[2023] KETAT 104 (KLR)

Mugala Engineering & Construction Limited v Commissioner of Domestic Taxes (Tribunal Appeal 803 of 2021) [2023] KETAT 104 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 104 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 803 of 2021

RM Mutuma, Chair, E.N Njeru, RO Oluoch, D.K Ngala & EK Cheluget, Members

March 17, 2023

Between

Mugala Engineering & Construction Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and does construction business and supplies within the Republic of Kenya. The Appellant is registered for both Income tax and Value Added Tax since 2014 and 2015, respectively.

2. The Respondent is a principal officer appointed under the Kenya Revenue Authority Act Cap 469 of the laws of Kenya and the Kenya Revenue Authority has the mandate of collecting and accounting for revenue on behalf of the Republic of Kenya.

3. The Appellant was subjected to compliance check to establish whether it was compliant in filing of returns for both Income tax and VAT for the period of 2016 and 2017. It was discovered that it failed to file returns for the month of April 2017 for supplies to Ministry of Finance and further that it failed to declare supplies made to the County Government of Tharaka Nithi for contract awarded in 2016.

4. The Respondent issued an additional assessment for Income tax and VAT in the sum of Kshs 77,280,966. 07 as follows;a.Income tax assessment of the year 2016 on 14th November 2018 and on 15th June, 2020 for the year 2017. b.VAT for the month of March 2017 on 14th November, 2021, for February and October 2017 on 15th October, 2020.

5. Dissatisfied by the assessment the Appellant filed an objection dated 3rd September, 2021. The Respondent issued its Objection Decision dated 8th November, 2021 stating that the same had been rejected for failure to avail records to support the application that was time barred. It confirmed Income tax assessment at Ksh 51,907,128. 03 and VAT at Ksh 25,373,176 all-inclusive of penalties and interest for the period of 2016 to 2017.

6. Aggrieved by the Respondent’s Objection Decision the Appellant preferred this Appeal to the Tribunal.

The Appeal. 7. The Appeal is premised on the Memorandum of Appeal dated 10th December 2021 which has raised five grounds of appeal as listed below;a.That the Respondent erred in law and in fact by seeking to demand extra taxes amounting to Ksh 51,907,128. 03 and Ksh 25,373,838. 04 with respect to Income Tax and Value Added Tax, respectively, from the Appellant.b.That the Respondent erred in law and in fact by failing to consider the supportive documentation to the objection as adduced by the Appellant to support the fact that the Appellant is not the one who carried out the indicated contract.c.That the Respondent erred in law and in fact by assuming that the Appellant was contracted and made business from erroneous information when there was overwhelming documentary evidence that the Appellant never executed the contract.d.That the Respondent erred in law and fact by violating the Appellant’s legitimate expectations and the right to fair administrative action.e.That the Respondent demanded an amount that is not only erroneous, excessive and punitive and beyond the ability of the Appellant to pay contrary to the canons of taxation.

8. The Appellant prays and asks that this Appeal be allowed and that part of the decision of the Commissioner contained in the letter dated 8th November 2021 be vacated.

The Appellant’s Case 9. The Appellant’s case is premised on the Statement of Facts dated and filed on 10th December, 2021 and the written submissions filed on the 19th July, 2022.

10. The Appellant raised several issues that at the time of assessment the Appellant was not engaged in active business and therefore could not be assessed for taxes for work not done.

11. That the Respondent issued Agency Notice to the Appellant’s bank on the 24th June, 2021 and in response, the Appellant wrote to the Respondent on the 26th July seeking to understand the basis of the taxes demanded as per the Agency Notice as the company was not operating.

12. During the delivery of the letter the Appellant stated it was informed by the Respondent that the Respondent had information that the Appellant was awarded a contract in the sum of Ksh 105,030,000. 00 to develop Plot LR No. Karingani/Ndagani/2788 by the County Government of Tharaka Nithi that was to start in October 2017. The Respondent stated that that was not declared in VAT returns.

13. The Appellant from information obtained from the Respondent concerning the alleged contract, went ahead to request National Construction Authority NCA to provide to it the details of the company/person awarded the contract and the details were provided and forwarded to the Respondent vide a letter dated 3rd August 2021. As per the letter the Appellant was not the contractor.

14. That the Respondent then asked the Appellant to object to the assessment orders issued on iTax and the Appellant filed the objection dated 3rd September 2021. The objection was acknowledged by the Respondent and the Respondent on 17th September 2021 requested the Appellant for records in support of the objection application. The Appellant in response provided bank statements confirming that it did not receive any payments in respect of the alleged contract.

15. On 8th November, 2021 the Respondent issued an assessment confirming the assessment as above stated. The Appellant states it then paid the taxes not in dispute. It then appealed on the tax in dispute through this Appeal after filing of a Notice of Appeal with the Tribunal on 8th December, 2021.

16. It averred that the Respondent having been supplied with details from NCA as requested and having provided the relevant bank statements and documents requested, it was incumbent upon the Respondent to take the necessary steps to confirm from NCA whether the Appellant was awarded the contract as alleged by the Respondent.

17. It further made reference to the decision of this Tribunal in Shrejee Enterprises (K) limited Vs Commissioner of Investigations and Enforcement where the Tribunal observed that despite the fact that the burden of proof as to whether the tax decision was excessive, wrong or should have been made differently lay with the tax payer it would be unreasonable to ask the taxpayer to provide document which are not within its control.

18. That the main documents being in possession of another Government entity where the records were not related to the Appellant, the Respondent was the one better placed to obtain the same and share them with the Appellant. That by so doing, the Respondent violated the rights of the Appellant as envisaged in Article 47 of the Constitution and Section 4(1) of the Fair Administrative Actions Act.

19. That the powers donated to the Respondent must be applied fairly, justly, in an expeditious way and in a reasonable manner. The Respondent then should it have applied the law properly it would have demanded the taxes from the right contractor not the Appellant.

20. It stated that the Respondent at Paragraph 9(b) of its Statement of Facts insisted that it had intelligence report of contracts of above 50 Million awarded to different contractors and the Appellant was awarded a contract of 105 Million which was to begin in October 2017 and the Appellant failed to declare both income tax and VAT.

21. The Appellant went ahead and identified only one issue for determination to wit;

i. Whether the Appellant was the contractor in the Karingani/Ndagani/2788 in Tharaka Nithi County and thereby necessitating the decision by the Respondent to demand income tax and VAT ? 22. It stated it countered the Agency Notice vide a letter dated 3rd august 2021 by providing a detailed print out letter from NCA that indeed it was not awarded the alleged contract. Thus, the burden shifted to the Respondent to counter it or provide information of how in any way the company awarded the contract was related to the Appellant. It did not do so.

23. The Appellant finally relied on Republic Vs Kenya Revenue Authority Ex-parte Jaffer Mujtab Mohamed [2015] eKLR where the judge in similar situation stated the taxing authority cannot just pick a figure from the air and impose on a tax payer.

THE RESPONDENT’S CASE 24. The Respondent opposed the Appeal by filing its Statement of Facts dated 6th December, 2022 and filed with the Tribunal on 7th January, 2022 and the written submissions dated 12th July, 2022 together with the legal authorities filed therewith.

25. The Respondent’s chronology of events is extensively similar to that of the Appellant, and it affirms that the Appellant was subjected to a tax compliance check and found to be non-compliant.

26. That intelligence received and the iTax VAT returns filed was analyzed for the months of February & October 2017 and income tax returns for 2017 to determine whether the Appellant had declared incomes earned.

27. That in a further review it was established that the Appellant did not declare supplies made to the Ministry of Finance in the month of April 2017. It also failed to declare supplies made to Isiolo County Government in the month of March 2018 with a taxable value of Kshs 830,344. 83 as well as business income of Kshs 350,000. 00 in the year 2016.

28. That the Respondent requested the Appellant via email to explain the inconsistencies in it returns for 2016 and 2017 but it did not. The additional assessment was therefore raised on 15th June 2020 based on the information below;a.For February 2021 (sic) VAT returns, undeclared supplies made to the ministry of finance with taxable value of Kshs 350,000. 00 was brought to charge.b.For October 2021 (sic) VAT returns, undeclared supplies based on the contract awarded for development on plot number LR Karingani/Ndagani/2788 valued at Kshs 105,030,000. 00 was brought to charge.c.For the year 2017 Income Tax, the total undeclared business incomes of 106,240,344. 83 was brought to charge.

29. That a total additional assessment of 77,280,966. 07 was raised as below; Income tax.Year Principal Tax Penalty Interest Totals

2016 105,000. 00 41,000. 01 56,699. 84 202,699. 85

2017 31,872,103. 45 6,446,041. 41 13,386,283. 32 51,704,428. 18

51,907,128. 03

Feb 2017 35,000. 00 21,200. 00 19,600. 00 75,800. 00

March 2017 86,034. 47 31,508. 61 47,318. 96 164,862. 04

Oct 2017 14,704,200. 00 3,370,960. 00 7,058,016. 00 25,133,176. 00

25,373,838. 04

Grand Total 77,280,966. 07

30. The Respondent contended that having requested for documents that the Appellant was requested, it failed to produce the same. It stated that even the bank statements availed were not sufficient hence the extra assessment of the taxes as per the Objection Decision.

31. It relied on the following Sections of the TPA;a.56(1) as regards the burden of proof that the assessment was not proper,b.94 as regards failure to submit tax return or document,c.95 as regards failure to pay tax,d.24(1) as to submission of returns in the approved form,e.29 & 31 regarding default assessment and amendment of assessment,f.59 as to requiring of any person to produce any documents needed by the Commissioner; andg.Income Tax Act 54A & 54B as to the keeping of records.

32. Among other decisions relied by the Respondent on is TAT 67 of 2017 Monaco Engineering Limited Vs Commissioner Domestic Taxes where the Tribunal interpreted the issue of burden of proof.

Respondents Prayers 33. It prays that the Tribunal finds;a.That the Respondent’s Objection Decision be upheld.b.That the outstanding tax arrears of Ksh 77,280,966. 07 are due and payable by the Appellant.

34. That the Appeal herein be dismissed with costs to the Respondent.

Issues For Determination 35. The Tribunal has considered pleadings, Statements of Facts, Submissions and the documents filed by both parties and has come to the considered opinion that there are two issues which fall for determination;a.Whether the Respondent based on the contract of development of Plot LR No. Karingani/Ndagani/2788 of contract value of Ksh 105,030,000. 00 awarded by Tharaka Nithi County Government justly levied taxes on the Appellant.b.Whether the Objection Decision dated 8th November 2020 and the assessment of Ksh 77,280,966. 07 is proper and justified.

Analysis And Findings a. Whether the Respondent, based on the contract of development of plot LR No. Karingani/Ndagani/2788 for a value of Ksh 105,030,000. 00 awarded by Tharaka Nithi County Government justly levied taxes on the Appellant. 36. The Respondent has stated that the Appellant did not declare income and did not file tax returns for the contract for the sum of Ksh 105,030,000. 00. It therefore brought the same to charge both for Income Tax and VAT. As for Income tax the sum of Ksh 51,704,428. 18 for the year 2017 and for VAT the sum of Ksh 25,133,176. 00 for the month of October 2017 as per the above tables and the stated arguments.

37. The Appellant on the other hand has stated it was not awarded the said contract and did not therefore earn income as alleged by the Respondent and there was nothing to declare.

38. In an email dated 17th September, 2021, the Respondent wrote to the Appellant requesting for documents and the said mail read in part as follows;“These records should include certified bank statements from the year 2016 to 2017, official letter from National Construction Authority showing that the said tender was not performed by Mugala Engineering and construction Limited…’’

39. It also requested for other documents including several books of accounts. The Appellant responded as thus;“Find attached bank statements for 2016 to 2018. We will share the accounts after we get response from the accountant who has indicated that he will come next week to assist us with the same……with respect to the NCA, we are of the considered opinion that you as KRA is better placed to request this information as Government authority to another authority…’’

40. Later however, probably on the realization of the burden of proof on tax matters, the Appellant seemed to have stopped asking the Respondent to request for the letter from NCA, and wrote to NCA and obtained details of whom the contract was awarded to. It said NCA responded to its letter and provided details as asked but declined to divulge more information on the same.

41. Through its tax consultants, Bsc Tax and Business Advisory Services Ltd, the Appellant wrote on 3rd august 2021 to the Respondent in the letter stamped and received by the Respondent on the same date, and the letter partly read;“…we did background check with the National Construction Authority (NCA) and established some specific details of the project which we would like to share with you as below…’’

42. The details are put in a table and among others it states that the contactor was one Ibeco builders, it gave the names of consultants; architect and engineer, together with their telephone numbers and emails and attached a print out from NCA with some of the details.

43. It is the considered view of the Tribunal as per the TPA Section 56(1) which reads;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”;

44. Further Section 30 of the TAT Act states that:-“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.”

45. The Tribunal is satisfied that the Appellant had discharged the burden of proof as it had proven that the contract was not awarded to it and therefore could not be charged tax on income it did not earn.

46. Section 59(1) of the TPA reads as follows:-“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 authorised 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; At 59(3) it reads;The Commissioner or authorised officer may require that the information referred to in subsection (1) be—

(a) given on oath, verbally or in writing, and, for that purpose, the Commissioner or authorised officer may administer the oath; or…” 47. In purporting to ask the Appellant to produce a letter which the Appellant was not in possession of, nor was it in control of, the Respondent was putting extra burden on the Appellant which to the Tribunal’s view was not intended by the statute. The burden in Section 30 and Section 56, supra, shifted squarely to the sitting space of the Respondent once the Appellant stated through the letter that it was not awarded the contract and produced the details of the person who was awarded.

48. Further it was incumbent upon the Respondent to ask the Appellant to put its assertion on oath as per Section 59(3) if it did not trust the information given, or in the alternative, require clarification from the counterpart, the National Construction Authority,NCA.

49. This finding gets credence from the Judgment in the case of Kenya Revenue Authority Vs Man Diesel & Turbo Se,Kenya [2021] eKLR where justice Mutivo observed at paragraph 39 as follows:-“As I observed in ITA No 078 of 2020, Burden of Proof, is a legal term used to assign evidentiary responsibilities to parties in litigation. The party that carries the burden of proof must produce evidence to meet a threshold or standard in order to prove their claim. If a party fails to Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a Tax payer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner’s position. This is the basic principle. However, there are some situations where this responsibility or onus is reversed. The onus may also shift based on the stage of the proceedings and the actions taken by the parties.

50. At paragraph 48, the Judge continues as follows:-“The burden placed upon the Respondent by the law was to establish by evidence that it was not the importer and to confirm its role under the contract. Simply put, it was required to demonstrate that the tax was not due. The test is whether the Respondent established a prima facie case and having done so, the evidential burden shifted to the Appellant to persuade the TAT on the contrary. It never did so.”

51. It was also observed in the case of Republic Vs Kenya Revenue Authority Exparte Jaffer Mohamed [2015] eKLR at paragraph 46 by Justice Odunga as follows;“Therefore, whereas this Court is not entitled to question the merits of the decision of taxing authority, that authority must exercise its powers fairly and there ought to be a basis for the exercise of such powers. A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court in intervening.”

52. Section 29 (1) of the TPA states;-“where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment") of—

53. The Section 31(1) of the TPA provides as follows;-“Subject to this section, 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 for a reporting period to ensure that— (a) in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;(b) in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or (c) in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

54. It seems that the Respondent did not use the available information including any information it could get under Section 59 of TPA it therefore could not have applied Section 31 of the TPA as quoted above, as it would not be available to it in respect of the contract allegedly awarded to the Appellant.

55. It follows therefore that the Respondents assessment of the tax based on the contract was not justified.

b. Whether the Objection Decision dated 8th November 2020 and the assessment of Ksh 77,280,966. 07 is proper and justified. 56. The Appellant wrote to the Respondent that it would provide documents as requested by the Respondent and it stated in the email letter dated 28th September 2021 as follows:-“…as discussed, please note that we requested the bank for the statement and they indicated that it may take some time since the years involved are past and would require to be retrieved. For accounts and invoices, the management have put in place plans to retrieve the same since the accountant who was involved left the company a long time ago…”

57. Subsequent to that, the Appellant later only provided to the Respondent the bank statement for the period 2016 to 2018. It did not provide any other documents neither did it attach any to the pleadings before the Tribunal in respect of that request, except it attached payment printouts for a tax payment of Kshs 105,000. 00 dated 2nd December 2021 for income tax of the year 2016, and VAT for March 2017, February 2017, and February 2016 all in total of Ksh 177,035. 00.

58. In that aspect the Respondent stated in its Objection Decision as thus;-“Kindly note that the Commissioner has rejected your Objection application for failure to avail records to support application which was time barred.”

59. The Respondent then referred to the assessment as per the two tables above for income tax and Value Added Tax. The Tribunal agrees with the Respondent in this aspect as the Appellant never provided the accounting records as requested.

60. The Tribunal finds therefore that the following additional assessments were proper and justified.ii.Income tax for the year 2016 of Ksh 202,699. 85iii.VAT for February 2017 of Ksh 75,800. 00iv.VAT for March 2017 of Ksh 164,862. 04 final decision

61. The Tribunal in the end determines that the Appeal is merited and succeeds partly and proceeds to make the following Orders;a.That the Appeal be and is hereby partly allowed.b.That the Objection Decision date 8th November 2021 and the assessment of both income tax and VAT in the sum of Ksh 77,280,966. 07 be and is hereby varied as follows:i.The assessment relating to the contract of development of Plot LR No. Karingani/Ndagani/2788 be and is hereby set aside.ii.The assessment relating to Income tax for the year 2016 of Ksh 202,699. 85 and VAT for February & March 2017 of Ksh 75,800. 00 and Ksh 164,862. 04 respectively, be and are hereby upheld.c.Each party to bear its own costs.

62. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023………………………………….ROBERT M. MUTUMACHAIRPERSON………………………………….ELISHAH NJERUMEMBER………………………………….RODNEY O. OLUOCHMEMBER………………………………….DELILAH K. NGALAMEMBER………………………………….EDWIN K. CHELUGETMEMBER