[2024] KETAT 1087 (KLR)

Mathu v Commissioner for Domestic Taxes (Tax Appeal 924 of 2022) [2024] KETAT 1087 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 1087 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 924 of 2022

E.N Wafula, Chair, EN Njeru, M Makau, E Ng'ang'a & AK Kiprotich, Members

June 28, 2024

Between

Samuel Mwangi Mathu

Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a citizen of the Republic of Kenya and a trader, distributor and importer of second-hand (Mitumba) clothes in Nairobi and Nakuru.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent reviewed the Appellant’s tax affairs and issued an assessment of Kshs 589,672,610. 00 inclusive of penalties and interest. The assessment comprised of: Income tax- KShs 148,813,469. 00, VAT - KShs 439,999,141. 00 and tax on monthly rental income - KShs 860,000. 00. All the amounts being inclusive of penalties and interest.

4. The Appellant objected to the Respondent’s assessment vide notices of objection dated 13th December 2019 and 17th December 2019.

5. The Respondent issued its Objection decision on the 6th July 2020.

6. Being dissatisfied with the Respondent’s Objection decision the Appellant lodged this Appeal.

7. The Appellant’s earlier Appeal (TAT 369/2020) was struck out in a Judgment dated 15th December 2021 because the Appeal was out of time contrary to Section 13 of the Tax Appeals Tribunal Act.

8. The Appellant subsequently filed an application dated 7th March 2022 seeking leave to appeal out of time, and which application was granted in a Ruling dated 29th July 2022.

The Appeal 9. The Appellant’s Memorandum of Appeal dated 11th August, 2022 and filed on the 15th August, 2022 raised the following grounds of appeal:-i.That the Respondent erred by issuing a tax decision outside the statutory period of 60 days contrary to Section 51 (11) of the Tax Procedures Act (“TPA”);ii.That the Respondent erred by issuing default assessments in contravention of the statutory timelines set out under Section 29(5) of the TPA;iii.That the Respondent erred by disallowing input tax incurred by the Appellant on imported goods and local purchases in contravention of Section 29(1) (c) of the TPA;iv.That the Respondent erred in its Objection decision by disregarding the supporting documentation provided by the Appellant;v.That the Respondent erred in its Objection decision by considering that the Appellant’s turnover was exclusive of VAT and by proceeding to calculate VAT thereon in contravention of Regulation 5(1) of the VAT Regulations 2017;vi.That the Respondent erred by invalidating the Appellant’s notice of objection without giving detailed reasons;vii.That the Respondent should be estopped from breaching a legitimate expectation created upon the Respondent directing the Appellant to pay a total of KShs 2,000,000. 00 which would then lead to a closure of the matters in dispute; andviii.That the Respondent erred in fact and law by failing to consider allowable business deductions.

Appellant’s Case 10. The Appellant’s case is premised on the following documents filed and proceedings taken before the Tribunal:-a.The Appellant’s Statement of Fact filed on the 15th August, 2022. b.The Witness Statement of the Appellant filed on the 9th November, 2023 that was admitted in evidence under oath on the 30th November, 2023. c.The Witness Statement of Daniel Maina Mbugua filed on 9th November, 2023 and admitted in evidence under oath on the 30th November, 2023. d.The Appellant’s written Submissions.e.The Appellant’s Supplementary Submissions filed on the 19th January, 2024.

a) The Respondent erred on fact and in law by issuing its tax decision outside the requisite statutory timelines 11. The Appellant submitted that he lodged his notices of objection on 13th and 17th December 2019 which was within the statutory timelines but the Respondent failed to communicate a decision within the timeframe stipulated under Section 51(11) of the TPA by issuing an Objection decision dated 6th July 2020 which was over 7 months from the date the Appellant lodged his notices of objection.

12. The Appellant submitted that Section 51 (11) of the TPA required the Commissioner to issue an Objection decision within 60 days from the date of receipt of the notice of objection or submission of any additional information requested by the Commissioner, and that in the event of failure to do so, the Objection shall be deemed to have been allowed.

13. The Appellant referred to the case of Republic-vs-Kenya Revenue Authority ex parte M-Kopa Kenya Limited [2018] eKLR where the High Court emphasized on the need for the Commissioner to communicate his decision within the timelines set out in Section 51 (11):“In my view since there is no format for making an objection, what is required is the substance rather than the form. What the law frowns at is an objection that is framed in such an ambiguous manner as not to be certain whether the tax payer is seeking further particulars or indulgence to enable it pay the taxes demanded. In this case the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under section 51(11) of the said Act. As the Respondent defaulted in making a termination thereon within the prescribed time, the said objection was deemed to have been allowed.”

b) The Respondent erred by issuing default VAT assessments outside the statutory timelines as per Section 29 of the TPA. 14. The Appellant submitted that the Respondent’s VAT assessment was a default assessment pursuant to Section 29 of the TPA, i.e. an assessment made by the Commissioner due to the taxpayer’s failure to submit a tax return for a reporting period in accordance with the respective tax law. A default assessment is based on the information which is available to the Commissioner and the assessment is based on the Commissioner exercising his best judgment.

15. That Section 29(5) of the TPA requires that default assessments can only be issued within five years immediately following the last day of the tax period to which the default assessment relates unless a case of gross or wilful neglect, evasion or fraud has been demonstrated. In the instant case, the Respondent has not demonstrated any of these circumstances.

16. The Appellant submitted that the default VAT assessment covered the period January 2014 to October 2019. Since, the assessments were issued in November 2019 it would follow that the default assessments relating to the period prior to November 2014 were time-barred. The Appellant refers to the case of Commissioner of Domestic Taxes-vs-Unga Limited [2021] eKLR. The High Court held (at Paragraph 50) that the Commissioner was not at liberty to circumvent the provisions of Section 29(5) of the TPA by stating:“Our courts have reiterated the principle that tax laws should be interpreted strictly and leave no room for intendment. The law regarding the procedure for filing self-assessment, the consequences for late filing and of failure to file are clearly set out in the TPA as I have set out above. There is nothing in those provisions, that allows the Commissioner to circumvent those provisions and none can be implied on reading of the statutes. Counsel did not point any other provision of the law that allows the Commissioner to circumvent the structures of section 29(5) of the TPA by implication…”

17. It is the Appellant’s view that the VAT assessment is not only overstated but is founded on a misinterpretation of the applicable law and therefore the entire VAT assessment should be set aside.

c) The Respondent erred by disallowing input tax that the Appellant incurred on importation and local purchases in contravention of Section 29(1) (c) of the TPA. 18. The Appellant submitted that Section 29 (1) (b) requires the Commissioner to consider any excess input tax arising with respect to a reporting period for which a taxpayer did not file his tax return.

19. The Appellant submitted that he was not VAT-registered during the period under review, and therefore could not file VAT returns however, the Appellant is of the view that the Commissioner’s default assessment ought to have considered deduction of input tax incurred both on importation and local purchases. According to the Appellant, the amount of input tax due for deduction amounts to Kshs 153,679,628. 00 as per the table below.Year of Income Import VAT (KShs)

2014 16,918,897

2015 26,913,572

2016 30,716,748

2017 24,479,100

2018 25,132,149

2019 29,519,162

Total 153,679,628

d) The Respondent erred in its Objection decision by disregarding the supporting documentation provided by the Appellant to validate its Objection 20. The Appellant submitted that the Respondent’s request to provide further evidence in the form of supporting documents gave the Appellant a legitimate expectation that the documents would validate the notices of objection.

21. The Appellant’s arguments were based on the following grounds:-i.That although the assessment was based on the Appellant’s turnover extracted from the bank statements, the Respondent completely ignored the debits in the same statements thus assuming that all the expenses were not legitimate business expenses.ii.That the Appellant provided relevant documents including Customs entry forms for the imported consignments (C17s) to support its cost of sales but the Respondent did not fully consider the same in arriving at its computation.iii.That despite the Appellant explaining to the Respondent that the Appellant incurs certain business costs in the Country of origin relating to the handling, warehousing, packaging of consignments, fumigation, inspection, local transport in the country of origin, documentation, loading and offloading of cargo, the Respondent completely disregarded these expenses and proceeded to compute an estimated cost of sales that was erroneous.iii.That had the Respondent considered the supporting information and documentation made available to it, the Respondent would not have over-stated its tax demand.iii.That based on the supporting documents provided the cost of sales per container should have included USD 15,500 which is additional costs incurred in the country of origin. Based on the number of containers the Appellant imported during the periods under review, the following deductible expenses were omitted by the Respondent in its computation of the additional income tax liability:Year of Income Number of ContainersBased onCustoms Data Rate per Container(USD) USD/KShsExchange Rate Total Cost (KShs)

2014 37 15,500 87. 94 50,433,590

2015 58 15,500 98. 51 88,560,490

2016 63 15,500 101. 5 99,114,750

2017 51 15,500 103. 41 81,745,605

2018 54 15,500 101. 29 85,873,662

TOTAL

405,728,097vi.That the Respondent further omitted various deductible expenses of Kshs 2,482,518. 00 from the computation of the 2014 income tax demand.

e. The Respondent acted in contravention of Regulation 5(1) of the VAT Regulations 2017 22. The Appellant submitted that Regulation 5(1) of the VAT Regulations, 2017, prescribes the formula to be applied where a registered person makes taxable supplies without separately stating the VAT amount on the supply. The formula requires that the taxable value be determined by working backwards as below:B = A (1 + t), where:A = the amount charged inclusive of VAT; B = the taxable value; andt = the tax rate

23. The Appellant submitted that not having declared separately the VAT amounts on sales, the transactions must therefore be considered as per Regulation 5(1) of the VAT Regulations, 2017. However, that the Respondent applied VAT on the turnover leading to overstatement of the tax demand by KShs 26,670,211. 00 as illustrated in the table below:2014 2015 2016 2017 2018 2019 Total (KShs)

Respondent’sturnover subject to VAT 130,213,099 225,575,929 250,731,359 206,642,385 215,091,339 180,239,848 1,208,493,959

Respondent’soverstated VAT liability 20,834,096 36,092,149 40,117,017 33,062,782 34,414,614 28,838,376 193,359,033

VAT liability pursuant toRegulation 5(1) (17,960,427) (31,113,921) (34,583,636) (28,502,398) (29,667,771) (24,860,669) (166,688,822)

Overstatement 2,873,668 4,978,227 5,533,382 4,560,384 4,746,843 3,977,707 26,670,211

24. The Appellant further submitted that the Income tax assessment is similarly overstated since the total turnover which forms the basis of computation is inclusive of VAT.

f. The Respondent violation of the Appellant’s legitimate expectation 25. The Appellant submitted that despite providing detailed grounds of objection in his notices of objection, the Respondent disregarded the same and violated his legitimate expectations by:i.Issuing iTax generated assessments to the Appellant un-procedurally.ii.Registering the Appellant for VAT, backdating the VAT obligation and proceeding to issue a demand notice without giving the Appellant reasons for the said assessment.iii.Issuing demands for tax without giving clear reasons for the additional tax.iv.Failing to provide reasons for the assessment.

26. The Appellant submitted that the above actions violate his Constitutional right to fair administrative action under Article 47 (1) and (2) of the Constitution of Kenya, 2010 and Sections 4 and 6 of the Fair Administrative Action Act, 2015. That the principle of fair administrative action requires that if a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.

27. The Appellant submitted that Section 49 of the TPA further provides where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons for the refusal. However, that the Respondent failed to provide the Appellant with clear reasons for the assessment thus limiting the Appellant’s ability to respond satisfactorily in his objection.

28. The Appellant also submitted that the Respondent breached its legitimate expectation by requesting the Appellant to pay a total of KShs 2,000,000. 00 in order to have a closure of the dispute. Despite settling the agreed amount, the Respondent did not keep its promise, but instead demanded more money which was a violation of the doctrine of legitimate expectation.

29. The Appellant contended that a legitimate expectation arises when a member of the public, as a result of a promise or other conduct, expects that he will be treated in one way and the public body wishes to treat him or her in a different way. In the case of Keroche Industries Limited-vs-Kenya Revenue Authority & 5 Others Nairobi HCMA No. 743 of 2006 [2007] KLR 240 it was held that:“…stated simply legitimate expectation arises for example where a member of the public as a result of a promise or other conduct expects that he will be treated in one way and the public body wishes to treat him or her in a different way…”

g. The Respondent erred by failing to consider allowable deductions 30. The Appellant submitted that he invested in storage facility, where he would store his stock. However, despite this information being provided, the Respondent did not consider the same when arriving at taxable rental income of KShs 860,000. 00.

31. The Appellant cited the case of Commissioner of Domestic Taxes-vs-Kenya Maltings Limited [2013] eKLR. The High Court held that:“For expenditure to be deductible under circulating capital, it must have been incurred for the direct purpose of producing profits, by wholly it means, the expenditure would be used in the business completely, totally, absolutely, entirely…”

Respondent’s Case 32. The Respondent’s case is premised on the following documents and proceedings before the Tribunal:-a.The Respondent’s Statement of Facts filed on the 28th September, 2022. b.The Respondent’s bundle of documents filed on the 21st November, 2023. c.The Witness Statement of Rachel Wanjiku Ndungu filed on the 1st November, 2023 that was admitted in evidence under oath on the 30th November, 2023. d.The Respondent’s written submissions filed on 14th December,2023. e.The Respondent’s Supplementary Written submission filed on 14th December, 2023f.The Respondent’s Supplementary Written Submissions filed on the 15th December, 2023

33. The Respondent has summarised the issues for determination as follows:i.Whether the Objection decision was within the timeliness mandated by law?ii.Whether the taxes in the assessment and Objection Decision are lawful and justified?iii.Whether the Appellant has satisfied his burden of proof in challenging the assessment?iv.Whether the Appellant’s objection and business expenses were considered by the Respondent?

i. Validity of the Objection decision 34. The Respondent submitted that the Appellant miscomprehended the law guiding the issuance of Objection decisions. That the Finance Act, 2019, amended Section 51 (11) of the TPA by introducing a further provision(b) which provides that:“The Commissioner shall make the objection decision within sixty days from the date of receipt of –a.the notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

35. The Respondent submitted that the consequence of the Section 51 (11) ( b) is that in the event that the Respondent requests for further information from the Appellant then an Objection decision is due within 60 days from the date which the further information is requested. The Respondent referred to the case of Desert Star Transporters Ltd-vs- Commissioner of Domestic Taxes (TAT 304/ 2020) where the Tribunal stated that:“[53]In pursuant to the purport of the provisions of Section 51(11)(b) of the TPA the time for the Respondent to render the objection decision started running on the 2nd June, 2020, which is manifestly the last date when the Respondent made a request to the Appellant to supply some specific documents relating to its transportation business.”

36. The Respondent further contended that the Appellant objected to the assessment on 13th and 17th December 2019. Following submission of the Objection, the Respondent requested the Appellant to validate his Objection vide various correspondences. These correspondences culminated in an email dated 22nd May 2020. The correspondences demonstrated that there was on-going communication between parties as follows:i.An e-mail dated 17th January 2020 asking the Appellant to validate his Objection.ii.A letter from the Appellant received by the Respondent on 21st January 2020 providing importation documents and bank statements.iii.E-mail dated 5th March 2020 requesting the Appellant to provide certified audited accounts for the years 2014-2018 and the certified bank statements of the Equity bank account.iv.A letter dated 10th March 2020 from the Appellant providing his bank statements.v.Minutes of meeting held on 8th May 2020 between the parties.vi.A letter dated 14th May 2020 from the Appellant explaining the costs of salesvii.An e-mail of 19th May 2020 from the Appellant responding to the Respondent’s email dated 18th May 2020viii.An e-mail from the Respondent dated 20th May 2020 requiring the Appellant to provide detailed information on the costs of salesviii.An e-mail dated 22nd May 2020.

37. The Respondent submitted that these correspondences demonstrate that parties were in constant communication following the Objection and that it did not surpass the 60 days deadline for rendering an Objection decision.

38. The Respondent submitted that following the Appellant’s failure to provide the requested information, an Objection decision was issued on 6th July, 2020, which decision was within 60 days from the date of the last communication pursuant to Section 51(11) of the TPA. Given the chronology of events highlighted hereinabove, the Respondent submitted that the Objection decision was well within the timelines stipulated by the law.

ii. Validity of the tax assessment 39. The Respondent submitted that the two tax heads in contention in this Appeal are the Income tax assessment for the periods 2014-2018 and the VAT assessment between January- December 2014 and January- August 2019.

40. The Respondent averred that the basis of the Income tax assessment is as follows:i.The Appellant had been involved in the business of importation and subsequent sale of second-hand clothes, shoes and handbags since 2014 and he does not dispute the data (volume) of imports as per the Customs entries lodged.ii.The Appellant under-declared his cost of sales (CIF and import duty) and subsequently suppressing his sales value in the original return as follows.a.In 2014, whereas the purchase/ value of the imports (CIF) (as per the import data entries) was Kshs 68,895,819. 60, the Appellant did not file any tax returns and thus erroneously represented not having conducted any businesses.b.In 2015, whereas the purchases/ value of the imports (CIF) (per the import data entries) was Kshs 119,352,343. 48, the Appellant, in his returns, declared his imports/ purchases to be only Kshs. 12,456,020. 00) and turnover/ sales value to be Kshs 19,398,000. 00c.In 2016, whereas the purchases/ value of the imports was Kshs 132,662,094. 53 the Appellant, in his returns, only declared his imports/ purchases to be Kshs 15,446,586 and a turnover/ sales value of Kshs. 23,624,088. d.In 2017, the purchases/value of the imports was Kshs 109,334,595. 00, yet the Appellant declared his imports/ purchases to be Kshs. 13,564,432. 00 and a turnover/ sales value to be Kshs. 23,404,316. 00e.In 2018, the purchases/value of the imports was Kshs 113,804,941. 10 but the Appellant declared his imports/ purchases to be Kshs 12,224,455. 00 and a turnover/ sales value to be Kshs 23,714,456. 00. iii.The Respondent submitted that the Appellant did not dispute the volume of the imports made and that based on the declaration in his returns, there was gross under-declaration of his turnovers and imports made. That taking into account the value of the purchases in the import entries, the Respondent computed the Appellant's turnover/ sales values by using a markup of 40% on the cost of sales.iii.The Respondent submitted that the margin of 40% was obtained from the average margins disclosed in the Appellant’s declarations/ returns, and which is comparable to the industry margins of the Appellant's business. That the Appellant’s returns in fact disclosed margin of about 65%.v.The Respondent submitted that it exercised its best of judgement and did not act unreasonably or capriciously. Furthermore, the Appellant has not disclosed what his margins were by producing audited accounts and which he also did not produce before the TAT.v.The Respondent submitted that the analysis of the bank statements revealed that the Appellant’s turnover was even higher than the margin that was used by the Respondent in the assessment and that the Appellant has not adduced any evidence to controvert the assessment.

41. With regard to the VAT assessment, the Respondent contended that the Appellant attained the VAT threshold in 2014. The Appellant’s turnover for 2014 was Kshs 130, 213,099. 04 but he did not register for VAT as required by law.

42. The Respondent submitted that it therefore exercised its powers under Sections 34(6) and (7) of the VAT Act and forcefully registered him for VAT as per Section 34(6) which provides that:-“(6)If the Commissioner is satisfied that a person eligible to apply for registration has not done so within the time limit specified in subsection (1), the Commissioner shall register the person.”

43. That Section 34(7) meanwhile provides for the effective date of VAT registration as follows:-“(7)The registration of a person under subsection (1) or (6) shall take effect from the beginning of the first tax period after the person is required to apply for registration, or such later period as may be specified in the person's tax registration certificate.”

44. The Respondent submitted that the import of Section 34(7) is that the VAT liability runs from the date a person was required to register, which is the date when the threshold was reached. That the Respondent acted lawfully by backdating VAT liability to the year 2014 and imposing tax.

45. With regard to input VAT deduction, the Respondent submitted that Section 17 of the VAT Act stipulates that claim of input tax should be within 6 months from the date of supply or importation. The Section provides that:“(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies. (2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation. Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

46. The Respondent submitted that the Appellant was therefore required to claim input VAT within 6 months of importation for the various years 2014 to August 2019. Since this did not happen the claims were automatically barred by law and accordingly, the net VAT liability is the output amounts.

iii. Whether the Appellant has satisfied the burden of proof in challenging the assessment. 47. The Respondent submitted that Section 51(3) of the TPA provides that:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.

48. According to the Respondent, the Appellant failed to support the Objection by producing records and documents required to validate it as per the various correspondences and review findings enumerated in the Objection decision. That the Appellant was informed that his Objection was not validly lodged and was requested to provide various documents but he did not do so. Neither did he adduce them before the Tribunal.

49. The Respondent submitted that critical documents that were requested from the appellant but he failed to provide included certified audited accounts for the years 2014-2018 which information was necessary for ascertaining the basis of the Appellant’s tax returns for the years 2015- 2019. The Appellant was unable to provide a detailed breakdown of the costs of sales.

50. Accordingly, it is the Respondent’s submission that the burden of proof was not discharged by the Appellant, either at the objection stage or before the Tribunal, to demonstrate that the taxes assessed, which were based on turnover and the volume of imports made from the available customs data, not being disputed, is erroneous or in any way excessive.

51. Section 56 of the Tax Procedures Act, Section 30 of the Tax Appeals Tribunal Act and Section 107 of the Evidence Act places the burden of proof on a taxpayer. Section 56(1) of the TPA provides that:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

52. The Respondent submitted that the question of burden of proof in tax disputes was settled in Kenya Revenue Authority-vs-Man Diesel & Turbo Se, Kenya [2021] eKLR wherein it was stated 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. The court further held "The uniqueness of tax laws is underscored by the fact that even where the constitutionality of such provisions has been challenged, courts have consistently held that placing the burden upon the tax payer is not unconstitutional nor is it contrary to Parliament's intent. This is because there is a distinction between the legal burden of proof and the evidential burden of prove. These are two different concepts. The Evidence Act places the burden of proving the existence any fact in issue on the party who asserts. The evidential burden exists in the form of a tactical onus to contradict, weaken or explain away the evidence that has been led. It is the latter form of burden which may shift from one party to the other." Placing the burden of proof in tax cases on the tax payer reflects the unique nature of the tax system. This is evident from the three-fold justifications for placing the burden on the tax payer. These are: - (a) the presumption of correctness; (b) the government's need for revenue' and, (c) the taxpayer's possession of evidence. The taxpayer's burden of proof comprises two parts: – establishing, with evidence, the underlying facts on which the law is to operate (and in this regard, the standard of proof to which each fact must be proved is relevant);and - that the operation of the law when applied to those facts establishes that the assessment is excessive or erroneous.”

53. The Respondent further referred to the cases of Mulheim-vs-Commissioner of taxation (2013) FCAFC 115 and Gashi-vs-Respondent of Taxation [2012] FCA 638 which have emphasised that when challenging an assessment, what the Appellant ought to do is to produce evidence to demonstrate to the Tribunal that the assessment was incorrect or excessive. The Respondent submits that the Appellant failed to do so.

iv. Whether the Appellant’s Objection and business expenses were considered by the Respondent 54. Regarding input VAT deduction, the Respondent submitted that the only expense that a taxpayer may be allowed to claim is its input VAT from its purchases. However, for a taxpayer to claim input VAT, it must satisfy the requirements of Section 17 of the VAT Act. That the burden was on the Appellant to provide information and documents that its claim of input VAT was in compliance with Section 17.

55. The Respondent submitted that the Appellant failed to provide documents supporting input VAT deduction at the objection and Appeal stages. Furthermore, that the claims were in any case time-barred as they were beyond 6 months.

56. The Respondent referred to the case of Highlands Mineral Water Limited-vs-Commissioner of Domestic Taxes ML HC ITA No. E026 OF 2020 [2021] eKLR where it was held that:“The straightforward interpretation of section 17(2) is that the 6-month period of claiming input VAT begins to run when the supply or importation occurred and not necessarily when the return is filed. Meaning, if a taxpayer files a VAT return say, 7 months after when the supply or importation occurred, then the input tax claimed on that return cannot be allowed.”

57. The Respondent further relied on the decision in Gracan Construction Limited-vs-Commissioner of Domestic Taxes ( HCCOMMITA/E162/2021) where the court similarly held that it did not find any fault in the Commissioner disallowing input VAT claims relating to purchases made outside the 6-months window period from the date of supply provided in Section 17(2) of the VAT Act notwithstanding that a return was filed late.

58. The Respondent submitted and reiterated that all business expenses by the Appellant were considered in arriving at the assessment and in the Objection decision. Any expenses disallowed was because they were unsupported.

59. With respect to Income tax, the Respondent submitted that the Appellant filed its returns for the years 2015-2019 and claimed various expenses which were allowed as is. Therefore, if there were other unclaimed expenses then the Appellant needs to provide evidence of such costs and prove that they did not form part of the expenses already allowed in the returns. In the case of 2014, the Appellant did not file tax returns and thus needed to demonstrate which expenses related solely to that year 2014 which information the Respondent had sought by requesting for analysis/breakdown of the cost of sales and the same was not provided.

Issues For Determination 60. The Tribunal frames the following to be the main issues for its determination:i.Whether the Respondent’s Objection Decision dated 6th July 2020 was time-barred;ii.Whether the Respondent erred in raising the VAT Assessments;iii.Whether the Respondent erred by failing to consider allowable deductions; andiv.Whether the Respondent violated of the Appellant’s legitimate expectation.

Analysis And Findings 61. The Tribunal having determined the issues falling for its determination proceeds to analyse the same as hereinunder.

i. Whether the Respondent’s Objection Decision dated 6th July 2020 was time-barred. 62. The Appellant submitted that he lodged the notices of objection on 13th and 17th December 2019 but the Respondent rendered the Objection decision on 6th July 2020 which decision was outside the 60 days prescribed under Section 51(11) of the TPA.

63. On its part, the Respondent submitted that following receipt of the Appellant’s notices of objection, the Respondent requested him to validate his Objection by providing additional information and documentation. Subsequently, there were various correspondences exchanged and meetings held between the parties the last one being an email dated 20th May 2020 from the Respondent requesting the Appellant to provide a breakdown of its cost of sales. The Respondent argued that the Objection decision was issued on 6th July 2020 which was within 60 days after the date of its last communication pursuant to Section 51(11) (b) of the TPA.

64. Section 51 (11) of the TPA provides as follows with regard to issuance of objection decisions:-“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—a.the notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

65. The Tribunal has reviewed both parties’ submissions and together with the evidence tabled before it and finds the Appellant’s argument to have no merit. The Respondent has placed before the Tribunal documents and materials to show that the parties were in regular communication after the Appellant lodged his notices of objection. These include:i.An email dated 17th January, 2020 from the Respondent requesting the Appellant to provide additional documents.ii.A letter from Appellant dated 21st January, 2020 forwarding additional documents including a rental income schedule.iii.The Appellant’s letter dated 10th March, 2020 acknowledging the Respondent’s letter dated 6th March, 2020 requesting for additional bank statements.iv.The Respondent’s email on 13th May, 2020 sharing Minutes of 8th May, 2020 meeting.v.The Appellant’s letter dated 14th May, 2020 forwarding a revised Income tax computation for discussion the following day.vi.The Appellant’s e-mail on 19th May, 2020 in response to the Respondent’s e-mail of 18th May, 2020vii.An e-mail from the Respondent on 20th May, 2020 to the effect that the Appellant had not provided all the information requested.viii.An e-mail from Daniel Maina (Appellant’s Tax Agent) dated 22nd May, 2020 forwarding additional information on the cost of sales.

66. From the timeline for the correspondences exchanged as outlined above and as read together with the import of Section 51 (11) (b), the Tribunal observes that time began to run after the Appellant’s last communication providing additional information which was on 19th May 2020. The Appellant cannot therefore argue that the Objection decision was time-barred having been issued on 6th June 2020, 18 days after.

67. It follows that the Tribunal finds the Appellant’s argument on this count to have no merit.

ii. Whether the Respondent erred in raising the VAT Assessments 68. The Appellant faulted the Respondent’s VAT assessments for three reasons, first that the Respondent’s VAT assessment was a default assessment pursuant to Section 29 of the TPA and the assessment covered the period January 2014 to October 2019. According to the Appellant, since the VAT assessment was issued in November 2019 it should not have included any period prior to November 2014 which was time-barred. Secondly, that Section 29 (1) (b) requires the Commissioner to consider any excess input tax with respect to that period for which tax was assessed; and lastly that the Respondent acted in contravention of Regulation 5(1) of the VAT Regulations 2017. The Regulation provides as follows:-“5. (l)Unless the Act otherwise provides, where a registered person makes a taxable supply without a separate amount being identified as tax, the taxable value of the supply shall be computed in accordance with the following formula—B = A/(1+t)Where:A.is the total amount charged for the supply inclusive of VAT;B.is the taxable value; and t tax rate”

69. As to whether the Respondent’s assessment covered periods outside the 5 years stipulated by Section 29 of the TPA, the Respondent submitted that only December 2014 was included in its computation and which period was within 5 years. The Tribunal notes that the Appellant did not provide any details or breakdown of the amount of VAT related to statute-barred period. As such the Tribunal finds that the Appellant did not satisfy his burden of proof.

70. With regard to whether the Respondent ought to have considered the deduction of input tax under its computation, the Appellant relied of Section 29 of the TPA however, the Respondent argued that Section 17 of the VAT Act stipulates that a claim of input tax should be within 6 months from the date of supply or importation. The Tribunal observes that Section 29 of the TPA covers default assessments while Input VAT deduction is governed under Section 17 of VAT Act. Further, the Tribunal observes that the Appellant did not put on record before the Tribunal the invoices that it sought to be deducted in arriving at its chargeable VAT. The Tribunal therefore finds that the Appellant’s argument that the Respondent erred by excluding input VAT to be unmerited.

71. On whether the Respondent acted contrary to Regulation 5(1) of the VAT Regulations, the Tribunal finds the Appellant’s argument to have merit. The Respondent erred by computing VAT on the gross revenues instead of using the formula provided under this Regulation, i.e. the revenue should have been treated as inclusive of 16% VAT. It would follow that the turnover in the Income tax computation should be adjusted accordingly to exclude the VAT component.

72. With regard to forceful registration for VAT, Sections 34 (6) and (7) empower the Commissioner to register any person who is required to register but has not done so and backdate the registration to the time when the person was required to register. The Section reads as follows;-“34(6)If the Commissioner is satisfied that a person eligible to apply for registration has not done so within the time limit specified in subsection (1), the Commissioner shall register the person. (7)The registration of a person under subsection (1) or (6) shall take effect from the beginning of the first tax period after the person is required to apply for registration, or such later period as may be specified in the person’s tax registration certificate.”

73. The Tribunal reiterates that the Appellant not having registered for VAT despite having achieved the threshold, has no basis to complain about having been forcefully registered by the Commissioner as this was done as per the provisions of the relaevant law.

iii. Whether the Respondent erred by failing to consider allowable deductions 74. The Appellant submitted that he invested in storage facility for the storage of his goods upon which the Respondent assessed tax on the rental income of KShs 860,000. 00 earned without considering allowable deductions.

75. The Respondent, on the other hand, submitted that all valid business expenses were considered unless the same was not supported.

76. The Tribunal notes that the Appellant has not provided details and evidence of any expenses or a breakdown of the allowable deductions which were disallowed. As such the Tribunal is left with no choice but to find that the Appellant is merely making generalised assertions without backing the same with evidence and proper particulars to enable the Tribunal interrogate its arguments.

77. The Tribunal therefore finds that the Appellant’s argument lacks merit and the Respondent did not err in failing to consider allowable deductions.

iv. Whether the Respondent violated the Appellant’s legitimate expectation 78. The Appellant contended that despite providing detailed grounds of objection in his notices of objection, the Respondent disregarded the same and violated his legitimate expectations byi.issuing the assessments to the Appellant un-procedurally andii.registering the Appellant for VAT, backdating the VAT obligation and issuing a demand notice without giving the Appellant reasons for the said assessment.

79. The Appellant also submitted that the Respondent breached his legitimate expectation by requesting him to pay a total of KShs 2,000,000. 00 in order to close the matter and despite him doing so the Respondent did not keep its promise.

80. Section 4(1) of the Fair Administrative Action Act provides that every person has the right to administrative action which is expeditious, efficient, lawful, reasonable and procedurally fair.

81. Whereas the Appellant has alleged that the Respondent violated its legitimate expectations he has not demonstrated or provided evidence of any actions by the Respondent which were unlawful, inefficient or procedurally unfair. The Tribunal does not find the Respondent having acted contrary to the law or un-procedurally by raising the VAT assessment, and the reasons for the assessment were communicated to the Appellant. There is also no evidence submitted to show that the Respondent had promised to vacate the assessment upon payment of Kshs 2,000,000. 00.

82. The Appellant having not discharged his burden of proof, the Tribunal has no choice but to find in favour of the Respondent.

Final Decision 83. In the upshot of the foregoing analysis the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following final Orders:i.The Appeal be and is hereby partially allowed.ii.The Respondent to re-compute the VAT assessment and adjust the revenue on the Income tax computation accordingly within Thirty (30) days of the date of delivery of this Judgment;iii.Each party to bear its own costs.

84. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE, 2024ERIC NYONGESA WAFULA - CHAIRMANELISHAH N. NJERU - MEMBERMUTISO MAKAU- MEMBEREUNICE N. NG’ANG’A- MEMBERABRAHAM K. KIPROTICH- MEMBER