[2023] KETAT 566 (KLR)

Midland Emporium Limited v Commissioner of Domestic Taxes (Tax Appeal 1137 of 2022) [2023] KETAT 566 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 566 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1137 of 2022

E.N Wafula, Chair, D.K Ngala, GA Kashindi & CA Muga, Members

October 13, 2023

Between

Midland Emporium Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya in January 1993 whose principal activity is wholesale and retail of fertilizer, cement, milk and sugar. The said products are imported mostly from Uganda.

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 stated that based on intelligence reports regarding the Appellant’s operations and in pursuant to the provisions of Section 59 of the TPA, it issued a notice dated 17th February 2022 to the Appellant requiring alist of the records to be examined. This was followed up with interviews and verification of documents at the Appellant’s premises.

4. On 11th May 2022 the Respondent issued the Appellant with a notice of audit findings for an amount of Ksh 133,584,899. 00 relating to Corporation tax, VAT and Capital gains tax for the 2017-2020 review period. The Amount assessed was inclusive of penalties and interest.

5. On 13th July 2022, the Respondent issued an assessment of Ksh 69,570,015. 00 vide its notice of assessment for Corporation tax, VAT and Capital gains tax for the 2017 to 2020 review period, the assessment was inclusive of penalties and interest.

6. On 5th August 2022 the Appellant lodged its notice of objection against the Respondent’s assessment.

7. On 22nd August 2022, the Respondent wrote to the Appellant stating that it was unable to proceed in determining the notice of objection as lodged as the Appellant’s objection did not comply with Section 51 of the TPA.

8. The Respondent issued its objection decision on 6th September 2022 confirming the assessment of Ksh 69,570,015. 00 comprising principal tax, interest and penalties in relation to Corporation tax, VAT and capital gains tax.

9. Aggrieved by the Respondent’s objection decision, the Appellant lodged its Notice of Appeal with the Tribunal on 6th October, 2022.

The Appeal 10. The Appeal was premised on the following grounds as set-out in the Appellant’s Memorandum of Appeal dated 6th October 2022 and filed on 7th October 2022;a.That the variances noted between sales declaration for income tax purposes and that declared in the VAT returns was as a result of zero- rated sales and exempt sales which had not been captured in the VAT returns.b.That the Respondent erred in law and fact by claiming that the Appellant did not declare all the imports.c.That the Respondent erred in law and fact by assessing banking variances and failed to consider that the Appellant had an overdraft facility of over Ksh 60,000,000. 00. Additionally, the Appellant alleged that the Respondent did not provide the workings on how it arrived at its figures.d.That the Respondent erred in law and fact by assuming the Appellant sold assets yet it was an error in the Appellant’s book keeping.e.That the assessment was based on estimates and do not reflect the true position of the business. The Appellant alleged that it was not accorded a fair hearing or adequate time to provide all necessary documentation and reconciliations to support its objection.f.That the assessment was humongous, unfair and the amount demanded would greatly affect the Appellant’s business.

Appellant’s Case 11. The Appellant stated as follows in its Statement of Facts dated 6th October 2022 and filed on 7th October 2022:

12. The Appellant averred that the issues identified in the audit by the Respondent related to variances between non-vatable sales, non-declaration of imports and omission of assets from the balance sheet.

13. It was the Appellant’s contention that the assessed amount was humongous, unfair; an amount if demanded would greatly affect the Appellant’s business.

14. The Appellant claimed that the Respondent failed to accord the Appellant adequate time to provide more reconciliation and support documents, the Respondent went ahead to issue an assessment that was based on estimates.

15. The Appellant averred that the matter could be rectified at the objection stage where the Appellant was ready to provide explanations and relevant supporting documents/ evidence that the Respondent might require to conclude the matter amicably.

16. That the Appellant had all relevant reconciliations and support needed to resolve the matter to reflect its true financial position.

17. That the Appellant had been a compliant taxpayer and should be given an opportunity to present its case.

Appellant’s Prayer 18. The Appellant prayed that the Tribunal;a.Allows the Appeal and set aside the Respondent’s objection decision of 6th September 2022. b.That the Tribunal grants more time for the Appellant to provide the information and reconciliations that were not provided during the ADR.

The Respondent’s Case 19. The Respondent replied to the Appeal through its Statement of Facts dated 8th November 2022 and filed on 10th November 2022.

20. The Respondent detailed that it received intelligence reports that the Appellant’s declared sales were not a true reflection of imports since the Appellant was grossly under-declaring its income. That the said reports had indicated that the Appellant had imported goods worth Ksh 977,658,927. 00 between 2016 and 2018.

21. That based on the intelligence reports, the Respondent vide its notice of 17th February 2022 requested the Appellant to avail documents for verification of the Appellant’s operations regarding income tax, VAT and PAYE for the 2016-2021 review period. That the Appellant adduced the documents at its premises whereby the Respondent verified the documents including import entries and conducted interviews on 23rd February 2022, 29th February 2022 and 18th March 2022 at the Appellant’s premises.

22. That consequently, the Respondent obtained import data from its Customs Department and compared the import data declarations made by the Appellant for VAT and Income tax. That this led to the Respondent assessing a tax amount of Ksh 133,584,899. 00 vide its notice of audit findings letter dated 11th May 2022. That this was followed up with additional interviews of the Appellant’s agents on 10th June 2022 and 30th June 2022.

23. The Respondent averred that the Appellant’s directors disputed some of the entries quoted by the Respondent and requested time to verify the same which was granted. That the Appellant availed documents that led to a reviewed notice of assessment of Ksh 69,570,015. 00 dated 13th July 2022.

24. On 22nd August 2022, the Respondent averred that it was unable to proceed in either acknowledging or determining the Appellant’s notice of objection due to non-submission of some crucial documents/information regarding the audit. The Respondent referred the Appellant to Section 51 of the TPA to guide it on how to lodge a valid objection.

25. The Respondent averred that it considered the Appellant’s objection notice alongside documents availed and reviewed the assessment to Ksh 69,570,015. 00 vide its objection decision of 6th September 2022.

26. It was the Respondent’s assertion that it granted the Appellant a fair hearing and several opportunities to avail documentation to support the notice of objection. The Respondent also disputed the allegations as set out in the Appellant’s Memorandum of Appeal and Statement of Facts.

27. The Respondent averred that the Appellant bore the burden of proof to show that an assessment was excessive and/or erroneous; a burden that the Appellant failed to discharge by adducing documentation and reconciliation in support of the objection pursuant to Section 51(3) of the TPA.

28. The Respondent averred that it requested the Appellant severally to avail documentation and that in the absence of documents, the Respondent had no option but to rely on available information in assessing tax liability as laid out by Section 24(2) of the TPA.

29. The Respondent disputed the Appellant’s assertion of zero rated and exempt sales by stating that the Appellant failed to declare VAT on sales leading to the Respondent analyzing them separately and unreconciled sales variances brought to charge. That a similar method was adopted when the Respondent compared the actual imports declared against declared imports and the variances brought to charge for VAT and corporation tax.

30. In an analogous fashion, the Respondent defended its application of the banking test as the best method in yielding correct tax decision. The Respondent averred that it conducted analysis based on available banking information and the same was brought to charge and that the method showing highest tax was used for tax computation.

31. It was the Respondent’s assertion that it opted to charge capital gains tax on the Appellant’s land and buildings after noting that they disappeared from the Appellant’s balance sheet without explanation. That without any supportive documentation on the movement of the said assets, the Respondent deemed them sold and thus brought them to charge for capital gains tax at the standard rate.

Respondent’s Prayer 32. The Respondent prayers to the Tribunal were that;a.The assessment by the Respondent be found due and payable.b.The Appeal be dismissed with costs

Parties Written Submissions 33. The Appellant’s written submissions dated 23rd May 2023 were filed on 26th May 2023. The Appellant blamed its tax agent for the following issues:a.That the tax agent failed to involve the Appellant in ADR proceedings or provide ADR communications despite the frequent follow up by the Appellant.b.That the tax agent failed to provide the Appellant with evidence of communication regarding the Appellant’s Memorandum of Appeal and Statement of Facts as filed including the objection decision.c.The tax agent failed to acknowledge the Respondent’s submissions dated 13th April 2023 and served upon them on 17th April 2023. d.The tax agent failed to attend the mention at the TAT on 17th April 2023.

34. That the Appellant was concerned with its agent’s conduct and being unfamiliar with ADR and TAT procedures chose to appoint a new tax agent. It is the new tax agent who attended the Mention at TAT on 16th May 2023.

35. The Appellant averred that it still wants to pursue the matter through ADR even though the same was denied in the order by the Tribunal for the parties to make and serve upon each other written submissions within seven days of the mention date of 16th May 2023.

36. That despite complying with the Tribunal’s direction on submissions, the Appellant sought the Tribunal’s indulgence in having the matter resolved through ADR within the shortest time possible since the Appellant acknowledged it was misled by its tax agent.

37. The Appellant averred that it attached documentation and workings in its submissions specifically banking test workings and bank statements for the 2019 and 2020 years of income that indicated totally different amounts from those assessed by the Respondent. The Appellant further submitted that the following information was ready for presentation to the Respondent;a.Point of sales analysis for the year 2020. b.An analysis of import entry VAT claims matched against bank VAT payments.c.Confirmation from the bank of all title deeds in existence at end of the year 2017 since the audited financial statements did not pick balances carried forward.

38. It was the Appellant’s contention that the assessment was not proper in law and it legally objected to the same.

39. The Appellant averred that it was led to believe it was receiving adequate representation at the ADR and TAT which was not the case and sought to be allowed by the Tribunal more time to provide information and reconciliations.

40. The Respondent’s submissions dated 13th April 2023 were filed on 14th April 2023. In the submissions, the Respondent addressed two issues as follows;

a. Whether the Respondent’s assessments were justified 41. The Respondent claimed that the assessments were based on variances established between non-vatable sales, non-declaration of imports and omission of land and buildings that were sold.

42. The Respondent stated that Section 24 (2) of the TPA grants it the liberty to make assessments based on information available. That to reinforce its position of altering assessments, the Respondent cited Section 31 of the TPA which provides as follows;“Subject to this section, 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 taxpayer for a reporting period to ensure that;a.In the case of a deficit carried forward the Income Tax Act (Cap 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period.b.In the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.In any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

43. That in compliance to Section 31, the Respondent raised additional VAT assessment based on available information and cited the Court’s holding in Commissioner of Domestic Taxes v Altech Stream (E.A) Limited [2021]eKLR which stated that;“Section 31(1) of the TPA allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.”

44. The Respondent avowed that even though Section 59 of the TPA empower it to seek any information in ascertaining the correct tax liability, the Appellant failed to provide such documentation and information despite repeated requests and time granted to avail the same. In defending this position, the Respondent relied on the court decision in Osho Drappers Limited v Commissioner of Domestic Taxes [2022]eKLR where it was held that:“Section 59 of the TPA empowers the Commissioner to request for more and additional information to satisfy himself on the taxable income declared.”

45. Additionally, the Respondent submitted that the Appellant had a duty to keep records for a period of five years as couched in Section 23 of the TPA.

46. The Respondent averred that the Appellant neither challenged the position held by the Respondent regarding the disappearance of land and buildings from the balance sheet which were deemed sold nor availed documents to ascertain their existence. That additionally, the Appellant failed to avail bank statements to counter the variances established by the Respondent in its banking analysis.

47. It was the Respondent’s assertion that Section 51(3) of the TPA obligates the Appellant to provide all relevant documentation it relied on while lodging its notice of objection. The Respondent relied on the following cases to buffer its position regarding validity of objections lodged by an Appellant;a.Boleyn International Limited vs Commissioner of Investigations & Enforcement (TAT No. 55 of 2019)b.Rongai Tiles and Sanitaryware Limited vs Commissioner of Domestic Taxes (TAT No. 163 of 2017)

48. The Respondent stated that Section 30 of TAT as read together with Section 56(1) of the TPA place the arduous burden of proof in tax disputes upon the Appellant, a burden the Appellant failed to discharge. That as result, the Respondent’s objection decision was justified since it was backed by statute and thus proper.

b. Whether the Appellant was accorded a fair hearing 49. The Respondent averred that it acted at all times fairly and within the law and issued its assessment for taxes that it reasonably believed to be due while granting the Appellant the right to reply.

50. The Respondent averred that it was misleading for the Appellant to purport it was never accorded a fair hearing because the Respondent gave the Appellant the opportunity to adduce evidence in support of its objection and informed the Appellant of the tax decision and its right to appeal the Respondent’s decision. The Respondent asserted that it acted in good faith at all times during its engagement with the Appellant.

51. The Respondent cited Article 47 and Article 50(1) of the Constitution of Kenya as protecting the right to fair administrative action and guaranteeing the Appellant’s right to a fair hearing.

52. It was the Respondent’s assertion that the instant Appeal was not merited as the Appellant’s notice of objection was properly rejected due to the Appellant’s failure to provide proof in support of its objection.

Issue For Detemination 53. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions notes that a single issue distil for the Tribunal’s determination being:-Whether the Objection Decision was justified.

Analysis And Determination 54. Having established the issue for determination, the Tribunal proceeds to analyze the same as hereunder.

55. The Tribunal notes that the Appellant was assessed based on intelligence reports by the Respondent’s agents which was a culmination of meetings, interviews and document verification that was carried out by the Respondent.

56. The Tribunal notes that after the first audit and assessment, the Appellant availed information that led to a downward review of the assessment as issued in the Respondent’s objection decision. The Respondent cited lack of supportive documentation as the major reason why it could not fully accept the Appellant’s notice of objection.

57. The Tribunal notes that Section 30 of TAT Act as read in tandem with Section 56(1) of the TPA places the burden of proof in tax disputes upon the Appellant and can only be discharged upon adducing documentation and information that counters the Respondent’s assertions.

58. The Tribunal is also guided by Section 54A of the Income tax Act as read together with Section 23 of the TPA that require any person or individual carrying out business to maintain proper books that aid the Respondent in ascertaining tax liability. The Tribunal has sighted the Appellant’s own admission that it failed to keep proper records by non-declaration of imports and omission of assets from the balance sheet.

59. The Tribunal did not sight any information or documentation in the Appellant’s bundle of documentation dispelling the Respondent’s assertions apart from the Appellant’s pleading against the assessment. The Tribunal reiterates its position in Faisawema Company Limited vs Commissioner of Domestic Taxes (TAT 326 OF 2022) that;“…the assertions that the Appellant provided documents must be shown at the Tribunal as well.”

60. The Tribunal observes that the Appellant blamed its tax agent on the assessment and/ or communication breakdown that occurred with the Respondent and that it rectified the same by appointing another tax agent. It is the Tribunal’s view that equity aids the vigilant and not the indolent. The Appellant’s burden of proof in tax matters is borne by it alone it is not a shared or transferable obligation. The Tribunal relies on Section 30 of the TAT Act and Section 56(1) of the TPA which are very clear regarding the Appellant’s discharge of tax burden.

61. From the foregoing, it is the Tribunal’s view that the objection decision was justified.

Final Decision 62. The upshot of the foregoing 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 6th September 2022 be and is hereby upheld.c.Each party to bear its own costs.

63. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 13TH DAY OF OCTOBER, 2023ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBERCHRISTINE A. MUGA - MEMBERABDULLAHI M. DIRIYE - MEMBERSPENCER S. OLOLCHIKE - MEMBER