[2023] KETAT 863 (KLR)

Mjengo & General Hardware Ltd v Commissioner of Domestic Taxes (Tax Appeal 1136 of 2022) [2023] KETAT 863 (KLR) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 863 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1136 of 2022

RM Mutuma, Chair, BK Terer, EN Njeru, M Makau & W Ongeti, Members

November 24, 2023

Between

Mjengo & General Hardware Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered under the Companies Act, Kenya. Its major economic engagements are in hardware and related business.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. On 15th December 2021, the Appellant was assessed Kshs. 10,954,728. 00 for Corporation tax for the 2018 year of income and VAT of Kshs. 1,865,253. 00 for the periods July 2017, December 2018, January 2019, March 2019, July 2019, September 2019, November 2019, May 2020, May 2021, July 2021 and September 2021.

4. The assessment was based on a returns review carried out by the Respondent which revealed under-declared VAT sales, overstated/unsupported purchases, double claimed inputs and unsupported salaries and wages expense.

5. On 13th July 2022, the Appellant lodged an objection against the assessment mentioned above and highlighted its grounds of objection.

6. On 26th July 2022, the Appellant was allowed to lodge a notice of objection out of time and was required to provide documentary evidence in support of the substantive objection.

7. The Appellant availed part of the requested information on 1st & 2nd August 2022.

8. The Respondent issued a decision 9th September 2022 partially accepting the objection application.

9. Dissatisfied with the Respondent’s decision the Appellant filed an Appeal on the 7th October 2022.

The Appeal 10. The Appeal is premised on the following grounds as stated in Memorandum of Appeal filed on the 7th October 2022 as follows;a.That the Respondent assessment was excessive and wrongb.That the Respondent did not fairly make its decision dated 9th September 2022. c.That the Commissioner failed to respond to/or address the substantive matter of assessment in the dispute.d.That the Respondent did not consider genuine purchase invoices which were not declared in 2018 VAT and submitted to Respondent’ s office.

Appellant’s Case 11. The Appellant set down the ground of its case vide the Statement of Facts filed on 7th October 2022 as hereunder:

12. The company made purchases amounting to Kshs. 84,329,482. 00 which includes purchases claimed in VAT and purchases not claimed in VAT.

13. The Commissioner disallowed genuine- purchases invoices even after submitting them to Nakuru office.

14. That company has both salaried and casual workers and the Commissioner did not consider the submitted payroll, which clearly indicates not all employees are within PAYE threshold.

Appellant’s Prayers 15. The Appellant prayed to the Tribunal as follows:a.That the Tribunal considers and determines fairly the substantive matter raised by the Appellant and the Respondent ordered to amend accordingly as the Tribunal shall so determine.b.The cost of inclination to the Appeal and cost to the Appeal be awarded to the Appellant.

Respondent’s Case 16. The Respondent premised its case on the herein under filed documents;a.Its Statement of Facts dated 28th October 2022 and filed on 4th November 2022 and;b.its written submissions dated 15th May 2023 and filed on even date as follows:

17. The Respondent refutes each and every allegation by the Appellant in the Memorandum of Appeal and Statement of Facts and further avers as follows:a.The Respondent in response to ground 1 avers that it issued the assessment as per the provisions of Section 31 of the Tax Procedures Act, which allows the Respondent to amend the Appellant's self-assessed returns based on available information and its best judgement.b.The Respondent further avers that as explained to the Appellant the basis of the additional assessments was a returns review exercise conducted by the Respondent which revealed under declared VAT sales over- claimed inputs and over-statement of purchases and salaries and wages expense as shown below;

i. Under- declared VAT sales 18. The Respondent established that the Appellant had under-declared its VAT sales as determined from the variance of turnover between its Income tax and the VAT returns. The variance was treated as under-declared VAT sales and charged VAT as tabulated below:Details 2018(KSHS)

Turnover as per Income Tax returns 86,763,195

Turnover as per VAT3s 79,625,389

Variance 7,137,806

VAT@16% 1,142,048. 96

ii. Over-statement of Purchases 19. The purchases variance between the Appellant's Income tax and VAT returns (overstatement of purchases cost in the Income Tax returns) for the Year 2018 was disallowed/charged corporation tax @ 30 % as follows:Details 2018 (Kshs)

Purchases as per IT2C 84,329,482

Purchases as perVAT3S 49,263,722

Variance 35,065,760

Corporation Tax @30% 10,519,728

iii. Overclaimed Salaries and wages Expenses 20. The Salaries & wages expense claimed in the Income tax returns were more than those declared in the PAYE returns for the period 2018. The Over-claimed Salaries were disallowed and charged corporation tax as follows;Details 2018 (KSHS)

Salaries and wages as per Income tax Returns 2,250,000

Salaries and wages as per PAYE returns 800,000

Variance 1,450,000

Corporation tax @ 30 % 435,000

iv. Double Claims of input tax 21. The Respondent established that the Appellant claimed inputs more than once in various periods covering July 2016 to September 2021. The double claimed inputs totaling Kshs. 723,203. 73 were disallowed.

22. The Respondent in response to ground 2 avers that it fairly made its decision after allowing the Appellant to avail its evidence and after the exchange of various correspondences. The Respondent via its objection decision dated 9th September 2022 communicated its decision on the substantive objections.

23. The Respondent in further response avers that in the course of review of the Appellant's objection application, the Appellant agreed to the VAT assessments save for the month of May 2020 in which the Appellant indicated that one of the disallowed invoices had not been claimed twice. The Respondent agreed with the Appellant with respect to this invoice thereby amending the May 2020 assessment partially.

24. In response to ground 4, the Respondent avers that whereas the Appellant provided purchases schedules and a reconciliation of the assessed purchases variance in support of the 2018 corporation tax objection application, the Respondent noted a number of inconsistencies in the Appellant's reconciliations, hence could not be relied upon. For instance, the Respondent observed that some of the invoices listed under the unclaimed purchases schedule were found to have been claimed in the Appellant's VAT returns.

25. That whilst the Appellant provided a copy of the payroll in support of the disallowed salaries and wages expenses, evidence of payment of the disallowed salaries and wages expense was not provided, hence the Appellant failed to support the allowability of the said expense. Thus, the Respondent proceeded to confirm the Corporation tax assessment as the Appellant failed to discharge the required proof that the disallowed purchases/expenses were wholly and exclusively incurred in earning the declared turnover for the 2018 year of income.

26. The Appellant thus failed to meet the burden of proof contrary to Section 56 (1) of the TPA which provides that in any proceedings, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

27. The Respondent elicits the following issues for determination;a.Whether the tax assessment raised by the Respondent were proper in law.b.Whether the Respondent failed to consider the documentation provided by the Appellant.

28. The Respondent proceeded to submit on the issues as herein under;

a. On whether the tax assessment raised by the Respondent were proper in law. 29. The Respondent submits that the Respondent issued the assessment as per the provisions of Section 31 of the Tax Procedures Act, which allows the Respondent to amend the Appellant's self-assessed returns based on available information and its best judgement.

30. That the assessment was issued based on under-declared VAT sales (December 2018 VAT assessment), double claimed purchases/input tax (for the July 2016, December 2018, January 2019, March 2019, July 2019, September 2019, November 2019, May 2020, August 2020, November 2020, May 2021, July 2021 & September 2021 assessments), over-stated purchases/variance between purchases claimed in the income tax returns and those claimed in the corresponding VAT returns for 2018 year of income as well as variance between salaries and wages expense claimed in the 2018 income tax returns and the gross remuneration declared in the corresponding PAYE returns (charged corporation tax in 2018).

31. That in the course of review of the Appellant's objection application, the Appellant agreed to the VAT assessments save for the month of May 2020 in which the Appellant indicated that one of the disallowed invoices had not been claimed twice. The Respondent agreed with the Appellant with respect to this invoice thereby amending the May 2020 assessment partially.

32. That whereas the Appellant provided purchases schedules and a reconciliation of the assessed purchases variance in support of the 2018 Corporation tax objection application, the Respondent noted a number of inconsistencies in the Appellant's reconciliations, hence could not be relied upon. For instance, the Respondent observed that some of the invoices listed under the unclaimed purchases schedule were found to have been claimed in the Appellant's VAT returns.

33. That whilst the Appellant provided a copy of the payroll in support of the disallowed salaries and wages expenses, evidence of payment of the disallowed salaries and wages expense was not provided, hence the Appellant failed to support the allowability of the said expense. Thus, the Respondent proceeded to confirm the Corporation tax assessment as the Appellant failed to discharge the required proof that the disallowed purchases/ expenses were wholly and exclusively incurred in earning the declared turnover for the 2018 year of income.

34. The Respondent places reliance to the case of Boleyn International Limited vs. Commissioner of Domestic Taxes, as rightly quoted in Digital Box Limited vs. Commissioner of Investigations and Enforcement [2020], it was held:-“... on 8th March 2018, the Appellant lodged an objection with the Respondent. However, the said objection did not reiterate the grounds of objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide the relevant documents in support of its alleged objection. Therefore, there was no conceivable way the Respondent would have considered the Appellant's objection as the same did not place itself within the parameters of Section 51 (3) of the Tax Procedures Act."

35. The Respondent further relies on the judgment of this Honorable Tribunal in TAT No. 70 of 2017, Afya X-ray Centre Limited vs. Commissioner of Domestic Taxes in which it was held that:“From then foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be done. Accordingly, 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..."

36. Further, the Respondent pursuant to Section 24 (2) of the Tax Procedures Act is not bound by a tax return or information provided by, or on behalf of, a taxpayer and may assess a taxpayer's liability using any information available to him. In that regard, the Appellant failed to produce further supporting documents that had been requested by the Respondent.

37. What constitutes the Commissioner's best judgment was dealt with extensively in The Commissioner for her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid Appellant vs. the Commissioners for Her Majesty's Respondents Revenue & Customs at paragraph 29 therein where the Tribunal set out the following requirements for a decision to be to the best of HMRC's judgment as follows: -''...the very use of the word Judgment' makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them...Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there its no material at all it would be impossible to form a judgment as to what tax is due.Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words 'best of their judgment' does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations. What the words 'best of their judgment' envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."

b) Whether the Respondent failed to consider the documentation provided by the Appellant. 38. The Respondent states that it requested the Appellant to provide evidence of payment of the disallowed salaries and wages expense but the same was not provided.

39. That Section 23 (1) of the Tax Procedures Act requires the Appellant to keep records which enable the Respondent assess its tax liability. The provision states that;“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; andc.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.”

40. The Respondent relies on the provisions of Section 59 of the Tax Procedures Act on the production of documents which provides that;“(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-a.produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

41. The Respondent referred the Tribunal to the decision in Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR where the court 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 tax payer"

42. In Pearson vs. Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited vs. Kenya Revenue Authority (2013) eKLR to the extent that: -“where there is an assessment made by the Additional Commissioner upon the Appellant; it is perfectly settled by cases such as Norman Vs. Galder 267C 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs." “57. ........the Appellant in the present appeal has manifestly failed to discharge such an onerous burden of proof placed squarely on it.”

43. In Primarosa Flowers Limited vs. Commissioner of Domestic Taxes (2019) eKLR, the Hon. Makau J. whilst making reference to the Australian case of Mulherin vs. Commissioner of Taxation [2013] FCAFC 115 held that: -“......the onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence which demonstrates that the taxable income on which tax ought to have been levied "

44. From the foregoing, the Respondent submits the Appeal herein is devoid of any merits.

45. The Respondent maintains that the taxes outlined in the assessment and the decision were in conformity with the provisions of the various tax laws and the same should be upheld.

Respondent’s Prayersa.The Respondent prays that the Tribunal the Respondent's Objection decision dated 9th September 2022 be upheld.b.Dismisses the Appeal as the same lacks meritc.The instant Appeal be dismissed with costs

Issues For Determination 46. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions from the Respondent puts forth the following issue for determination:a.Whether the Appellant has demonstrated that the Respondent’s Objection Decision dated 9th September 2022 is incorrect.

Analysis And Findings 47. The Tribunal observed that in the Objection decision addressed four areas of assessments;i.Under declared VAT salesii.Overstatement of purchasesiii.Overclaimed salaries and wages expensesiv.Double claims in input tax

48. The Appellant in its pleadings only addressed items (ii) & (iii). The Tribunal therefore, concludes the Appellant conceded on the items (i) & (iv), and will proceed to canvass on the only issues under contention.

49. In regards to overstated purchases, the Appellant alleged that the assessment was excessive and wrong, that the Objection decision is not fair, the Commissioner failed to respond to or address the substantive matters of assessment in the dispute and that the Respondent did not consider genuine purchase invoices which were not declared in 2018 VAT.

50. The Respondent in response to this argued that it fairly made its decision after allowing the Appellant to avail its evidence and after the exchange of various correspondences.

51. The Tribunal has reviewed the documents presented by the Appellant in support of its position and found that the Appellant availed its audited financial statements for the year ended 31st December 2018, those financial reports, without source documents including invoices, were not sufficient for the Tribunal to determine whether the Respondent’s decision to disallow the purchase invoices was justified.

52. The Tribunal emphasizes that the Appellant has the burden to substantiate its allegations as has been stipulated under Section 56 (1) of the Tax Procedures Act 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.’’

53. The Tribunal concludes that, the Appellant having failed to provide the necessary documents and information to validate its objection, the Respondent was justified in confirming the assessment on the disallowed purchase invoices.

54. In regards to the issues of overstated salaries and wages expense, then Respondent acknowledged that the Appellant provided a copy of the payroll in support of the disallowed salaries and wages expenses, however, the Respondent further stated that the evidence of payment of the disallowed salaries and wages expense was not provided, hence the Appellant failed to support the allowability of the said expense.

55. The Tribunal has had the opportunity to peruse the payroll provided by the Appellant and noted that this payroll contained a register of names of the employees, the days worked, the amounts payable, the deductions made, the net amount paid and the employees’ signatures.

56. Whilst the Respondent is at liberty to request for documents form the Appellant to prove expenses for the purposes of allowability, the request ought to be specific, the Tribunal observes that the Respondent did make any specific request for proof of payment of the salaries, save in stating so in its Objection decision.

57. Additionally, as far as the proof of an allowability of an expense extends, the taxpayer ought to demonstrate that the expense was incurred wholly and exclusively in the production of the income and not the proof of payment. In the instance case, the Appellant demonstrated that it incurred the expense by providing the signed payroll.

58. The Tribunal cites the Court of Appeal holding In Mbuthia Macharia vs. Annah Mutua Ndwiga & another Civil Appeal No. 297 of 2015 [2017] eKLR, the Court of Appeal when dealing with the issue of burden of proof observed as follows;“The legal burden is discharged by way of evidence, with the opposing party having a corresponding duty of adducing evidence in rebuttal. This constitutes evidential burden. Therefore, while both the legal and evidential burdens initially rested upon the Appellant, the evidential burden may shift in the course of trial, depending on the evidence adduced. As the weight of evidence given by either side during the trial varies, so will the evidential burden shift to the party who would fail without further evidence”

59. Consequently, on the account of salaries and wages, the Tribunal finds that the Appellant discharged its burden of proof having provided the muster roll detailing, the name, daily attendance, gross pay other statutory deduction and signatory of the recipient.

Final Decision 60. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal partially succeeds and orders as follows:a.The Respondent’s Objection decision issued on the 9th September 2022 is varied on the following terms;i.The assessment on under-declared VAT sales, overstatement of purchases and double claims in input tax be and are hereby upheld.ii.The assessment on overclaimed salaries and wages expenses be and are hereby set aside; andb.Each party to bear its own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023ROBERT MUTUMA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERDR WALTER ONGETI - MEMBER