[2023] KETAT 996 (KLR)

Malik Boeki Limited v Commissioner of Domestic Taxes (Appeal 1055 of 2022) [2023] KETAT 996 (KLR) (6 October 2023) (Judgment)

Neutral citation: [2023] KETAT 996 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1055 of 2022

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

October 6, 2023

Between

Malik Boeki Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated and domiciled in Kenya dealing in used motor vehicles. The Appellant is a registered taxpayer with Corporate tax, Value Added Tax (VAT) and Income Tax and PAYE obligations.

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 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 ll 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 revenues in accordance with those laws.

3. On 10th September 2018, the Respondent issued the Appellant three assessments totaling Ksh 240,240,337. 32 inclusive of penalties and interest relating to corporation tax for 2015, 2016 and 2017 years of income.

4. On 11th September 2018, the Appellant lodged its notice of objection for the three assessments via the iTax portal which was duly acknowledged by the Respondent on even date.

5. On 10th March 2021 the Respondent issued the Appellant an “Audit Commencement Letter” in relation to Corporation tax, VAT and PAYE obligations for the January 2015 to February 2021 review period.

6. On 25th May 2021, following a desk audit on tax obligations of the Appellant, the Respondent issued a pre-assessment letter against the Appellant for Ksh 362,061,059. 00 against which the Appellant objected on 16th June 2021.

7. This was followed up with a notice of assessment for Ksh 221,429,542. 00 inclusive of penalties and interest dated 30th June 2021.

8. On 27th September 2021, the Respondent confirmed additional assessments of Ksh 221,429,542. 00 via the iTax portal.

9. On 29th September 2021, the Appellant vide a letter dated 28th September 2021 objected to the assessment in its entirety.

10. On 29th August 2022 vide its objection decision, the Respondent confirmed a revised amount of Ksh 221,420,542. 00 against the Appellant.

11. Aggrieved by the Respondent’s decision, the Appellant lodged a Notice of Appeal dated 22nd September 2022.

The Appeal 12. The Appellant’s Appeal was premised on the following grounds as indicated in the Memorandum of Appeal dated 23rd September 2022 and filed on 26th September 2022;a.That the Appellant was a good corporate citizen that complied with Part VIII of the Act, periodically submitted annual return of income together with a self-assessment of tax under Section 52B and business accounts under Section 54. b.That the Appellant complied with various relevant provisions of the Income Tax Act and VAT Acts by filing monthly returns.c.That the Appellant submitted all the requested information via email and physically all the while continuously engaging the Respondent in a bid to resolve the dispute.d.That the Appellant provided detailed listing of sales and purchases for four years as requested by the Respondent which clarified the actual margins earned by the Appellant.e.That the Respondent without any basis or legal foundation assumed a salary to be adopted for the Appellant’s director contrary to the actual amount already charged to PAYE tax.

Appellant’s Case 13. The Appellant’s case is premised on its Statement of Facts dated 23rd September 2022 and filed on the 26th September 2022;

14. That the Appellant was issued with three assessments on 10th September 2018 and objected accordingly on 11th September 2018 pursuant to Section 51 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’). That the objection was not challenged by the Respondent thus the Appellant considered it validly lodged.

15. That there was no correspondence between the parties until 10th March 2021 where the Appellant was issued with an audit commencement letter requiring it to avail records prior to the commencement of the audit slated to begin on 24th March 2021 as per the notice. That in the letter, the Appellant was requested to avail general ledgers, trial balances, bank statements, financial statements and tax computations covering January 2015 to February 2021 review period.

16. The Appellant averred that it supplied the requested information via electronic mail on 11th March 2021. That this was followed by another request on 15th April 2021 for additional information which was duly supplied by the Appellant on 20th April 2021 both via electronic mail and physically.

17. The Appellant averred that it adduced the following among other information and documents; books of accounts, system generated ledgers, cashbooks, payment vouchers and or invoices, sales agreements, sales invoices, copies of ETR, bank statements and copies of relevant custom entries.

18. That the availed information and documents notwithstanding, the Respondent went ahead to issue a pre-assessment amounting to Kshs 362,061,059. 00, an amount the Appellant considered ridiculous. Consequently, the Appellant objected to the pre-assessment on grounds of various anomalies while decrying the arbitrary and assumed exaggerated estimates.

19. That as evidenced by the copy of the Director’s passport, the Appellant was unable to respond in time to the Respondent’s pre-assessment as its Director had travelled outside Kenya on 2nd July 2021 and returned on 1st August 2021 whereupon he went into self-isolation in line with Covid-19 health guidelines. That it was only after the self-isolation period that discussion regarding the pre-assessment matter was resumed between the parties.

20. That the Respondent again issued additional assessment on 27th September 2021 via the iTax portal; to which the Appellant objected to the entire assessment vide its letter dated 28th September 2021 and filed on 29th September 2021. That the Appellant also partially objected to the assessment on iTax platform on 1st October 2021 for Ksh 6,158,158. 20 and claimed that this was the only amount captured by the Respondent’s iTax portal yet it had objected to the entire amount.

21. That following the Appellant’s letter of objection dated 28th September 2021, the Respondent’s Internal Review of Objections division took over the matter and requested for information and explanations which was followed by several engagements where the required information and documents were supplied.

22. The Appellant averred that it provided a detailed listing of sales and purchases requested for four years which clarified the actual margins earned with further explanations on the nature of business including how sales are made both on cash basis and hire purchase (installment basis).

23. It was the Appellant’s contention that apart from pre-assessment, assessment notices and objection decision, the Respondent had neither availed nor communicated the basis of workings upon which additional assessments were based. That at no time did the Respondent disagree with information and documents provided by the Appellant or provided how it arrived at the workings fixed and estimated margins; whereas the margins for the Appellant’s products varied from unit to unit that was dependent upon diverse features.

24. The Appellant expressed its desire to be enlightened how, without legal basis, the Respondent assumed a salary to be adopted for the Director contrary to the actual amount already charged to PAYE tax based only on the alleged lifestyle audit; yet at no time did the Respondent ask for any details of the Director’s spending and lifestyle.

25. The Appellant averred that despite providing all the requested information and documents, the Respondent confirmed an additional assessment of Ksh 221,420,542. 00 for 2017, 2018 and 2019 review period in its objection decision dated 29th August 2022 that was inclusive of penalties and interest.

26. It was the Appellant’s contention that the statement of findings in the objection decision was vague, erroneous and not factual. That the Respondent seemed not to have factored in the Appellant’s information while evaluating the Appellant’s position.

27. That whilst the Income Tax Act , Cap 470 of laws of Kenya (hereinafter ‘ITA’) and TPA place the burden of proof on the taxpayer, the laws were not envisaged to allow the Respondent to create imaginative figures without basis, purely estimated in order to arbitrarily derive huge tax liability.

28. That contrary to globally accepted principles of social justice, fair administration and the Constitution of Kenya 2010; the Respondent envisaged the Appellant as wrong until proven otherwise by himself. That such a case only served to alienate investment both foreign and local in the economy.

29. That even after issuing its objection decision, the Respondent issued additional tax liabilities via email against the Appellant in a summary on 12th September 2022 reflecting additional assessments in excess of amounts stated in the objection decision and in some instances duplicating the tax liabilities.

Appellant’s Prayer 30. Based on the above, the Appellant’s prayer was that the Tribunal vacate all assessments in full and restrain the Respondent from taking any enforcement action thereof.

The Respondent’s Case 31. The Respondent replied to the Appellant’s grounds of Appeal through its Statement of Facts dated 25th October 2022 and filed on 26th October 2022.

32. The Respondent averred that its audit established that the Appellant’s declaration of income tax was inconsistent with VAT declared and was not commensurate with import declaration.

33. The Respondent averred that it derived the weighted average margin of 10% based on the Appellant’s imported vehicle cc rating and known market value. That it was therefore baseless for the Appellant to allege that the Respondent did not rely on any basis in coming up with the margin used.

34. It was the Respondent’s contention that it did not arbitrarily estimate amounts against the Appellant but relied on the law in determining the tax liability.

35. The Respondent averred that it established that the Appellant understated the turnover as per VAT returns compared to the determined turnover using import value. That additionally, the Respondent vide tax investigations established that the Director’s salaries were understated based on analysis of their personal and private expenditure.

36. To buttress this position, the Respondent relied on Section 29(1)(a) of the TPA which empowers it to issue an assessment based on information available and to his best judgement. Further, the Respondent cited Section 24(2) of the TPA in asserting that it is not bound by information provided by the Appellant in assessing tax liability.

37. It was the Respondent’s contention that the Appellant did not provide the requested documents specifically the following;a.All the bank statements affiliated to the company.b.Missing cost of sales entries for the period under review.c.Softcopy of the cashbookd.Purchase invoices for the period under review

38. The Respondent averred that Section 56(1) of the TPA place the burden of proof on tax matters upon the Appellant who failed to discharge the burden. That apart from failing to provide documents, the Appellant did not validate its objection as set out in Section 51(3)(c) of the TPA.

Respondent’s Prayersa.That the Tribunal upholds the Respondent’s objection decision dated 29th August 2022 and tax demand as properly issued under the law.b.That the Appeal herein be dismissed with costs to the Appellant as the same was without merit.

Parties Written Submissions 39. The Appellant’s written submissions dated 15thApril 2023 were filed on 21st April 2023, the Appellant submitted on four issues for determination as follows;a.Whether the Respondent has a reasonable case against the Appellant with regard to the additional charges raised in the form- of additional assessments for Corporation Tax, VAT and PAYE.b.Whether the Respondent abided by the law in subjecting the Appellant to additional taxes.c.Whether the Respondent exhausted all avenues while considering documents and information provided by the Appellant in support of its position.d.The Appellant fully discharged its burden by providing all evidence to support its position.

40. The Appellant averred that the Respondent ignored the fundamental tenets of Article 47 of the Constitution of Kenya 2010 by not according it a fair hearing during objection process. It further claimed that Section 29 of the TPA only provides the Respondent to issue default assessment where a taxpayer has failed to submit a tax return yet the Appellant duly made returns of income under Income Tax Act and VAT Act within the stipulated timelines in full disclosure as required under self-assessment criterion.

41. The Appellant submitted that it made declarations in terms of revenue, costs and expenses which clearly align with the business performance as confirmed by the Respondent in its preliminary findings. That thus the additional assessments were raised in a frivolous and vexatious manner contrary to Section 31 of the TPA because the Respondent ignored evidence availed in form of documents, explanations and financial analysis all of which were done in good time. That the Respondent has neither provided contrary evidence nor availed reasons as provided for in Section 49 of the TPA.

42. The Appellant submitted that it disputes the Respondent use of markup stating that each used motor vehicle is sold at a unique price based on age, usage(mileage), condition at landing, clearance time, registration mark, color, body type, trim, interior, extras, tire condition and so on. That therefore, a fixed margin cannot be ascertained to such a business a fact that was acknowledged by the Respondent. The Appellant cited the OECD guidelines on usage or computation of markup estimation which clearly stipulates factors such as labor, capital, materials as well as different markets and factors affecting them.

43. The Appellant averred that how the Respondent arrived at 10% fixed weighted average markup was alien to it as the workings were never availed for the Appellant to counter the percentile claim that was the basis for Corporation Tax and VAT.

44. The Appellant submitted that it availed all payroll data, payment slips, statutory deduction summaries and full access to cashbooks and general ledger and it even demonstrated actual expenditure and the shared accommodation used by the Director. That thus the Respondent was wrong to assume a supposed salary figure based on what it felt the taxpayer ought to earn.

45. The Appellant claims it read mischief in 2018 assessments because despite highlighting that the assessments were overlapping and time barred as per Section 51(11) of the TPA, the Respondent confirmed the same on 9th February 2023. That contrary to the Respondent’s assertions, on burden of proof being upon the Appellant, the law does not afford the Respondent a blanket opportunity to levy taxes based on unsupported and arbitrary assessments. That as a result of the Respondent’s actions, it raised additional taxes in excess of import data extracted from its own system. The Appellant cited the Tribunals holding in the case of Digital Box Limited vs Commissioner of Investigations and Enforcement, TAT 115 of 2017 that;“The officer is to make an assessment to the best of his judgement against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously, because he must make exercise judgement in the manner. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances, and his own knowledge of previous returns by and assessments of the assesses, and all other matters which he thinks will assist him in arriving at a fair and proper estimate and though there must necessarily be guess-work in the matter, it must be honest guess work.”

46. To buttress its position, the Appellant relied on the case of Alfred Kioko v Timothy Miheso & another [2015] eKLR where the court held that a party can only discharge its burden upon adducing evidence.

47. The Appellant averred that the law does not function in a vacuum and allowing the objection decision to hold would water down gains made in enhancing tax laws, administration and collection in the Country and cited the Tribunals judgement in the case of Bidco Africa Limited vs Commissioner of Customs and Border Control, TAT 124 of 2021 that;“Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity…any ambiguity in such a law must be resolved in favor of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.”

48. The Appellant averred that it fully cooperated and provided all facts but the Respondent chose to hide behind legal provision on the burden of proof while failing to afford the Appellant the opportunity to explain or be heard and feared that the Appeal may be determined on technicalities as advanced by the Respondent rather than facts provided by the Appellant. The Appellant relied on the case of Commissioner of Domestic Taxes V Mayfair Insurance Company Limited [2017] where the court held that each case is to be viewed sui genesis and on its own circumstances and facts. To reinforce this position, the Appellant cited Article 159(2)(d) of Constitution of Kenya 2010 that; “justice shall be administered without undue regard to procedural technicalities.”

49. The Respondent’s written submissions dated 20th March 2023 were filed on 27th March 2023 whereupon the Respondent submitted on three issues;a.Whether the Respondent’s charge to Corporation Tax was erroneous and excessive.b.Whether the Respondent’s charge to VAT was erroneous and excessive.c.Whether the Respondent’s charge to PAYE was erroneous and excessive.

50. The Respondent averred that Section 3(1) and 2(b) of the ITA empower it to charge tax on the Appellant’s gains from business operation. Additionally, that as per Section 24(2) of the TPA, the Respondent is not bound by a tax return or information provided by or on behalf of a taxpayer and may assess a taxpayer’s liability using any information available to it.

51. That Section 31(1) of the TPA allows the Respondent to amend taxpayer’s assessment. Further, that Section 73(2)(b) of the ITA empowers the Respondent to assess according to the best of his judgement where the Respondent has reasonable cause to believe that the Appellant’s return is not true and correct.

52. To buttress this position, the Respondent cited the court decision in;a.Republic v Commissioner General, Kenya Revenue Authority & Another Ex-Parte contract Network Limited [2004] eKLR that;“It is clear from a reading of the said provisions that the Respondents are indeed clothed with powers to estimate taxes payable by a taxpayer in certain circumstances.”b.Commissioners of Customs & Excise c Pegasus Birds Limited [2004] EWCA CIV 1015 that;“to the best of their judgement has to be understood in a context in which the taxpayer’s records maybe incomplete so that a fully informed assessment is unlikely to be possible. The word “best” recognizes that the result may involve an element of guesswork and that it was the best of the Revenue’s judgement on the information available.”c.Oliver Merrick Fowler & Another v Kenya Revenue Authority [2022] eKLR that;“The very use of the word judgement makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before the...”

53. The Respondent avowed that VAT returns are directly proportionate to Corporation Tax and that Section 2(a)(i) of ITA provides that business gains are subject to tax while Section 5 of the VAT Act impose VAT tax for a person or business dealing in taxable supplies. That the Appellant’s VAT was computed by tallying the adjusted underdeclared VAT assessments in compliance with principles set out in Section 24 and 31 of the TPA. The Respondent claimed that the Appellant’s VAT claim were unsupported and as such it was proper to disallow them.

54. That in line with Sections 3(1),(2)(b) & 73 of ITA as read together with Section 24 and 31 of the TPA, the Respondent charged additional PAYE for the Appellant’s directors by utilizing the personal and private expenditure method of analysis as guided by the courts holding in the Oliver Merrick Fowler & Another v Kenya Revenue Authority [2022]eKLR (supra).

55. The Respondent averred that in utilizing the above method, it was able to establish that the Appellant’s returns on income earned by its directors was untrue and inaccurate. That thus, the use of both direct and indirect methods by the Respondent was necessitated by the absence of credible and reliable documentation on the Appellant’s tax affairs. To buttress its position the Respondent cited Section 56(1) of the TPA and the court’s ruling in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021]eKLR that;“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.”

56. It was the Respondent’s assertion that it exercised its discretionary power under Section 73 of the ITA and Section 24 of the TPA in utilizing the mark up method to ascertain the Appellant’s income and resultant tax liability. That this was necessitated by the inaccurate and untrue returns by the Appellant whose margin of 4% was not supported by documentary evidence and was below the market rate. Additionally, the Appellant did not give reasonable explanation why it departed from the known market profit margin.

Issues For Determination 57. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions finds that a single issue calls for its determination as follows;Whether the Respondent’s Additional Assessments were proper.

Analysis And Determination 58. Having established a single issue for determination, the Tribunal proceeds to analyze it as follows;

59. The Tribunal notes that the Respondent first assessed the Appellant on 10th September 2018 which was challenged by the Appellant on 11th September 2018 without a rebuttal from the Respondent.

60. The Tribunal’s notes that the instant objection decision of 29th August 2022 was for a different assessment not a confirmation of the Respondent’s assessment made on the 10th September 2018.

61. The Tribunal is well aware that the Respondent’s assessment method was based upon a 10% mark-up, an uplift from the Appellant’s reported 4% margin. The Respondent had indicated that the Appellant’s margin was below the known industry margin. The Tribunal sighted the Respondent’s request for documentation from the Appellant to dispute the Respondent’s method of assessing tax liability in the attached pleadings.

62. The Tribunal notes that Section 3(1) & (2)(a)(i) & (b) and Section 73 of the ITA together with Section 5 of the VAT Act empower the Respondent to bring to charge income or gains thereof obtained by a chargeable person or business. Additionally, Section 24(2) of the TPA provides that;“...the Commissioner shall not be bound by a tax return or information provided by or on behalf of a taxpayer and the Commissioner may assess a taxpayer’s tax liability using any information available to the Commissioner.”

63. The Tribunal notes that the onus was on the Appellant to disapprove the Respondent’s assessment method by adducing documentation or proposing an alternative method to dispute the Respondent’s calculations. The Tribunal notes that Section 31(1) of the TPA as well as Section 73(2)(b) of the ITA sanction and lend the Respondent the discretion to amend a taxpayer’s assessment to the best of its judgement in the absence of documentation to enable it assess tax liability.

64. The Appellant had the opportunity to avail documents requested at the audit stage as well as at the pre-assessment and assessment stage which it did not do. It is only at the submissions stage that the Tribunal has sighted the said documents that the Appellant unprocedurally filed before the Tribunal. Consequently, the Tribunal notes that the Appellant failed to follow the procedure stipulated in the TPA when introducing new evidence. The Appellant’s pleadings and submissions were mere denials to the tax assessment.

65. The Tribunal notes that Section 56(1) of the TPA and Section 30 of the TAT Act places the burden of proof upon the Appellant to prove that a tax decision is incorrect. In the instant Appeal, the Appellant failed to discharge its burden of proof by presenting documentation or other information to counter the Respondent’s assessment. To reinforce this position, the Tribunal reiterates its position as held in Joycott General Contractors Limited V Kenya Revenue Authority (TAT No. 28 of 2018) as follows;“We find that the Appellant seems to forget that it bears the burden of proof in law to demonstrate to this Tribunal that the Respondent’s assessment was wrong. Especially with regards to the under declarations and variance in respect of VAT and income sales. On the contrary, the Appellant has not bothered to substantially traverse the assessment raised. All it has done is to make sweeping and expansive accusations without substantive support.”

66. Having established that the Appellant failed to discharge its burden of proof while also failing to offer an alternative method to the assessment by the Respondent, it is the Tribunal’s view that the Respondent’s additional assessment was proper.

Final Decision 67. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The 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.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 6TH DAY OF OCTOBER, 2023. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A MUGAMEMBERABDULLAHI M. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER