[2024] KETAT 746 (KLR)

Mount Kenya Breweries Limited v Commissioner of Investigation & Enforcement (Tax Appeal E111 of 2023) [2024] KETAT 746 (KLR) (24 May 2024) (Judgment)

Neutral citation: [2024] KETAT 746 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E111 of 2023

E.N Wafula, Chair, E Ng'ang'a, AK Kiprotich, EN Njeru & M Makau, Members

May 24, 2024

Between

Mount Kenya Breweries Limited

Appellant

and

Commissioner of Investigation & Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya under the Companies Act. Its principal business is the manufacture of alcoholic beverages branded Blue vodka, Chivalry brandy, Yala beer and Sparkler spirits.

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 collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning 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 to assess, collect and account for all revenues under those laws.

3. On 29th March 2022, the Appellant received a letter from the Respondent captioned “Tax Investigations” years 2015 to 2019.

4. On 19th October 2022, the Respondent shared via email a letter titled “Tax Investigations findings – years 2015-2021”

5. On 18th November May 2022, the Respondent issued additional tax assessments in respect of Excise tax, VAT and Income tax for a sum total of Kshs. 4,926,243,030 (inclusive of penalties and interest).

6. On 17th December 2022, the Appellant filed objections against the additional tax assessment via the iTax platform.

7. On 31st December 2022, the Appellant responded to the Respondent’s letter contesting the basis of the invalidation of the objection.

8. On 15th February 2023, the Respondent via email issued an Objection decision rejecting the objections and confirming the additional tax assessment in entirety.

9. Being aggrieved with the Respondent's decision, the Appellant filed an appeal at the Tribunal on 29th March, 2023.

The Appeal 10. The Appellant’s Memorandum of Appeal which was dated and filed on 29th March 2023 was premised on the following grounds:a.That the Respondent erred in law and fact in raising additional Excise tax assessments of Section 29(5) of the Tax Procedures Act 2015. Given that the notice of additional excise respect of tax periods prior to November 2017 are ultra vires for want of legal backing.b.That the Respondent erred in law and fact by issuing additional Excise tax assessments pertaining to tax periods where similar additional assessments had been issued and the matter challenged at the TaxAppeals Tribunal via TAT Appeal Number 591 of 2021, Mount Kenya Breweries Limited Versus the Commissioner of Domestic Taxes.c.That the Respondent erred in law and fact in alleging that the Appellant was engaged in tax evasion without presenting any proof to back up such wild claims. The claim of tax evasion by the Respondent is untrue and unfounded since the Appellant was in full compliance with VAT obligations as declared in self-assessments filed with the Respondent for all the tax periods in dispute including the tax periods falling outside the statutory five-year time frame.d.That the Respondent erred in fact in issuing the additional VAT assessments based on exaggerated ethanol purchases for the tax periods in dispute. The Respondent merely imposed the purchase volumes on the Appellant as stated in its letter dated 19th October 2022 titled "Tax Investigation Findings," without offering any proof to substantiate the enormous purchases of ethanol as claimed.e.That the Respondent erred in fact by issuing additional VAT assessments for a tax period when the Appellant had already ceased production. The Respondent sealed and closed the Appellant’s factory premises on 9th April 2021 and the Appellant has since not undertaken any production. In this regard, the additional VAT assessment raised by the Respondent for the tax period December 2021 is thus incorrect and frivolous.f.That the Respondent erred in law and fact by failing and/or ignoring to appreciate the self-assessment declarations made by the Appellant via the iTax platform, whereof these declarations are readily accessible from the iTax system database. The Respondent's action of disregarding the information within its custody culminating into the erroneous and irregular additional VAT assessments is not only oppressive and unduly burdensome but also unnecessarily expensive since the burden of accessing such information via the iTax platform is substantially the same or less for the Respondent as it is for the Appellant.

Appellant’s Case 11. The Appellant’s case was premised on its-a.Statement of Facts dated 28th March 2023 and filed on the 29th March 2023b.Appellant’s written submissions dated and filed on 18th September 2023.

12. That Appellant averred that the Respondent issued additional Excise tax assessments by ignoring the fact that the Appellant suffered huge losses occasioned by a raging fire incident that occurred on 10th March 2017 gutting down huge quantities of excercisable finished goods and raw materials, as well as other business assets. Based on the quantity the insurer deemed to be verifiable in accordance with the terms and conditions of the insurance policy cover, the loss caused by the fire was put at 70,000 litres for insurance compensation purposes. That this is despite the fact that the total amount of final excisable products lost as a result of the fire was substantially higher than the estimate made by the insurer. In addition, the store's entire inventory of hundreds of thousands of stamps was burned down.

13. The Appellant claimed that it suffered massive losses arising from contaminated finished excisable products produced during the tax periods in dispute, thus necessitating their destruction. In other instances, finished products already sold were returned due to contamination necessitating their destruction and/or reprocessing of the same. That more than 46,000 litres of finished excisable products were either destroyed or reprocessed during the tax periods in dispute.

14. The Appellant stated that during the tax periods in dispute, a significant amount of broken/cracked bottles and caps with excise stamps already attached were destroyed. Typically, bottles frequently break and/or crack both during production and during delivery of final excisable products to various customers' locations.

15. The Appellant further stated that during the tax periods in dispute, the Appellant particularly experienced excessive breakages from frequent machine glitches attributable to reduced efficiency and effectiveness due to many years of usage. As a result, during the tax periods in dispute and up until the Respondent's decision to close the Appellant's factory, the use of old equipment with the associated glitches seriously reduced production efficiency.

16. The Appellant averred that the spillages occurred during production process partly due to delay between the time the packaged bottle was released and the arrival of the next bottle for packing, as well as due to inefficiencies brought on by the use of antiquated equipment. That in addition, leakages of the finished products occurred as a result of incorrect capping or faults on the caps. That on average, the losses occasioned by spillages and leakages were in the range of 10% to 20%.

17. The Appellant posited that in 2018, the minimum packaging of alcoholic drinks was raised to 250 millilitres. That the company was hitherto packaging drinks in bottles with capacity of 205 millilitres. Owing to this change, the products already produced and packaged in 205 millilitres alongside the excise stamps and caps already affixed thereon, had to be destroyed. That in addition, new legislation mandated that the market participants alter the kind of bottles used for finished goods packaging. As a result, all of the caps that had been previously purchased became redundant and were destroyed.

18. The Appellant averred that on 9th April 2021, the Respondent's representatives without any notice or pre information entered the Appellant's premises and conducted a search after which it claimed to have discovered approximately 16,600 bottles of its product purportedly affixed with unverified excise stamps together with a reel of purported non-genuine excise stamps.

19. The Appellant stated that the search exercise was conducted unilaterally and forcibly with the aid of more than twenty (20) other persons who were armed and who claimed to be members of the National Police Service. The Respondent’s representative unlocked and unsealed the factory and moved freely within the premises without involving the proprietors or members of staff.

20. The Appellant further stated that the Respondent put the Appellant's factory under seal and a notice of summon was issued to appear before the Respondent in person on the 14th April 2021, at the Respondent's premises located at Times Tower on the 17th Floor.

21. The Appellant averred that on 14th April 2021, the Appellant appeared before the Respondent alongside tax agents, pursuant to the summon that during the meeting, the Respondent handed in a notice dated 12th April 2021 to the Appellant on the intention to suspend Appellant's excise licence.

22. The Appellant posited that by a letter dated 20th April 2021, the Appellant submitted a response to the issues raised in the Respondent's notice dated 12th April 2021 to dispel the Respondent’s intention to suspend its excise licence.

23. The Appellant stated that by a letter dated 26th May 2021, the Respondent suspended the Appellant's excise license and ordered the Appellant to cease manufacturing of all excisable goods.

24. The Appellant claimed that by a letter dated 6th April 2021 captioned "Demand Notice for Tax in Arrears" and received by the Appellant on 10th May 2021, the Respondent demanded for payment of taxes amounting to KES 934,816,934 (inclusive of penalties and interest).

25. The Appellant further claimed that on 9th June 2021, the Appellant submitted a detailed response to the demand notice and that between 7th June 2021 and 18th June 2021 (both dates included), the Respondent issued additional tax assessments in respect of Excise duty, VAT and Corporate income tax amounting to Kshs 705,073,664. 00 (inclusive of penalties and interest).

26. The Appellant further stated that on 6th July 2021, the Appellant lodged objections against the additional tax assessments via the iTax platform whereof the grounds of objection were clearly outlined in a cover letter dated 6th July 2021 and uploaded on the iTax system. That the aforementioned letter of objection alongside the objection acknowledgement notices issued via the Respondent's iTax platform were also shared with the Respondent via email on the 6th July 2021.

27. The Appellant averred that on 6th September 2021, the Respondent rendered its objection decision, via letter a dated 2nd September 2021 partially allowing the Objection(s) lodged.

28. The Appellant further stated that on 10th September 2021, the Respondent shared a fresh objection decision via email and directed the Appellant to ignore the objection decision earlier shared via email on the 6th September 2021 and confirmed an additional assessment summing up to Kshs 537,034,552. 46 whereof the assessments did not make a distinction between the principal tax and the penalties and the interest.

29. The Appellant posited that on 29th October 2021, the Appellant obtained conservatory orders following application at the High Court Petition No.E172 of 2021, Mount Kenya Breweries Limited v Kenya Revenue Authority, whereof the following orders were, inter-alia, issued:i.A conservatory order restraining the Respondent from continuing to lock, seal the outer doors or in any way deny or limit the access to the Appellant’s manufacturing premisesii.The Respondent was ordered to reinstate the Appellant’s excise licence and facilitate the resumption of normal business operations at the Appellant’s factory by resuming the issuance of excise stamps for production and unsealing the manufacturing premises.

30. The Appellant stated that the Respondent ignored the established procedure under the Tax Procedures Act 2015 in addressing a matter that has already been adjudicated and decided by this Honourable Tribunal by issuing fresh additional tax assessments immediately following the High Court decision as required under Section 53 of the Tax Procedures Act 2015, if dissatisfied with the decision.

31. The Appellant stated that the Respondent raised additional tax assessments for tax periods falling outside the Tax Procedures Act 2015. That given that the additional tax assessments were issued periods prior to November 2017 and additional tax assessments made in respect of Corporate income tax for tax years prior to 2017 are ultra vires for want of legal backing.

32. The Appellant averred that additional tax assessments issued for tax periods falling after 9th April 2021 are incorrect and frivolous given that the Appellant's factory was put under seal on the aforementioned date and the Appellant has since not undertaken any production.

33. The Appellant further stated that additional tax assessments in respect of Excise duty, VAT and Income tax have ostensibly been based on imagined, erroneous and excessive quantities of production and deliveries for the Excise tax obligation, and erroneous and excessive value of sales for VAT and Income tax obligation.

34. The Appellant posited that the basis applied in raising the additional tax assessments ignored material facts regarding chargeability of tax under the three tax heads: Excise tax, VAT and Income tax, thus resulting to the erroneous colossal amounts raised in additional assessments:-a.The additional Excise assessments were issued in complete disregard of the legal basis upon which excise liability is determined. Excise should be determined on the basis of the actual quantities produced and delivered.b.The additional assessments in respect of VAT and Income tax were issued in complete disregard of the basis upon which sales value is determined. The sales value should be determined on the basis of the actual quantities sold.

35. The Appellant averred that on 18th November 2022, the Respondent issued additional tax assessments in 17th November 2022 for sum total of tax of Kshs 4,926,243,030. 00 (inclusive of penalties and interest).

36. The Appellant claimed that the additional tax assessments issued in respect of Excise tax, VAT and Income tax were based on incorrect and inaccurate ethanol purchase volumes. The Respondent made unconfirmed claims that the Appellant had purchased massive volumes of ethanol without offering any proof to substantiate the purported substantial ethanol purchases.

37. The Appellant prayed that the Respondent's additional tax assessments be set aside as the findings and conclusions reached by the Respondent are not supported by law and in fact.

Appellant’s Prayers 38. The Appellant's prayers to this Tribunal are for the following orders:a.The decision by the Respondent to demand for additional Excise tax, VAT and Income tax vide additional assessment orders as confirmed via Objection decision letter dated 15th February 2023 be struck out in entirety.b.The Respondent's action to demand additional Excise tax, VAT and Income tax for tax periods falling outside the statutory five-year time limit contrary to the provision of Section 29(5) of the Tax Procedures Act 2015 be declared arbitrary, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant.c.The Respondent's action to demand additional Excise tax, VAT and Income tx based on deemed ethanol purchases without presenting any proof to back up such claims be declared arbitrary, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant.d.The Respondent's action to demand additional Excise tax, VAT and Income tax based on deemed ethanol purchases while conveniently ignoring the purchase cost, the Excise tax rebates and input VAT that would, in the normal course of business, be associated to such purchases be declared arbitrary, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant.e.The Respondent's action to demand additional Excise tax, VAT and Income tax relating unreasonable, unfair and contrary to the administration of justice and legitimate expectations of the Appellant.f.The Respondent, its employees, agents or other person purporting to act on its behalf be barred from demanding or taking any further steps towards enforcement or recovery of principal tax, penalties and interest on the Respondent's demand as stipulated above.g.The costs of this Appeal; andh.Any other remedies this Honorable Tribunal deems just and reasonable.

Respondent’s Case 39. The Respondent opposed this Appeal while relying on its:a.Statement of Facts dated and filed on 27th April 2023. b.Written Submissions dated and filed on the 23rd October 2023.

40. The Respondent averred that on or about 23rd December, 2020 the Respondent received intelligence that the Appellant and its directors could be involved in a tax evasion scheme through under-declaration of purchases and sales volumes.

41. The Respondent stated that investigations covered the period between January 2015 to December 2021 for Excise duty, Corporation tax and Value Added Tax (VAT).

42. The Respondent averred that investigations carried out sought to establish the following:-i.To establish/identify the correct taxable income;ii.To identify the tax evasion scheme used to evade taxes;iii.To identify culpable tax offences; andiv.To compute additional taxes arising from underdeclared taxable income.

43. The Respondent stated that in carrying out the investigations, the Respondent sought and considered information and documents including the following:-i.Appellant's filed tax returns for the period under review;ii.Excise stamps reconciliation analysis (Physical and EGMS);iii.Bank statements from various bank accounts belonging to the Appellant and its directors to establish taxable income through the banking analysis test;iv.Analysis of raw materials such as ethanol, caps, bottles, labels purchased by the taxpayer;v.EGMS records; andvi.Third party records from suppliers of the Appellant.

44. The Respondent stated that on Corporation tax the Appellant had filed tax returns for the period under review. That further, the team noted that the taxpayer had been filing nil returns before amending to include financial data i.e. for the years 2017-2020. During these years, the taxpayer made losses as a result of investment allowances claimed relating to capital investment.

45. The Respondent claimed that on Value Added Tax the Appellant had filed returns for the period under review albeit late and more particularly after the intervention by the Domestic Taxes Department.

46. The Respondent opined that on Excise duty the Appellant has been filing returns consistently for the period under review and made payments of the taxes due save for the year 2017.

47. The Respondent averred that in conducting the tax investigations, the Respondent adopted the input-output analysis. The Respondent obtained ethanol data purchases from the Appellant’s local suppliers such as Agro-Chemicals Limited, Kibos Limited and Mumias Sugar Company Limited as well as import data. The team also made reconciliations from the declarations made by its suppliers in Jaspersoft software and on itax.

48. The Respondent stated that from the analysis it established that the Appellant had procured 6,633,911 litres of ethanol and flowing from the analysis of the ethanol procured, the Respondent proceeded to compute the equivalent production at the standard rate 96/40 for spirits considering that it was the dominant SKU in order to establish the equivalent production in litres of 13,521,387 litres.

49. The Respondent stated that the established equivalent production was then compared with the production declarations in the Excise returns in order to determine if there were any production under-declarations.

50. The Respondent claimed that it had established that the Appellant had underdeclared its production by 9,683,280 litres. That from the established variance, the Respondent proceeded to calculate the taxes payable ie Excise duty, VAT and Corporation taxes and preliminary investigation findings were shared with the taxpayer vide a letter dated 19th October 2022.

51. The Respondent claimed that upon being served with the preliminary findings of the investigations, the Appellant failed to respond to the findings and in that regard, the Commissioner proceeded to issue assessments vide a letter dated 17th November 2022.

52. The Respondent stated that during the assessment stage, the Commissioner further obtained and analysed data from the Jaspersoft software and noted that there was duplication of invoices more particularly from Mumias Sugar Company Limited for the years 2018 and 2020 and thus made adjustments to remove the double invoices in a clean up exercise to reflect the correct position of the expected sales by the Appellant.

53. The Respondent further claimed that upon making adjustments for the volumes of ethanol purchased from Mumias Sugar Company Limited, the Commissioner recomputed the taxes as earlier elaborated in the preliminary findings there being no other adjustments and came to the summary of taxes.

54. The Respondent stated that upon reviewing the objection by the taxpayer, the Commissioner made a determination vide a letter dated 23rd December,2022 that the objection lodged was not valid for failing to adhere to the provisions of Section 51(3) of the Tax Procedures Act,2015.

55. That upon reviewing the validated objection, the Respondent noted on the question of the five-year limitation, the Appellant had fraudulently under declared purchases and thus lowering its tax liability and thus upholding the decision to make assessments beyond the five-year limitation.

56. That on closure of the Appellant's premises, the Respondent noted that no evidence was provided to support the assertion i.e. closure order and thus the Appellant's burden of proof had not been discharged.

57. That lastly, on the challenge on the basis of the tax assessments, the Respondent noted that the method used was sound and that the Appellant had not provided any evidence to support allegation of breakages or loss as a result of a fire incident and therefore no adjustments could be made.

58. The Respondent therefore proceeded to confirm the principal taxes of Kshs.2,792,321,549. 00 which is the subject of this Appeal.

59. That the Appellant herein, in line with the principles of the Fair Administrative Action Act,2015 and the Tax Procedures Act, 2015,was served with a notice of tax investigations dated 23rd December,2020 putting the Appellant on notice of the ongoing tax investigations and the options available to it relating to disclosure and resolution of outstanding issues.

60. That in a further letter dated 29th March,2022,the Commissioner wrote to the taxpayer requiring the production of documents necessary for the conclusion of the investigations i.e.inventory of finished products,ethanol,caps,bottles and excise stamps.The taxpayer was also required to furnish the Commissioner with a signed audited accounts and stock ledgers.

61. That in response to the foregoing letters, the Appellant wrote back to the Commissioner vide a letter dated 20th April, 2022 acknowledging the ongoing investigations, and made reference to an ongoing appeal before the TAT to wit TAT Appeal No. 591 of 2021- Mount Kenya Breweries Limited v The Commissioner of Domestic Taxes.

62. That in rebutting these allegations, the Commissioner wrote back to the Appellant vide a letter dated 12th May, 2022 informing the Appellant through its tax consultant that the investigations undertaken by the Domestic Taxes Department (which are compliance checks) were distinct from those by the Commissioner, Investigations and Enforcement and that reconciliations would be made in the final assessments to avoid duplicity. The Appellant was also reminded to supply the documents requested by the Commissioner vide letter dated 29th March, 2022.

63. That thereafter, the Appellant was then served with initial preliminary findings on 19th October 2022 with a tax liability of Kshs. 2,782,492,674. 00 being Kshs.1,391,412,774. 00 for excise duty, Kshs. 542,868,967. 00 for VAT and Kshs.848,210,392. 00 or Corporation tax.

64. That the Appellant did not respond to the notice of preliminary findings and this the Commissioner proceeded to issue tax assessments on 17th November,2022 with a tax liability of Kshs.1,458,351,466. 00 for Excise duty, Kshs.574,942,988. 00 and Kshs. 759,027,095. 00 for Corporation tax. This translated to a cumulative tax liability of Kshs. 4,926,243,030. 00 inclusive of interest and penalty.

65. That the Appellant aggrieved by the assessments, issued a notice of objection on 17th December, 2022 objecting to the tax assessments.

66. That upon reviewing the Appellant's objection, the Respondent vide a letter dated 23rd December,2022 communicated to the Appellant that its objection had been declared invalid for failure to adhere to the provisions of Section 51(3) of the Tax Procedures Act,2015 and therefore asked to validate it.

67. That the Appellant thereon validated the objection vide a letter dated 31t December,2022 as earlier advised by the Commissioner.

68. That the Respondent proceeded to consider the objection and on 15th February,2023, proceeded to render an objection decision confirming a tax liability of Kshs.2,792,321,549. 00 that is now the subject of the present appeal.

Respondent’s Prayer 69. The Respondent’s prayed to this Tribunal for orders that:a.The Respondent’s confirmation of assessment be upheldb.The taxes due and unpaid together with interest thereon be paid to the Respondent oral and written evidences during the hearing of the Appeal.c.That this Appeal be dismissedd.That the Appellant be compelled to pay costs to the Respondent.

Issues for Determination 70. The Tribunal having carefully considered the pleadings filed and the evidence tendered is of the view that there are three issues that call for its determination:a.Whether the Commissioner erred by issuing the assessment beyond the five-year period contrary to Section 29 of the TPAb.Whether the objection decision was justified

Analysis and Findings 71. The Tribunal having determined the issues falling for its determination proceeds to analyse them as hereunder.

a. Whether the Commissioner erred by issuing the assessment beyond the five-year period contrary to Section 29 of the TPA 72. The Appellant's argued that all the three tax heads being Excise duty, Corporation tax and VAT were confirmed on the 15th February, 2023 vide the objection decision that is the subject matter of Appeal.

73. The Respondent submitted that it was important to appreciate that tax investigation is an ongoing exercise and may take a number of years to be concluded. In that regard, the Respondent further submitted that the import of Section 29(5) and Section 31(4) of the Tax Procedures Act,2015 have to be read purposively rather than strictly as is the norm with tax statutes, which are normally interpreted narrowly.

74. The Tribunal notes that the Appellant was notified by the Respondent on 23rd December, 2020 under the notice of tax investigations of the investigations in line with the Fair Administrative Action Act of intention to audit its tax affairs from the year 2015.

75. The Tribunal further notes that engagements ensued between the Appellant and the Respondent culminating in the issuance of tax findings on 19th October 2022 effectively placing the Appellant on notice on the need to keep records in place till conclusion of investigations and to provide the same for the purpose of tax audit.

76. The Tribunal notes that the Appellant was given sufficient details and documentation as well as notice necessary for business certainty on the intention to vary the assessment. This interpretation is in tandem with the provisions of Section 29 as read with Section 31 of the Tax Procedures Act, 2015 and Section 43 of the Value Added Tax Act, 2013.

77. The Tribunal also notes that the provisions relating to the five year limitations cannot be read in isolation and has to be read together with the other provisions of the law on keeping of records, therefore it follows that in applying the five -year rule from the date of the letter of tax findings being the 19th October, 2022 and date of the notice of tax investigations being 23rd December 2020, the Commissioner was allowed to audit the taxpayer up to the year 2016.

78. The time limits have been codified in statute being the five-year statutory period in which the taxpayer must keep records and the bar on the Commissioner not to make assessments beyond a period of five years from the date of assessments unless in cases of wilful neglect, evasion or fraud by the taxpayer.

79. The Tribunal further notes that due to the variances that were noted and the pattern of fraud and wilful neglect drawn by the Commissioner, the year of income 2015 was included in the audit.

80. The Tribunal is guided by the UK case of Maciejewski v Revenue &Customs (Income Tax/Corporation Tax: Penalty) [2018] UKFTT 754 (TC) on time limit in tax administration which offers much guidance at paragraph 32 of the judgement to the effect that:-“What is the purpose of the time limit? The purpose is to ensure that both the taxpayer and HMRC have finality and certainty."

81. The Tribunal notes that the canon of certainty is the hall mark of a good tax administration or policy and a long-held practice and principle. One such important tenet of certainty in tax policy is limitation of time which allows a taxpayer to know the timeframe in which he can be held responsible for previous non-compliance. It is in this regard, the question of time limitation being administrative rather than substantive in nature, should not be interpreted strictly but rather purposively.

82. The Tribunal takes note of the purposive approach that is globally gaining traction as evinced by the Canadian case of Stubart Investments Ltd.v The Queen Supreme Court of Canada began to deviate from the strict interpretation approach towards a more broad and "purposive” approach to the interpretation of tax statutes. In this case, the Supreme Court held that: -“The words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.”

83. The Tribunal is further guided by Trustco Mortgage Co.v Canada where the Court stated that: -“As a result of the Duke of Westminster principle...Canadian tax legislation received a strict interpretation in an era of more literal statutory interpretation than the present. There is no doubt today that all statutes,including the Income Tax Act, must be interpreted in a textual, contextual and purposive way. However, the particularity and detail of many tax provisions have often led to an emphasis on textual interpretation.- Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe."

84. The Tribunal is further guided by Kenyan Supreme Court in the case of Gatirau Peter Munya vs. Dickson Mwenda Kithinji & 2 others, Supreme Court Petition No.26 of2014[2014]eKLR, where the Court opined that a purposive interpretation should be given to statutes so as to reveal the intention of the statute. The court observed as follows:-“In Pepper vs. Hart [1992] 3 WLR, Lord Griffiths observed that the “purposive approach to legislative interpretation" has evolved to resolve ambiguities in meaning. In this regard, where the literal words used in a statute create an ambiguity, the Court is not to be held captive to such phraseology. Where the Court is not sure of what the legislature meant, it is free to look beyond the words themselves, and consider the historical context underpinning the legislation. The learned Judge thus pronounced himself:“The object of the court in interpreting legislation is to give effect so far as the language permits to the intention of the legislature. If the language proves to be ambiguous I can see no sound reason not to consult Hansard to see if there is a clear statement of the meaning that the words were intended to carry. The days have long passed when courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted."

85. The Tribunal observes that the purpose of the five-year limitation is to give the taxpayer certainty in tax administration and thus, in this case, the taxpayer was given notice of tax findings on 19th October, 2022 and notice of tax investigations on 23rd December, 2020 therefore fulfilling the purpose of the statute being notified with certainty on the tax audit and the timeframe in question.

86. The Tribunal further notes that the Respondent wrote to the Appellant requiring the production of documents necessary for the conclusion of the investigations, inventory of finished products, ethanol, caps, bottles and excise stamps, signed audited accounts and stock ledger report. In response to which the Appellant wrote back to the Commissioner vide a letter dated 20th April 2022 acknowledging the ongoing investigations and making reference to the ongoing appeal before the Tribunal to wit TAT Appeal No. 591 of 2021.

87. The Tribunal therefore finds that the non-declarations by the Appellant of the full purchases cannot be explained or justified and accordingly have to be construed as fraudulent to which the Commissioner was entitled to audit beyond the five-year limitation period.

b) Whether the assessment was justified 88. The Appellant submitted that the accusations by the Respondent on the alleged involvement in tax evasion is a red-herring to subvert the provisions of the law well against the trite law that any allegation of fraud must be pleaded and strictly proved.

89. The Respondent further submitted that since the Kenyan system is a self-assessment regime it relies on the honesty of the taxpayer to disclose the true financial and business transactions. That to this end the Respondent was in possession of data and declarations made by both buyers and suppliers of goods and services when they file returns and make their declarations.

90. The Tribunal notes that in this regard, when a supplier makes a declaration, there is a corresponding obligation on the part of the purchase to make a declaration of purchase. If one of the parties to the transaction fails to make a declaration, the same constitutes fraud/tax evasion and the Respondent is under law entitled to investigate such a party and therefore the Respondent can take data supplies from a manufacturer in this case the manufacturers or producers of ethanol which is highly regulated commodity and thus data easily available as undeclared purchase by the Appellant.

91. The Tribunal is guided by Section 97 of the Tax Procedures Act which outlines instances of fraud in relation to tax which includes failure to include an amount which should have been included in a tax return and also making an incorrect statement which affects tax liability.

92. The Tribunal notes that the Appellant failed to make all the declarations truthfully of all the ethanol that it had bought from its suppliers which constitutes fraud within the meaning of Section 97 of the Tax Procedures Act, 2015. This position is corroborated by the South African case of South African Revenue Service v Spur Group Limited [2021] ZASCA 145 where the court held as thus:-“Spurs assertions that the wrong entries in the tax returns were negligent and inadvertent is patently false. Central to this entire dispute is the contribution of R48million that Spur made to the trust in 2005. The answer 'no' to the question whether any contribution was made to a trust or whether the company was party to the formation of a trust, is, in my view, plainly false and a misrepresentation. These were questions pertinently, and for tax purposes, seriously raised. It required specific attention and an honest answer. Strikingly, the answers were repeated."“In each of the 2005 to 2009 years of assessments, deductions claimed by Spur were in fact limited in terms of s 23H of the ITA. It simply boggles the mind that Spur answered 'no' to the relevant question for each and every subsequent year from 2005 to 2009. Moreover, Spur's failure to include the said amounts in a separate line item which specifically required a disclosure of deductions limited by s 23H,and their inclusion in a general line item, amounts in my view, to a deliberate stretch of imagination, be ascribed to any inadvertent error."

93. The Tribunal reiterates its decision in Digital Box Limited v Commissioner, Investigations and Enforcement (TAT 115 of 2017) that tax administration in Kenya and indeed across the globe gives tax authorities the leeway to use any tax analysis method provided that the same is not biased, arithmetically flawed or unreasonable.

94. The Tribunal notes that the Respondent wrote to the Appellant several times requiring the production of documents necessary for the conclusion of the investigations being inventory of finished products, ethanol, caps, bottles and excise stamps, signed audited accounts and stock ledger report. In response to which the Appellant wrote back to the Commissioner vide a letter dated 20th April 2022 acknowledging the ongoing investigations and making reference to the ongoing appeal before the Tribunal to wit TAT Appeal No. 591 of 2021.

95. The Tribunal therefore finds that the non-declarations by the Appellant of the full purchases cannot be explained or justified and accordingly have to be construed as fraud.

96. The Tribunal also notes that the allegation of the method used by the Respondent being flawed because of failure to take into account the Excise duty rebates, breakages, spillages and a fire incident that razed down part of the plant, was not fully substantiated by the Appellant. The Appellant did not provide any proof to this and therefore failed to discharge its burden under the Tax Procedures Act, 2015.

97. The issue of burden of proof under Section 30 of the TAT Act was clarified by the High Court in Primarosa Flowers Ltd -vs Commissioner of Domestic Taxes (2019) eKLR, where it was held that:-“In tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge the income tax assessment. The onus is on the taxpayer in proving that the assessment excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

98. The Tribunal is therefore persuaded that the Appellant failed to discharge its burden of proof placed upon it and therefore demonstrating that the assessment was justified.

Final Decision 99. In view of the foregoing, the Tribunal finds that the Appeal is unmeritorious and accordingly makes the following Orders:-a.That the Appeal be and is hereby dismissed.b.That the Objection decision dated 15th February 2023 be and is hereby upheld.c.Each Party to bear its own costs.

100. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF MAY, 2024. ERIC NYONGESA WAFULA - CHAIRMANEUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBER