal liability for which a trial has not been committed or accused persons charged and convicted. It argued therefore that the Appellant was found to have wilfully neglected to pay taxes.

38. The Respondent relied on the holding in the case of Income Tax Appeal No. 7 of 2014 National Social Security Fund Board of Trustee vs Commissioner of Domestic Taxes, Kenya Revenue Authority (2010) eKLR where the Court held that where there are allegations of wilful neglect, then the Respondent should prove the wilfulness. It therefore submitted that the assessment beyond five years was due to the fact that there was wilful neglect on the part of the Appellant.

iv. Whether the Respondent erred in disallowing expenses that were incurred wholly generating income earned by the Appellant contrary to Section 15 (1) of the ITA. 39. The Respondent reiterated its Statement of Facts and submitted that it was its position that Section 15 of the ITA provides for allowable expenses and that it is a general accounting principle that expenditure must be supported with evidence to ensure they are available. It argued further that Section 54 A(1) of the ITA provides that a taxpayer shall keep a record of the expenses, goods purchased and sold accounts, books, deed and contacts and vouchers which in the opinion of the Respondent are adequate for the purposes of computing tax.

40. The Respondent submitted that the Appellant failed to prove its assertion by not providing supporting documents required and that it was given ample chances to produce documents but continued to delay the process of collection of taxes. It therefore asserted that the Appellant’s failure to supply the Respondent with supporting documents justified its decision to disallow expenses as that was within the Respondents rights.

v.Whether the Respondent erred in demanding tax from a deceased director contrary to Section 48 of the TPA. 41. The Respondent submitted that Section 48 of the TPA provides for erroneous refund of tax and the same therefore does not apply as per the Appellant’s allegations. It submitted further that the Appellant failed to avail any documents in support of the assertion and as such, no adjustments were made to the tax computation .Further that as per the assessment issued, the Respondent was unable to obtain an explanation from the Appellant’s directors on the source of these funds hence the Respondent treated the funds as undisclosed incomes and subjected them to PAYE.

vi.Whether the Respondent erred by taxing a benefit that was apparently acquired by the company on the directors 42. Reiterating the contents of its Statement of Facts the Respondent stated that the Appellant failed to prove that the benefit acquired by the company through a loan facility did not benefit the director. The Respondent submitted that the Appellant did not provide any evidence to support its claim hence no adjustments were made to the tax computation. Further that the said asset had been acquired by the Appellant through a loan facility where the Appellant subsequently claimed interest expenses.

43. The Respondent asserted that the loan facility was fully serviced by the Appellant and upon cessation the asset remained an asset of the Appellant as it was never transferred to the related party(Lucky Ironmongers Ltd).It averred that this asset was treated as benefit in kind to all the Appellant’s directors and the same was subjected to PAYE as per the provisions of Section 3(2) (a)(iii) of the ITA which stipulates that tax is chargeable under the Act in respect of gains or profits from a right granted to another person for use or occupation of property.

44. The Respondent contended that the Appellant had been advanced funds amounting to Kshs 24,707,024. 00 in the years 2008 to 2011. However, the Appellant’s directors were unable to explain the source of these funds hence the Respondent treated the funds as undisclosed incomes and subjected them to PAYE. The Respondent contended further that all loans are classified as deductions not allowed under Section 16(I) of the ITA and that Section 16(3) of the ITA defines loans to mean loans, overdrafts, ordinary trade debts, overdrawn current accounts or other form of indebtedness for which the company is paying a financial charge, interest, discount or premium. It was the Respondent’s contention that the Appellant failed to demonstrate where the funds came from and that infact the loan advances have never been paid back to date hence the Appellant is barred from claiming interest income.

vii.Whether the Respondent erred in finding that the Appellant failed to provide the requisite documentation and evidence in support of its objection. 45. On this issue the Respondent submitted that the Appellant did not provide supporting documentation. Further that the Appellant ought to have submitted its objection with supporting documents having been given a second opportunity to do so. It submitted further that Section 54A of the ITA is couched in mandatory terms and requires every person carrying on business to maintain records of all transactions, therefore in the absence of documentary evidence to support the Appellant’s claims, it was obliged to bring the income to charge.

46. The Respondent submitted in conclusion that even after the Appellant was allowed 14 more days to file its objection, it failed to provide any documentation to support its objection instead the objection only contained denials and allegations without any proof.

ISSUES FOR DETERMINATION 47. Having considered the parties pleadings, documentation and submissions, the Tribunal is of the considered view that this Appeal raises two issues for determination namely:a.Whether the Respondent was justified in demanding for tax outside the five-year timelines contrary to Section 29(5) of the TPA.b.Whether the demanded tax is due and payable.

ANALYSIS AND FINDINGS 48. The Tribunal will now proceed to analyse and determine the identified issues as hereinunder:-a.Whether the Respondent was justified in demanding for tax outside the five year timelines contrary to Section 29(5) of the TPA.

49. The Appellant had submitted that the Respondent had made a default assessment contrary to Section 29 (5) of the TPA which bears a limitation on how far back the Respondent can go in determining the period under review. The Appellant had argued further that the Respondent had masked an apparent procedural impropriety by tactfully avoiding to specify the timelines in its objection decision dated 24th June, 2022.

50. The Respondent on its part had submitted that there had been wilful neglect on the part of the Appellant hence it assessed the Appellant beyond 5 years based on intelligence reports and under Section 31(4) of the TPA where wilful neglect is alleged.

51. The Tribunal observes that in the three tax heads that the Respondent assessed, the period was from 2008, whereas the assessment was dated 10th April 2017. Five years going backward would place the effective year at 2012. The Respondent had justified expansion of time in assessing the Appellant outside the five year statutory time on the allegation that the Appellant was guilty of wilful neglect based on intelligence reports it received on the Appellant. However the Respondent has not adduced this evidence to help the Tribunal make an informed decision. Section 107 of the Evidence Act provides that:“Whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist”

52. In light of the foregoing the Tribunal is of the view that where the Respondent was of the opinion that there was wilful neglect or fraud based on its intelligence reports, the onus was on it to adduce evidence to prove its allegation.

53. The Tribunal associates itself with the holding in the case of Trust Bank Ltd vs Paramount Universal Bank Ltd and 2 others (2009) eKLR where the Court held:-“It is trite where a party fails to call evidence in support of its case that party fails to substantiate its pleadings.”

54. In view of the foregoing, the Tribunal finds that the Respondent was not justified in demanding for tax outside the five-year timeline.

b. Whether the demanded tax is due and payable. 55. Having determined that the Respondent erred in demanding tax outside the timelines, the question now is whether indeed the Appellant owes any tax. In its Statement of Facts the Respondent had alleged that investigation into the tax affairs of the Appellant revealed that the Appellant was evading tax by raising ETR receipts for amounts less than the actual sales and that it had not filed its Corporation tax returns since 2009 and PAYE since April 2012. Further that it had changed its name to Lucky Ironmongers to evade payment of taxes.

56. On its part, the Appellant had stated that contrary to the Respondent’s allegations, it had duly paid all the taxes due from the financial years in issue and that the Respondent’s decision to demand the said amounts were arbitrary and irrational.

57. The Tribunal notes that the Appellant was granted leave by the Tribunal in the TAT No.40 of 2018 to file its notice of objection within 14 days after the delivery of the Judgement. However, in its notice of objection dated 27th April, 2022, apart from stating its grounds of objection, it did not avail relevant documentary evidence to support its assertions.

58. The Tribunal has gleaned though the Appellant’s bundle of documents and notes that the few documents that have been adduced do not speak to someone that has indeed paid all the tax for the period under review as alleged by the Appellant. As stated herein above, the Appellant only made allegations and complaints which it did not substantiate with documentary evidence.

59. The Tribunal will associates itself with the case of National Social Security Fund Board of Trustees vs Commissioner of Domestic Taxes Kenya Revenue Authority (2016) eKLR where it was affirmed at Paragraph 36:-“there is a world of difference between assertion and proof. That which a party put to be his case is an assertion. The party needs to adduce evidence to support his assertion with a view to supporting his case”.

60. Section 56(1) of the Tax Procedures Act places the burden of proof on the Appellant. It provides as follows;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

61. The Appellant in this instance had the benefit of another lifeline offered by the Tribunal in its second Appeal where it was directed to file a notice of objection. However even in this instance, it never took advantage of the opportunity to support its assertions with documententary evidence.

62. The Tribunal cites the case of TAT No.70 of 2017 Afya X-RAY Centre limited v Commissioner of Domestic Taxes to emphasize the importance of discharging one’s burden of proof. In the said appeal, the Tribunal held that;-“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents in order that a comprehensive audit of its affairs be done .Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to consider the Respondent’s finding after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent’s assessment, after all, the Appellant by law bears the burden of proof…”

63. In view of the foregoing, the Tribunal finds that the demanded tax is due and payable.

Final Decision 64. The upshot of the above is that this Appeal partially succeeds and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal is hereby partially allowed.b.The objection decision dated 24th, June 2022 be and is hereby varied as follows:i.The assessment in resepct of the tax for the period exceeding five (5) years, being for the period 30th June, 2008 to 30th June 2012 is hereby set aside.ii.The Respondent to undertake a fresh re-evaluation for the taxes for the period 1st July, 2012 to 30th June, 2017, within a period of sixty (60) days from the date of delivery of this Judgement.c.Each party to bear its own costs.

65. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023. ERIC NYONGESA WAFULA........CHAIRMANDELILAH K. NGALA......MEMBERCHRISTINE A . MUGA.........MEMBERGEORGE KASHINDI..........MEMBERSPENCER S. OLOLCHIKE........MEMBERMOHAMED A. DIRIYE...........MEMBER