[2024] KETAT 732 (KLR)

Micson Boreholes Services Limited v Commissioner of Domestic Taxes (Tax Appeal E629 of 2023) [2024] KETAT 732 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 732 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E629 of 2023

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, W Ongeti & G Ogaga, Members

May 9, 2024

Between

Micson Boreholes Services Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company registered in Kenya and its main activity is architectural, engineering business and related consultancy.

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 revenue.

3. The Respondent stated that it noted a variance between VAT-Withholding declarations vis a vis VAT withholding payable by the Appellant as per the claimed purchases and on 3rd October 2022 issued VAT-Withholding additional assessment for the period 2017-2021 and on 4th November 2022, the Respondent issued a notice of assessment.

4. That the Appellant lodged a late manual objection to the assessments on 16th June 2023 which was accepted.

5. That the Appellant was requested to provide certain documents and from a review of the same, the Respondent noted a variance between the records provided and the iTax declarations of tax.

6. On 8th August 2023, the Respondent issued its objection decision confirming withholding VAT assessments on grounds that the explanations and records provided to support the objections were not sufficient to explain the variance.

7. The Appellant being dissatisfied with the Respondent’s objection decision filed the Notice of Appeal against it on 8th September 2023.

The Appeal 8. The Appeal is premised on the Memorandum of Appeal dated 22nd September, 2023 and filed on 25th September 2023, stating the following grounds:a.That the Respondent erred in law and in fact by issuing an objection decision whose tax computation was neither based on any material or true facts.b.That the Respondent erred in law and in fact in assessing the Appellant, contrary to well established tax administration principles and the Tax Procedures Act which empower the Respondent to use all and any information available to it at the time of assessment to determine the tax affairs of a taxpayer.c.That the Respondent erred in fact and in law by assessing the Appellant on Withholding of Kshs. 1,735,607. 00 without providing the basis of the assessment for the months of September 2022, October 2022, November 2022 and January 2023. d.That the Respondent erred in law and in fact by failing to take into account relevant considerations and disregarded the materials, evidence and documents availed to it by the Appellant.

The Appellant’s Case 9. The Appellant’s case is premised on the following documents:a.The Statement of Facts dated 22nd September 2023 and filed on 25th September 2023. b.The written Submissions dated 5th December , 2023 and filed on the same date.

10. That at all material times, the Appellant was fully cognizant of its duties to withhold VAT pursuant to Section 42A of the Tax Procedures Act and denies in totality the assessment raised.

11. That it is the Appellant's position that the Respondent grossly misconstrued itself by raising assessment as illustrated in the Objection decision and in specific the months of September 2022, October 2022, November 2022, December 2022 and January 2023.

12. That in addition to the above, the months of January 2020 and May 2020 have no assessments, yet they are indicated in the Respondent’s basis of assessment schedule and this action indicates the haphazard nature of the Respondent.

13. The Appellant asserted that the Respondent miscalculated the total withholding tax amount owed by including in its calculation purchases/transactions that were VAT exempt despite the Appellant providing the relevant supporting- documentation at the initial stages.

14. The Appellant further stated that the Respondent grossly erred in its computation of its total purchases for the year 2022 despite being furnished with all the supporting documents including the withholding certificates.

15. The Appellant further asserted that the Respondent maliciously misinterpreted Section 42 A) (D) by imposing a penalty on the variance to the purchases rather than on the VAT on the Appellant’s purchases.

16. That based on the above cited reasons the Appellant averred that the Respondent's actions have no legal justification, are unreasonable and contrary to the Appellant's legitimate expectation and right to fair administration under Article 47 of the Constitution of Kenya.

17. That the Respondent calculated the total Withholding tax owed by deducting declared purchases from general purchases, as stated to be the basis in the objection decision, completely disregarding the principle behind Withholding tax and the supporting documents provided by the Appellant.

18. The Appellant averred that after it carefully analysed and reconciled its accounts the total amount owed to the Respondent is Kshs. 149,217. 20 and which amount it is willing to pay.

19. The Appellant argued that there were glaring irregularities between the periods assessed and the periods indicated as the basis of the said assessments. That the Appellant's Statement of Fact on annexure 1 indicates the assessment period from June 2020 to January 2023 for Kshs. 1,734,607. 00, while the basis of the said assessments on page 2, gives figures from January 2020 to June 2022 for Kshs. 1,613,110. 66.

20. That further errors are observed in the months of September 2022, December 2022 and January 2023 where despite assessments, which amounts are subject to this appeal, the months are not featured in the basis of assessments.

21. That therefore some of the months assessed and the months highlighted as being the basis of the said assessment do not tally, leading to an erroneous computation of the total assessment raised against the Appellant.

22. That without prejudice to the foregoing, it is the Appellant’s position that should it be held that it failed to withhold the VAT as obligated, Section 42A (4C) as read together with 4D, as amended by Finance Act 2017 provides as follows:“(4C)A person who is required under this section to withhold tax commits an offence if the person –a.fails to withhold the whole amount of the tax which should have been withheld; orb.fails to remit the amount of the withheld tax to the Commissioner by the fifth working day after the deduction was made.(4D)A person who commits an offence under subsection 4C is liable on conviction to a penalty of ten percent of the amount involved.”

23. That the Respondent arbitrarily decided that incase of the contravention of 4C above, Section 39A is applicable for penalty purposes. That the Respondent prefers the latter Section, which provides a secondary penalty, as it prefers a higher penalty.

24. That Section 39A provides that;“Penalty for failure to deduct or withhold taxWhere a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner. "

25. The Appellant also submitted that the general rule is that where there is conflict between a general statutory provision and a specific statutory provision, the latter takes precedence.

26. That it is trite that there is no intendment. In cases where the drafters of the law prefer alternatives of penalties, the law indicates, either or the higher of'. That in this case the primary section for Withholding VAT is Section 42A, which also gives the penalty thereof.

27. That the Courts have over time ruled that the rules of interpretation of tax statutes require that a tax statute is read and interpreted strictly. That without prejudice to foregoing, on the face of it, it may appear that Section 39A is a penalizing provision. That as to which provision is applicable to the Appellant, on matters of withholding VAT, is an issue to be determined by the Tribunal.

28. The Appellant further submitted that from the foregoing, the general rule should be applicable. That this is due to the fact that the language employed in Section 42A is clear and leaves no room for misinterpretation.

29. The Appellant further asserted that, the application of Section 42C would not prejudice the Respondent as, there would be no loss of revenue as anticipated under Section 42A(4).

30. The Appellant also contended that it should not be held responsible for the entire VAT withholding amount of Kshs. 1,492,178. 50 but should only be liable for Kshs. 149,217. 85 which represents the 10% penalty for not remitting the 2% withholding VAT in this case, in line with Section 42 (4D).

31. The Appellant in support of its case relied on the authorities of KRA V Waweru and 3 others [Civil appeal E591 of 2021][2022] KECA 1306 (KLR), Tanganyika Mine Workers v The Registrar of Trade Unions [1961] EA 629 and Stanbic Kenya Ltd v KRA [2009] Eklr amongst others.

Appellant’s prayers. 32. The Appellant prayed to the Tribunal for the following orders: -a.That the VAT Withholding assessments for the period of June 2020 to January 2023 be vacatedb.That the Respondent’s objection decision be set asidec.That this Appeal be allowed with costs

The Respondent’s Case 33. The Respondent’s case is premised on the Statement of Facts dated 25th October, 2023 and filed on 26th October 2023.

34. That on 3rd October 2022 the Respondent issued VAT withholding additional assessment for the period 2017 to 2021 and on 4th November 2022 issued a notice of assessment.

35. That the Appellant lodged a late manual objection to the assessments on 16th June, 2023 and the objection was accepted.

36. That the Appellant was requested to provide purchase records, bank statements and sales records and that from a review of the documents, the Respondent noted a variance between the records provided and the iTax declarations of tax.

37. That on 8th August 2023, the Respondent issued its objection decision confirming withholding VAT assessments on grounds that the explanations and records provided to support the objections were not sufficient to explain the variance.

38. The Respondent asserted that the Appellant failed to remit tax withheld as an agent and was therefore in contravention of Section 42A of the Tax Procedures Act.

39. The Respondent submitted that the Appellant was requested to provide purchase records, bank statements and sales records and upon provision of the same the Respondent stated that the said documents were insufficient to support the Appellant’s objection. That the same was communicated to the Appellant via several emails, but the Appellant failed, refused and or neglected to provide sufficient explanations.

40. The Respondent stated that the Appellant failed to discharge its burden of proof to prove that it had remitted all the amounts withheld from its suppliers as required by Section 56 of the Tax Procedures Act.

41. That the Respondent relied on Section 59 (1) of the Tax Procedure Act 2015 which required the Appellant to provide records to enable the Respondent determine its tax liability. That the Respondent was subsequently compelled to reject the Appellant's Objection application because of the failure of the Appellant to avail its records.

42. That the Respondent further relied on the provisions of Section 31(1) of the Tax Procedures Act 2015 which provides as follows: -“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the "original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of an Appellant for a reporting period .... “

Respondent’s prayers. 43. The Respondent prayed to the Tribunal for the following orders: -a.The Respondent’s Objection decision dated 8th August, 2023 be found to be proper and in law and be upheld.b.The Appeal be dismissed with costs to the Respondent as the same lacks merit.

Issue for Determination 44. The Tribunal, having carefully reviewed the pleadings made by the parties and the supporting documentation in its possession is of the view that the following issue falls for its determination: -Whether the Respondent’s Assessment of the Appellant on withholding tax is justified

Analysis and Findings 45. The Tribunal notes that the gist of the instant dispute between the Appellant and the Respondent emanated from the Objection decision dated 8th August 2023, where the Respondent confirmed the tax liability of the Appellant on VAT withholding tax.

46. The Appellant is a VAT withholding agent appointed on 2nd October 2018. The tax in issue in the Appeal is the withholding tax covering the periods January 2020 and May to December 2020, January, February, March and June to December 2021; and January to June 2022 as per the objection decision.

47. The Respondent submitted that it issued the Objection decision after according the Appellant sufficient opportunity to supply the documents in support of its objection.

48. That the documents sought included purchase records, bank statements and sales records and that what the Appellant provided was insufficient to discharge the Appellant’s burden of proof.

49. The Respondent averred that consequently it was compelled to disallow the objection and rely on the available information to confirm the assessments.

50. On its part, the Appellant submitted that it had provided sufficient information and records to the Respondent, and that the objection decision was erroneous. That there was a glaring reconciliation issue on the purchases that were paid in cash and that some of the assessed transactions were VAT exempt and which fact was not considered during the assessment.

51. The Appellant further submitted that it provided the Respondent with the list of all the suppliers involved in the assessed period .

52. The Tribunal noted that the assertion(s) by the Appellant that there were glaring reconciliation issues on the purchases that were paid for in cash and that some of the assessed transactions were VAT exempt were not supported by any documentation.

53. The Tribunal further notes that the Appellant has not annexed sufficient documents to its Statement of Facts to show that the Respondent’s assessments were erroneous. The only documents it has attached comprises of the schedules of the suppliers’ names, invoice numbers, invoice amounts and VAT amounts. The Tribunal notes that these schedules are not primary documents or evidence and are therefore incapable of sufficiently supporting the

Appellant’s case. 54. The Tribunal asserts that many of the averments put forward by the Appellant remain unverified and of no probative value to the Appellant’s case as they have not been supported by any documentation, explanations etc. Averments and schedules do not constitute evidence per se.

55. The law is very clear that in tax matters the burden is always on the Appellant to disprove the Respondent’s assessments and which burden the Appellant failed to discharge. This principle has been held in many decisions as can be seen in the case of Digital Box Limited vs Commissioner of Investigations and Enforcement (2020) eKLR, obligation this Tribunal observed held us follows: -“The question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56(1) of the Tax Procedures Act states that: ‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect’. Section 30 of the Tax Appeals Tribunal Act similarly provides that: In 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; orb.In any other case, that the tax decision should not have been made or should have been made differently.”In this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving as its assessment. Thus, according to the provisions of Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant…the Tribunal is of the view that the Appellant did not discharge its burden proof in showing that the Respondent used extraneous considerations and documents other than those prescribed in the law. The averments made by the Appellant did not amount to evidence.”

56. Once the taxpayer fails to prove its case the Respondent is legally allowed to make the assessments as per the information in its possession as provided for in Section 24 (2) of the Tax Procedures Act which states as follows: -“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”.

57. The Tribunal also considered the provisions of Section 23 of the TPA which provides that its upon the taxpayer to maintain any documents required under the tax law to enable a person’s tax liability to be readily ascertained. The case law has also emphasized the same requirement as was held in the case of Commissioner of Investigations and Enforcement vs Kidero (Income Tax Appeal E028 of 2020 eKLR, where it was stated that:“…the duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self-assessment. This system relies on the taxpayer making full and good faith disclosures in their tax declaration and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer…”

58. The Appellant had also argued that should it be found to have failed to withhold and remit the taxes due to the Respondent, the applicable penalty for the failure is as provided under Section 42A (4C) and (4D) which provide as follows:-“42A (4C)A person who is required under this section to withhold tax commits an offence if the person-a.fails to withhold the whole amount of the tax which should have been withheld; orb.fails to remit the amount of the withheld tax to the Commissioner by the fifth working day after the deduction was made.(4D)A person who commits an offence under subsection 4C is liable on conviction to a penalty of ten percent of the amount involved”.

59. The Appellant therefore argued that it ought to have been punished under Section 42A (4D) above meaning that its supposed to have paid a penalty of ten percent of the amount involved and not be put under the provisions of Section 39A of the TPA.

60. The Tribunal has taken into consideration the provisions of Section 42A (4) which provides as follows:“For the avoidance of doubt, the withholding of tax under subsection (1) shall not relieve the supplier of the obligation to account for tax in accordance with this Act and the regulations”

61. The provisions of Section 42A (4D) connotes a criminal procedure and after the conviction a penalty of ten percent of the amount involved is imposed on the taxpayer.

62. The Tribunal notes that the Respondent therefore had the right to pursue the Appellant under the two provisions of Sections 42A (4D) or 42A (4) TPA read together with Section 39A TPA which provides as follows:“Where a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner."

63. The assessment therefore imposed by the Respondent is legally prescribed and proper.

64. Accordingly, the Tribunal holds that the Appellant having failed to discharge its burden of proof bears the tax liability in issue and its Appeal lacks merit and therefore has to fail.

Final Decision 65. The upshot of the foregoing is that the Appeal fails and the Tribunal proceeds to make the following Orders:-a.This Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 8th August 2023 be and is hereby upheld.c.Each party to bear its own costs.

66. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024. GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERDR. WALTER J. ONGETI - MEMBERGLORIA A. OGAGA - MEMBER