[2024] KETAT 641 (KLR)

Muasya v Commissioner of Investigations & Enforcement (Appeal E193 of 2023) [2024] KETAT 641 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 641 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E193 of 2023

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

April 26, 2024

Between

Prexidis N 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 Prexx Ventures as a sole proprietor.

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 2014 to 2017 for Income tax and Value Added Tax.

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

5. The Respondent issued the Appellant with a tax assessment notice dated 7th November 2022.

6. The Appellant lodged a notice of objection to the assessment on 29th November 2022.

7. The Respondent and the Appellant’s agent 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.

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

9. 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 10. The Appeal is premised on the Memorandum of Appeal dated and filed on 3rd May 2023 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. 6,621,971. 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 11. The Appellant’s case was also 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.

12. The Appellant averred that the Respondent issued assessments to her vide its assessment notice dated 7th November 2022 and issued a demand notice for Kshs. 6,621,971. 00 on Income tax and VAT.

13. That the Appellant, being dissatisfied with the assessments objected to the tax assessment vide a notice of objection dated 29th November 2022.

14. 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.

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

16. That in its objection decision, the Respondent confirmed the assessment on the Income tax and VAT assessment for the years 2016 and 2017 amounting to Kshs. 6,621,971. 00.

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

18. 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 and VAT amounting to Kshs. 6,621,971. 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 and VAT amounting to Kshs. 6,621,971. 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 and VAT amounting to Kshs. 6,621,971. 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.

19. 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 trading as Jewel Enterprises who went ahead to endear himself and enter into a marriage with the Appellant’s daughter so as to defraud her and the family members.

20. That the Respondent further disregarded the Appellant’s self-assessed liability amounting to Kshs. 178,916. 00 based on the information available.

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

22. 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.

23. 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.

24. 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.

25. 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.

26. The Appellant submitted that she took all necessary steps in trying to mitigate the assessment by holding consultative engagements 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. 178,916. 00.

27. 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.

28. 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.

29. That the Respondent did not issue additional PRNs to enable the Appellant to make subsequent instalment payments despite reminders to share the same.

30. 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."

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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 37. 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 set aside.c.That the costs of this Appeal be awarded to the Appellant.

Respondent’s Case 38. The Respondent’s case was premised on the following: -a.The Respondent’s Statement of Facts dated and filed on 2nd June 2023 together with the documents attached thereto.b.The Respondent’s Written Submissions dated 1st November 2024 and filed on 2nd November 2024.

39. The Respondent averred that the principal activity of the Appellant’s business was general supplies and its main customer was the County Government of Kirinyaga.

40. That the Respondent analyzed the bank statements of the Appellant's business as obtained from the Appellant's bank and noted that the Appellant received payments from Kirinyaga County amounting to Kshs. 19,489,889. 00.

41. That since the income was established in the bank statements, it was assumed that it was inclusive of Value Added Tax (VAT) where vatable goods/services were concerned.

42. That the Respondent also analyzed the bank statements belonging to Prexidis Muasya from her personal account at Equity Bank and noted that she received payments with total credits of Kshs. 3,637,409. 00 and the income was subjected to income tax payable by Prexidis Ndila Muasya.

43. That since the Appellant had been filing nil returns for income tax, additional assessments were raised based on the established income.

44. That based on the banking analysis from the personal account, the additional assessments were raised.

45. That from the analysis, it was recommended that since the findings were shared with the Appellant and no feedback was received, the Respondent would proceed to raise tax assessments as per the tax computations.

46. That the Appellant filed a notice of objection on 29th November 2022 disputing the taxes assessed by the Respondent.

47. That the Appellant's objection was invalidated on 16th December 2022 for failure to comply with the requirements of a valid objection under Section 51 of the Tax Procedures Act especially for failure to pay the undisputed tax of Kshs. 178,916. 00.

48. The Respondent averred that it held a meeting with the Appellant's agent on 23rd January 2023 wherein the agent sought time to lodge an appeal for a payment plan which was submitted and approved by the Respondent on 30th January 2023. That this effectively validated the objection.

49. That the objection was validated on 30th January 2023 and the 60 days envisaged in Section 51 of the Tax Procedures Act started running on that date.

50. That the Respondent's position was that the letter dated 30th January 2023 indicated that the Appellant had validated its objection application and not that the Appellant was entitled to pay that amount as the tax due.

51. That the Respondent issued the objection decision on 20th March 2023 and addressed the Appellant's grounds of objection.

52. That it was the Respondent's view that in the absence of documentary evidence to support the expenses there was no justification for the Appellant's grounds of objection to be allowed for purposes of computing tax.

53. That it was also apparent at the objection review stage and in the course of the engagements with the Appellant, that the Appellant did not have any documents to support the costs claimed apart from the bank statements she availed and which were analyzed.

54. That the Respondent did not make any adjustments to the taxes assessed and proceeded to confirm principal taxes.

55. That the Appellant also claimed that the business in question was opened under the false and fraudulent behest of Shawn Mwangi trading as Jewel Enterprises without providing any evidence.

56. That in fact, the Appellant's action of writing to the Directorate of Criminal Investigations (DCI) and the Office of the Director of Public Prosecution (ODPP) is an afterthought as the letter attached and marked as Appendix F in the Appellant's Statement of Facts was dated 14th April 2023 and received by the two offices on 20th April 2023.

57. That also, the Appellant's sworn statement is dated 2nd May 2023 and is without the receiving stamp of the DCI, whom the Appellant urgently required to launch investigations yet the letter dated 14th April 2023 addressed to the DCI refers to draft witness statements being attached.

58. That this is despite the fact that the Appellant knew of the "alleged fraudulent scheme" and referred to it in its notice of objection dated 29th November 2022.

59. That it also negates the Appellant's grounds of appeal as the Respondent was guided by the law when raising the additional assessments as well as reviewing the objection and issuing the objection decision.

60. That the Respondent could only issue the assessment and objection decision based on facts available to the Respondent and not based on allegations.

61. That further to the above, the Kenyan tax system is a self-assessment system where a taxpayer assesses itself and makes payments to KRA. That all one requires is to acquire a KRA P1N and access the iTax system for one to file their returns for purposes of Income tax and VAT.

62. The Respondent averred that the Appellant was accorded the opportunity to file her returns and only thereafter did the Respondent proceed under Section 31 of the Tax Procedures Act to review the Appellant's self-assessment returns.

63. That upon conclusion of the review, it was discovered that there were some areas where there were omissions or taxes which were underpaid.

64. That pursuant to Article 47 of the Constitution of Kenya, 2010 and Section 51 of the Tax Procedures Act, the Respondent engaged the Appellant at every stage of the process up to when the objection decision was issued. That the Appellant was requested to avail documents, records and any other information for purposes of verifying the self-assessment. That the Appellant was notified in writing of the gaps that were identified that led to tax liability and requested to respond to the issues arising.

65. That the Respondent informed the Appellant in the objection decision that the computation of appropriate tax was based on the limited information that was availed to it.

66. That according to Section 59 of the Tax Procedures Act, the onus is on the Appellant to produce records for the purposes of obtaining full information in respect of the Appellant's tax liability.

67. That further, Section 30 of the Tax Appeals Tribunal Act and Section 56 of the Tax Procedures Act impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect.

68. The Respondent submitted that the following are the issues for determination in this matter:-a.Whether the additional assessments are legally justified;b.Whether the Appellant has discharged her burden of proof.

69. The Respondent submitted that the decision to issue the additional assessments was justified and had basis in law as required under the Tax Procedures Act, 2015.

70. The Respondent also submitted that in conducting its investigations against the Appellant's bank account, it was revealed that the Appellant received income from Kirinyaga County Government and the same was charged to tax.

71. That the Appellant was requested to provide documents in support of her objection and to enable the Respondent to ascertain the correctness of her tax declarations as the Appellant had been filing Nil returns for the period under review.

72. The Respondent submitted that the Appellant failed, refused and or neglected to proffer any documentary evidence in support of her objection and instead carried out its own analysis of the bank statements to confirm that the Appellant was not the beneficiary of the income from the County Government.

73. The Respondent submitted that the Appellant neither provided records to clarify that she was wrongly assessed nor documents and details indicating the rightful person(s) to be assessed hence compelling the Respondent to issue additional assessments.

74. The Respondent submitted that it is not bound by the tax returns filed by a taxpayer. That the Respondent may assess a taxpayer's tax liability using any information available to the Respondent.

75. The Respondent submitted that it is not bound by the Appellant's returns or self - assessment and that it is empowered to vary the assessments using any available information in its possession as provided in Section 24(2) of the Tax Procedures Act which states that:“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."

76. The Respondent submitted that Section 31 of the Tax Procedures Act empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the Respondent's best judgement. That this section provides;“The Commissioner may amend an assessment: (referred to in this section as the "original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer…..”

77. The Respondent submitted that it is the duty of the Appellant to provide documents whenever required by the Respondent. That Section 23(1)(a) of the Tax Procedures Act provides that a taxpayer is required to keep documents or records in such a manner that the taxpayer's tax liability can be readily ascertained.

78. The Respondent submitted that the Appellant bore the burden to demonstrate that the Respondent's assessment was excessive or erroneous by placing evidence before the Tribunal to that effect.

79. The Respondent submitted that the Appellant did not discharge her burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

80. That Section 56(1) of the Tax Procedures Act places the burden on the taxpayer to proof that a tax decision is incorrect. That the Section states:-“In any proceedings under this Part, the burden shall be on the Appellant to prove that a tax decision is incorrect."

81. That further, Section 30 of the Tax Appeals Tribunal Act provides that when appealing to the Tribunal, the Appellant has the burden of proving that where an Appeal relates to an assessment, the assessment is excessive or in any other case, the tax decision should not have been made or should have been made differently.

82. The Respondent relied on the following cases:-a.Osho Drapers Limited V Commissioner of Domestic Taxes [2022] EKLR.b.Prima Rosa Flowers Limited V Commissioner of Domestic Taxes [2019] EKLR.c.Ushindi Exporters Limited V Commissioner of Investigations and Enforcement (TAT No 7 of 2015).d.Commissioner of Domestic Taxes V Metoxide Limited [2021].

Respondent’s Prayers 83. 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.

Issues for Determination 84. The Tribunal has considered the facts of the matter and the submissions made by the parties and identified the following to be the issues for determination: -a.Whether the Respondent erred in law and in fact by issuing an assessment for year 2016. b.Whether the additional income tax assessment for year 2017 and VAT assessment for December 2017 were justified.

Analysis and Findings 85. Having identified the issues that fell for its determination, the Tribunal proceeded to analyze them as hereunder.

a. Whether the Respondent erred in law and in fact by issuing an assessment for year 2016. 86. The Tribunal notes that the instant Appeal relates to the tax dispute for the years 2016 and 2017 as outlined in the Respondent’s Statement of Facts.

87. The Tribunal notes that Section 29(5) of the TPA states that: -“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”

88. 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.

89. The Tribunal notes that the assessment was made on 7th 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 October 2017 for VAT and the year 2017 for income tax as it did not allege or prove “wilful neglect, evasion or fraud” by the taxpayer.

90. 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 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.

91. 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.”

92. 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 for income tax which period was outside the statutory timelines of five years provided by the law.

b. Whether the additional income tax assessment for year 2017 and VAT assessment for December 2017 were justified. 93. The Appellant submitted that she made a self-assessed tax liability of Kshs. 178,916. 00 in recognition of the fact that she did not have any supporting documents to provide to the Respondent.

94. On the other hand, the Respondent submitted that since the Appellant did not provide any documents after her payment plan was approved by the Respondent on 30th January 2023, it had no choice but to make an objection decision based on the information that it had in its possession.

95. The Tribunal notes that Section 59(1) of the Tax Procedures Act, 2015 provides that;“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorized officer may require any person, by notice in writing, to-(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person. "

96. The Tribunal notes that the Appellant expressly stated that she did not provide any documents to the Respondent.

97. The Tribunal notes that Section 56(1) of the Tax Procedures Act places the burden of proof on the taxpayer. The Section reads as follows: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

98. Further, Section 30 of the Tax Appeals Tribunal Act provides as follows: -“In any proceeding before the Tribunal the Appellant has the burden of proving-a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

99. In analyzing this matter, the Tribunal relied on its holding in Ushindi Exporters Limited V Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No. 7 of 2015) on the issue of burden of proof where the Tribunal held that:-“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act states:a.Where an appeal related to an assessment, that the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.By purporting to shift the burden of proving that the tax assessment against it was incorrect or should have been made differently, the Appellant failed in discharging the burden, placed upon it by law.”

100. The Tribunal also relied on its holding in the case of TAT No. 70 of 2017 Afya X-RAY Centre Limited v Commissioner of Domestic Taxes to emphasize the importance of a taxpayer discharging its burden of proof. In the said Appeal, the Tribunal held that: -“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to consider the Respondent’s finding after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent’s assessment, after all, the Appellant by law bears the burden of proof…”

101. After consideration of the documents submitted by the parties, the law and the case laws cited above, the Tribunal finds that the Appellant did not discharge her burden of proof and the Respondent was therefore justified in issuing the Income tax assessment for year 2017 and the VAT assessment for December 2017.

Final Decision 102. The upshot of the foregoing is that the Appeal partially succeeds. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 30th March 2023 is varied in the following terms: -i.The Respondent’s income tax assessment for year 2016 is hereby set aside.ii.The Respondent’s income tax assessment for year 2017 is hereby upheld.iii.The Respondent’s VAT assessment for December 2017 is hereby upheld.c.Each party to bear its own costs.

103. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024. GRACE MUKUHA -CHAIRPERSONJEPHTHAH NJAGI - MEMBERDR. WALTER ONGETI - MEMBERGLORIA A. OGAGA - MEMBERDR. ERICK KOMOLO - MEMBER