[2024] KETAT 1626 (KLR)

Melly and Lelly General Contractors Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal E827 of 2023) [2024] KETAT 1626 (KLR) (11 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1626 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E827 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members

October 11, 2024

Between

Melly And Lelly General Contractors Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a resident company and a registered taxpayer who is engaged in the business of construction and civil works.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. 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.

3. The Respondent carried out a review of the Appellant’s tax affairs and issued a pre-assessment notice dated 5th October 2022 demanding taxes totaling Ksh 56,824,317. 00.

4. The Respondent further raised assessments on iTax on 9th October 2019, 7th December 2020, 23rd December 2020 and 30th June 2023. The Appellant lodged a late objection on 12th July, 2023 which was allowed by the Respondent on 17th July 2023.

5. The Respondent subsequently issued its objection decision through a letter dated 21st August 2023 confirming the assessments.

6. The Appellant being dissatisfied with the objection decision filed a Notice of Appeal dated 19th September, 2023

The Appeal 7. The Appeal as stated in the Memorandum of Appeal dated and filed on 20th November, 2023 was premised on the following grounds:i.The Respondent erred in law and in fact by arriving at an additional assessment for reason of errors or mistake in the apportioning of liability.ii.The Respondent erred in law and fact by overlooking the fact that the invoices submitted by the Appellant in filing of VAT returns were similar in substance and content of the transactions reflected therein to those submitted by the Appellant's suppliers, despite the discrepancies in the invoice numbering and dates of issuance.iii.The Respondent erred in law and fact by disregarding deductible inputs for non-vatable items used as raw materials in civil works. That such items comprise sand, building stones and dust used in construction and grading and gravelling of roadsiv.The Respondent erred in law and fact by mounting an additional tax assessment on the Appellant without regard that it was its automated system that did not reconcile and match the invoices produced by the Appellant and the Appellant's suppliers, emanating from the same purchases.v.The Respondent erred in law and fact by not considering operational expenses for the 3 years (direct labour and operational expenses), wear and tear schedules for capital items for the three years (2018, 2019 and 2020).

The Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated and filed on 20th November, 2023 together with the documents attached thereto.

9. The Appellant stated that the dispute arose as a result of a tax review carried out which showed that the taxpayer had not declared business income for the year of incomes 2018, 2019 and 2020.

10. That on 21st August 2023 the Commissioner issued an objection decision confirming additional assessments on both VAT and Corporation tax.

11. It averred that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies with the taxpayer to demonstrate that the Commissioner's decision was incorrect. That this burden was discharged at the initial desk audit review period and documentary evidence was submitted in the form of original copies of purchase invoices and bank statements as documentary evidence to the Commissioner to support the audited books and VAT returns filed for respective periods in iTax.

12. The Appellant submitted that the invoices submitted by the Appellant in filing of VAT returns were similar in substance and content of the transactions reflected therein to those submitted by the Appellant's suppliers, despite the discrepancies in the invoice numbering and dates of issuance.

13. That the Commissioner disregarded deductible inputs for non-vatable items used as raw materials in civil works. That such items comprised sand, building stones and dust used in construction and grading and gravelling of roads.

14. That the Commissioner also disregarded other operational expenses for the 3 years (direct labour, and operational expenses).

15. The Appellant contended that the Commissioner did not factor in wear and tear schedules for capital items for the three years 2018, 2019 and 2020.

Appellant’s Prayers 16. The Appellant prayed that;a.This Appeal be allowed.b.The decision of the Respondent to levy additional VAT assessment of Kshs. 95,179,131. 00 against the Appellant be set aside.c.Each party to bear its own costsd.Such other further orders or reliefs as the Tribunal may deem just and expedient.

The Respondent’s Case 17. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 23rd February, 2024 and filed on the same day together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 6th August 2024.

18. The Respondent pleaded that it carried out a review exercise on the Appellant as a result of unutilized withholding certificate and despite having made vatable supplies for the period January, 2020 to June, 2022 failed to declare Value Added Tax and Income tax. That the information was sourced from IFMIS data.

19. The Respondent stated that it communicated the information in a pre-assessment notice dated 5th October, 2022 demanding taxes of Kshs. 56,824,317. 00.

20. That despite receiving the Respondent's communication, the Appellant did not respond nor make any communication regarding the pre-assessment notice.

21. The Respondent pleaded that the assessments were raised on iTax platform on diverse dates being 9th October,2019, 7th December 2020, others on 23rd December 2022 and on 30th June, 2023 demanding total taxes of Kshs.73,490,277. 00.

22. That the Appellant lodged a late objection on 12th July, 2023 and was allowed to object on 17th July,2023.

23. That the Appellant contended the following in the objection:-a.The Respondent did not factor in all deductible inputs purchased in that year of income and other operational expenses incurred in the course of running the business.b.The Appellant had assets that were used in the running of the business, construction, and had claimed capital deduction on the same.c.The records for operational expenses and business inputs were available for examination.d.Incomplete records caused the Commissioner to raise additional assessments.e.The audited accounts for the year 2020 were availed.

24. The Respondent stated that it requested the Appellant to avail the following documents in support of the objection:-a.Capital deductions-wear and tear schedule.b.Bank statements and the reconciliations.c.Loan interest schedule and support.d.Casual labour schedules and support.e.Salaries and wages schedules and support.f.Schedules and support for operational expenses i.e. transport, murram costs etc.g.Audited accounts.h.Trial balances.i.General Ledgers.

25. The Respondent submitted that it made several reminders to the Appellant to avail the documents on 14th and 18th August,2023.

26. The Respondent stated that constrained by the limited documents, it issued an objection decision on 21st August, 2023 rejecting the objection and confirming taxes of Kshs. 95,179,131. 00.

27. The Respondent submitted that it relied on the following statutes:-a.Sections 23, 24, 31, 51, 56 and 59 of Tax Procedures Act.b.Section 54A of the Income Tax Act.c.Sections 5 and 43 of the Value Added Tax Act.

28. That the crux of the Respondent's decision was that it upheld the assessment on the basis that the Appellant failed to avail documentation in support of the objection.

29. The Respondent submitted that there were several demonstrable instances where the Appellant was directed to avail documents to the Respondent for examination and review. That some of the instances include:-a.On 7th October, 2022 in the pre-assessment notice, the Appellant was directed to avail documentation.b.On 17th July, 2023 the Appellant was requested to avail documents for examination by 21st July, 2023 after the application for late objection was allowed.c.On 27th July, 2023 there was a meeting where the Appellant through its appointed agent undertook to avail the documents.d.On 14th and 18th August, 2023, the Respondent made a reminder to the Appellant to provide documents in support of the objection.

30. The Respondent stated that the Appellant's failure to avail documents rendered the Respondent in a position where it was unable to consider all of the claims raised in the objection.

31. That Section 51(3) of the Tax Procedures Act mandates the Appellant to support its objection with all relevant documents.

32. The Respondent averred that the burden of proof that an assessment is excessive and/or erroneous lies with the Appellant. It added that in the absence of documents it was left with no option but to rely on information available to it. That as such therefore it was the Respondent's case that its decision was not flawed as alleged by the Appellant.

33. That pursuant to the provisions of Section 24(2) of the Tax Procedures Act the Respondent is empowered to assess any taxpayer based on information available to it.

34. That Section 43 of the VAT Act 2013 and Section 54A of the Income Tax Act read together with Section 23 of the Tax Procedures Act enjoins a taxpayer to maintain records for inspection by the Commissioner.

35. That further Section 59 (1) of the Tax Procedures Act also provides that a taxpayer shall produce records when required to do so by the Commissioner.

36. The Respondent pleaded that the allegations of the Appellant as laid out were unfounded. That its conduct was in adherence to the law and the resultant objection decision cannot be faulted.

Respondent’s Prayers 37. Based on the above, the Respondent prayed that:a.The Appellant's Appeal be dismissed with costs,b.The assessment raised by the Respondent amounting to Kshs. 95,179,131. 00 be confirmed and the principal taxes and interest be found due and payable as per the objection decision rendered by the Respondent.

Issue for Determination 38. The Tribunal upon due consideration of the pleadings, documents and the written submissions filed on the part of both parties was of the view that the only issue that crystalized for its determination was:-

Whether the Respondent erred in confirming the assessments. Analysis and Determination 39. The Tribunal having appropriately ascertained the issue that falls for its determination shall proceed to make an analysis as hereafter.

40. The genesis of this dispute is the Respondent’s assessments dated 5th October 2022 for Corporation Income tax and VAT following its review of the Appellant’s tax affairs.

41. The Appellant contended that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies with the taxpayer to demonstrate that the Commissioner's decision was incorrect. That this burden was discharged at the initial desk audit review period and documentary evidence was submitted in the form of original copies of purchase invoices and bank statements as documentary evidence to the Commissioner to support the audited books and VAT returns filed for respective periods in iTax.

42. The Appellant submitted that the invoices it submitted in filing of VAT returns were similar in substance and content of the transactions reflected therein to those submitted by the Appellant's suppliers, despite the discrepancies in the invoice numbering and dates of issuance.

43. That the Commissioner disregarded deductible inputs for non-vatable items used as raw materials in civil works. That such items comprised sand, building stones and dust used in construction and grading and gravelling of roads.

44. That the Commissioner further disregarded other operational expenses for the 3 years(direct labour, and operational expenses). The Appellant contended that the Commissioner did not factor in wear and tear schedules for capital items for the three years 2018, 2019 and 2020.

45. The Respondent on its part stated that it carried out a review exercise on the Appellant as a result of unutilized withholding certificates and despite having made vatable supplies for the period January, 2020 to June, 2022 failed to declare Value Added Tax and Income tax. That the information was sourced from IFMIS data.

46. The Respondent submitted that it upheld the assessment on the basis that the Appellant failed to avail documentation in support of the objection.

47. The Respondent having pleaded that there were several demonstrable instances where the Appellant was directed to avail documents to the Respondent for examination and review.

48. The Tribunal having perused through the pleadings notes that the key issue in contention in this dispute is the provision of documents in support of the objection which the Respondent stated that they were not provided by the Appellant.

49. In particular the Tribunal notes that in the objection decision, the Respondent had stated in part as follows;“…3. 0Statement of FindingsUpon review of your grounds of objection, evidence provided and email correspondences with the last email dated 18th August, 2023, we made the following observations and deductions: We accepted the reasons for the late objection application on 17th July 2023.

On the same letter, we requested you to avail the following records by 21st July 2023:

1. Sales & Purchase invoices-with ETR Receipt2. Proof of payment for the purchases e.g Certified bank statements3. Audited accounts4. General Ledger5. Trial balances6. Any other relevant supporting documents We held a meeting on 27th July, 2023 at our offices. The tax agent committed to provide the following documents:1. Capital deductions-wear& tear schedule2. Bank statements & the reconciliations3. Loan interest schedule and support4. Casual labour schedules & support5. Salaries & wages schedules & support6. Schedules & support for operational expenses i.e transport, murram costs etc7. Audited accounts8. Trial Balances9. General ledgers On 14th and 18th August 2023 we did reminders on email which were not responded to.

You failed to support your grounds of objection and as such we have confirmed the assessment as raised by the Commissioner.

…”

50. From the above citation, the objection decision was an unequivocal as to the Appellant’s default in providing material documents and verifiable information that prompted the Respondent to disregard the costs of sale and other operational expenses that the Appellant cited in its pleadings that it had sought to be applied in arriving at its proper taxable income and appropriate tax liability.

51. In the instant case the Tribunal notes that despite the fact that the Respondent raised the issue of specific documents that the Appellant failed to provide at the objection stage, the Appellant has not addressed this issue in its pleadings.

52. Given that the Appellant was assessed for Income tax and VAT it ought to have provided documents requested for or as provided in law to support its objection in order to rebut the Respondent’s basis for the assessments.

53. Section 23 of the Tax Procedures Act provides as follows regarding record keeping;“(1)A person shall—(a)maintain any document required under a tax law, in either of the official languages; (b) maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.(2)The unit of currency in books of account, records, paper registers, tax returns or tax invoices shall be in Kenya shillings.”

54. Further, Section 54A of the Income Tax Act provides as follows regarding keeping of records;“(1)A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax. (1A) For the purposes of this section, the carrying on of business includes any activity giving rise to income other than employment income.”

55. In addition, Section 17(3) of the VAT Act provides as follows regarding record keeping;“(3)The documentation for the purposes of subsection (2) shall be—(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under section 16(2); or(e)a debit note in the case of input tax deducted under section 16(5)”

56. It is the Tribunal’s position that the Appellant having been served with an assessment, was enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justifiable in the circumstances.

57. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely places the burden of proof upon a taxpayer to discredit any tax assessment or decision. The Section reads as follows regarding burden of proof:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

58. Additionally, Section 30 of the Tax Appeals Tribunal Act provides as follows:-“In any proceeding before the Tribunal the Appellant has the burden of proving –where an appeal relates to an assessment, that the assessment is excessive; orin any other case, that the tax decision should not have been made or should have been made differently.”

59. The Tribunal reiterates its decision in Tax Appeal No. 1296 Of 2022 James Finlay (Kenya) Limited V Commissioner Legal Services & Board Coordination where it held as follows at Paragraph 83:-“In the instant case the Tribunal found that the Appellant failed to address the specific documents mentioned by the Respondent in the objection decision and therefore failed to discharge the burden of proof.”

60. Consequently, the Tribunal finds that the Respondent was justified in confirming the assessments.

Final Decision 61. Based on the foregoing analysis the Tribunal determines that the Appeal lacks merit and the Orders that accordingly recommend themselves are as follows:-i.The Appeal be and is hereby dismissed.ii.The Respondent’s objection decision dated 21st August, 2023 be and is hereby upheld.iii.Each party to bear its own costs.

62. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF OCTOBER, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBER