[2024] KETAT 281 (KLR)

Muhumed v Commissioner of Domestic Taxes (Tax Appeal 1567 of 2022) [2024] KETAT 281 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 281 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1567 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

March 8, 2024

Between

Mohamed Abdi Muhumed

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a registered taxpayer residing in Garissa.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) 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. On 17th January, 2022, the Respondent sent a notice of intention to review the Appellant's tax declarations.

4. The Respondent issued an additional assessment on 1st February, 2022.

5. On 20th May, 2022, the Appellant lodged an objection application.

6. On 23rd May, 2022, the Respondent requested for the provision of supporting documents through a notice of invalidly lodged objection.

7. On 18th July, 2022, the Respondent issued an objection decision invalidating the Appellant’s objection and thereby confirming the tax assessment.

8. Following its dissatisfaction with the Respondent’s objection decision, the Appellant filed a Notice of Appeal to the Tribunal on 22nd December, 2022.

The Appeal 9. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 22nd December, 2022:-i.The Commissioner in his objection decision dated 18th July 2022 sites the reason for the rejection of the objection as being late and further said that the taxpayer did not provide support documents as required by provisions of Section 51 of the Tax procedures Act, 2015. That the taxpayer would wish to demonstrate to this Honourable Tax Appeals Tribunal that this is not the case. The Commissioner did not request any additional information.ii.That the taxpayer would wish to provide to the Honourable Tax Appeals Tribunal that all the information required to support the objection was provided and explained in several meetings and interviews by the Commissioner of Investigation and Enforcement at the Kisumu Tax office.iii.That the taxpayer notes with prejudice that the Commissioner’s rejection of the objection by the letter date 18th July, 2022 and further by late objection Rejection Notices Referenced 194985936, 194985580 and 194985835 dated 18th July, 2022 did not address itself to whether the additional assessed taxes are confirmed partially or in totality.

Appellant’s Case 10. The Appellant’s case is premised on the following documents:i.The Appellant’s Statement of Facts dated 21st December, 2022 and filed 22nd December, 2022. ii.The Appellant’s written submissions dated 21st August, 2023 and filed on 22nd August, 2023 and the authorities attached thereto.

11. That KRA wished to collect Income tax principal tax amounting to Kshs. 70,708,363. 00, penalty Kshs.3,535,316. 00, interest Kshs.22,534,469. 00 and total tax Kshs.96,778,251. 00.

12. That the above was contained in a KRA communication of assessment letter dated 1st February 2022. That the letter further advised that the summary of analysis is limited to the information available to the Commissioner and the Appellant was advised to avail further information or documents that would wish to disclose within 7 days of the letter.

13. That on 8th April, 2020 the Commissioner advised the Appellant that he was being investigated for an offense of failure to file tax returns and remit taxes. That further, the Respondent ordered him to provide sales and purchase documents, individual income tax returns and lists of creditors and debtors in accordance with provisions of Section 59(1)(a) of Tax Procedures Act 2015.

14. That on 14th April 2020, the Appellant filed 2017, 2018 and 2019 Income tax resident returns.

15. That on 3rd June, 2020, the brokerage clients order account statements (sales and purchases reports), individual income tax return and list of creditors for 2017, 2018 and 2019 were presented by the Appellant to the Respondent’s office at KRA Kisumu Tax Office.

16. That on 17th July 2020, the brokerage clients order account statements (sales and purchases reports), individual income tax return and list of creditors for 2017, 2018 and 2019 were sent to the KRA email account.

17. That the Commissioner disregarded the information on nature of business and business income availed in the self-amended assessments and support documents presented at KRA Kisumu Tax Office and issued grossly overstated additional assessment on 21st January, 2022 contrary to Section 31(1) of the TPA.

18. That further the Commissioner did not undertake the verification of the self-amended assessments to ensure the best of Commissioner’s judgment before issuance of the additional assessments as required by Section 31(1) of the TPA.

19. That on 20th May, 2022 the Appellant objected to the Commissioner’s additional assessments and provided the grounds for objections, reasons for objections and amendments required.

20. That on 18th July 2022 the Commissioner issued a decision on the Appellant’s objection rejecting the objection to the additional assessments.

21. That on 17th November, 2022 the Commissioner issued Agency notices to the Appellant’s bank accounts in First Community Bank, Kenya Commercial Bank, Equity Bank, Cooperative Bank and National Bank.

22. That the Commissioner’s ascertainment of taxable income based on creditor funds or deposits/credit transactions in the bank accounts by use of 30% gross margin is unrealistic, illogical and unsupported in the business industry of brokerage where income is earned on commissions.

23. That for business entities in a similar industry, commission does not go beyond 7% and ranges as low as 0. 5% because an income-expenditure accounting where by the commission earned takes into consideration direct expenses a fact that was demonstrated to the Commissioner at Kisumu Tax office.

24. That the Appellant’s nature of business as a broker was explained in detail both in writing & interviews and support documents provided to the Commissioner at Kisumu KRA offices. That further the Appellant demonstrated that its taxable income is from brokerage commissions and schedules showing clients’ names, items descriptions, creditors’ funds, vendor payments and commissions was availed.

25. That the decision by the Commissioner to ignore the Appellant’s nature of business explanation and support evidences and the Respondent’s averments that the evidence was not provided to demonstrate commission broker is arbitrary, unreasonable and oppressive.

26. That the Commissioner’s decision to disallow exchange losses as allowable expenses ignores the nature of business of intermediary of seller and buyer across Kenya Tanzania borders. That the money deposited in the bank account funds in Kenya shillings is paid into Tanzania shillings in an informal exchange.

Appellant’s Prayers 27. The Appellant prayed that his Appeal be allowed and further:-i.That the impugned decision of the Commissioner of Domestic Taxes dated 18th July, 2022 plus all consequential demands and Agency Notices thereupon be reviewed and set aside ex- debito justitiae.ii.That the Honourable Tax Appeals Tribunal finds that the assessments KRA202202243680 - 2017, KRA202202243802-2018 and KRA202202243892-2019 are excessive, unfair and contrary to the provisions of the Income Tax Act.iii.That the costs of this Appeal be borne by the Respondent herein.

Respondent’s Case 28. The Respondent’s case is premised on the hereunder filed documents before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 18th January, 2023 together with the documents attached thereto.ii.The Respondent’s written submissions dated 8th August, 2023 and filed on 11th August, 2023.

29. The Respondent averred that the decision to arrive at the confirmed assessments was justified and was in conformity with the law under Sections 23(1), 24, 51(3) (c)(8)(9), 56 and 59 of the Tax Procedures Act.

30. The Respondent submitted that the Appellant's failure to provide the required documents made it difficult for it to determine the nature of the business the Appellant was involved in.

31. That Sections 29 and 31 of the Tax Procedures Act gives the Commissioner the mandate to make an assessment based on such information as may be available where a taxpayer has failed to submit a tax return for a reporting period. The same provides as follows;“29(1)“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 of-(a)the amount of the deficit in the case of a deficit carried forward under the Income Tax Act for the period(b)the amount of the excess in the case of an excess of input tax carried forward under the Value Added Tax Act,2013 for the period; or(c)the tax (including a nil amount) payable by the taxpayer for the period in any other case.”

32. That based on the foregoing, the Respondent was forced to rely on the information available then, return review analysis, and treated the income as business income since the Appellant had captured the income turnover under the business column in his annual returns for the period under review.

33. That further, due to the unclear nature of the Appellant's nature of business, the Respondent factored in 30% gross profit margin and disallowed the additional cost of sales claimed.

34. That to better understand the Gross Profit Margin, the Respondent wished to define and elaborate how to calculate gross profit margin as follows:i.Gross profit margin is a metric analysts use to assess business financial health by calculating the amount of money left over from product sales after subtracting the cost of goods sold (COGS).ii.A company's gross profit margin percentage is calculated by first subtracting the cost of goods sold (COGS) from the sales (Turnover). This figure is then divided by sales, to calculate the gross profit margin in percentage terms as hereunder;Gross Profit Margin={in= {Sales-Purchases} 100Sales

35. That the Respondent's judgment on Gross Profit Margin was arrived at best of the facts that since the Appellant had not provided any of the documents requested to enable the Commissioner in ascertainment of income and cost of sales as declared in the returns, the nature of the business of the taxpayer was therefore not clear.

36. That further, from the return analysis, the Respondent noted that cost of sales claimed by the taxpayer was huge, for instance, the Appellant's cost of sales accounts for 98% of the total expenses for the three periods under review (2017, 2018 and 2019).

37. The Respondent averred that a matter reviewed at Garissa TSO is independent from one in Kisumu TSO, it is therefore, not in order for the Appellant lo allege in the Appeal that he provided the documents to the Commissioner of Investigation and Enforcement at Kisumu TSO. That it is therefore the Respondent's contention that the matter the Domestic Tax Commissioner was reviewing at Garissa TSO is independent from the one under investigation at Kisumu TSO. The onus is on the Appellant to provide requested documents to both Commissioners based on their individual requests.

38. That be it as it may, the Respondent contended that the Commissioner at Garissa TSO in no way would have knowledge of the provision of documents to Commissioner of Investigation and Enforcement at Kisumu TSO when the Appellant did not give any notification thereof during the request of the documents for compliance and objection review.

39. The Respondent averred that a foreign exchange gain/loss occurs when a company buys and/ or sells goods and services in foreign currency, and that the currency fluctuates relative to their home currency. That it is the Respondent's averment that the expense can only be claimed when the loss is realized and not as provision, the above explains why the Respondent disallowed the Appellant's claims.

40. That pursuant to Section 56(1) of the Tax Procedures Act, the burden of proof is on the Appellant to prove that a tax decision is incorrect by producing documentary evidence to that effect.

41. That the Appellant was given an opportunity to present his case by way of documentary evidence which he squandered prior to the issuance of the objection decision.

42. The Respondent maintained that the Appellant has not provided any additional evidence to show that the Respondent's confirmed assessment was wrong and therefore the Appeal herein is devoid of any merits.

43. That contrary to the Appellant's averments, the Respondent's decision and assessment was legally and procedurally issued and the Appellant's objection duly considered and objection decision rendered in accordance with the law.

44. That Section 51(3) of the Tax Procedures Act states as follows;“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-i.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andii.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.iii.all the relevant documents relating to the objection have been submitted.”1. That the Appellant lodging the objection failed to meet the threshold set in Section 51(3) of the Tax Procedures Act as he did not provide the clear basis for which the Respondent could amend the assessment.2. That the Respondent in the circumstances, having considered the objection as lodged and the applicable law proceeded and confirmed the assessment.3. That this Honourable Tribunal has in a number of cases held the position that where the Appellant fails to lodge a valid objection, then the Commissioner is by all means justified in confirming the assessments earlier issued to the Appellant. That this was the position in Ngurumani Traders Limited V Commissioner of Investigations and Enforcement ( TAT No. 125 of 2017).4. That in the matter of Grace Njeri Githua V Commissioner Of Investigations & Enforcement (Tat No. 102 Of 2018), the Tribunal emphasized the fact that the burden is on the Appellant to prove the assessment was wrong.5. That it is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is not due from him. That in this regard, Section 56(1) of the Tax Procedures Act places the burden on the taxpayer to prove that a tax decision is incorrect. That in this particular case, the Appellant's objection was a mere statement and without evidence to back it up, the Respondent had no other option than to confirm the assessments.6. That Section 30 of the Tax Appeals Tribunal Act states as follows;“In a proceeding before the Tribunal, the appellant has the burden of proving­i.where an appeal relates to an assessment, that the assessment is excessive; orii.in any other case, that the tax decision should not have been made or should have been made differently.”

51. That further Section 107 of the Evidence Act states that:“1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.2. When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

52. That the law, therefore, places the onus on the Appellant to prove his case. That in this particular case, the Appellant has not proved that the tax decision should not have been made or should have been made differently. That the Appellant has the burden of proving that the decision of the Respondent is wrong. This can be done by providing documents that prove his case and the Appellant as a sign could have even attached the said documents in this Appeal to prove his case but it has failed to do so.

53. That this position is reinforced in Digital Box Limited V Commissioner of Investigations and Enforcement [2020].

54. The Respondent also relied on the following cases:i.Diversity Distributors Ltd -v- Commissioner of Domestic Taxes ( TAT Appeal No. 77 of 2018).ii.Mulherin vs Commissioner of Taxation [2013] FCAFC 115.

Respondent’s Prayers 55. The Respondent prayed that the Tribunal:i.Dismisses the Appeal.ii.Upholds the Respondent's assessment and decision dated 18th July, 2022. iii.Awards the Respondent the costs of the Appeal.

Issue for Determination 56. The Tribunal has evaluated the pleadings and documentation filed by both parties and is of the respectful view that the singular issue for its determination is: Whether the Respondent’s objection decision was justified.

Analysis and Determination 57. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

58. This dispute arose from the Respondent’s action of confirming by way of an objection decision its invalidation of the Appellant’s objection.

59. The Appellant argued that it provided comprehensive documents to the Respondent and therefore the Commissioner’s decision was not justified.

60. The Respondent submitted that the Appellant failed to provide the information it requested and therefore invalidated the Appellant’s objection as a result.

61. A review by the Tribunal of the pleadings submitted by the parties revealed that the Respondent issued a “notice of intention to verify tax declarations” on 17th January, 2022. In this notice, the Respondent requested the Appellant to avail various documents to enable this review. The timeline for provision of documents was 14 days from the date of the letter.

62. Thereafter, the Respondent issued a further letter on 1st February 2022 communicating its assessments and further requesting the Appellant to provide documents within 7 days.

63. The Appellant filed an objection on 20th May 2022 which the Respondent replied to on 23rd May 2022 by issuing an invalidation notice. The Respondent, in its letter, informed the Appellant that its objection was invalid due to non-provision of documents. Further, the Respondent requested the Appellant to provide documents to support its objection application within 14 days of the date of the Respondent’s letter.

64. Thereafter, the Respondent issued an objection decision on 18th July, 2022 that:i.Confirmed the invalidation notice of 23rd May 2022. ii.Informed the Appellant that it had not provided requisite documentation despite reminders, by the Respondent, to do so.iii.Informed the Appellant of its right to appeal the decision to the Tax Appeals Tribunal.

65. The Tribunal notes that while the Appellant in its pleadings stated that it provided documentation to the Respondent, it did not provide an iota of evidence to prove that indeed it submitted information to any of the KRA offices that it mentioned.

66. It is the Tribunal’s position that the Appellant having been served with an assessment was enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justifiable in the circumstances. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely place the burden of proof upon a taxpayer to discredit any tax assessment or decision.

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

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

69. In the instant case, the Tribunal noted that the Appellant had only averred that it provided information to the Respondent but did not provide any evidence to show that it indeed submitted the said documents to any of the KRA offices to prove that the Respondent’s decision was not justified.

70. It is the Tribunal’s position that it was upon the Appellant to furnish evidence to prove its case. This was the finding in Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR where the court held that:-“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

71. Further, the Tribunal buttresses the issue of burden of proof through the case of Boleyn International Limited vs. Commissioner of Investigations & Enforcement (Tax Appeals Tribunal No 55 of 2019), where the Appellant failed to provide documents, and the Tribunal held that there was no conceivable way the Respondent would have considered the objection as the same did not place itself within the parameters of Section 51(3) of the Tax Procedures Act.

72. Based on the aforementioned provisions of the law and the case law, the Tribunal finds that the Respondent’s invalidation decision was justified.

Final Decision 73. In view of the foregoing, the Tribunal finds that the Appeal lacks merit and accordingly makes the following Orders: -i.The Appeal be and is hereby dismissed.ii.The Respondent’s objection decision dated July 18, 2022 be and is hereby upheldiii.Each Party to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTH B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER