[2024] KETAT 1609 (KLR)

Mbaru v Commissioner Income Taxes (Tax Appeal E824 of 2023) [2024] KETAT 1609 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1609 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E824 of 2023

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

November 22, 2024

Between

Simon Kangethe Mbaru

Appellant

and

Commissioner Income Taxes

Respondent

Judgment

Background 1. The Appellant is an adult male of sound mind residing in Kenya and whose principal activity is farming and farm produce.

2. The Respondent is the Commissioner of Domestic Taxes appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1), the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all 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 5th April 2022 the Appellant was issued with value added tax (VAT) assessment no KRA202204196473 amounting to Kshs. 1,849,442. 72 for the period December 2019 and assessment no KRA 202204228709 amounting to Kshs. 485,243. 74 for the period December 2020.

4. On 5th May 2022, the Appellant lodged objections to the above assessment orders.

5. On 1st July 2022, the Respondent issued a Notice of Objection Invalidation against the VAT assessments of Kshs. 2,334. 685. 46 for the year 2019 and 2020.

6. On 20th December 2022, the Appellant was issued with another assessment no KRA202219677404 for Kshs. 3,115,159. 61 to which the Appellant objected on 19th January 2023.

7. On 27th February 2023, the Respondent issued an Agency Notice to the Appellant’s banker demanding for VAT amounting to Kshs. 2,334,685. 00 to be paid by the bank to the Respondent.

8. On 30th June 2023, the Respondent issued a confirmation of assessment notice in respect of the VAT assessments of Kshs. 3,115,159. 61 which the Appellant had objected to on 19th January 2023.

9. The Appellant being aggrieved appealed the decision of the Respondent through a Notice of Appeal dated 17th November 2023 with leave of the Tribunal.

The Appeal 10. The Appellant filed his Memorandum of Appeal dated 17th November 2023 and setting out the following grounds of appeal:a.That the Respondent misdirected itself in fact and in law by raising value added tax additional assessments for the period of December 2017, December 2019 and December 2020 arising from inconsistencies between the VAT and sales declared.b.That the Respondent misguided itself in law and in fact by disregarding the Appellant's valid explanations in line with the provisions of section 17 of the VAT Act, No. 35 of 2013, as it read at the time.c.That the Respondent misguided itself in fact and in law by assessing and demanding from the Appellant the tax amounts in question, despite the taxes having already been paid previously, and the Appellant furnishing the Respondent with the payment slips and e-return acknowledgement receipts as proof of the payments.d.That the Respondent erred in fact and in law by confirming the VAT assessments upon the Appellant, despite there being no outstanding VAT obligation on the part of the Appellant, contrary to spirit of the provision in Articles 201 and 210 of the Constitution of Kenya 2010 respectively.e.That the Respondent misdirected itself in law and in fact by exercising its powers arbitrarily and with reckless abandon, since they have failed to vacate the confirmation assessment notices issued upon the Appellant, despite the Appellant discharging its burden of proof and proving that the tax demanded is unreasonable since the appellant has always complied with its tax obligation.f.That the Respondent erred in fact and in law by exercising its powers and mandate improperly, thus occasioning complications in the Appellant's business operations, since the latter is required to furnish tax compliance certificates regularly in their dealings with their bankers and their industry-specific regulators, and this is not possible with the Respondent failing to revoke the assessment notices.g.That the Respondent erred in fact and in law by relying on estimates and not conducting proper audit and verification.h.That the Respondent erred in fact and in law by infringing upon the Appellant's legitimate expectation, and therefore the latter's constitutional Right to Fair Administrative Action which is enshrined in Article 47 of the Constitution of Kenya, 2010, as well as Section 4 (1) of the Fair Administrative Action Act, No. 4 of 2015.

The Appellant’s Case 11. The appeal is anchored on the following documents filed before the Tribunal:i.Appellant’s Statement of Facts dated 17th November 2023. ii.The Appellant’s written submissions dated 13th September 2024.

12. The Appellant averred that the Respondent issued assessments amounting to Kshs. 5,449,842. 00 inclusive of penalties and interest, relating to VAT for the periods of December 2017, December 2019, and December 2020.

13. The Appellant averred that, in response, he issued Notices of Objection to the Respondent's assessments on 5th May 2022 and 19th January 2023, providing strong explanations and supporting evidence.

14. The Appellant averred that on 30th June 2023, the Respondent confirmed the assessment of Kshs. 3,115,159. 61 and Kshs. 2,334,685. 00 in VAT against him, inclusive of penalties and interest, disregarding the explanations and evidence provided by the Appellant.

15. The Appellant stated that the Respondent's actions have left him in a state of confusion and violated his right to fair administrative action, as guaranteed under Article 47 of the Constitution of Kenya, 2010, and the Fair Administrative Action Act, No. 4 of 2015.

16. The Appellant stated that on 27th February 2023, the Respondent issued agency notices on his bank account, instructing the Co-operative Bank of Kenya to remit funds held in his account to the Respondent.

17. The Appellant averred that his tax agent repeatedly visited the Respondent’s offices seeking to mediate the adverse impact of the agency notices on his clients and bank account. However, he was not afforded a proper opportunity and was simply directed to the Tax Appeals Tribunal.

18. The Appellant stated that he had pleaded with the Respondent to reconsider its decision and consider engaging in progressive alternative dispute resolution discussions to resolve the dispute productively.

19. The Appellant averred that he is elderly, retired, and currently residing in his rural home, which restricts his ability to fully attend to tax matters.

20. The Appellant stated that, at the time the assessments and confirmation were issued, he was unable to access email and provide the necessary documents requested by the Respondent.

21. The Appellant stated that he is currently experiencing substantial difficulties in his service delivery and client operations due to the restrictions placed on his bank account by the agency notices.

22. The Appellant stated that he was also suffering significant economic losses, as he was unable to perform essential profit-making activities due to the freeze in operating funds in his bank account.

23. The Appellant averred that he was severely prejudiced, as he had expressed a willingness to engage in alternative dispute resolution but was not properly guided on how to proceed with that approach.

24. The Appellant stated that the Respondent’s decision continues to negatively affect his liquidity position, business operations, and ability to trade.

25. The Appellant averred that he has provided documentary evidence, including receipts and invoices, in support of this appeal.

26. The Appellant submitted that the additional assessment raised by the Respondent was based on incorrect figures that were erroneously filed by his accountant.

27. The Appellant submitted that the correct annual sales earned in the relevant years were as follows:2017:Hardware shop: Kshs. 1,486,095. 00Farm produce: Kshs. 9,452,170. 00Total Sales: Kshs. 10,938,265. 002019:Hardware shop: Kshs. 1,565,951. 00Transport: Kshs. 813,550. 00Farm produce: Kshs. 5,354,501. 00Total Sales: Kshs. 7,734,002. 002020:Hardware shop: Kshs. 2,227,960. 00Transport: Kshs. 503,420. 00Farm produce: Kshs. 2,602,100. 00Total Sales: Kshs. 5,333,480. 00

28. The Appellant further submitted that he had substantiated his farming activities by providing title deeds for parcels of land where he engages in farming, specifically, Molo South Ikumbi Block 1/185, Molo South Ikumbi Block 1/180, Molo South Ikumbi Block 1/526, and Molo South Ikumbi Block 1/154.

29. The Appellant submitted that he had also provided supporting documents, including cash sale receipts for farm produce transactions, his certificate of registration, trading licenses, bank statements, a detailed income analysis, and a reconciliation explanation to account for any variance in turnover.

30. The Appellant submitted that during discussions with the Respondent, it emerged that the accountant had mistakenly reported the sales transactions of Mwamba General Enterprises, a partnership in which the Appellant is a partner, under the Appellant’s PIN instead of the partnership’s correct PIN, P051384937I. The figures erroneously reported as the Appellant’s income were as follows:2017:General Sales: Kshs. 8,976,522. 00Transport: Kshs. 3,065,620. 00Total Income: Kshs. 12,042,142. 002019:General Sales: Kshs. 3,425,965. 00Transport: Kshs. 1,614,500. 00Total Income: Kshs. 5,040,465. 002020:General Sales: Kshs. 85,038. 00

31. The Appellant submitted that the Respondent erred in using the partnership’s income as a basis for calculating the additional assessment against him.

32. The Appellant submitted that he had further provided documentation to demonstrate his role as a partner in the business, entitled to share half of the partnership’s net profits, and had supplied the Respondent with the partnership’s registration certificate and trading licenses to substantiate its existence.

33. The Appellant submitted that he remained open to resolving the matter through Alternative Dispute Resolution (ADR), despite what appears to be reluctance from the Respondent to engage in ADR discussions.

34. The Appellant also submitted that the Respondent had not complied with the Honourable Tribunal’s prior ruling directing the Respondent to withdraw the agency notice and unfreeze the Appellant’s bank account.

35. In support of his case, the Appellant relied on the case of Orix Oil (Kenya) Limited -vs- Paul Kabeu & 2 others [2014] eKLR, in which the Honourable Court stated:“…the court should have been guided by the law that costs follow the event, and the Plaintiff being the successful party should ordinarily be awarded costs unless its conduct is such that it would be denied the costs or the successful issue was not attracting costs. None of those deviant factors are present in this case and the court would still have awarded costs to the Plaintiff, which I do.”

Appellant’s Prayers 36. The Appellant prayed to the Tribunal for orders that:a.The Respondent's confirmation of assessment dated 30th June 2023 be set aside in its entirety.b.An order be issued restraining the Commissioner, its employees, agents, or other persons purporting to act on its behalf or under its instructions from enforcing and/or collecting the sum of Kshs. 5,449,842. 00 which related to VAT for the period December 2017, December 2019, and December 2020 together with penalty and interest from the Appellant.c.An order be issued that the Commissioner do admit the evidence adduced by the Appellant as per their objection.d.An order be and is hereby issued that the Appellant be given time to produce further documents to the Commissioner.e.The cost of this appeal be borne by the Commissioner.f.The Tribunal be at liberty to grant any other or further remedies that it deems just and reasonable to grant in the circumstances.

The Respondent’s Case 37. The Respondent’s case is premised on the following documents filed before the Tribunal:a.Respondent’s Statement of Facts dated 22nd December 2023. b.Respondent’s Written submissions dated 12th July 2024.

38. The Respondent averred that the Appellant was issued with an additional assessment due to inconsistencies shown on the Appellant’s returns.

39. The Respondent requested the Appellant to provide documents in support to its objection as required by Section 51(3) of Tax Procedures Act.

40. The Respondent averred that the Appellant promised to supply the documents immediately it retrieved them but failed to do so.

41. The Respondent averred that the Appellant ought to have treated the objection with care by providing required documents or giving sufficient explanations.

42. The Respondent submitted that it played its crucial role in ensuring that it complied with the provisions of Section 51(4) of the Tax Procedures Act, which requires the Respondent to inform the Appellant on validating his objection, which states as follows:(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.

43. The Respondent submitted that the law requires all relevant documents should be provided for an objection to be treated as validly lodged.

44. The Respondent stated that the Appellant had not kept records of its business transactions as required by the law and that Section 23(1) of the Tax Procedures Act lays a duty on the Appellant to keep records of his transactions and to produce the same when required by the Respondent.

45. The Respondent further submitted that section 54A of the Income Tax Act also deals with the issue of the necessity for the taxpayers to keep records and states as follows:“A person carrying on a business shall keep records of all receipts and expenses of 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"

46. The Respondent asserted that the burden of proof lies on the Appellant in proving that indeed the Respondent’s assessments were wrong as stipulated under Section 56 (1) of the Tax Procedures Act.

47. The Respondent stated that the Appellant’s failure to avail crucial documents as required made it hard for the Respondent to ascertain the truthfulness of the Appellant and ascertaining its position, and the Respondent had to rely on information available.

48. The Respondent submitted that Section 50(1)(a) of the Tax Procedures Act, 2015 provides that the production of a notice of assessment or document signed by the Commissioner is conclusive evidence that the assessment was made and that the amount and particulars of the assessment are accurate.

49. The Respondent submitted that there exists a rebuttable presumption in tax matters that any assessment made by the Respondent is accurate unless proven otherwise.

50. The Respondent submitted that, as established in Kenya Revenue Authority -vs- Man Diesel & Turbo Se, Kenya [2021] eKLR, Section 56 of the Tax Procedures Act unequivocally places the burden of proof on the taxpayer in tax disputes. Specifically, the taxpayer must demonstrate that the Commissioner’s assessment is incorrect. The court in this case held that a taxpayer bears a substantial burden of proof to show that an assessment is erroneous, owing to the presumption of correctness that attaches to the Commissioner’s assessments or determinations of deficiency.

51. The Respondent submitted that this presumption of correctness is not considered evidence itself but remains in effect until the taxpayer produces competent and relevant evidence that supports their position.

52. The Respondent submitted that once the taxpayer provides such evidence, the presumption is set aside, and the matter is resolved based on the evidence presented, with the burden of proof on the taxpayer.

53. The Respondent submitted that the Appellant did not furnish any evidence to dispute the assessment, despite several requests from the Respondent to do so.

54. The Respondent submitted that under the Tax Procedures Act, the burden in tax objections lies with the taxpayer, who, in this case, failed to provide any evidence that might have influenced the Respondent to reconsider the assessment.

55. The Respondent submitted that in PZ Cussons East Africa Limited v. Kenya Revenue Authority [2013] eKLR, the court reiterated this principle by quoting Pearson v. Belcher, which emphasized that when:“there is an assessment made by the Additional Commissioners upon the Appellant; it is perfectly clearly settled by cases such as Norman v Golder, 26 T.C. 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect; and of course he has completely failed to do so. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs.”

56. The Respondent submitted that the invalidation notice dated 31st March 2023 was lawful, as the Appellant failed to provide the supporting documentation requested.

57. The Respondent submitted that section 59 of the Tax Procedures Act empowers the Commissioner to request any documents or information necessary to determine a taxpayer's liability.

58. The Respondent relied on section 59(1) of the Tax Procedures Act which states that:1. For purposes of obtaining complete information about the tax liability of a person or class of persons, or for other matters related to tax law, the Commissioner or an authorized officer may require any person, by written notice, to:a.produce for examination any documents, including electronic records, in their custody or control related to the tax liability of any person;b.furnish information related to any person’s tax liability in the specified manner and time; orc.attend at a specified time and place to provide evidence on any matter relevant to a person's tax liability.

59. The Respondent submitted that several requests were made to the Appellant for documents supporting the claim that a transfer of commercial property and assets was part of a business transferred as a going concern. The Appellant was afforded multiple opportunities to provide this documentation in support of their objection to the additional assessment.

60. The Respondent submitted that as the Appellant failed to provide the necessary documentation to substantiate his objection, the Respondent’s decision to invalidate the Appellant's objection was proper and in line with section 51(3) of the Tax Procedures Act.

61. In conclusion, the Respondent submitted that it did not err in assessing the tax payable and it considered all the documents produced and that the Appellant failed to discharge is burden of proof and challenge the Respondent’s assessments and to show that they were incorrect.

Respondent’s Prayers 62. The Respondent prayed to the Tribunal for the following orders: -a.Dismisses the Appeal and uphold the assessments and resultant interest and penalties issuedb.Upholds the invalidation notice dated 1st July 2022. c.Costs of the appeal be issued to the Respondent.

Issues for Determination 63. Based on the pleadings and submissions filed by the parties, the Honourable Tribunal has framed the following issues for determination:i.Whether the Respondent’s Notice of Objection Invalidation dated 1st July 2022 was justified.ii.Whether the Respondent’s Confirmation of Assessment dated 30th June, 2023 was justified.

Analysis and Findings 64. In determining the issues above, the Tribunal has analysed the chronology of events from the date of assessment and notes as follows;a.On 5th April 2022 the Appellant was issued with value added tax (VAT) assessment no KRA202204196473 amounting to Kshs. 1,849,442. 72 for the period December 2019 and assessment no KRA 202204228709 amounting to Kshs. 485,243. 74 for the period December 2020. b.On 5th May 2022, the Appellant lodged objections to the above two assessment orders.c.On 1st July 2022, the Respondent issued a Notice of Objection Invalidation against the VAT assessments of Kshs. 2,334,685. 46 for the year 2019 and 2020. The Tribunal has noted that on 27th February 2023, the Respondent issued an agency notice to the Appellant’s banker demanding for VAT amounting to Kshs. 2,334,685. 00 to be paid by the bank to the Respondent.d.On 20th December 2022, the Appellant was issued with another assessment no KRA202219677404 for Kshs. 3,115,159. 61 to which the Appellant objected on 19th January 2023. e.The Respondent on 30th June, 2023 issued a Confirmation of Assessment confirming VAT assessment of Kshs. 3,115,159. 61

i. Whether the Respondent’s Notice of Objection Invalidation dated 1st July 2022 was justified. 65. The jurisdiction of the Tribunal relating to invalidation of objections is limited to determining whether or not the Respondent was justified to invalidate a taxpayer’s objection.

66. The Tribunal noted that the Appellant on 5th May 2022 lodged objection to assessment no KRA202204196473 amounting to Kshs. 1,849,442. 72 for the period December 2019 and assessment no KRA 202204228709 amounting to Kshs. 485,243. 74 for the period December 2020.

67. The applicable law relating to invalidation at the time the Appellant objected to the assessment on 5th April 2022 was Section 51(4) which provided as follows:(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.

68. The Respondent invalidated the Appellant’s objection vide letter dated 1st July 2022 which was almost two months later. It is the finding of the Tribunal that the invalidation did not comply with the requirement of Section 51(4) as the same failed the immediacy test.

69. The Tribunal has additionally observed that even though the Respondent has stated in the invalidation decision as well as its Statement of Facts that it followed up with the Appellant vide email of 14th June 2022, but the Appellant failed to avail any document in support of his objection, no evidence of such email correspondence was adduced by the Respondent.

70. Due to the above two reasons, The Tribunal is constrained in the circumstances to set aside the notice of objection invalidation and to remit the matter back to the Respondent so that it can render a proper Objection Decision in line with the provisions of Section 51 of the Tax Procedures Act taking into account any supporting documents that may be provided by the Appellant.

ii. Whether the Respondent’s Confirmation of Assessment dated 30th June, 2023 was justified. 71. As pointed out above, on 20th December 2022, the Appellant was issued with another assessment no KRA202219677404 for Kshs. 3,115,159. 61 to which the Appellant objected on 19th January 2023.

72. The Tribunal has reviewed the appeal record and has not seen any Objection Decision rendered by the Respondent in respect to the Appellant’s objection.

73. The Respondent has asserted in its Statement of Fact as well as its submissions filed before the Tribunal that the Appellant did not provide any evidence that would have altered the assessments despite the Respondent’s several requests and therefore the Respondent invalidated the Appellant’s objection.

74. Again, the Tribunal has reviewed the appeal record and noted that the Respondent has not adduced any evidence of the several requests it alleges to have made to the Appellant to provide documentation necessary to support its objection to the additional assessment.

75. Moreover, the Tribunal has not sighted any invalidation decision other than the one dated 1st July 2022 which we have already considered above. The only decision on record is the Confirmation Assessment Notice dated 30th June 2023 fully rejecting the Appellant’s objection lodged on 19th January 2023.

76. Having considered the above facts and the provisions of Section 51 of the Tax Procedures Act, the Tribunal finds and holds that the Respondent was not justified in issuing the Confirmation Assessment Notice dated 30th June 2023 which, in any event, was issued outside the 60-day statutory timeline set in law for issuance of Objection Decisions. The Appellant is entitled to have its objection deemed as allowed by operation of the law in the circumstances of the appeal.

final decision 77. For the reasons set out above, the Tribunal finds that this Appeal is merited and accordingly the Tribunal proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s Notice of Objection Invalidation dated 1st July 2022 be and is hereby set aside, and the matter relating the assessments for 2018 and 2019 be and is hereby remitted to the Respondent to issue an Objection Decision.c.The Respondent’s Confirmation Assessment Notice dated 30th June 2023 be and is hereby set aside.d.Each party to bear its own cost.

78. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER 2024. .............................................GRACE MUKUHACHAIRPERSON……………..…………… ……………………………GEORGE KASHINDIMEMBER…..............……………DR. ERICK KOMOLOMEMBER……………..…………… ……………………………ABDULLAHI DIRIYEMEMBER