[2024] KETAT 1022 (KLR)

Melanie Atieno Onyango and Brenda Otieno t/a Alleys Beers Garden v Commissioner of Domestic Taxes (Tax Appeal E488 of 2023) [2024] KETAT 1022 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1022 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E488 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

July 12, 2024

Between

Melanie Atieno Onyango and Brenda Otieno t/a Alleys Beers Garden

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellants are business partner based in Kisumu and Trading under the business name and style of Alleys Beer Garden.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Respondent conducted a compliance check on the Appellants for the period of 1st July 2021 to December 2022, during which various gaps were found on both VAT and Income tax returns declared by the Appellants.

4. The Respondent issued an assessment notice on the Appellants dated 23rd May 2023 pursuant to Section 29 of the TPA on the basis that the Appellant’s partnership business had not declared the income derived from the partnership business.

5. The Appellants objected to the assessment vide notices of objection dated 24th May 2023, 6th June 2023, and 16th June 2023, objecting to the VAT assessment for the period July 2021 to December 2022 and income tax assessments, respectively.

6. The Respondent consequently issued an objection decision vide a letter dated 21st July 2023 upholding the tax assessments.

7. The Appellants, being dissatisfied with the Respondent’s objection decision, lodged a Notice of Appeal at the Tribunal dated and filed on 18th August 2023.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated and filed on 18th August 2023:a.That the Commissioner erred in law and fact in unjustly raising an additional assessment for income tax for the year 31st December 2021 and Value Added Tax for the period between July 2021 to December 2022, declaring that the Appellant was liable to pay VAT of Kshs. 48,023,941. 00 constituting of a principal tax of Kshs. 41,116,788. 00 and penalties of Kshs. 2,055,839. 41 and interest of Kshs.4,851,313. 00 when the actual principal tax was in fact Kshs. 3,773,195. 00 much to the detriment of the Appellant.b.That the Commissioner erred in law and fact in unjustly raising additional assessment for income tax for the year 3Ist December 2021 and Value Added Tax for the period between July 2021 to December 2022, declaring that the Appellant was liable to pay Income tax of Kshs. 9,526,621. 00 constituting of a principal tax of Kshs. 7,938,851. 00 and penalties of Kshs. 396,942. 00 and interest of Kshs. 1,190,827. 00 when the actual principal tax was in fact Kshs. 1. 068,020. 00 much to the detriment of the Appellant.c.That the Commissioner erred in law and fact in assessing the Appellants’ due tax based on the unfounded and unjustifiable Gross turnover income on VAT and Income tax of Kshs. 48,023,941. 00 and Kshs. 9,526,621. 00, respectively, and occasioned a miscarriage of justice to the Appellant.d.That the Commissioner erred in law and fact in disregarding the Appellant's correct declared Gross turnover income on VAT and Income tax of 3,773,195. 00 and Kshs. 1,068,020. 00, respectively, and occasioned an injustice to the Appellant.e.That the Commissioner erred in law and fact in mounting unsubstantiated and unfounded penalties and interest for payment by the Appellants much to the Appellants’ detriment.f.That the Commissioner erred in law and fact in disregarding the Appellants’ well-supported objection and appeal against the assessment of tax that was punitive and baseless.g.That the Commissioner erred in law and fact in failing to take into consideration the fact the Appellants’ legitimate expectations as law-abiding and tax-compliant citizen that its tax due for the impugned period would be based on the Appellants correctly declared Gross turnover income.h.That the Commissioner erred in law and fact in unjustly altering the method of determining the taxable value and mounting additional taxes contrary to the law and to the detriment of the Appellants.

Appellants’ Case 9. The Appellants’ case is premised on the following documents before the Tribunal:-a.Their Statement of Facts dated 18th August 2023 and filed on the same date.b.Their Written Submissions dated 16th April 2024 and filed on even date.

10. The Appellants averred that the Respondent did not address the ground set out in its notice of objection. The Appellants relied on Section 51 of Tax Procedures Act which provides:“9. The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.

10. An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

11. The Appellants submitted that the additional VAT assessment is in contention since the officer was not able to provide the summaries of VAT workings to explain where the VAT liability of Ksh 41,116,788. 00 came from.

12. The Appellants averred that the Respondent erred in law by raising the additional VAT assessments on an approach that contravenes the applicable Sections of the Income Tax Act and Value Added Tax Act.

13. The Appellants submitted that the Commissioner failed to achieve his standard of proof under Sections 107, 108, 109, and 112 of the Evidence Act. That the evidentiary burden shifted to the Commissioner, who failed to prove it, and the claim must fail.

14. The Appellants stated that Section 15 (1) of the Income Tax Act sets the guiding principles on allowability of expenditure, it provides that:“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

15. The Appellants submitted that they exclusively incurred the cost of purchasing the goods in the production of their income while relying on the Judgement in the case of Commissioner of Income Tax v Kencell Communications Limited (Now Airtel Kenya Limited) [2016] eKLR, where Justice F. Tuiyott stated:“21. And it must be said that this is the nature of inquiry that the Indian Tax Appellate Tribunal made in the case of Vodaphone Essar (Gujarat) vs. The Department of Income Tax cited to this Court by Kencell when it held;‘ In Bombay Steam Navigation’s Co. 1953 Ltd’s case, it was held that the question of whether a particular expenditure incurred for the purpose of business must be viewed in the larger context of business necessity or expediency. It was held that if the outgoing of expenditure is so related to the carrying on or the conduct of the business, the expenditure may be regarded as revenue expenditure.”

16. The Appellants submitted that it is standard business practice and in conformity with the law for one to be issued with an invoice and corresponding ETR when making a purchase.

17. The Appellants averred that the issues to do with purchases were not in any way addressed by the Respondent in the objection decision. The Appellant further submitted that they furnished the Respondent with a detailed financial report and audited accounts for the year ending 31st December 2022, which the Respondent did not take into consideration.

18. The Appellants submitted that Section 15(1) of the Income Tax Act is applicable to an expenditure that has occurred in the production of the Appellants’ income.

19. The Appellants averred that the Respondent's exclusion of the purchases in the assessment implies a claim that purchases were not made so as to exclude them from the Appellants’ returns while retaining the sales for the alleged non-existent goods as part of the Appellants’ revenue while computing the additional Corporation tax.

20. The Appellants averred that VAT requires that the payments to the Commissioner be the difference between the tax charged on the sales/revenue, which is the output VAT and the tax paid on the purchases and expenses, which is the input VAT of a taxpayer.

21. The Appellants submitted that Section 17 (1) of the VAT Act provides that:“Subject to the provisions of this Act 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 in a return for the period, 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.”

22. The Appellants averred that Regulation 7 of the VAT Regulations of 2017 is to the effect that;“7. (1)A person shall be entitled to a deduction of input tax incurred for trading stock on hand at the date that the person becomes registered.(2)A deduction of Input Tax shall not be allowed unless —(a)the input tax to which the deduction relates is deductible under section 17 of the Act;(b)the registered person has provided the Commissioner with satisfactory evidence—(i)that input tax was paid on acquisition of the goods;(ii)of the quantities, descriptions, and values of the goods on hand at the time of registration.”

23. The Appellants submitted that the assessment did not consider normal overall general input expenses like rent, labour, wages, license, repairs, printing and stationery, Telephone postage, courier services, fuel power, and other major expenses.

24. The Appellants further submitted that it is trite law that taxation has to be based on the strict letters of the law and not implied or assumed as held in Keroche Industries Limited V Kenya Revenue Authority &5 Others [2007] eKLR where Justice Nyamu stated:“I accept the Applicant's counsel's powerful argument that taxation can only be done on clear words and that taxation cannot be on intendment. Linked to this is that a penalty must be imposed in clear words. Finally, even where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation which imposes a burden tax or duty on the subject.”

25. The Appellants submitted that disallowing the expense deductions, while the same were incurred towards making the profit of the business, would lead to a situation of double taxation, which would be unfair and capricious.

26. The Appellants averred that it is their legitimate expectation as a law-abiding and tax-compliant citizens that their tax due for the impugned period would be based on the Appellants’ correctly declared Gross turnover income, which the Respondent did not take into consideration.

27. The Appellants relied on the case of Raghubar Mandal Harihar Mandal V. The State of Bihar AIR 1952 Pat 235 where the court held that:“The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose, he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by & assessments of the assesses, & all other matters which he thinks will assist him in arriving at a fair and proper estimate and though there must necessarily be guess-work in the matter, it must be honest guesswork.”

28. The Appellants averred that the Tax Procedure Act provides under Section 51 (3) (b) thereof as follows:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if – a 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; and 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 or an extension of time to pay the tax not in dispute under section 33(1).”

29. The Appellant submitted that the Respondent did not comply with the provisions of Section 51(10) of the Tax Procedures Act by not giving a detailed statement of findings and reasons for the findings in its objection decision. The Section provides:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

30. The Appellants averred that the Respondent did not reveal the basis or detail of the information relied upon contrary to proper tax administration. The Appellants relied on the case of Pz Cussons East Africa Limited v. Kenya Revenue Authority [2013] eKLR where Justice Majanja guided that:“… KRA should not arbitrarily charge tax on the basis of information in its sole possession, especially if it has not provided the details of the items picked and without it verifying the validity.”

Appellants’ Prayers 31. The Appellants prayed to the Tribunal that:-i.The decision of the Commissioner dated 21st July 2023 be set aside.ii.The Appellants’ objections be allowed.iii.Costs of this Appeal be awarded to the Appellants.

Respondent’s Case 32. The Respondent’s case is premised on the hereunder filed documents: -a.The Respondent’s Statement of Facts dated 18th September 2023 and filed on the 21st September, 2023. b.The Respondent’s Written Submissions dated 18th April 2024 and filed on even date.

33. The Respondent averred that during the review of the Appellants’ objections, there exists evidence wherein the Appellant were required to provide various documentation necessary to validate their objections.

34. The Respondent submitted that the Appellants did not provide the requested documents. Further, the Respondent averred that the correspondence between them shows reminders were sent to the Appellants via an email dated 8th June 2023 requesting the Appellants to validate the objection; however, the Appellants did not provide the requested documents.

35. The Respondent averred that the Appellants failed to discharge their burden of proof to demonstrate that the Respondent’s assessments were erroneous or in any way excessive. The Respondent relied on the case of Kenya Revenue Authority v. Man Diesel &Turbo Se, Kenya [2021] eKLR where it was stated:“… 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 taxpayer is npt 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 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 taxpayer. 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.”

36. The Respondent further relied on the case of Mulherin v Commissioner of taxation (2013) FCAFC 115, where the Full Federal Court of Australia (FFC) affirmed the critical need for supporting evidence in tax disputes, and emphasized that taxpayers must satisfy the burden of proof to successfully challenge income tax assessments. The FFC held that:-“…it is not enough for a tax payer to simply demonstrate that the assessment issued by the Commissioner is incorrect. Rather the onus is on the taxpayer in proving that an assessment issued by the Commissioner is excessive can only be discharged by the by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied. The onus requires the taxpayer to positively prove his or her actual taxable income and in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer.”

37. Further, the Respondent relied in the Australian case of Gashi v. Respondent of Taxation [2021] FCA 638, where the court opined that:“In appeals of the present kind, it then becomes the obligation of the applicants... to prove that the Commissioner’s assessments were excessive. They will not succeed in that task unless they can demonstrate that their true taxable incomes in the years in question were less than the income levels by reference to which the Commissioner assessed the tax that was payable by them: Commissioner of Taxation v. Dalco (1990), 168 CLR 614. That is to say, it is not enough for the applicants to establish that the Commissioner's estimations were mistaken or erroneous in some or even many respects. It is necessary that they go further and establish what their taxable incomes actually were (our emphasis). If, in the course of that project, they demonstrate that they were not in partnership and/ or that their own income did not contribute to accretions in the assets of other members of the family, all well and good. But the bottom-line question, as it were, will always be: what were the taxable incomes of the applicants? It is for them to determine how they will go about answering that question. The approach taken and the assumptions employed but the Commissioner will not be binding in that arena (our emphasis).”

38. The Respondent averred that the Tribunal should not depart from the already rich jurisprudence developed on the issue of the effect of the invalid objection. The Respondent submitted that it is easy to find that the Appellants’ objection was invalid, and thus, the Appeal has no merit.

39. The Respondent relied on the case of Ngurumaini Traders Limited v. Commissioner of Investigation and Enforcement (TAT No. 125 of 2017), where the Tribunal held that in Paragraph 40 of its Judgment that:“From the foregoing, the Appellant’s failure to lodge a proper objection meant that the Respondent was at liberty to confirm the assessment. Measured against the provisions of section 51(3) of the Act, the Appellant’s conduct and manner of lodging the objection fell considerably short of the permissible statutory requirements under section 51(3) of the Tax Procedures Act, 2015. It would be fundamentally non-justifiable for this Tribunal to entertain this preliminary objection, taking into account the Appellant’s fragrant non-compliance with the law on raising objections…”

Respondent’s Prayers 40. The Respondent prays that the Tribunal finds:-a.Upholds the Respondent’s decision dated 21st July 2023. b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issue For Determination 41. The Tribunal having considered the pleadings and submissions of both parties, is of the view that the issue that calls for its determination is Whether the Respondent’s assessments were justified.

Analysis And Determination 42. The Tribunal having determined the issue that fell for its determination, proceeded to analyse the same as hereunder.

43. The Appellant’s main contention was that the Respondent erred in raising additional VAT and Income tax assessments by unjustly altering the method of determining taxable value to the Gross turnover income method much to the detriment of the Appellant.

44. The Respondent maintained that the Appellant had failed to seize the several opportunities it was afforded to provide evidence to disprove the Respondent’s assertions but that it failed to do so.

45. The Appellant averred that it had provided the requisite proof to show what its correct income was and that the Respondent had failed to discharge the burden of proof which had shifted to it once the Appellant supplied it with documents.

46. The Tribunal noted that the Respondent in its objection decision had specified the documents which remained pending and without which the Appellant could not be said to have dislodged its burden of proof.

47. The Objection decision reads in part as follows:-“documents provided are not sufficient to ascertain your income, given that the following documents have remained pending: Detailed breakdown of the sales ledger, Z reports, monthly ETR receipts and the catering levy ledger and payment details.”

48. It is commonplace that once the Commissioner has made a tax assessment or decision, the burden is on the Appellants to prove that the said assessments or objections were erroneous. This is supported by Section 56(1) of the TPA which provides as thus:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

49. Further, Section 30 of the TAT Act provides that:“30. Burden of proofIn a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

50. The burden was thus on the Appellants to prove that the Respondent’s assessment was erroneous. The easiest way to discharge this burden would have been by sharing the documents that they had supplied to the Respondent to prove that the Respondent’s assessments were inaccurate, excessive or should have been made in a different way with the Tribunal.

51. The Appellants did not provide any document to confirm that they had shared any documents with the Respondent and which documents ought to have guided the Respondent to find that its tax assessment was wrong, erroneous and or excessive.

52. The documents presented by the Appellants before the Tribunal included the following:a.Appellants’ objection letterb.The impugned objection decision dated 21st July 2023c.Appellants’ Notice of Appeal dated 18th August 2023

53. It is clear and not in doubt that none of the aforementioned documents could have aided the Appellants in discharging the onerous burden of proof placed on them to persuade the Tribunal that the Commissioner’s assessment was wrong and or erroneous. The Appellants have not provided evidence that they furnished the Respondent with the said documents at the objection state.

54. Without supporting documents, the Appellants’ contentions remained mere averments, the Tribunal finds guidance in the case of Alfred Kioko Muteti V Timothy Miheso & Another (2015) eKLR where it was held that;“A party can only discharge its burden upon adducing evidence. ...........Merely making pleadings is not enough."

55. The fact that the burden of proof that the Respondent’s tax decision was wrong always rests on the Appellants has been affirmed by this Tribunal in Tumaini Distributors [K] Ltd -vs- Commissioner of Domestic Taxes [2020] eKLR , where the court held that the taxpayer has the burden to prove that the tax decision is wrong. Similarly in the case of Otieno Odongo & Partners -vs- Commissioner of Domestic Taxes TAT N O. 290 of 2019, again it was held that it is upon the Appellants to prove that the Respondent’s decision is wrong.

56. Guided by the foregoing analysis, authorities, Section 56(1) of the TPA and Section 30 of the TAT Act, the Tribunal thus finds and determines that the Appellants failed in discharging their burden of proof that the Respondent’s assessments were not justified.

Final Decision 57. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 21st July 2023 be and is hereby upheld.c.Each party to bear its own costs.

58. It is so ordered.

DATED and DELIVERED at NAIROBI thIS 12TH DAY OF JULY, 2024ERIC NYONGESA WAFULA CHAIRMANCYNTHIA B. MAYAKA MEMBERDR. RODNEY O. OLUOCH MEMBERABRAHAM K. KIPROTICH MEMBERDR. TIMOTHY B. VIKIRU MEMBER