[2024] KETAT 51 (KLR)

Mugoiri Investment Company Limited v Commissioner of Domestic Taxes (Tax Appeal 1161 of 2022) [2024] KETAT 51 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 51 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1161 of 2022

RM Mutuma, Chair, EN Njeru, BK Terer, M Makau & W Ongeti, Members

January 26, 2024

Between

Mugoiri Investment Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act. Its main form of business is manufacturing food products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authourity is mandated with the responsibility for the assessment, collection, receipting, and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out under the Schedule to the said Act.

3. The Respondent noted from the available IFMIS data that the Appellant had supplied goods worth Kshs. 25,471,000. 00 and Kshs. 4,367,000. 00 in the years 2020 and 2021 respectively to the State Department of Correctional Services and unclaimed Withholding VAT and Income tax credits in the Appellant’s ledgers.

4. The Respondent consequently issued the Appellant with withholding assessments on 30th May 2022 after which the Appellant lodged an objection on 29th July 2022 adducing documentation which excluded a letter from the Permanent Secretary in charge of the State Department of Correctional Services canceling the withholding tax deducted erroneously which was expected by the Appellant in due course.

5. The Respondent, on 22nd August 2022 requested more documents from the Appellant and subsequently issued an objection decision on 26th August 2022 confirming the additional assessments.

6. Dissatisfied with the Objection decision, the Appellant filed the instant Appeal.

The Appeal 7. The Appeal is premised on the following grounds listed in the Memorandum of Appeal dated 7th October 2022 and filed on 11th October 2022: -a.The Respondent erred in law and fact by failing to acknowledge that the supplies on which the VAT assessment was based were exempt supplies.b.The Respondent erred in law and fact by failing to consider the information that a letter from the Permanent Secretary in charge of the State Department of Correctional Services was confirming the erroneous deduction of withholding tax.c.The Respondent erred in law and fact by failing to accept the invoices submitted citing inconsistency and illegibility.d.The Respondent erred in law and fact by failing to consider the information that the main director of the Appellant company had passed on leaving the widow to handle a company whose operations she knew nothing about.

The Appellant’s Case 8. The Appellant’s case was premised on its Statement of Facts dated 7th October 2022 and filed on 11th October 2022.

9. The Appellant stated that on 1st February 2022, the Respondent’s Office at Thika wrote a letter to it stating that they have information through IFMIS that the Appellant had undeclared transactions with a state agency, the State Department of Correctional Services and that the Appellant needed to pay Kshs. 4,059,468. 30 as VAT from the undeclared income within 7 days.

10. It argued that it replied to the Respondent requesting time to gather the invoices and prove that the supplies were exempt, after which the Appellant forwarded what it could find with the consequence of a demand notice issued on 7th April 2022 including Corporate tax arising from the IFMIS amounting to Kshs. 4,536,558. 57.

11. It contended that the Respondent further demanded documents for 2020 and 2021, followed by a demand notice dated 31st May 2022 for tax arrears amounting to Kshs. 9,970,974 being VAT of Kshs 2,082,187 and Corporate tax of Kshs. 7,888,787. 54.

12. It asserted that it objected to the assessment within the stipulated time on 29th June 2022 and attached the required documents and on 13th July 2022, the Respondent replied to the objection claiming it was a late objection which the Appellant refused to agree with, and responded accordingly.

13. It averred that the Respondent later, on 19th August 2022, through its legal department asked the Appellant to supply reasons for the late objection and the Appellant stood by its position that it was not a late objection and could not comply, an averment that was agreed upon by the Respondent.

14. It contended that the Respondent requested the Appellant to provide documents supporting the objection within three days which included the weekend after which a telephone conversation followed by an extension of one day to supply documents on Tuesday 23rd August 2022 with the specifications provided on 22nd August 2022, one day to the deadline.

15. It reiterated that within such short notice, it could only provide what was available and asked for more time to provide the rest including a letter expected from the Permanent Secretary in charge of the State Department of Correctional Services explaining that it supplies exempt supplies and that the withholding tax deducted was erroneous. The process of canceling the same was underway.

16. It stated that the letter addressed to the Respondent with a copy to the Appellant was delayed until 31st August 2022 but by that time the Respondent had made an objection decision. It contended that the letter could only be signed by the respective Principal Secretary who was out of the Country but the letter was on her desk.

17. It asserted that the objection decision dated 26th August 2022 put the tax payable at Kshs. 10,355,014 inclusive of penalties and interest.

18. Seeing as the Appellant did not file its submissions with the Tribunal, the Tribunal will rely on the pleadings before it and the documents attached to determine the totality of the Appellant’s case.

The Appellant’s prayers 19. The Appellant prayed that the Tribunal finds for the Appellant’s case and order that: -a.This Appeal be allowed and the objection decision be set aside;b.Such further orders as this Honourable Tribunal may deem just and reasonable be issued.

The Respondent’s Case 20. The Respondent’s case is premised on its Statement of Facts dated and filed on 2nd November 2022.

21. It stated that the Appellant’s customer withheld VAT on the purported exempt supplies and the Appellant was asked to seek corroborative evidence from its customer in the form of a letter from the Appellant’s customer and a certificate of WHTVAT cancellation which was not provided leading to confirmation of the assessments.

22. It averred that the purported letter from the Appellant’s customer was never availed and the same is an afterthought tailor-made for the instant Appeal.

23. It reiterated that the purchase invoices were addressed to persons other than the Appellant thus the expenditure was not incurred by the Appellant who was asked to avail specific records to aid in the substantive review of the matter but failed to produce them.

24. It averred that while it sympathizes with the Appellant’s loss, the Appellant failed to avail the documents requested and the Respondent issued an objection decision based on the documents availed and the information drawn from them.

25. It stated that the Appellant consequently failed to meet the burden of proof contrary to Section 56 (1) of the Tax Procedures Act which provides that in any proceedings, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

26. The Respondent submitted that the Assessment Order issued as well as the confirmation assessment notices issued are valid for reasons that although the Appellant was given an opportunity to sort out the inconsistencies/variances noted in its returns, the Appellant failed to support its notice of objection even with reminders thus being in breach of Section 51 (3) of the Tax Procedures Act.

27. It relied on Sections 24 and 31 (1) of the Tax Procedures Act 2015 and asserted that based on the available information, it established that there were variances noted between what was declared in the Appellant’s Income tax assessment and the monthly VAT return and that the Appellant failed to declare the corresponding sales in its VAT returns, therefore, bringing the same to charge.

28. It cited Section 29 of the Tax Procedures Act and reiterated that it relied on the information available after the Appellant failed to file its returns after and it was advised to validate its objection by providing the following documents but failed to do so:i.Evidence that the erroneous withholding credit from the state agency had been reversed;ii.The source documents relating to the disallowed expenses in 2020;iii.Contract between the Appellant and the employing state agency;iv.Certified bank statements;v.payment vouchers;vi.Invoices issued to the state agency; and vii. Financial Statements for 2020.

29. It cited Section 43 (2) of the VAT Act, Section 23 (1) of the Tax Procedures Act, and the case of Income Tax Appeal E028 of 2020 Commissioner of Investigations and Enforcement vs. Evans Odhiambo Kidero and contended that it was guided by the law in conducting an examination of the Appellant’s business operations.

30. It further relied on Section 62 of the VAT Act and the cases of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya (2021) eKLR; Kilburn vs. Bedford (H.M. Inspector of Taxes) [3]; and Primarosa Flowers Ltd vs. Commissioner of Domestic Taxes [2019] eKLR to buttress its submission that the burden is on the taxpayer or on the person claiming that the tax has been paid or that any goods or services are exempt from payment of tax to prove that any tax has been paid or that any goods or services are exempt from payment of tax and that the Appellant has failed to support the provided explanations by providing the relevant records, the Respondent had no option but to confirm the VAT Assessments.

31. The Respondent maintained that the Appellant had failed to prove that the Respondent’s tax decision was in any way inconsistent based on extraneous factors, excessive or incorrect and the Respondent has demonstrated to the Tribunal what was considered in arriving at the assessment and subsequently the objection decision which are within the law with reasons for its findings thus its assessment was hinged on the letter of the law.

The Respondent’s prayers 32. The Respondent prayed for the Tribunal to find that:a.The confirmed assessment notices issued be affirmed and declared;b.The taxes demanded by the Respondent from the Appellant were properly assessed in conformity with the law and the same is due and payable; andc.The Appeal be dismissed for lack of merit with costs to the Respondent.

Issues for Determination 33. After perusing the Memorandum of Appeal and the parties' Statements of Facts, with the Respondent’s submissions and documentation attached therewith, the Tribunal believes that the following is the main issue for determination:-

Whether the Appellant has discharged its burden of proving that Respondent’s Objection Decision dated 26th August 2022 confirming the Additional Assessments was unjustified. Analysis and Findings 34. The Tribunal wishes to analyse the issue as hereinunder.

Whether the Appellant has discharged its burden of proving that Respondent’s Objection Decision dated 26th August 2022 confirming the Additional Assessments was unjustified. 35. The Appellant contended that it could not provide all the documents within time including a letter expected from the Permanent Secretary in charge of the State Department of Correctional Services explaining that it supplies exempt supplies and withholding tax deducted was erroneous and that the process of canceling the same was underway.

36. It stated that the letter addressed to the Respondent with a copy to the Appellant was delayed until 31st August 2022 but by that time the Respondent had made an objection decision. It contended that the letter could only be signed by the respective Principal Secretary who was out of the Country but the letter was on her desk.

37. The Respondent maintained that the Appellant has failed to prove that the Respondent’s tax decision was in any way inconsistent based on extraneous factors, excessive or incorrect and the Respondent has demonstrated to the Tribunal what was considered in arriving at the assessment and subsequently the objection decision which are within the law with reasons for its findings thus its assessment was hinged on the letter of the law.

38. On the burden of proof, Section 56 of the Tax Procedures 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”

39. It is apparent to the Tribunal that the Appellant requested the Respondent for more time to gather documents from the State Department of Corrections to prove its position which were only available to the Appellant on 31st August 2022 by which time the Respondent had already rendered its decision.

40. The same documents have now been adduced before the Tribunal, a document by the Appellant from the State Department of Corrections dated 31st August 2022.

41. In determining whether to allow the evidence documents, the Tribunal is guided by the case of Commissioner of Income Tax vs. Total Kenya Limited (2021) eKLR where it was held:“In Tarmohamed & Another vs. Lakhani & Company [1958] EA 567, the Court of Appeal for Eastern Africa adopted the decision in Ladd vs. Marshall [1954] WLR 1489 and stated: -Except in cases where the application for additional evidence is based on fraud or surprise: to justify the reception of fresh evidence or a new trial, three conditions must be fulfilled: first, it must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; secondly, the evidence must be such that, if given, it would probably have an important influence on the result of the case, though it need not be decisive; thirdly, the evidence must be such as is presumably to be believed, or in other words, it must be apparently credible, though it need not be incontrovertible.”

42. Guided by the above, the Tribunal observes that the matters which ensued were well beyond the Appellant’s control as the Appellant could not force the Principal Secretary to issue the letter much earlier than it was issued.

43. For that matter, it is the Tribunal’s finding that the Appellant has satisfactorily discharged its burden that the tax decision should have been made differently had the Respondent had the opportunity to take the letter from the Principal Secretary into account while making its decision.

Final Decision 44. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following Orders; -i.The Appeal be and is hereby allowed.ii.The Respondent’s objection decision dated 26th August 2022 be and is hereby set aside.iii.The Respondent be at liberty to review the Appellant’s tax affairs taking into account the letter from the Principal Secretary to the State Department of Corrections dated 31st August 2022 and issue the appropriate decision with sixty (60) days of the date of delivery of this Judgment.iv.Each party to bear its own costs.

45. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERBONIFACE K. TERER - MEMBERMUTISO MAKAU - MEMBERDR. WALTER ONGETI - MEMBER