[2024] KETAT 751 (KLR)

Mohegan Limited v Commissioner of Domestic Taxes (Appeal 1358 of 2022) [2024] KETAT 751 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 751 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1358 of 2022

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

May 9, 2024

Between

Mohegan Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated and registered in Kenya under the Companies Act. The Appellant’s principal business activity is running an entertainment establishment.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. 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 Parts 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. In a letter dated 28th December 2020, the Respondent informed the Appellant of variances noted of Ksh 3,033,554. 81 between VAT returns and declared sales. As part of resolving the variance, the Respondent requested for audited accounts and general ledgers for the 2018 to 2019 review period.

4. As a result of the unresolved variances, the Respondent raised additional VAT assessments of Ksh 621,272. 02 on 23rd March 2021. The amount was inclusive of interest and penalties.

5. On 8th March 2022, the Appellant lodged a late objection vide iTax platform which was duly acknowledged by the Respondent on 21st April 2022.

6. The Respondent issued its objection decision dated 14th April 2022 confirming principal VAT assessment of Ksh 485,368. 77.

7. Aggrieved by the Respondent’s objection decision, the Appellant filed its Notice of Appeal dated 10th November 2022 on 11th November 2022 at the Tribunal.

The Appeal 8. The Appeal was premised on the following grounds as laid out in the Memorandum of Appeal dated 10th November 2022 and filed on 11th November 2022 where the Appellant averred;a.That the Respondent erred in its decision to issue the Appellant with an additional assessment in respect of VAT for the period March 2018 and December 2018. The assessment was based on mismatched invoices. The Appellant claimed input invoices as per physical invoices and upon the assessments made obtained and was ready to avail the physical invoices for verification.b.That the Respondent confirmed an additional assessment due to VAT inconsistencies (VAA). The Appellant’s accountant raised an objection.The Appellant was not aware of the confirmed assessment until it received a call from KRA demanding it to pay the taxes.

Appellant’s Case 9. In the Appellant’s Statement of Facts dated 10th November 2022 and filed on 11th November 2022, the Appellant stated that it filed the Statement of Facts based on matters within its knowledge and experience in support of the Memorandum of Appeal by attaching e-return acknowledgement receipts and the Respondent’s assessment orders.

Appellant’s Prayers 10. The Appellant’s prayer to the Tribunal were that the March 2018 and December 2018 VAT additional assessment be vacated in full.

The Respondent’s Case 11. The Respondent’s case is premised on its Statement of Facts dated 5th August 2022 that was filed on 5th December 2022.

12. The Respondent averred that the Appellant had been identified as part of continuous Sector monitoring activities and identification of inconsistencies in taxpayer filed returns. That the Respondent disallowed the direct purchase amount in the Appellant’s Income tax return and instead relied on the invoice value in the determination of VAT payable as the true direct purchase cost.

13. The Respondent averred that following a review of Appellant’s returns, it identified variation between Income tax and VAT turnover following a returns review which entailed analysis of purchases claimed by purchasers and sales declared by suppliers which were run on the Respondent’s iTax system for the months of March and December 2018.

14. That the inconsistency arose as a result of returns filed by the Appellant’s suppliers who had not declared any sales for the period under review and invoices claimed by the Appellant. The inconsistency of the VAT3 returns invoices was relayed to the Appellant to resolve but failed to do so within the stipulated timeframe.

15. The Respondent averred that in light of Appellant’s late notice of objection, which it duly acknowledged, the Respondent demanded for the following documents; delivery notes, purchase invoices, supplier statements and bank statements.

16. The Respondent stated that the Appellant in turn provided physical invoices, ETR receipts and proof of payment; but failed to provide all relevant supporting documents of records and invoices for the period under audit in support of its objection. That as a result, its VAT was estimated as this was the only reasonable basis of assessing the VAT tax and objection decision issued.

17. The Respondent asserted that whereas Section 56(1) of the Tax Procedures Act (hereinafter ‘TPA’) places the onus of proof in tax objections on the taxpayer, the Appellant in the instant Appeal failed to avail evidence that would support a contrary assessment thus the assessments were correctly issued and conformed to the Value Added Tax Act, No. 35 of 2013 (hereinafter ‘VAT Act’).

18. The Respondent averred that even though the Appellant filed all necessary returns and paid what it had assessed itself to be payable, the Appellant was uncooperative in provision of relevant records and failed to respond to request for documents; thus, no relevant records were provided to support its objection necessary in determination of tax liability pursuant to Section 59(1)(a) of the TPA. Additionally, the Respondent failed to provide requested documents in support of its input VAT pursuant to Sections 17(1)(2) and 5(1) of the VAT Act.

19. The Respondent asserted that Section 31(1)(a)(b)(c) of the TPA empowers it to make alterations or additions to original assessments from available information for a reporting period based on the best judgement.

20. It was the Respondent’s assertion that the Appellant did not declare all income earned and that assessment was done based on available information pursuant to Section 24(1) and (2) and Section 29(1) of the TPA which provide as follows;“24(1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.2. 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.29(1)Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as “default assessment”).”

21. The Respondent averred that an examination of the Appellant’s records established that the Appellant earned but did not declare income from export services in the period under audit; additionally, the Appellant carried on business in contravention of Sections 42(1), 43(1) and 93(1) of the TPA.

Respondent’s Prayers 22. The Respondent stated that the Appellant was undeserving of prayers sought and urged the Tribunal to;a.Dismiss the Appeal with costsb.Uphold the objection decision as proper in law and find the tax arrears of Ksh 621,272. 02 as due and payable.

Parties Written Submissions 23. The Appellant did not file written submissions.

24. The Respondent’s written submissions dated 8th June 2023 were filed on 9th June 2023, where the Respondent identified three issues for determination and submitted on the three issues as follows;a.Whether the Respondent took into consideration all additional information availed before making the decision?b.Whether the Respondent erred by raising an assessment for the period of VAT for the year 2018?c.Whether the assessments issued were excessive?

25. It was the Respondent’s assertion that the assessments were correctly issued and conformed to the Income tax Act. The Respondent cited Section 56(1) of the TPA as placing the onus of proof in tax matters upon the Appellant who in the instant Appeal failed to avail evidence to support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

26. Further, the Respondent averred the Appellant failed to adhere to Section 51(3)(b) and (4) of the TPA when lodging its notice of objection as it failed to provide evidence to address issues raised in the assessments which left the Respondent no option but to confirm them vide its objection decision.

27. The Respondent stated that contrary to the Appellant’s assertions, review meetings, site inspection and document verifications were all taken into consideration before issuance of the objection decision.

28. The Respondent averred that examination of Appellant’s records established that the Appellant earned income from importation and sale of bags and cases but failed to declare it contrary to Section 59(1) of the TPA as read together with Section 54(A)(1) of the Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter ‘TPA’) even though the Appellant filed all necessary returns and paid what they had assessed themselves to be payable.

29. It was the Respondent’s assertion that the Appellant carried on business and failed to maintain documents for purposes of taxation contrary to Sections 42(1), 43(1) and 93(1) of the TPA. Further, that the alleged cost expenses made in cash could not be traced to any payments from the bank statements contrary to Section 97 (a)(b)(c) and (d) of the TPA.

30. Moreover, the Respondent insisted that the Appellant was uncooperative in provision of relevant records and failed to respond to request for documents.Thus, the Respondent’s assessment was issued based on the information provided in light of inconsistencies within the Appellant’s VAT ledgers. That to compound this, the Appellant failed to provide signed financial statements and books of accounts as espoused in Section 24(1) and (2) as read with Section 94 and 95 of the TPA.

31. The Respondent stated that the Appellant supplied insufficient documents yet the Respondent had embraced the self-assessment regime through trust and facilitation and only verified information when in doubt.

32. The Respondent cited the following authorities in buffering its position;a.Monaco Engineering Limited v Commissioner Domestic Taxes TAT Appeal No. 67/2017b.Osho Drappers Limited v Commissioner of Domestic Taxes, TAT No. 159 of 2018c.Miao Yi v Commissioner of Investigations & Enforcement TAT No. 441 of 2019d.Rits Enterprises Limited v Commissioner of Investigations & Enforcement TAT No. 227 of 2018e.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya[2021]eKLRf.Janet Kephiphe Ouma and another v Marie Stopes International (Kenya), HCC No. 68 of 2007g.Dyer & DyerLimited v Commissioner of Domestic Taxes TAT 139 of 2020h.Commissioner of Domestic Taxes v Metoxide Limited [2021]

33. The Respondent averred that it was evident there was no error in invalidating the Appellant’s objection and in issuing a decision since the Appellant had failed to discharge its burden of proof and challenge the Respondent’s assessment with unchallenged and contradicted evidence to prove the incorrectness of the tax assessments.

Issues for Determination 34. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions notes that a single issue distils for determination as stated hereunder.

Whether the Respondent’s objection decision dated 14th April 2022 was justified. Analysis and Findings 35. Having identified the aforestated single issue for determination, the Tribunal will now proceed to analyse it as hereunder.

36. The Tribunal notes that the Respondent selected the Appellant for a return review as part of sector monitoring activities and the subsequent variance from the analysis of its VAT returns.

37. The Respondent stated that an in-depth examination of records established that there were inconsistencies in the returns filed by suppliers and invoices claimed by the Appellant resulting in variances between VAT returns filed and Income tax returns filed which was not explained by the Appellant. On its part, the Appellant failed to offer rebuttals to the Respondent’s allegations.

38. The Tribunal further notes that the Respondent issued the assessment based on information provided by the Appellant. The Tribunal observes that Section 31 (1) of the TPA grants the Respondent powers to amend an assessment by making alterations or additions from available information and to its best judgement.

39. Further, the Tribunal notes that the Appellant did not avail or attach any supportive documentation in its pleadings to dispel the Respondent’s assertions. The Tribunal is guided by both Section 30 of Tax Appeal Tribunal Act, No. 40 of 2013 (hereinafter ‘TAT’) and Section 56 (1) of the TPA which place the burden of proof in tax disputes upon the taxpayer who has to demonstrate why a tax assessment is excessive or incorrect. In this regard, the Tribunal reiterates its position as held in the case of 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.”

40. From the foregoing, the Tribunal finds that the Appellant was derelict in its duty as a taxpayer and the Respondent was justified in issuing its objection decision dated 14th April 2022.

Final Decision 41. The upshot of the foregoing 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 14th April 2022 is hereby upheld.c.Each party to bear its own costs.

41. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K NGALA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE - MEMBER