[2023] KETAT 293 (KLR)

Mreri v Commisioner of Domestic Taxes (Appeal 595 of 2022) [2023] KETAT 293 (KLR) (Civ) (2 June 2023) (Judgment)

Neutral citation: [2023] KETAT 293 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 595 of 2022

RM Mutuma, Chair, RO Oluoch, EN Njeru & D.K Ngala, Members

June 2, 2023

Between

David Obonyo Mreri

Appellant

and

Commisioner of Domestic Taxes

Respondent

Judgment

1. The Appellant conducted business as a contractor in the construction business until 2017.

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 Actwith 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 Actfor the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The dispute in this Appeal arose when the Respondent conducted an analysis of the Appellant’s bank accounts. It thereafter issued a tax assessment of Kshs 55,302,553. 00 for 2014-2017 years of income vide a letter dated April 15, 2021.

4. The Respondent also issued additional assessment amounting to Kshs 78,974. 72 on the December 2, 2021.

5. The Appellant objected to these assessments vide notices of objection dated December 18, 2021.

6. The Respondent issued its Objection Review on the 6th of January 2022 wherein it stated that the objections were not validly lodged because they did not comply with provisions of Section 51(3) of the TPA.

7. The Appellant subsequently filed a series of fresh notices of objection dated the January 12, 2022 whereupon the Respondent issued its Objection decision on the April 25, 2022 reviewing the tax due downwards to Kshs 33,262,275.

8. The Appellant was aggrieved by this decision and it filed a Notice of Appeal to the Tribunal on the May 25, 2022.

The Appeal 9. The Appellant’s Memorandum of Appeal filed on the June 8, 2022 was premised on the following grounds:-a.The Appellant’s notice of objection letter dated January 13, 2022 which was received by the Respondent on the same date, was a valid objection within the meaning of Section 51(3) of the Tax Procedures Act.b.That by dint of the operation of Section 51(11) of the Tax Procedures Act, the Appellant’s valid notice of objection dated January 13, 2022 which was received by the Respondent on the same date, was automatically allowed by operation of statute and thus the Respondent’s assessments were extinguished by operation of law.c.That the Respondent erred in law and fact by failing to serve the Appellant with a notice of intention to audit, and also not conducting in-depth analysis of the Appellant’s tax affairs; instead choosing to conduct a superficial and manifestly inadequate desk audit whose outcome was predetermined.d.That the Respondent erred in law and fact by failing to raise procedurally proper assessments pursuant to the provisions of Sections 29 and 30 of the Tax Procedures Act.e.That the Respondent failed to issue a demand notice but made additional assessments to the Appellant, an act which was legally improper and did not conform to the applicable provisions of the law; thus, the additional assessments were null and void ab initio.f.That the Respondent erred in law and fact in determining that the Appellant owed additional income tax for the yeas of income 2014 to 2017 by taking the Appellant’s alleged banking in his bank accounts and bringing them to charge.g.That the Respondent erred in law and fact in determining that the Appellant owed Value Added Tax arising from banking analysis of the Appellant’s bank accounts for the years 2014 to 2017; as well as erroneous legal and factual determination that Value Added tax was owed by the Appellant arising from alleged undeclared sales derived from banking analysis of the Appellant’s bank accounts.h.That the Respondent erred in law and fact in depiction and appreciation of the Appellants’ business, financial and tax affairs.i.That the Respondent erred in law by not considering all the information relevant to this matter and without due regard to the objection, or to the information or documents adduced by the Appellant or to the information and records to the Appellant held by the Kenya Revenue Authority.j.That the Respondent erred in law and in fact by failing to utilize its suo moto powers under Section 31(1) of the Tax Procedures Act, by dint of which Section the Respondent could and should have amended the Appellant’s income tax and Value Added Tax for the tax periods in question to effect the correct amount of tax owed, if at all any tax was owed.k.That if at all any additional income tax or any Value Added Tax are owed by the Appellant, the same would be far less than the extremely exaggerated and excessive sums raised by the Respondent.l.That the Respondent acted illegally, unreasonable, and ultra vires the powers conferred on the office by the applicable tax statutes.m.That the Respondent’s decisions were guided by extraneous considerations that the Commissioner is not legally entitled to consider and the assessments flowing therefrom were consequently incurably tainted and thus illegal.n.That the demanded tax being income tax and Value Added tax assessments, and the aggregates amounts of Kshs 33,262,275. 00 as confirmed through the Objection decision/ Confirmation notice dated April 25, 2021; are ultra vires, arbitrary excessive and erroneous and have been levied on the Appellant in a manner that contravenes the law.

10. It relied on the foregoing grounds to pray to the Tribunal for orders that:a.The Appeal be allowed.b.The Objection decision of the Commissioner issued on the April 25, 2022 be struck out.c.Any other relief the Tribunal deems fit.

The appelant’s case 11. The Appellant supported its Appeal with its Statement of Facts filed on the June 8, 2022 and Written Submissions filed on December 27, 2022.

12. The Appellant stated that it filed notices of objection dated the December 18, 2022 contesting the additional assessments whereupon an objection review dated January 6, 2022 invalidating the Appellant’s Objection notices.

13. It stated that it filed fresh notice of Objection on the January 12, 2022 and the Respondent issued its Objection decision on April 25, 2022 amounting to Kshs 33,262,275. 00.

14. It submitted that the Appellant’s objection was not valid as it breached the mandatory provisions of Section 51(11) of the TPA which required it to issue its Objection decision within 60 days of receipt of any further information requested from the Appellant.

Respondent’s Case 15. The Respondent has set out its response to the Appellant‘s case in the Statement of Facts filed on July 6, 2022 and Written Submissions filed on January 17, 2023.

16. It submitted that its objection decision was valid because it was issued within 60 days of receipt of further information from the Appellant. It was its case that the Appellant sent it further documents on the February 25, 2022. Therefore, time started running on the February 25, 2022 and the Objection decision was validly issued on the April 25, 2022. It relied on the case of Esl Forwardes Limited v Commissioner of Domestic Taxes (TAT No. 255 of 2020) where the Tribunal held as follows with regard to Section 51(11) of the TPA“section enjoins the Respondent to render an objection decision within 60 days. The section also underscores two ways of calculating the 60 days within which the decision should be delivered. In the first instance the Respondent must deliver an objection decision within 60 days of receipt of the notice of objection. In our view this first option will apply when a taxpayer has lodged a valid objection decision and the Respondent is satisfied with both the objection notice and the supporting document’s thereof. The second way of calculating the 60 days stipulated in section 51(11) (b); the Respondent shall render an objection decision within 60 days of the receipt of any further information the Respondent may require from the taxpayer.”

23. It averred that it was guided by Section 59 of the TPA when it conducted its investigations against the Appellant because it eventually gave him an opportunity to avail supporting documents which he failed to fully satisfy.

24. It was also its position that Sections 30 of the TAT and 56(1) of the TPAplaced the onus of proving a tax decision to be incorrect on the Appellant, and the Appellant had failed to discharge this burden because he did not provide all documents in support of its objection.

25. The Respondent submitted that its decision to apply the average profit ratio of 12% was based on the sampled contractors in the construction industry with similar turnover as that of the Appellant. It supported its assertion with the case ofAtronix Limited v Commissioner Of Domestic Taxes (At No. 555 of 2021).

26. It concluded by asserting that the Appellant’s Appeal lacks merit and should be dismissed with costs.

Issues For Determination 27. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that the issues that call for its determination are:a.Whether the Respondent’s Objection Decision was Valid ?b.Whether the Respondent’s tax Assessment was justified and payable ?Analysis andDeterminationa.Whether the Respondent’s Invalidation Decision was Valid ?

28. Section 51(11) of the TPAprovides as follows in regard to time limit for issuing Objection decisions:“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of –a)a valid notice of objection; orb)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed”.

29. The Tribunal has gleaned through the documents filed by both parties and it has established the chronology of events in this dispute to be as follows:a.The Respondent issued its tax demand for tax assessments on the April 15, 2021 and for additional assessments on the December 2, 2021. b.The Appellant lodged its notices of objection dated December 18, 2021 and vide letters dated December 23, 2021. c.The Respondent issued its Objection review on January 6, 2022 allowing the Appellant 7 days to validate its objection.d.The Appellant validated its objection by serving fresh notices of objection dated January 12, 2022. The forwarding email containing these objections was however sent on the January 13, 2022 at 5. 16 PM.e.The Respondent reminded the Appellant to supply it with supporting documents to regularize its objections on the February 24, 2022. f.The Appellant supplied the documents required vide an email of February 24, 2022 and received and stamped by the Respondent on the February 25, 2022. g.The Respondent subsequently issued its Objection decision on the April 25, 2022.

30. Section 51(11) (b) of theTPA Actprovides as follows in regard to timelines within which the Respondent should respond to an objection letter:“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed”.

31. This Tribunal stated as follows in the case of Ibangua Investments Co. Ltd –Versus- The Commissioner of Domestic Taxes, Nrb TAT No. 207 of 2022:“Section 51(11) (b) of the TPA intervenes and kick starts the statutory timelines from the time the requested documents are availed.”

32. Based on the foregoing authorities and Section 51(11) of the TPAit is clear that time started running in this Appeal on the 24th of February 2022 when Appellant supplied the documents required vide an email of February 24, 2022 which was received and stamped by the Respondent on the February 25, 2022. Meaning that the impugned Objection decision ought to have been issued on or before the 25th of April 2022. The said Objection decision was issued on the April 25, 2022. It was therefore issued within time prescribed statutory timelines for which reasons it is valid and lawful.a.Whether the Respondent’s tax Assessment was justified and payable ?

33. The fact that the burden of proof in tax disputed lies on the taxpayer is elucidated in Section 30 of the TAT Act which provides as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

34. The Appellant was thus required to provide evidence to show that the Respondent’s assessment was Respondent’s or erroneous.

35. Once the Respondent stated that it relied on the Appellant’s bank statements, documents available to it and the industry profit margin in arriving at its assessment. It was then incumbent of the Appellant to table evidence to show and prove that the Respondent’s assessment was erroneous, excessive and or unlawful.

36. The Appellant’s Statement of Facts and list of documents both filed on 8th June 2022 dwelt on the legal underpinnings of the validity of the Objection decision without explaining or substantiating the particulars of dispute in the assessment with relevant evidence in support.

37. The averments in the Appellant’s Statement of Facts did not contain any argument or statement in regard to whether or how the Respondent erred in arriving at its Objection decision which assessed the Appellant’s principal tax liability at Kshs 33,262,275. 00.

38. The onus was on the taxpayer to demolish the basic facts on which the taxation rested. It failed in this endeavor when it failed to present any documents or evidence to prove that the Respondent’s tax assessment was either erroneous, unlawful and or not due.

39. This position that has been taken by the Tribunal in this Appeal was affirmed in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where the High Court stated that:-“Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect.…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 taxpayer.”

40. The Appellant’s failure to prove its case in this Appeal therefore means that the presumption of correctness of the Respondent’s assessment that was communicated vide the Respondent’s letter dated April 25, 2022 remains undisturbed. It is thus valid and justified.

Final decision 23. The upshot of the forgoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to issue the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent‘s Objection decision dated April 25, 2022 be and is hereby upheld.c.Each party to bear its own costs.

41. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 02ND DAY OF JUNE ,2023. …………………………ROBERT M. MUTUMACHAIRPERSON………………………… ……………………RODNEY O. OLUOCH ELISHAH NJERUMEMBER. MEMBER.………………………..DELILAH K. NGALAMEMBER.