[2024] KETAT 1608 (KLR)

Mathia v Commissioner of Domestic Taxes (Tax Appeal E048 of 2024) [2024] KETAT 1608 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1608 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E048 of 2024

Grace Mukuha, Chair, GA Kashindi, E Komolo & AM Diriye, Members

November 22, 2024

Between

Lydia Wambui Mathia

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a registered taxpayer operating Elem Ventures, a sole proprietorship, whose business was the supply of Covid-19 personal protective equipment to KEMSA supplier for the period 2020.

2. The Respondent is established under the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. Under Section 5 (1), the Respondent is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) concerning the performance of its function under sub-section (1), the Respondent is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues per those laws.

3. The Respondent carried out a returns review of the Appellant’s returns and issued the Appellant with a pre-assessment notice for the period January to December 2020.

4. The Appellant responded to the said notice on 4th January 2023 and 6th July 2023, but vide a letter dated 13th September 2023, the Respondent issued the Appellant an assessment for corporation tax and withholding tax totaling to Kshs. 11,208,227. 00.

5. Aggrieved by the said notice, the Appellant objected to the same via iTax on 4th October 2023.

6. Subsequently, the Respondent issued its objection decision on 5th December 2023 confirming its earlier assessment for corporation tax and withholding tax assessment amounting to Kshs. 11,208,227. 00.

7. Being dissatisfied with the Respondent’s Objection Decision, the Appellant lodged a Notice of Appeal dated and filed on 3rd January 2024 against the said decision.

The Appeal 8. The Appellant’s appeal is premised on its Memorandum of Appeal dated 16th January 2024 raising the following grounds: -i.That the Respondent erred in fact and law by disallowing deductible business expenses amounting to Kshs.45,937,756. 32 in the Appellant’s tax computation which were incurred in the generation of taxpayer’s income; andii.That the Respondent erred in fact and law by imposing withholding tax on expenses that the Appellant did not incur for the assessed period.

The Appellant’s Case 9. The appeal is anchored on the following documents filed before the Tribunal:i.Appellant’s Statement of Facts dated 16th January, 2024, and filed on 18th January 2024ii.The Appellant’s Submissions filed on 27th August, 2024.

10. The Appellant stated that in 2020, Accenture Limited subcontracted her to deliver 12,500 Personal Protective Equipment (PPE) kits to the Kenya Medical Supplies Authority (KEMSA) during the height of the Covid-19 pandemic. Due to the urgent nature of the situation and the increasing severity of the pandemic in the country, there was limited time available to supply the PPE kits to KEMSA.

11. The Appellant stated that she purchased various essential equipment for the PPE kits, such as KN95 masks, coveralls, gloves, goggles, and gumboots, from different suppliers based on availability and high demand. Some of the key suppliers she dealt with included Iconic Healthcare Limited, Encartar Diagnostics Limited, and Shree Ghanshyam Hardware Limited. She then assembled the masks, goggles, coveralls, gumboots, and gloves to create complete PPE kits.

12. Appellant stated that the cost of sales amounting to Kshs. 27,633,423. 32 which the Respondent disallowed for not being properly supported was in its view properly supported through invoices, receipts and customer statements from various suppliers (Iconic Healthcare Limited, Encartar Diagnostics Limited and Shree Ghanshyam Hardware Limited), which it annexed as Appendix VI of the Statement of Facts and the Appellant prayed that the Tribunal allow these expenses as tax deductions as it was incurred in the generation of income as stipulated in Section 15 of the Income Tax Act.

13. The Appellant contended that as a business engaged in supplying goods, it is unjust and constitutes a breach of good faith to deny the deduction of the cost of sales and impose taxes on the overall revenue, all the while neglecting the expenses associated with procuring the very goods provided to KEMSA to aid those greatly impacted by Covid-19.

14. The Appellant further stated that in the Objection Decision, the Respondent deemed that the Appellant failed to provide delivery notes to show actual delivery of goods. To counter this, the Appellant provided delivery notes as annexed in Appendix VII of Statement of Facts being 5 delivery notes that clearly indicate a total of 12,500 PPE kits being delivered to KEMSA.

15. Further, the Appellant stated that the Respondent’s Independent Review Office team never requested the delivery notes, despite their availability to the team that did the pre-assessment and therefore there was no reason for the Respondent to disallow cost of sales.

16. The Appellant stated that the Respondent vide the Objection Decision letter indicated that the Appellant’s suppliers did not declare sales made to the Appellant in their tax returns, and as a result, the Respondent disallowed the respective expenses associated with the said suppliers. In response to this, the Appellant stated that it was beyond her control to ensure that suppliers make declarations on iTax, therefore, it is an act of bad faith for the Respondent to disallow the Appellant’s expenses on this basis whereas it is the Respondent’s legal obligation to follow up with the suppliers on the whatsoever reason behind their undeclaration of the said revenues.

17. The Appellant stated that the supply of Covid-19 kits demanded a significant amount of manual labour and required individuals proficient in packaging PPEs according to the purchaser's specifications. A total of 12,500 kits were required, and each complete kit consisted of a mask, coveralls, goggles, gumboots, and gloves. Each of these items needed to be individually packed in separate bags before being included in a complete kit, which also had its own cover. 20 of these kits were later packaged into one carton before being delivered to KEMSA as complete kits.

18. To support its assertion on the issue of labour expenses, the Appellant attached casual schedules detailing the casual laborers’ work, substantiating the expenditure of Kshs 10,000,000. 00 annexed as Appendix VIII to the Statement of Facts and asked the Tribunal to recognize this expense as an eligible taxable deduction.

19. The Appellant further stated that the Respondent in its Objection Decision alluded that the Appellants’ labour schedules failed to include other noteworthy details of employees such as identity numbers. In response to this, the Appellant argued that employees assigned in packaging of PPEs were contracted on a temporary basis and details such as identity numbers were neither required nor retrieved and that in addition, the Income Tax Act does not require the Appellant to provide identity numbers and contacts of temporary employees. As a result, the Appellant submitted that the names and amounts provided in the casual schedules sufficiently support the labour casual wages as per the requirements of Section 15 of the Income Tax Act.

20. The Appellant contended that it is therefore arbitrary, capricious and in bad faith for the Respondent to assume that the medical equipment were supplied without incurring any labour costs and asked the Tribunal to allow the same for tax deduction purposes.

21. The Appellant stated that it utilized Ziplock bags to individually package each Personal Protective Equipment (PPE) item and that each Ziplock bag contained a set of PPE items, including a KN-95 Mask, a coverall with shoe covers, a pair of medical gloves, and a pair of goggles.

22. The Appellant stated that subsequently, these PPE items were assembled and packed in 625 cartons, with each carton containing twenty sets. These cartons were then transported in 25 separate trips, with each trip incurring a cost of Kshs 26,000. 00 The Appellant stated that freight and transport costs are substantially supported by payment vouchers paid to different transporters and packagers, which were annexed as Appendix IX of the Statement of Facts contrary to the Respondent’s assertion in the Objection Decision that the Appellant failed to support its freight and transport costs.

23. The Appellant annexed in Appendix X of the Statement of Facts loan agreements supporting the finance cost that was accrued in the Appellant’s books of accounts. The Appellant submitted that this is satisfactory as corroborative evidence to denote that the Appellant incurred the stated amount with regards to the aforementioned expense and it will therefore be unfair for the Respondent to disallow the same.

24. The Appellant stated that it incurred further expenses (legal, start-up costs and book-keeping expenses) amounting to Kshs.121,000. 00 which the Respondent had purported not to have been supported. The Appellant stated that the expenses were supported through petty cash vouchers and the general ledger annexed as Appendix XI to the Statement of Facts, and requested the Tribunal to set aside the Respondent’s position and allow the Appellant to deduct the aforementioned expenses.

25. The Appellant stated further that the Respondent vide the Objection Decision letter purported that the Appellant failed to provide bank statement copies as well as show actual movement of funds. To counter this, the Appellant provided bank statements for the period 2020 annexed as Appendix XII to the Statement of Facts. The Appellant stated, however, that purchase invoices were settled in cash as evidenced by payment vouchers and receipts.

26. Furthermore, ledgers showing cash movement of expenses were availed, annexed as Appendix XI to the Statement of Facts. The Appellant submitted that this is substantial proof of payment of these expenses, with reference to section 54A (1) of the Income Tax Act, which requires a person carrying on a business to keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts, and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.

27. The Appellant submitted that its interest expense for the period 2020 was not Kshs 3,260,000. 00 as purported by the Respondent. Therefore, withholding tax charged on interest and legal fees in this case should not apply as the above expenses were not claimed in the IT2C of the taxpayer. The Appellant relied on the Court of Appeal's ruling in the case of Fintel Limited vs Commissioner of Domestic Taxes J.R Misc. Application No.1768 of 2004, which the Appellant submitted clarified that withholding tax on interest becomes applicable only upon payment as outlined in sections 35 (1) and (3) of the Income Tax Act. In the case, Majanja J. faced with a similar scenario held that:“The issue in this case is really whether the applicant must deduct withholding tax on interest claimed as an expense in the audited accounts under section 35 of the Act. As I have pointed, the meaning of “paid” and the language of sections 2 and 35 of the Income Tax Act as a whole do not support the Respondent’s position. Sections 35(1) and (3) clearly state that tax is withheld “upon payment” and payment is a necessary prerequisite for the withholding tax to apply. I find and hold that the decision made to impose tax on the applicant in this case is without jurisdiction and without mandate of the Income Tax Act and therefore an order of certiorari is appropriate to quash the ultra viresact of the Respondent in demanding tax outside its mandate.”

28. The Appellant maintained that all expenses were incurred in the generation of business income and that it would therefore be unfair for the Respondent to disallow the expenses without substantial grounds as they were well supported through invoices, receipts, payment vouchers, customer statements and the general ledger.

29. The Appellant submitted further that under Section 15(1) of the Income Tax Act, the cost of sales totaling Kshs. 27,633,423. 32 should be allowed as tax deductions since they were substantiated by invoices, receipts, and customer statements from various suppliers, proving they were incurred to generate income.

30. The Appellant relied on the case of Income Tax Appeal No E098 (Commissioner of Domestic Taxes -vs- One Stop Trading Limited) and argued that the Respondent unjustly disallowed expenses associated with suppliers who allegedly failed to declare sales on iTax, a matter beyond the Appellant's control.

31. In conclusion, the Appellant prayed that this Honourable Tribunal makes an order to the effect that: -a.This appeal be allowed and the Respondent’s Objection Decision dated 5th December 2023 be set aside; andb.The costs of the Appeal be in the cause.

Respondent’s Case 32. The Respondent opposed the instant appeal vide its Statement of Facts dated 16th February 2024 and Written Submissions dated and filed on 22nd August 2024.

33. The Respondent stated that it conducted a returns review of the Appellant’s returns and noted variances (income tax turnover and VAT turnover) in the Appellant’s returns.

34. The Respondent issued its Return Review Findings and Notice of Assessment upon completion of the returns review process based on the following findings –i.It disallowed all the unsupported expenses which were:a.Labour casual wages;b.Legal Expenses;c.Freight and Transport;d.Start-up cost/ Operating Expenses;e.Bookkeeping; andf.Finance Cost.ii.It charged withholding tax on legal and interest expenses.

35. The Appellant being dissatisfied with the Notice of Assessment went on to file its objection to the assessment on 4th October 2023. It opposed the return review and assessment in its entirety on the grounds that:i.It had all the necessary documents to support the expenses that the Respondent deemed unverifiable.ii.The withholding tax on interest and legal fees do not apply because the above expenses were not claimed by the taxpayer.

36. The Appellant presented the following documents at the objection stage for review by the Respondent –i.Objection letter.ii.Trade agreement between the itself and Accenture.iii.purchase invoice and customer statements.iv.casual labour schedule.v.payment vouchers.vi.loan agreements, andvii.GL 2020

37. The Respondent convened a working meeting with the Appellant’s agent on 14th November 2023 to discuss the merits of the tax dispute when the Appellant reiterated the grounds as raised in the objection letter.

38. The Appellant presented various documents to support its objection in relation to its suppliers Iconic Healthcare, Shree Ghanshyam and Encartar Diagnostics namely (i) Purchase invoices and payment vouchers in relation to the costs of sale; (ii)Payment Receipts; and (iii) Customer statements form

39. The Respondent stated that the Appellant claimed that the payments were done in cash so it could only produce payment receipts as evidence that payments were done.

40. The Respondent stated that it considered these payments in their totality and noted, however, that there were no corroborative documents presented to verify these payments and that the Appellant failed to provide:a.Delivery notes to show that the items were delivered;b.Appellant’s bank statements to show actual movement of money and how it was able to pay for the purchase invoices; andc.No cash reconciliation analysis to support the cash payments of the said purchase invoices

41. The Respondent stated that the purchase invoices presented were not proper tax invoices per Regulation 9 of the Value Added Tax (VAT) regulations 2017 in that (a) some lacked unique identifier numbers; (b) some lacked tax rate charge; and (c) some lacked the Personal Identification Number (PIN) of the Appellant’s suppliers.

42. The Respondent did the analysis of the Appellant's suppliers’ iTax returns and found that they had not declared any taxable or exempt sale to the Appellant.

43. The Respondent stated that the Appellant provided labour costs schedules to buttress its claim in the financial statement. The schedule provided for only two names of the Appellant’s employees, the rate of payment, number of days worked and total cost incurred. The Appellant stated that it used cash to pay for labour costs.

44. The Respondent further stated that it noted that the schedules did not include other noteworthy details for the employees, which were their identity numbers and confirmation documents that the employees had received the said payments.

45. The Respondent stated that the Appellant went on to provide payment vouchers to support expenses for legal services, business registration, bookkeeping services, transport and logistics and that even though the Appellant provided a general ledger to support the expenses, this was not enough and required further corroboration especially through source documents.

46. The Appellant provided loan agreements showing that it borrowed money from the following persons:i.Loan of Kshs.3,000,000. 00 from Kogweno & Bubi Advocates LLP with interest of Kshs. 600,000. 00;ii.Loan of Kshs. 8,000,000. 00 from Beryl Rebecca Adhiambo with interest of Kshs. 2,000,000. 00; andiii.Loan of Kshs. 800,000. 00 from Kogweno & Bubi Advocates LLP with interest of Kshs.160,000. 00.

47. The Respondent, after considering these agreements, charged withholding tax per section 35 (3) of the Income Tax Act (ITA) on the interest on loan and allowed the Appellant to deduct the interest on loans as an expenditure.

48. The Respondent stated that it also allowed the Appellant to deduct legal fees as allowable deduction but charged a withholding tax per Section 35 (3) of the ITA.

49. The Respondent stated that after considering all the grounds of objection and documents presented upheld the Appellant’s assessments as follows:Assessment Number Assessment date Tax Obligation Tax period Principal Tax Assessed

KRA20231XXXXX42 12/09/2023 Income Tax Resident Individual Year ending December 2020 10,706,727. 00

KRA20231XXXXX98 12/09/2023 Income Tax Withholding July 2020 501,500. 00

11,208,227. 00

50. The Appellant being aggrieved by the decision of the Respondent filed this Appeal on 18th January 2024.

51. The Respondent stated that deductions allowable are governed under Section 15 of the ITA and the Appellant has the responsibility to maintain relevant tax records that should ascertain the same per Section 54A of the ITA, as read with Section 23 of the Tax Procedures Act (TPA). Section 24(1) of the ITA requires that the Appellant produce its tax records when required. This requirement is because the Appellant has the burden of proof in disproving the Respondent’s tax assessments per Section 56 (2) of the TPA.

52. The Respondent requested the Tribunal to take judicial notice of the fact that this assessment comes at the backdrop of a KEMSA scandal in 2020, where there was loss of billions of shillings in procurement of Covid – 19 kits. It is with this knowledge that the Respondent exercised utmost scrutiny in reviewing the Appellant’s tax affairs, requiring that evidence of every expenditure be produced.

53. The Respondent admitted that the Appellant did produce documents in the objection stage, however, these documents were not enough to extinguish its burden of proof. The Respondent stated that the problems identified included:i.Improper tax documents presented i.e. the purchase invoices;ii.No delivery notes to show that goods were actually delivered;iii.No bank statements provided or cash reconciliations provided to show movement of money; andiv.No source documents to support expenses

54. The Respondent, therefore, stated that the Appellant failed to prove its grounds of objections by failing to provide the necessary documents to answer the issues above. The Appellant failed to extinguish its burden of proof; hence the Respondent was right in maintaining the said assessments through exercise of its best judgement.

55. On the second ground of Appeal relating to the issue of withholding tax, the Respondent stated that Section 31(1) of the TPA empowers it to issue additional assessments from the information available to it and in exercise of its best judgement.

56. The Respondent noted the loans that were advanced to the Appellant by various persons and in exercise of its powers under Section 35 (3) of ITA, it charged withholding tax on the interest, and allowed the Appellant to deduct the loan interest as an expense. The Respondent also charged withholding tax on the legal fees under the said section.

57. The Respondent contended that the Appellant had introduced new evidence at the appeal stage that was not availed at the objection stage as no documentation was availed at the objection stage relating to this issue.

58. The Respondent stated that from the facts as provided, the law as it guides and the arguments presented, the Respondent had proved that its actions were justified, lawful and reasonable, hence this Appeal is unmerited.

59. The Respondent submitted that the Appellant was given a chance to explain the variances but failed to do so, justifying the variance as the basis for the assessment. Citing the case of Republic -vs- Commissioner for Income Tax & another ex-parte Stockman Rozen (K) Limited [2015] eKLR, the Respondent asserted that expenses must meet the criteria in Section 15 of the Income Tax Act to be allowable.

60. The Respondent further submitted that it applied its best judgment in issuing the tax assessment based on available information and findings from the returns review, justifying the assessment. It referenced the Commissioner for Her Majesty’s Revenue and Customs TC/2017/02292 Saima Khalid -vs- The Commissioners for Her Majesty’s Revenue & Customs, and stated that the instant assessment was properly conducted and in line with applicable laws, hence it should be upheld as valid.

61. The Respondent argued that under Section 51 of the Tax Procedures Act, a valid objection requires a taxpayer to file a Notice of Objection within 30 days, clearly state the grounds, pay undisputed taxes, and submit relevant supporting documents which the Appellant had failed to provide.

62. The Respondent cited Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, arguing that the Appellant failed to meet the burden of proof required to show that the assessment was excessive, incorrect, or illegal, and therefore there was no basis for the Respondent to amend it.

63. The Respondent further argued that since the Appellant failed to provide evidence proving the assessment was erroneous or invalid, it acted correctly in rejecting the notice of objection based on best judgment. It cited the cases of Afya X-Ray Centre -vs- Commissioner of Domestic Taxes (TAT No. 70 of 2017), Green road KenyaLimited -vs- Commissioner of Domestic Taxes (TAT Appeal No. 538 of 2021), and Pearson -vs- Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 referred to the Court by PZ Cussons East Africa Limited -vs- Kenya Revenue Authority [2013] eKLR and asserted that it was the Appellant's responsibility to show the assessment was excessive, erroneous, or unlawful, which the Appellant failed to do.

64. In conclusion, the Respondent prayed that the Tribunal considers the case and:a.Dismisses the Appeal;b.Uphold the Respondent’s objection decision dated 5th December 2023; andc.Award the Respondent the costs of the Appeal.

Issues for Determination 65. Upon consideration of the instant appeal, the Statements of Fact by the parties herein and the written submissions by Counsel for the parties, the Tribunal is of the considered view that the following issue arises for determination: -i.Whether the Respondent’s Objection Decision dated 5th December, 2023 is justified.

Analysis and Determination 66. The Appellant claims that sometime in the year 2020, she was sub-contracted by Accenture Limited to deliver 12,500 Personal Protective Equipment (PPEs) kits to the Kenya Medical Supplies Authority (KEMSA) during the height of the Covid-19 pandemic. Consequently, she purchased various essential equipment from different suppliers based on availability and high demand. Some of the key suppliers she dealt with included Iconic Healthcare Limited, Encartar Diagnostics Limited, and Shree Ghanshyam Hardware Limited. She then assembled the equipment to create complete PPE kits.

67. In a letter dated 13th September 2023, the Respondent issued her with an assessment for corporation tax and withholding tax amounting to Kshs. 11,208,227. 00. Upon objection, the Respondent issued an Objection Decision confirming the said assessment on ground that the Appellant did not fully discharge its burden of proving that the said assessment was incorrect.

68. The main bone of contention in this Appeal is the Respondent’s action of disallowing certain expense items on the basis that the Appellant could not sufficiently support the expenses.

69. Section 15 of the Income Tax Act provides for allowed deductions when ascertaining total income. It provides that: -“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on someday other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

70. The Appellant contends that the Respondent was not justified in disallowing purchase expenses and operating expenses relating to generation of taxable income since she provided documentary evidence in the form of trade agreement between her and Accenture, purchase invoices and customer statements, casual labour schedule, payment vouchers, loan agreements and GL2020 in support of the said expenses. Production of documents when it comes to ascertaining the tax liability of a taxpayer is provided for under Section 59 of the Tax Procedures Act, which provides as follows:-1. For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-a.produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.

71. Further, Section 54A (1) of the Income Tax Act provides that: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

72. The Respondent’s contention is that even though the taxpayer did produce the documents requested, the same were not sufficient to extinguish the Appellant’s burden of proof.

73. The Tribunal has reviewed the documents annexed to the Appellant’s Statement of Facts. It is evident that in addition to trade agreement between the Appellant and Accenture, purchase invoices and customer statements, casual labour schedule, payment vouchers, loan agreements and GL2020, which the Respondent acknowledges were provided at the objection stage, the Appellant also provided delivery notes showing that the said equipment were actually delivered and copies of her bank account statements from Equity bank.

74. The Respondent averred that in as much as the Appellant has provided receipts and customer statements from its suppliers showing that she indeed bought the Personal Protective Equipment from the said suppliers, the suppliers did not declare the said sales in their tax returns. To this end, this Tribunal agrees with the court’s finding in the case of Commissioner of Domestic Taxes -vs- One Stop Trading Limited [2021] KEHC 130 (KLR) the Court when faced with a similar argument held that –“With due respect, it was not for the respondent to ensure its suppliers complied with the law, but the appellant. The respondent can only do so much i.e. provide and supply to the appellant that which is in its possession and power. This it had done.”

75. In the premise, we find that the Appellant had no duty and/or responsibility to ensure that its suppliers declared the said sales in their tax returns.

76. It is now well settled that the burden of proving that a tax assessment is wrong, excessive and/or should not have been made in the first place lies with the taxpayer pursuant to the provisions of Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act. In Commissioner of Taxes -vs- Galaxy Tools Ltd [2021] eKLR, the Court with relation to who bears the burden of proof held: -“With greatest respect, the Tribunal got it wrong. What the respondent had done by producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that; he had carried investigations on the alleged suppliers and concluded that they never existed, that there was no supply of any goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction. All this was laid before the Tribunal.”

77. Further, in Commissioner of Domestic Taxes -vs- One Stop Trading Limited (supra) the Court held that –“The appellant having not questioned the veracity of all or any of the documents supplied to it by the respondent, with utmost respect, its insistence on the existence of a fraud in which the respondent might have participated could not arise. There was no evidence that was produced to link the respondent to the alleged fraud. In this regard, I hold that there is nothing on record to suggest that the Tribunal misdirected itself on the burden of proof.”

78. Considering the foregoing, and the fact that at no point did the Respondent question the veracity of the documents produced by the Appellant in support of her claim for deduction of purchase expenses relating to generation of taxable income as provided for under section 15 of the Income Tax Act, this Tribunal finds that the Appellant discharged her burden of proof.

79. On the Respondent’s contention that that the schedules of labour costs provided by the Appellant only contained two names of the apparent employees, the rate of payment, and the number of days worked, but omitted other crucial information such as identity card numbers and acknowledgement of receipt of payment by the casual employees, the Appellant countered this by submitting that there is no requirement in law for the schedules to contain the information which the Respondent claims was omitted.

80. The Tribunal has considered this matter and is of the view that the schedules provided by the Appellant did not sufficiently discharge the burden of proof to demonstrate that the expenditure was indeed incurred. The real proof of expenditure would be for the recipients of the amounts to have acknowledged that indeed they received the payments. The Tribunal is of the considered view that the Respondent was justified in disallowing this particular expense of Kshs. 10,000,000. 00 on the ground that the same was not sufficiently supported.

81. The other expense disallowed by the Respondent relates freight and transport costs amounting to Kshs. 6,900,000. 00. The Appellant explained to a great detail how this expense arose and that PPE items were assembled and packed in 625 cartons, with each carton containing twenty sets. These cartons were then transported in 25 separate trips, with each trip incurring a cost of Kshs 26,000. 00 The Appellant stated that freight and transport costs are substantially supported by payment vouchers paid to different transporters and packagers.

82. The Tribunal has considered this matter and scrutinized the evidence presented by the Appellant to support the expenditure and is of the view that the payment voucher adduced by the Appellant does did not sufficiently discharge the burden of proof to demonstrate the expenditure was indeed incurred. The real proof of expenditure would be for the various transporters who were contracted to have acknowledged that indeed they received the payments and any other documents to support that the expenditure was indeed incurred. The Tribunal is of the considered view that the Respondent was justified in disallowing this particular expense of Kshs. 6,900,000. 00 on the ground that the same was not sufficiently supported.

83. The Tribunal notes that it is the taxpayer’s responsibility to keep all the relevant documents within their custody to ascertain their tax position. The power to request these documents by the Commissioner is provided under Section 59 of the Tax Procedures Act. Looking at documents requested by the Respondent in respect to the expenses relating to casual labourers as well as for the freight and transport costs, these are documents the Appellant is required to be in possession of or keep and maintain in their ordinary business operations in order to enable the Respondent to assess their taxable income.

84. On the other issue on withholding tax, the Tribunal notes that Section 35 (3) of the Income Tax Act provides for deduction of tax in respect of interest and professional fees paid to persons resident or having a permanent establishment in Kenya.

85. The Appellant having demonstrated that she took friendly loans from different people, and the said amounts were paid back with interest, and that she incurred legal fees, the Tribunal finds and holds that the Respondent was within its right to demand withholding tax on the said interest and legal fees as provided for under Section 35 (3) of the Income Tax Act.

86. The net effect of the above findings, therefore, is that save for the expenses relating to cost of sales for which the Appellant adduced supporting documentation and which expenses ought to have been allowed, the Respondent’s decision was justified in all other respects.

87. The Tribunal will therefore remit the matter to the Respondent for review and adjustment of the additional assessment in line with the Tribunal’s findings herein.

Final Decision 88. In the circumstances, the Tribunal finds and holds that the instant appeal is partly successful and as a result, the Tribunal makes the following orders –a.The Respondent’s Objection Decision dated 5th December, 2023 is varied to the extent that the expenses relating to the cost of sales for which the Appellant has provided documentation is allowed.b.The matter is referred to the Respondent to review its Objection Decision taking into consideration the Tribunal’s Order in (a) above within 30 days of delivery of this Judgment.c.For the avoidance of doubt, the rest of the Respondent’s Objection Decision dated 5th December, 2023 be and is hereby upheld.d.Each party to bear its own costs.

89. Orders accordingly.

DATED AND DELIVERED AT NAIROBI ON THIS 22ND DAY OF NOVEMBER 2024. GRACE MUKUHA - CHAIRPERSONGEORGE KASHINDI - MEMBERDR. ERICK KOMOLO - MEMBERABDULLAHI DIRIYE - MEMBER