[2024] KETAT 640 (KLR)

Muasya v Commissioner of Investigations & Enforcement (Appeal E192 of 2023) [2024] KETAT 640 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 640 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E192 of 2023

Grace Mukuha, Chair, Jephthah Njagi, W Ongeti, G Ogaga & E Komolo, Members

April 26, 2024

Between

Beldina Mwelu Muasya

Appellant

and

Commissioner Of Investigations & Enforcement

Respondent

Judgment

1. The Appellant is an individual taxpayer registered in Kenya and trading under the business name Astrapia Solutions. The business is a sole proprietorship.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and KRA 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. The Respondent commenced investigations on the Appellant’s tax affairs for the period 2016 and 2017 for Income tax.

4. During the investigations, the Respondent reviewed and analysed the Appellant's bank account in Co-operative Bank of Kenya.

5. The Respondent established that the deposits made into the bank account at Cooperative Bank amounted to Kshs. 20,298,441. 00.

6. The Respondent’s investigations also revealed that the Appellant made supplies to Kirinyaga County Government worth Kshs. 15,929,205. 00 during the period.

7. These investigations also revealed that the Appellant was not registered for VAT although she was dealing in vatable goods. It also revealed that the Appellant was filing NIL returns except for the year 2017.

8. The Respondent communicated to the Appellant the notice of tax assessment for the period 2016 and 2017 vide a letter dated 4th November 2022 and demanded payment of taxes amounting to Kshs. 5,672,226. 00.

9. The Appellant objected to the assessment on 1st December 2022.

10. The Respondent and the Appellant held a meeting on 23rd January 2023, and the Appellant proposed a tax settlement plan which was approved by the Respondent on 30th January 2023.

11. The Respondent issued its objection decision on 20th March 2023.

12. Aggrieved by the Respondent’s objection decision, the Appellant filed this Appeal on 3rd May 2023 after giving the Notice of Appeal on 19th April 2023.

THE APPEAL 13. The Appeal is premised on the Memorandum of Appeal dated and filed on 3rd May raising the following grounds:-a.That the Respondent erred in law and in fact by disregarding the Appellant's submission that the business in question was opened under the false and fraudulent behest of Shawn Mwangi T/A Jewel Enterprises and confirmed in its objection decision, an assessment arising from Income tax for the years 2016 and 2017 amounting to Kshs. 5,672,226. 00. b.That the Respondent erred in law and fact by issuing the assessment without clarity on the rightful culprit as the assessment was generic and lacked the requisite details in support of the assessed incomes.c.That the Respondent violated the Appellant's right to fair administrative action by ignoring the criminal elements of the case as presented and unfairly subjected the Appellant to taxes due from a third party.

APPELLANT’S CASE 14. The Appellant’s case was premised on the following documents filed with the Tribunal:-a.The Appellant’s Statement of Facts dated and filed on 3rd May 2023 and the documents attached thereto.b.The Appellant’s Written Submissions dated 5th February 2024 and filed on 6th February 2024.

15. The Appellant averred that the Respondent issued assessments to her vide its assessment notice dated 4th November 2022 and issued a demand notice for Kshs. 5,672,226. 00 on Income tax.

16. That the Appellant, being dissatisfied with the assessments objected to the tax assessment vide notice of objection dated 1st December 2022.

17. That in its objection, the Appellant presented various arguments urging the Respondent to re-consider its position contained in the tax assessments, based on applicable tax legislation, the principle of equity and fairness and the industry’s best practice.

18. That the Respondent, vide a letter dated 20th March 2023 confirmed the assessments by issuing its objection decision.

19. That in its objection decision, the Respondent confirmed the assessment on the Income tax years 2016 and 2017 amounting to Kshs. 5,672,226. 00.

20. That the Appellant, being dissatisfied with the Respondent's objection decision lodged a notice of intention to Appeal dated 19th April 2023.

21. The Appellant submitted that the following are the issues for determination in relation to the assessed taxes.a.Whether the assessment chargeable to the registered taxpayer was correct.b.Whether the actions of the Respondent to demand the Income tax amounting to Kshs. 5,672,226. 00 for the years 2016 and 2017 from the taxpayer instead of the alleged 'owner' of the business was reasonable;c.Whether, given the facts of the criminal intent in this case, the demand for the Income tax amounting to Kshs. 5,672,226. 00 for the years 2016 and 2017 was a violation of the Appellant’s right to fair administrative action;d.Whether the actions of the Respondent in accepting the self-assessed tax liability and approving a payment plan for the payment of the Income tax amounting to Kshs. 5,672,226. 00 for the years 2016 and 2017 created a legitimate expectation in favour of the Appellant that the Respondent would indeed stop levying the additional taxes on the Appellant.

22. The Appellant submitted that the Respondent disregarded her submissions that the liability arose from fraudulent business transactions carried out with criminal intent through the pre-meditated, planned and deliberate actions of Shawn Mwangi T/A Jewel Enterprises who went ahead to endear himself and enter into a marriage with the Appellant’s sister so as to defraud her and the family members.

23. That the Respondent further disregarded the Appellant’s self-assessed liability amounting to Kshs. 179,044. 00 based on the information available.

24. The Appellant submitted that she opened the business name and bank account under the false and fraudulent behest of her sister’s estranged husband, Shawn Mwangi Mwachofi, trading as Jewel Enterprises.

25. The Appellant further submitted that Jewel Enterprises was the actual owner of the tenders contracted by Kirinyaga County and Shawn Mwangi Mwachofi, trading as Jewel Enterprises was in full control of her bank account.

26. The Appellant submitted that payments were made into her bank account and the funds were immediately transferred to Jewel Enterprises or to the personal or business accounts of Shawn for ease of withdrawing the funds.

27. The Appellant submitted that although she willingly provided her company details to enable the trade with Kirinyaga County for tenders to supply materials, Jewel Enterprises operated in bad faith and with the intention to defraud the Appellant based on the close relationship he held with the family leading to the tax assessment on the Appellant.

28. The Appellant submitted that Shawn/Jewel Enterprises gave an undertaking that he had hired a qualified Accountant to ensure that all accounting and tax declarations for business transacted under her business name would be made to the Respondent.

29. The Appellant submitted that she took all necessary steps in trying to mitigate the assessment by holding consultative forums with the Respondent’s team with a view to directing the assessment to the rightful culprit and as a sign of goodwill undertook to carry out a review of the bank statements and to determine their rightful share of benefit arising from the payments amounting to Kshs. 179,044. 00.

30. That in arriving at the self-assessed tax liability, the Appellant was cognizant of the fact that there were no supporting documents available and therefore made the computation in good faith on the basis of the gross income received.

31. The Appellant submitted that the Respondent acknowledged the self-assessed tax and further approved a payment plan for the settlement of the self-assessed liability upon the request of the Appellant. That further, the Respondent issued the payment registration numbers (PRNs) to enable the Appellant to settle the first instalment, for which payments were made. That the Respondent did not issue additional PRNs to enable the Appellant to make subsequent instalment payments despite reminders to share the same.

32. The Appellant relied on the case of Republic V Commissioner of Domestic Taxes ex parte Barclays Bank of Kenya Limited, (Misc. Application no. 1223 of 2007), where Hon. Justice Majanja held that:-“In assessing taxes, the Respondent was under duty to identify the transactions or payments that attract tax, especially where there are objections to such categorization. Section 35(1)(a) of the Income Tax Act identifies specific types of payments that attract tax, the respondent is obligated by law to state with clarity its claim and state how the transaction falls within the terms of the statute. The respondent cannot exercise its duty like a trawler in the deep seas expecting all the fish by casting its net wide. The respondent's decision in this respect falls below this standard and the transaction caught by the decision cannot be said to fall within the statutory definition of the tax."

33. The Appellant submitted that the Assessment Orders as raised by the Respondent did not offer sufficient clarity in terms of the amounts assessed and the rightful party to whom the liability relates.

34. The Appellant also submitted that the objection decision was not accompanied by the reasons why the facts of this case were ignored and hence the correct tax liability owing by the Appellant was not adjusted even after several requests. That this therefore rendered the assessments unreasonable and procedurally unfair.

35. The Appellant submitted that she had a legitimate expectation that the Respondent would not issue an assessment because the Appellant had already provided a self-assessment on the extent of the benefit she accrued from the payments received.

36. That in addition, during a meeting with the Appellant’s team on 23rd January 2023, it was agreed that the self-assessed tax would be paid through an agreed payment plan which the Respondent approved on 30th January 2023.

37. That the Appellant had a legitimate expectation that the acceptance of the payment plan and the facts provided to the Respondent on the criminal intent to defraud the Appellant were taken into consideration and that the Respondent would not come back and alter the position and avoid charging the liability to the rightful culprit.

38. The Appellant relied on the following cases: -a.H.T.V. Ltd vs Price Commission [1976] I.C.R. 170. b.Republic vs Institute of Certified Public Accountants of Kenya ex parte Vipichandra Bhatt T/A JV Bhatt & Company Nairobi HCMA No. 285 of 2006. c.Republic vs Attorney General & Another Ex Parte Waswa & 2 Others [2005] KLR 280. d.Keroche Breweries Limited & 6 Others vs Attorney General & 10 Others [2016] eKLR.e.Pz Cussons East Africa Limited v Kenya Revenue Authority (2013} eKLR,f.Republic vs. Commissioner of Customs Ex Parte Mulchand Ramji & Sons Limited [20101 eKLR.g.Samuel Muihia Kariuki & 26,249 others v Attorney General & 4 others [20211 eKLR,

Appellant’s Prayers 39. The Appellant made the following prayers to the Tribunal: -a.That this Appeal be allowed.b.That the Respondent’s assessment dated 20th March 2023 be annulled.c.That the costs of this Appeal be awarded to the Appellant.

RESPONDENT’S CASE 40. The Respondent’s case was premised on the following:-a.The Respondent’s Statement of Facts dated 29th May 2023 and filed on 30th May 2023 together with the documents attached thereto.b.The Respondent’s Written Submissions dated 29th February 2024 and filed on 1st March 2024. c.The Respondent’s Witness Statement of Simon Mugambi Njilu dated 13th October 2023 and admitted on oath by the Tribunal on 7th February 2024.

41. The Respondent averred that on or about the month of November 2022, it conducted investigations into the tax affairs of the Appellant’s business for the period 2016 to 2017, wherein bank statements for the accounts held at Cooperative Bank of Kenya were analysed to determine income earned after deposits amounting to Kshs 20,298,441. 00 were made into the account.

42. That the Respondent also analysed payment vouchers from Kirinyaga County Government which revealed that the Appellant supplied various goods to the County Government valued at Kshs. 15,929,205. 00.

43. That the Respondent was satisfied that, the above bank deposits fall within the ambit of deemed income under Sections 3(1) and 3(2) (a) of the Income Tax Act and therefore subject to tax.

44. That from the comparative analysis of the bank statements and submitted income tax returns, the Respondent treated the net inflows to the account as established income. That the difference between the established income as per banking method and the self-declared income was treated as undeclared income and income tax charged.

45. That the Respondent further engaged the Appellant at a meeting held on 23rd January 2023 wherein the Appellant’s agent sought time to lodge a payment plan which was submitted and subsequently approved by the Respondent on 30th January 2023 effectively validating the objection.

46. That the Respondent did not receive any further communication or documentation from the Appellant in support to its objection and thus after careful consideration of the grounds of objection, the Respondent proceeded to confirm the assessment vide a letter dated 20th March 2023 confirming the principal taxes of Kshs, 5,572,034. 00 earlier assessed as due and payable.

47. In response to Ground No. 1 of the Memorandum of Appeal, the Respondent averred that:-a.As per the Tax Procedures Act Section 51(8)- “Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it and the Commissioner's decision shall be referred to as an "objection decision".b.Therefore, the argument by the Appellant was unfounded as the Commissioner followed the due process and has the power to disallow the objection upon engaging a taxpayer, which it did. That furthermore, the Appellant created her company with the intent to conduct business, by doing so the company ought to pay taxes.c.The Respondent used best judgment to arrive at the taxes assessed as the said Appellant’s company did conduct business with Kirinyaga County therefore, taxes were due and payable by the Appellant.

48. In response to Ground No.2 of the Memorandum of Appeal, the Respondent averred that:a.The investigation conducted in the Appellant's bank account revealed that the Appellant received payments from Kirinyaga County Government and the same was used to establish taxable income.b.The Appellant did not provide any documents in support of her objection, instead, the Appellant carried its own analysis of the bank statements to confirm that they were not fully the beneficiary of the income from the County Government in order to determine the correct taxable income.c.Further, Section 54(A)(1) of the Income Tax Act provides that the Appellant shall keep records of all receipts and expenses, goods, purchased and sold and accounts books, deeds, contacts and vouchers which in the opinion of the Respondent are adequate for the purpose of computing tax.d.In addition, the Appellant has not provided any evidence to support its allegation against the said Shawn Mwangi to demonstrate the fraud committed and or if they have sought recourse from the rightful authorities.

49. In response to Ground No. 3 of the Memorandum of Appeal, that the Appellant was of the view that the Respondent violated her rights to fair administrative action by ignoring the criminal elements of the case. The Respondent averred that:-a.It was guided by all relevant laws and followed due procedure. The Appellant was given adequate opportunity to defend her position but failed to do so.b.The Respondent averred that any gains derived from business are taxable, the illegality notwithstanding.

50. That in arriving at the above position, the Respondent was guided by the decision of the Court of Appeal in Civil Appeal No. 55 of 2009 Kenya Revenue Authority Vs Yaya Towers where a three Judge bench held that:-“By parity of reasoning, and from the long chain of authorities, it would appear to us that even if the business is illegal. or as in this case the services obtained were rendered by an illegal entity. it is still subject of taxation. There is a lot of merit in this proposition; as otherwise holding would entitle a wrong doer to benefit/ram the illegal profits earned from unlawful business and on top of that be exempted from taxation. We wish to echo the words of Lord Morison that if we were to hold otherwise, then it would lead to absurdity that gains of an honest business are taxed whilst the dishonest escape taxation.Secondly, if we were to hold that profits of such an illegal business are not taxable, taxpayers would endeavour to have their business tainted with illegality for the purposes of securing exemption from taxation.Having come to the conclusion, like we have done that it is indeed taxable, then the issue of alternative remedy may not be called into play, as this remedy would apply to non-compliance of payment of tax, whether from an illegal or honest trade."

51. That guided by the decision of the court, the Respondent proceeded to confirm that the criminal elements in the case did not change the nature of the business being carried out.

52. The Respondent averred that its only mandate by the law is to assess and collect taxes. That it is also worth noting that the investigations team recommended for the prosecution of the Appellant.

53. The Respondent averred that it is not bound by the Appellant’s tax returns or information provided by, or on behalf of the Appellant and the Respondent may assess the Appellant's tax liability using any information available to it.

54. That under Section 31(1) of the Tax Procedures Act, 2015, the Respondent may amend the Appellant's tax assessment by making alterations or additions based on the available information and to the best of its judgement to ensure that the Appellant is liable for the correct amount of tax payable.

55. The Respondent averred that the grounds presented by the Appellant were not only spurious but also unsupported, as the Appellant failed to discharge its burden of proof. That further, the Appeal was brought in bad taste as the Appellant was engaged by the Respondent and given an opportunity to provide proof but failed to do so.

56. The Respondent submitted that in line with the provisions of Section 56(1) of the Tax Procedures Act, 2015, Section 30 of the Tax Appeals Tribunal Act, 2013 and Section 107 of the Evidence Act, Cap 80 of the of laws of Kenya, the Appellant did not prove that the Respondent's decision was incorrect or unlawful.

57. The Respondent further submitted that the Appeal is not supported by documentary proof showing why the Respondent’s assessment and objection decision is erroneous and the same is without merit and thus ripe for dismissal.

58. The Respondent submitted that the following are the issues for determination in this Appeal.a.Whether the Respondent's decision is valid.b.Whether the Appellant has discharged her burden of proof.c.Whether a legitimate expectation was created by the Respondent.

59. The Respondent submitted that as per Section 24(2) of the Tax Procedures Act, 2015, the Respondent is not bound by the Appellant's self-assessment returns. That consequently, the Respondent upon noticing the glaring inconsistencies in the Appellant's tax returns amended the same as per Section 31 of the Tax Procedures Act, 2015. That the amendments were in the form of additional assessment as confirmed through the objection decision letter of 20th March 2023.

60. The Respondent submitted that as per the Tax Procedures Act, Section 51(8),“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part or disallow it and the Commissioner's decision shall be referred to as an "objection decision".

61. The Respondent submitted that the Appellant averred that the Respondent did not consider the criminal elements or criminal nature of this case and that the Appellant has instituted criminal proceedings against the said culprit. The Respondent submitted that it did not make a determination of a criminal case against the Appellant as it does not have the requisite powers to do so and that is not within its mandate.

62. The Respondent submitted that it is the preserve of the Office of the Director of Public Prosecutions and the National Police service to introduce a criminal charge before a competent court.

63. The Respondent submitted that a decision to charge the Appellant if at all for any criminal offences does not constitute an appealable decision as defined by Section 3 of the Tax Procedures Act, 2015.

64. The Respondent submitted that it has not at any time given any promise or such undertaking to the Appellant simply because the Respondent had entered a payment plan of Kshs. 179,044. 00 with the Appellant, being self-assessed taxes by the Appellant and treated as undisputed tax due and payable to the Respondent.

Respondent’s Prayers 65. The Respondent prayed that: -a.The Tribunal upholds the Respondent’s objection decision dated 20th March 2023 as proper and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

ISSUE FOR DETERMINATION 66. The Tribunal, has considered the facts of the matter and submissions made by the parties and identified the following issue for determination.Whether the Respondent erred in assessing the Appellant for income tax liability

ANALYSIS AND FINDINGS 67. Having identified that issue that fell for its determination, the Tribunal proceeded to analyze it as hereunder.

68. The genesis of this Appeal is the tax assessment issued by the Respondent to the Appellant on 4th November 2022.

69. The Appellant lodged an objection to the assessment on 1st December 2022.

70. The Appellant entered into a payment plan with the Respondent for the payment of Kshs. 179,044. 00 after a meeting on 23rd January 2023. This payment plan was approved by the Respondent on 30th January 2023.

71. The Respondent issued an objection decision on 20th March 2023.

72. Aggrieved by the Respondent’s objection decision, the Appellant filed this Appeal.

73. The witness of the Respondent admitted on oath that he took over the investigations into the tax affairs of the Respondent in September 2022 and submitted tax assessment in November 2022.

74. The Tribunal noted that Section 31(4) of the Tax Procedures Act (TPA) states that: -“The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the (ii) for any other assessment, the date the Commissioner notified the taxpayer of the assessment...”

75. The only time that Respondent is allowed to assess beyond the five years period is in a situation where there is “gross or wilful neglect, evasion or fraud by a taxpayer.” The Respondent did not allege wilful neglect or fraud in this matter.

76. The Tribunal noted that the assessment was issued on 4th November 2022. Since the law allowed the Respondent to assess the taxpayer for a period of not more than 5 years, the earliest the Respondent should have gone back to was year 2017 as it did not allege or prove “wilful neglect, evasion or fraud” by the taxpayer.

77. The Tribunal reiterates its holding in a similar matter TAT Appeal No. 411 of 2021, City Gas East Africa v Commissioner of Investigations & Enforcement where the Tribunal held that the Respondent erred in assessing the Appellant for a period longer than five years when there was no evidence of wilful neglect or fraud.

78. The Tribunal is also guided by the High Court holding in Tax Appeal No E033 of 2020 Commissioner of Domestic Taxes V Unga Limited where Justice DS Majanja held at paragraph 41: -“Under Section 29 of the TPA, the Commissioner is empowered to make a default assessment when a taxpayer fails to file a tax return. This power is however limited in time to five years under section 29(5) thereof. There is thus an expectation that the Commissioner would move with haste in doing so before the statutory timeline expires.”

79. Based on the statute and case laws cited above, the Tribunal finds that the Respondent erred in law and in fact by issuing assessment for the year 2016 which period was outside the statutory timelines of five years provided by the law.

80. The Respondent submitted that the Appellant failed to provide supporting documents to demonstrate the expenses in issue and also to show that the computation was wrong.

81. The law requires the taxpayer to keep records necessary for use in determining the taxpayer’s tax liability and which requirement the Appellant had not adhered to. This is provided for in Section 23(b) of the TPA which provides as follows:“A person shall-(a)(b)maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained”

82. The law allows the Respondent to use the information within its reach to compute the tax liability of a taxpayer as per Section 31 of the TPA. The Respondent used the information it had in its possession to determine the assessments in issue and in the circumstances, it was in order. Section 31(1) provides as follows: -“Subject to this section, the Commissioner may amend an assessment (referred to this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner’s judgement………….”

83. The Tribunal has also taken into consideration the legal provisions of Sections 56 of the TPA and 30 of the Tax Appeals Tribunal Act which state very clearly that in all circumstances the burden of proof lies on the Appellant to demonstrate that they have discharged their tax liability. Section 56 (1) of the TPA provides as follows: -“In any proceedings under this Part, the burden shall be on the tax payer to prove that a tax decision is incorrect” while Section 30 goes on to provide as follows:“In any proceedings 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”.

84. The Tribunal is guided by the holding in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR in reference to the issue of the burden of proof in tax disputes the court held as follows:“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 taxpayer.

85. The Tribunal notes that the Appellant did not file any documents to support its Appeal and the Tribunal finds that the Appellant has not discharged its burden of proof which would have triggered the Respondent to compute the tax assessment differently.

86. Having failed to discharge its burden of proof on the assessment for year 2017, the Tribunal finds that the Appellant is liable for the tax assessed for year 2017.

FINAL DECISION 87. The upshot of the foregoing is that this Appeal partially succeeds. Consequently, the Tribunal makes the following final orders.a.The Appeal be and is hereby partly allowed.b.The Objection decision issued by the Respondent on the 20th March, 2023 be and is hereby varied as follows;-i.The assessment for year 2016 be and is hereby set aside.ii.The assessment for the year 2017 be and is hereby upheld.c.Each party to bear its own costs.

88. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024GRACE MUKUHACHAIRPERSONJEPHTHAH NJAGI DR. WALTER J. ONGETIMEMBER MEMBERGLORIA A. OGAGA DR. ERICK KOMOLOMEMBER MEMBERJUDGMENT TAT E192 BELDINA MWELU MUASYA VS. COMMISSIONER OF INVESTIGATIONS & ENFORCEMENT Page 19