[2023] KETAT 546 (KLR)

Mega Wholesalers Limited v Commissioner Investigations & Enforcement (Tribunal Appeal 936 of 2022) [2023] KETAT 546 (KLR) (18 August 2023) (Judgment)

Neutral citation: [2023] KETAT 546 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 936 of 2022

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

August 18, 2023

Between

Mega Wholesalers Limited

Appellant

and

Commissioner Investigations & Enforcement

Respondent

Judgment

1. The appellant is a registered private company under the Companies Act whose business is wholesaling and distribution of fastmoving consumer goods with its head office on 3rd Avenue, Eastleigh, Nairobi.

2. The respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, 1995. Under section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce 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. The respondent averred that it received intelligence reports on demonetization cases to be investigated and the appellant happened to be one them. That the appellant was picked up by intelligence reports because it was making huge cash deposits into its bank accounts during the demonetization period.

4. The respondent estimated the collectable taxes to be Ksh3,230,200. 00 and Ksh 798,689. 00 for the appellant and its director Abdi Mohamend Ali respectively.

5. The respondent followed this up with a tax investigation for income tax and VAT against the appellant covering the years 2015 to 2019. The tax investigations concluded that the appellant owed taxes amounting to Ksh 1,647,540,234. 00 [comprising income tax of Ksh 630,698,771. 00, VAT of Ksh 1,013,993,497. 00 and advance tax of Ksh 2,847,966. 00 for its 238 commercial motor vehicles].

6. The respondent claims that while conducting its investigations, it struck off cash deposits made by the appellant in the year 2019 citing lack of sufficient justification on why the appellant had treated them as related party transactions.

7. The respondent noted the bank reconciliations done by the appellant had inter-banking transfers done to two additional bank accounts held by the appellant; whereupon it sought the bank statements for the two accounts held by the appellant at Amalgamated Banks of South Africa (ABSA) and First Community Bank (FCB). The two accounts were analyzed and receipts therein treated as income and subjected to tax charge for income tax and VAT at the standard rate.

8. The respondent arrived at the taxable income for years 2015-2019 by adding gross receipts for the two banks to the appellant’s bank reconciliations. The respondent added the gross income for the year 2020 for all receipts received by the appellant in all its bank accounts.

9. The respondent arrived at income tax payable by adjusting the appellant’s bank reconciliations income using opening and closing trade payables, output tax and withholding tax. The income realized was then compared to the appellant’s filed iTax returns; the variance that was realized was then subjected to a declared gross profit margin percentile for the respective year of income after which it was subjected to the standard corporate tax of 30%.

10. Similarly, the appellant’s adjusted income was apportioned as either vatable or non-vatable using ratios established from the tax returns filed by the appellant on iTax. The variance established herein was then compared to VAT returns filed on iTax which was then brought to charge at the standard rate.

11. On May 11, 2022 arising from the tax investigations, the respondent issued a tax assessment of Ksh 721,192,910. 00 against the appellant. The appellant objected the same on May 27, 2022 vide its notice of objection which was acknowledged by the respondent on June 10, 2022. In the notice, the appellant, provided bank reconciliations and bank statements to the respondent including narrations and disclosure of loan proceeds, bounced cheques, EFT reversals and interbank transfers.

12. The respondent averred that the appellant operated in low-margin sector and that the proportion of vatable sales had been declining over the years whereupon the appellant clarified that in recent years it was gravitating more towards non-vatable items like flour while reducing sales of vatable items like sugar due to stiff competition and increased legislation.

13. The respondent’s findings were communicated to the appellant vide a letter on September 15, 2021 where the appellant was requested to review the findings and provide new evidence for consideration before the respondent issued a tax assessment based on the foregoing investigations.

14. The appellant objected to the findings on various grounds and challenged the sales figures used by the Respondent to compute tax payable in the tax investigation findings. In its summary of bank reconciliations that was accompanied by bank statements analysis to support its contention, the appellant highlighted the variances noted in the banking reconciliations done by the respondent such as inter-banking transfers and related parties.

15. The respondent declined the appellant’s notice of objection in its entirety and confirmed a revised amount of Ksh 712,215,161. 00 in its objection decision of August 16, 2022. The amount assessed was inclusive of penalties and interest.

16. Aggrieved by the objection decision, the Appellant filed its Notice of Appeal before the Tribunal on August 17, 2022.

The Appeal 17. The appellant’s Appeal was premised on the following grounds as stated in the Memorandum of Appeal dated and filed on August 31, 2022:-i.That the Respondent erred in law and fact by issuing an invalid objection contrary to Section 51(9) and (10) of the Tax Procedures Act (No. 29 of 2015)[hereinafter TPA].ii.That the Respondent erred in law by contradicting Section 23(1C) and Section 31(7) of TPA by assessing period beyond five years.iii.That the Respondent erred in law and facts by aggregating all bank deposits as business income contrary to the provisions of Part II Section 3(2)(a) of Income Tax Act.iv.That the Respondent erred in law and fact by assessing and demanding advance tax for year 2021 and 2022. v.That the Respondent erred in law and fact by demanding tax that are unreasonable and unfair as per Articles 210 and 201 (b)(i) of the Kenya Constitution.vi.That the Respondent actions are contrary to legitimate expectations on the operations of the taxpayer as per Section (15) of the Income Tax, and Article 47(1)&(2) of the Kenya Constitution 2010.

Appelant’s Case 18. The Appellant stated as follows in its Statement of Facts dated and filed on 31st August 2022 and Written Submissions dated 27th February 2022 and filed on 28th February 2022, that:a.Contrary to legitimate expectation of the Appellant, the Respondent made an Objection decision that confirmed the entire assessed amount.b.The Respondent failed to make an objective decision despite that the Appellant provided the proper bank reconciliations and bank statements sought by the Respondent.c.The Respondent erred by taxing credits from loan proceeds, bounced cheques/EFT reversals and interbank- transfers which were clearly narrated and properly disclosed in the bank statements thus violating Part II Section (3)(2a) of Income Tax Act (Cap 470 of Kenya’s Laws) [hereinafter ITA]which defines taxable income.

19. The Appellant averred that the Respondent erred in the estimates used in arriving at the assessment as they were erroneous and unjustified despite the fact that the Appellant and the Respondent exchanged correspondences and held several meetings during the investigations where the Appellant and its Director explained the source of the bank deposits.

20. The Appellant raised three issues for determination in its Written Submissions;i.Whether the Respondent acted ultra vires contrary to Section 23(1)(c) of the TPA in its assessment.ii.Whether the Respondent was right to assess based on assumption of mere cash credits in banks and hypothetical ratios/margin.iii.Whether the Respondent erred by demanding advance tax past statutory return period.

i. Whether The Respondent Acted Ultra Vires Contrary To Section 23(1)(c) Of The Tpa In Its Assessment. 21. The Appellant averred that despite providing all the documents demanded by the Respondent and the varied correspondences, the Respondent went ahead to assess income for the investigation period contrary to statute.

22. The Appellant submitted that it filed an Objection to the demanded taxes as provided for in law by stating the grounds of objection as the Respondent acted ultra vires in its assessments of more than 5 years.

23. The Appellant submitted that it was a compliant taxpayer and not a non- filler as alleged by the Respondent when it invoked Section 29 of the TPA as it had filed all its tax obligations as was indicated in the attached copy of the list of all its tax filings.

24. The Appellant relied on Section 29(5) of the TPA that limits the period within which the Respondent can issue an assessment;“subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”

25. The Appellant averred that the Respondent began investigations sometime in the year 2021 thus acted ultra vires because the five-year contemplated under the TPA would be up to the year 2017; therefore, the Appellant posits that the assessment for the year of income 2015-2016 ought to be vacated.

26. The Appellant averred that Section 29(6) of the TPA only applies where there is willful neglect or fraud. That it is trite law that fraud must be both specifically alleged and proven. Thus, the Respondent must not be allowed to assess tax by merely stating that there was fraud or willful neglect on the part of the Appellant without providing sufficient proof. That without proof, the Respondent’s assessment is without basis in law. That the burden of proving any willful neglect or fraud is on the Respondent. To buttress its position, the Appellant relied on the case of Kenya Revenue Authority vs Jimmy Mutuku Kiamba(2015)eKLR.

27. The Appellant averred that none of its directors had been tried and convicted for a criminal offence in relation to the alleged fraud thus, the Respondent could not purport to rely on the provisions of Section 29(6) of the TPA to assess the Appellant or its Director beyond the five-year statutory period.

ii)Whether The Respondent Was Right To Assess Based On Assumption Of Mere Cash Credits In Banks And Hypothetical Ratios/margin. 28. The Appellant averred that it provided proper narrations, detailed bank reconciliations and bank statements that the Respondent dismissed. The Appellant submitted that it maintains a record of transactions in a backup of ERP system to which the Respondent was given all information sought.

29. The Appellant submitted that the Respondent erred in taxing credits from loan proceeds, bounced cheques/EFT reversals, related parties deposits and interbank transfers which were clearly narrated and properly disclosed in bank statements in violation of Part II Section (3)(2a) of ITA.

30. The Appellant submitted that the Respondent erred by applying a gross margin which was not founded on any market research or statute. That tax law state what is to be considered in arriving at business gains/profit and it does not contemplate the application of margins.

31. The Appellant averred that the Respondent’s demand of advance tax is a nullity since this is a tax that is supposed to be set off against income tax which had not happened for the period in dispute.

32. The Appellant submitted that a void action ab initio cannot be ratified or validated; and it relied on the case of Alfred Kioko Muteti vs Timothy Miheso & Another (2015)eKLR where the court held that a party can only discharge its burden of proof upon adducing evidence. Merely making pleadings is not enough. It further relied on Section 107(1) of the Evidence Act:-“whoever desires any court to give judgement as to any right or liability dependent on the existence of facts which he asserts, must prove those facts exist.”

33. In further demolishing the Respondent’s assertions, the Appellant relied on the case of Miller vs Minister of Pensions (1947) 2 ALL ER 372-373 where the court held that:-“That degree is well settled. It needs not reach certainly, but it must carry a high degree of probability. Proof beyond a reasonable doubt does not mean proof beyond the shadow of doubt. The law would prevail to protect the community if it admitted fanciful possibilities to deflect the course of justice. If the evidence is so strong against a man as to leave only a remote possibility of his favour which can be dismissed with the sentence of course it is doubt but nothing short of that will suffice.”

Appellant’s Prayer 34. From the foregoing pleadings, the Appellant’s prayer was for orders that:a.The Tribunal do uphold the Appeal.b.The Tribunal sets aside the Respondent’s Objection decision dated 16th August 2022.

The Respondent’s Case 35. The Respondent’s case is grounded on its Statement of Facts dated 16th September 2022 and filed on the same date and the Written Submissions dated 15th February 2023.

36. The Respondent averred that Section 54 [A] of ITA obligates every person carrying on business to maintain records of all transactions while Sections 58 and 59 of the TPA requires the Appellant to produce and submit such records. To buttress its position regarding the procedure adopted in assessing a company’s tax liability, the Respondent relied on the case of Tumaini Distributors Company (k) Limited vs Commissioner of Domestic Taxes where the High Court held that;“…The Appellant had failed to provide the relevant documents despite several requests by the Commissioner. The parties also held meetings hence the claim that there were no meetings was baseless. The Tribunal had underscored the importance of self-assessment and held that it was the duty of the taxpayer to make full-disclosure in good faith…”

37. The Respondent averred that Section 23 of the TPA bestows the Appellant the duty to keep its records for a period of five years and that Section 29(6) overrides Section 29(5) of the TPA where a taxpayer is found to have willfully neglected to pay taxes, or has evaded or been involved in fraud. To further reinforce its position, the Respondent relied on Section 31(4)(a) of the TPA regarding the powers granted to amend an assessment.

38. The Respondent relied on Section 29(6) and 31(4)(a) of the TPA regarding assessment extending beyond the statutory recommended timeline of five years. To firm up its position, the Respondent further relied on Section 56(1) of the TPA that places the burden of proof upon the taxpayer. The Respondent relied on the following case law and statutory provisions in placing the burden of proof upon the Appellant;a.Pierson vs Belcher (H.M. Inspector of taxes) Tax cases Volume 38. b.Boleyn International Limited vs Commissioner of Investigations and Enforcement, TAT Appeal No. 55 of 2018. c.Mulherin vs Commissioner of Taxation (2013) FCAFC 115 the Federal Court of Australia.d.Section 30 of TPA.e.Section 107(1) of Evidence Act

39. The Respondent relied on Sections 26 and 30 of the TPA in demolishing the Appellant’s assertion regarding advance tax levied thereupon.

40. The Respondent averred that Section 24(1) of the TPA require the Appellant to submit its tax return in the prescribed form and in the manner provided by the Commissioner. The Respondent further advanced its position by quoting Section 52B(1)(b) of the ITA that require the Appellant to file a return of income and assess how much tax is payable from all the sources of income.

41. }The Respondent averred that Article 209 of the Kenya Constitution 2010 empowers it to impose and charge tax while the Appellant being the taxpayer has the obligation to submit correct and timely returns. To further buttress its position on this matter, the Respondent quoted Section 29 of the TPA regarding its powers to assess a tax.

42. In demolishing the Appellant’s assertions regarding legitimate expectation, the Respondent quoted the case of Republic vs Kenya Revenue Authority ex parte Krones LCS Centre East Africa Limited [2012]eKLR ;“Legitimate expectation can only operate inside and not outside the law, one can only rely on legitimate expectations when the law has been complied with. Where taxes have not been paid then the Appellant cannot rely on the principle of legitimate expectations to avoid paying taxes.’’

43. The Respondent disputed the grounds as laid out by the Appellant by alleging that its objection decision dated 16th August 2022 had clear responses to the grounds of objection which put the Appellant to the strictest proof thereof in proving the invalidity of the objection decision thereof. Regarding tax disputes, the Respondent relied on the case of Primarosa Flowers vs Commissioner of Domestic Taxes (2019)eKLR where the court held that;“..the tax payer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

44. The Respondent asserted that its assessment contained in its Objection decision dated 16th August 2022 was proper in law and prayed that the Tribunal upholds it and that the Appeal should be dismissed with costs as it lacks merit.

Issues For Determination 45. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions is of the view that the single issue for determination is whether the Respondent’s Additional Assessment is proper.

Analysis And Determination Whether The Respondent’s Additional Assessment Is Proper 46. The Tribunal notes that the Respondent adopted the banking analysis test in its assessment of the Appellant thereby relying on bank statements and bank reconciliations attached in arriving at the income that was brought to charge. The Appellant did not attach any other documents in its objection or in the pleadings provided herein. The Respondent cannot therefore be faulted for resorting to the alternative method of tax assessment in the absence of any transactional documentation being availed by the Appellant. In the instant Appeal, the Tribunal is guided by the holding in Afya Xray Limited vs Commissioner of Domestic Taxes TAT Appeal No. 70 of 2017;“….that the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent’s finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent’s assessment after all the Appellant by law bears the burden of proof”.

47. {The Respondent claims that the Appellant was picked by its intelligence network for making huge bank deposits during demonetization period. The Tribunal has gleaned through the Appellant’s pleadings and has neither seen any documentary evidence nor explanations to dispute the Respondent’s allegations regarding its bank deposits which were indeed substantive. The Tribunal is guided by Section 56(1) of the TPA in relation to burden of proof in tax disputes and which provides as follows;-“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

48. In the same vein, the Tribunal borrows from Section 24(2) of the TPA which stipulates that:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer· and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

49. The Respondent in this Appeal did not err in its tax assessment following the Appellant’s failure to avail any other documentary evidence apart from bank statements and bank reconciliation summaries. More specifically, the Appellant did not support the cash deposits it made in its various bank accounts thus failed to counter the Respondent’s claims. The Appellant did not meet the threshold of Section 54 A of the ITA and Section 23 of the TPA on keeping of records for a person carrying on a business. The Tribunal is guided by its holding in the case of Faisawema Company Limited vs Commissioner of Domestic Taxes Appeal No. 326 of 2022 where the Tribunal held that,“the assertions that the Appellant provided documents must be shown at the Tribunal as well.”

50. The Tribunal is well aware that Section 29(1) of TPA allows the Respondent to use any information that is available to it and to use the best of his or her judgement in making an assessment. In the instant Appeal, the Appellant did not provide an alternative method or evidence proving the Respondent’s misapplication of the banking analysis test and as such the averments made were mere allegations which did not amount to evidence. The Tribunal relies on the case of Bachmann V The Queen, 2015 TCC 51 where it was stated that:-“The court recognized that in an appropriate case, a bank deposit analysis is an acceptable method to compute income.”

51. To buttress this position, the Tribunal reiterates its holding in the case of Digital Box Limited vs Commissioner of Investigations & Enforcement, TAT No. 115 of 2017 where it stated that:-“…Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment. Thus, according to the provisions of the Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant.

52. The Tribunal is satisfied that the Appellant did not discharge its burden of proof to successfully challenge the assessments as issued which can only be done by adducing evidence which demonstrates the taxable income on which tax ought to have been levied. It was the courts holding in the case of Alfred Kioko Muteti vs Timothy Miheso & Another (2015)eKLR that a party can only discharge its burden of proof upon adducing evidence. Merely making pleadings is not enough.

53. Further the Tribunal is guided by the court judgement in Hole V The Queen, 2016 TCC 55 that;“There are two ways in which a taxpayer can challenge a bank deposit analysis; The first is to prove that his or her records are adequate and thus that his or her income should have been determined using those records. The second, and more common method is to challenge the actual determination of income made by the Minister under the bank deposit analysis.”

54. The Tribunal notes that the Appellant was merely making pleadings that were not backed-up with evidence to support cash deposits made in its various bank accounts. It is the Tribunals’ holding that the Appellant cannot hide behind the legitimate expectation doctrine as there is none that is expected from the Respondent in the absence of documentary evidence. The Appellant did not meet the threshold of section 30 of Tax Appeals Tribunal Act (No. 40 of 2013) [hereinafter TAT] regarding its legal burden of proof. The Tribunal is aptly guided by the court’s decision in the case of Republic vs Kenya Revenue Authority ex parte Krones LCS Centre East Africa Limited [2012]eKLR that;“Legitimate expectation can only operate inside and not outside the law, one can only rely on legitimate expectations when the law has been complied with. Where taxes have not been paid then the Appellant cannot rely on the principle of legitimate expectations to avoid paying taxes.’’

55. In this instance and in view of the foregoing the Tribunal finds that the Respondent’s assessment was proper.

Final Decision 56. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated August 16, 2022 be and is hereby upheld.c.Each party to bear its own costs

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 18TH DAY OF AUGUST, 2023…………..……………….ERIC NYONGESA WAFULACHAIRMAN…………..……………….DELILAH K. NGALAMEMBER…………..……………….CHRISTINE A. MUGAMEMBER…………..……………….GEORGE KASHINDIMEMBER…………..……………….MOHAMED A. DIRIYEMEMBER…………..……………….OLOLCHIKE S. SPENCERMEMBER