[2024] KETAT 354 (KLR)

Magoma v Commissioner of Domestic Taxes (Tax Appeal 1576 of 2022) [2024] KETAT 354 (KLR) (Civ) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 354 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 1576 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, W Ongeti & G Ogaga, Members

February 23, 2024

Between

Abel Nyaanga Magoma

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a resident of Kenya and an individual tax payer.

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

3. The Respondent conducted a compliance review on the Appellant based on intelligence received for the income period 2013 to 2021.

4. On 26th March 2022, the Respondent issued a notice of tax assessment of Kshs. 8,799,845. 00 on the Appellant through the iTax platform.

5. The Appellant filed his objection to the assessment dated 7th September 2022 and filed on 8th September 2022.

6. In the intervening period before and after the issuance of the objection decision, the Appellant and the Respondent actively engaged in email correspondences and held meetings

7. The Respondent issued its Objection decision on 9th November 2022 confirming the assessment and demanding Kshs. 4,116,652. 00.

8. Aggrieved by the Objection decision, the Appellant lodged the instant Appeal vide Notice of Appeal dated 6th December 2022 and filed on 7th December 2022.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 21st December, 2022 and filed on 23rd December, 2022 stating the following grounds: -a.That the Commissioner erred in law and in fact by deciding to demand tax that is based on incorrect and erroneous information.b.That the entire tax demanded by the Commissioner on 9th November, 2022 is not lawfully due because the Commissioner in making the assessments relied on incorrect information.c.That the Commissioner erred in fact and in law in subjecting and charging the additional taxes upon the Appellant contrary to laws of natural justice and fair administrative action.d.That the Commissioner’s assessment is contrary to the law and is procedurally unfair and unreasonable in the circumstances of the case, since the same is based on the Commissioner’s erroneous reconciliation of the Appellant’s records as held by the Commissioner.e.That the Commissioner has acted ultra vires and misapprehensively raised assessments and demanded taxes from the Appellant unduly as there are not due or payable taxes by the Appellant to the Commissioner.f.That the objection decision is erroneous as the Commissioner disregarded materials, evidence and documents availed to him and misrepresented and misdirected himself as to the law and facts relating to the Appellant’s case.

The Appellant’s Case 10. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 21st December, 2022, and filed on 23rd December, 2022. b.Appellant’s Written Submissions dated 13th July, 2023 and filed on 20th July, 2023.

11. The Appellant averred that he duly filed his self-assessment returns in accordance with the requirements of the law and has at all times remained a dutiful taxpayer.

12. That on 9th November 2022 the Respondent raised objection decision against the Appellant demanding taxes amounting to Kshs. 4,116,652. 00

13. That the Respondent wrongfully demanded from the Appellant Kshs. 4,116,652. 00 on account of monthly rental income and income tax-farming without any legal justification.

14. That the Respondent’s treatment of and demand for taxes from the Appellant has no legal basis or justification in law whatsoever as it is based on incorrect information.

15. That the Respondent has acted unfairly and in an oppressive and unjust manner contrary to rules of fair administrative action.

16. That the Appellant has discharged its burden of proof under the law by providing all relevant documents to the Respondent as requested.

17. That the Respondent is obliged by the law to observe the rules of natural justice to act lawfully, fairly, and reasonably in exercise of its statutory mandate.

18. That it is evident that the Respondent has misapplied the law in issuing an objection decision against the Appellant.

Appellant’s prayers 19. The Appellant prayed to the Tribunal for the following orders: -a.The instant Appeal be allowed.b.The Respondent’s Objection Decision dated 9th November 2022 be set aside.

The Respondent’s Case 20. The Respondent’s case is premised on the following documents filed before the Tribunal: -a.The Respondent’s Statement of Facts dated 20th January 2023 and filed on 27th January 2023. b.The Respondent’s Written Submissions dated 1st August 2023 and filed on 7th September 2023.

21. The Respondent averred that it conducted a compliance review on the Appellant’s iTax system following intelligence received that the Appellant was not declaring all the income. The intelligence received indicated that the Appellant owned 4 apartments in Kisii County and one apartment in Tassia Estate.

22. That the intelligence also revealed that the Appellant had bought a house in 2007 worth Kshs. 10,000,000. 00 and sold a house in Nakuru worth Kshs. 25,000,000. 00 to which the Appellant had not correctly accounted for in taxes.

23. That the investigations covered income tax for the years of income 2013 to 2021, and its aim was to confirm whether the Appellant had correctly accounted for the income earned in the tax years in question.

24. That in carrying out the investigations, the Respondent conducted a physical inspection of the Appellant’s properties, bank statements and investigations on the vehicles owned by the taxpayer from NTSA.

25. That the Respondent established that the Appellant had under-declared rental income of Kshs. 34,560,000. 00, which was subjected to monthly income tax at the rate of 10 percent (Kshs. 3,456,000. 00)

26. That the Respondent further analyzed the Appellant’s bank statements and established that the Appellant had received income from undisclosed sources for the period under review amounting to Kshs. 15,978,481. 00, which was subjected to income tax at 30 percent totaling to Kshs. 4,793,544. 00.

27. That subsequently the Respondent issued the Appellant with a notice of tax assessment of Kshs. 8,799,845. 00

28. That the Appellant subsequently lodged an objection to the additional assessment on 8th September, 2022. The Respondent reviewed the documents and information provided by the Appellant, upon which the Respondent issued an Objection decision on 9th November, 2022 confirming principal taxes of Kshs. 4,116,652. 00 as due and payable.

29. That the Respondent investigated the Appellant’s bankings and discovered that the Appellant had undisclosed income for the period 2016 and 2017, which the Appellant attributed to be because of him engaging in farming.

30. That on 28th October 2022, the Respondent requested the Appellant for information to demonstrate that he is engaged in farming in line with Section 17 (5) of the Income Tax Act, which provide that:-“every farmer who has elected not to take into account the value of stock shall furnish, when the Commissioner so requires, a statement setting out to the best of his knowledge and belief the value of the stock held by him at any date relevant for the purposes of this section.”

31. That from the information provided by the Appellant, the Respondent noted that the same did not have a statement explaining the Appellant’s stock in respect of farming, and as such the Appellant’s documentation was not sufficient to demonstrate the costs incurred by the Appellant.

32. That the Respondent in computing taxes carried out an industry analysis of farmers engaged in the same farming as the Appellant and calculated average profit margin of 15 percent.

33. That Section 31 of the TPA allows the Commissioner to amend the original assessment based on the information available and from best judgement to ensure that the Appellant is liable for the correct amount of tax.

34. That on account of rental income, the Respondent carried out a physical investigation of the Appellant’s properties to ascertain them and the monthly rental income, and to confirm whether the Appellant correctly accounted for resultant income. The Respondent established as follows:a.The Tassia property consisted of 2 blocks of 6 units, 2-bedroom apartments and the same had receivable monthly rental income of Kshs. 21,000. 00 and Kshs. 23,000. 00. b.The Daraja Mbili property was a flat with hotel (Fisherman Hotel), hair saloon and 18 two-bedroom residential units whose rent per unit was Kshs. 12,000. 00 per month; andc.The Nyancheki market property was an unfinished 2 storey flat consisting of both commercial and residential units.

35. That the Appellant initially had residential income tax of Kshs. 3,456,000. 00, but the Appellant in his objection stated that some of his residential units had existing rent restriction cases for unpaid rent and other tenants who had defaulted.

36. That the Respondent investigated this claim and realized that on the Rent Restriction Tribunal Cases, the Appellant had only one case on one residential unit at Fedha Estate.

37. That the Respondent further noted that the unpaid rent arrears amounted to Kshs. 432,000. 00, and security in household items was held for the rent due.

38. That the Respondent proceeded to adjust monthly rental income to reflect the amends on gross rent receipts, and this shows that the Respondent did use information that the Appellant provided and the same was adjusted to reflect correct monthly rental income and taxes payable.

39. That on income tax on the Appellant’s motor vehicles, the Respondent reviewed NTSA records and confirmed that the vehicles belonged to Nahshon Borura Ongeri. The Respondent thus found it erroneous to double tax the Appellant on undisclosed income and motor vehicles, and proceeded to vacate the taxes in respect to the motor vehicles at objection stage.

40. That from the above paragraphs, it is clear that at all times the Respondent considered the information provided by the Appellant.

41. That the Appellant, under Section 56 of the TPA, bears the burden of proving that the assessment made by the Respondent was incorrect, a burden the Appellant failed to discharge.

42. That the Appellant has not demonstrated by giving a breakdown of the figures how the assessment was incorrect and what ought to have been the assessment.

43. The Respondent averred that at the objection review, documents and explanations provided were considered and adjustments made to the extent that reconciliations had been substantiated by evidence.

44. The Respondent further averred that upon review of the documents presented, it was noted that they were not sufficient to demonstrate the costs incurred and as such, research was carried out into the average margins of agriculture for purposes of determining the Appellant’s taxable income from farming.

45. That the Appellant was engaged through a meeting with the Respondent, which resulted in him providing required information to support his objection, and thus the Appellant was granted opportunity to express himself and justify his position.

46. That Section 51 of the TPA requires the Respondent to review the objection made by the Appellant and issue an objection decision within 60 days, an action the Respondent carried out. Thus, the Appellant is in err in claiming that he was denied his right to fair administrative action as the Respondent made sure to engage the Appellant at all stages starting from the investigation up to the point of issuance of the objection decision.

Respondent’s Prayers 47. The Respondent prayed to the Tribunal for the following orders: -a.The Appeal be dismissed.b.The Respondent’s assessment and decision dated 9th November 2022 be upheldc.Costs be awarded to the Respondent.

Issue For Determination 48. The Tribunal, having carefully reviewed the pleadings and filings made by the parties and the supporting documentation is of the view that the following issue falls for its determination: -Whether the Respondent’s Additional Assessment of the Appellant is Justified.

Analysis And Findings 49. The Tribunal noted that the gist of the instant dispute between the Appellant and the Respondent emanated from the objection decision dated 9th November 2022, where the Respondent confirmed the principal tax payable by the Appellant at Kshs. 4,116,652. 00.

50. The Respondent submitted that it issued the objection decision after according the Appellant sufficient opportunity to lodge his objection and provide additional information and documents.

51. The Respondent further submitted that after reviewing the information and documents provided by the Appellant in relation to motor vehicles and rental income, it vacated some of the income initially assessed and revised the assessment appropriately.

52. It is the Respondent’s submission that it accorded the Appellant opportunity to provide statement of stock on account of his farming income in accordance with Section 17(5) of Income Tax Act, which the Appellant failed to do.

53. On its part, the Appellant submitted that he had provided sufficient information and records to the Appellant, and that the objection decision is unfair.

54. The Appellant submitted that the tax demanded by the Respondent is neither due nor payable as the Appellant had paid all taxes due from him and as assessed by the Respondent.

55. The residential rental income and income tax on farming income covered in the assessments spanned the years 2013 to 2021. Section 31 The law is very clear that the tax Authorities can only issue assessment(s) before the expiry of five years from the date of filing the self-assessment by the taxpayer. This is as per the provisions of Section 31 (4) of the TPA which provides as follows:“The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment.”

56. The exception applicable where the Respondent may issue an assessment beyond the five years is only where the Respondent can prove gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, which the Respondent did not allege or prove in the present matter.

57. The Tribunal reiterates its holding in a similar matter TAT Appeal number 411 of 2021, City Gas East Africa v Commissioner of Investigations & Enforcement where the Tribunal held that the Respondent erred in assessing the Appellant for a period longer than five years when there was no evidence of wilful neglect or fraud.

58. Consequently, the Tribunal finds that the Respondent’s assessment on VAT was illegal for the periods from 2013, 2014, 2015, 2016 and until February 2017 is concerned and the same was unjustified.

59. The Tribunal noted that outside the averments, the Appellant did not annex any documents or records confirming payments of the assessed taxes as alleged. The Appellant also did not substantively address himself to the issues of failure to account for farming and rental income including providing the records and statement of stock requested by the Respondent.

60. The Tribunal noted that the duty to make full and accurate disclosures in tax matters vests with the Appellant and is now settled law. The Tribunal relies on the authority in Commissioner of Investigations and Enforcement vs Kidero (Income Tax Appeal E028 of 2020 eKLR, where it was held that:“…the duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self-assessment. This system relies on the taxpayer making full and good faith disclosures in their tax declaration and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer…”

61. The Tribunal notes that the Respondent’s contention that the Appellant did not provide sufficient information and documents to vacate its additional assessment and that led to objection decision dated 9th November, 2022 is largely unrebutted. There is nothing on the record before us to conclude that the Appellant provided such information and documents. Logically, this raises the question of when burden of proof shifts in tax matters.

62. This Tribunal has previously addressed itself on the obligation of parties in tax matters and the shifting of burden of proof. In Digital Box Limited vs Commissioner of Investigations and Enforcement (2020) eKLR, obligation this Tribunal observed held us follows: -“The question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56(1) of the Tax Procedures Act stats tha: ‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect’. Section 30 of the Tax Appeals Tribunal Act similarly provides that: 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.”In this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving as its assessment. Thus, according to the provisions of Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant…the Tribunal is of the view that the Appellant did not discharge its burden proof in showing that the Respondent used extraneous considerations and documents other than those prescribed in the law. The averments made by the Appellant did not amount to evidence.”

63. In the instant case, the Tribunal is of the considered view that the Appellant has not discharged its obligation and proved that it provided the information and documents to the Respondent. Indeed, the Appellant did not even make effort to annex those relevant documents and information as part of the instant Appeal.

64. Accordingly, the Tribunal holds that the Appellant has, in the circumstances, failed to discharge his burden of proof.

Final Decision 65. The upshot of the foregoing is that the Appeal partially succeeds and the Tribunal proceeds to make the following Orders: -a.This Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 9th November 2022 be and is hereby varied in the following terms:i.The residential rental income tax and farming income tax assessments for the periods in 2013, 2014, 2015, 2016 and until February 2017 be and are hereby vacated.ii.The residential rental income tax and farming income tax assessments for the periods from March 2017 to 2021 be and are hereby upheld.c.Each party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERDR. WALTER J. ONGETI - MEMBERGLORIA OGAGA - MEMBER