[2023] KETAT 309 (KLR)

Mutai v Commissioner of Domestic Taxes (Appeal 442 of 2022) [2023] KETAT 309 (KLR) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 309 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 442 of 2022

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

May 26, 2023

Between

Paul Kipyegon Mutai

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant carries on business of hotel in Litein Town of Kericho County.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The dispute arose from a verification exercise that the Respondent conducted on the Appellant’s affairs which resulted in the issuance of an additional VAT assessment amounting to Kshs 1,019,460/= for the period January 1, 2021 to June 8, 2021. The demand notice thereon was issued on December 9, 2021.

4. The Appellant lodged an Objection thereon on December 29, 2021.

5. The parties were engaged in several correspondence culminating in the issuance of an Objection Decision on April 4, 2022.

6. The Appellant being aggrieved by the said objection decision filed a Notice of Appeal on May 4, 2022.

The Appeal 7. The Appellant filed a Memorandum of Appeal on May 4, 2022 which was premised on the following grounds:a.That the Commissioner erred in law and fact by alleging that the Appellant made sales of Kshs 6,371,625. 00 on October 2021. b.That the Commissioner erred in law and fact in totality by demanding Kshs 1,019,460/-c.That the Commissioner erred in law and fact in disregarding the evidence tendered by the Appellant when he raised the objection.d.That the Commissioner erred in law and fact in applying wrong principles of law on arriving at the decision.

Appelant’s Case 8. The Appellant opposed the Appeal with the support of its Statement of Facts filed on the May 4, 2022 and the Written Submissions filed on the December 9, 2022.

9. The Appellant stated that he was ‘fined’ Kshs 50,000. 00 and an order was issued to register him on VAT on June 11, 2021 despite his protestation that his sales fell below the statutory requirement of Kshs 5,000,000.

10. The Appellant posited that the pre-assessment and the additional assessment notices were not proper assessments pursuant to the provisions of Section 31(8) of the Tax Procedures Act (TPA), 2015 because they did not meet the requirements that are provided for in law. That in his view, this was therefore, a null assessment.

11. It is the Appellant’s submission that in the course of December 2020, there was a system installation exercise in order to automate the operations of his business. That the said installation was done on 31 December 2020, and a training of staff commenced on January 1, 2021.

12. The Appellant submitted that out of the alleged total sales of Kshs 6,372,625. 00, a total of Kshs 5,605,170. 00 related to ‘test sales’ for the period January 2021 which was entered into the system for trial purposes during the training period as shown in receipt No KT-0200.

13. Based on the foregoing, the Appellant submitted that it was not subject to the requirements of Section 34(1) of the VATAct.

The Respondent’s Case 14. The Respondent defended this Appeal vide its Statement of Facts filed on July 22, 2022 and Written Submissions filed on November 30, 2022.

15. The Respondent stated that upon examining the Appellants’ records for the period January 1, 2021 to June 8, 2021, it established that while the Appellant had accumulated sales of Kshs 6,372,625. 00 for the period 2021, he had failed to register for VAT in contravention of Section 34 and 37 of the VATAct 2013.

16. The Respondent stated that this figure of sales was obtained from the Appellant’s system which indicated a sales figure of Kshs 6,372,625. 00 for the year 2021. The Respondent took a photo of the Appellant’s system to confirm its assertion. It thus compounded the Appellant on the June 11, 2021 and it also ordered it to register for VAT obligation effective January 1, 2021.

17. It thereafter issued the Appellant with a VAT additional assessment of principal tax amounting to Kshs 1,019,460 on the 9th of December 2021.

18. The Appellant objected to the said assessment on the December 29, 2021 and the Respondent sent him an email on the February 2, 2022 requesting him to provide the following documents for review.a.Audited Accounts for year 2020. b.Bank statements for the period January 2020 to October 2021. c.Sales ledger for the period January 2020 to October 2021. d.Monthly sales reports for the period January 2020 to October 2021.

19. The Respondent posited that it reviewed the Appellant’s records and issued an Objection decision on the 4th of April 2022.

20. The Respondent averred that the burden of proof is on the Appellant to produce the evidence challenging the Respondent’s decision under Section 56 (1) of the Tax Procedures Act 2015. That from the facts of the case, the Appellant did not provide any evidence to contradict the basis of the Respondent’s assessment.

21. The Respondent prayed that its Objection decision be upheld and the Appeal be dismissed with costs.

Issues for Determination 22. Having gleaned through the documents and pleadings presented by the parties in this Appeal, the Tribunal is of the view that the issues that present themselves for determination in this Appeal are :a.Whether the Respondent acted lawfully in registering the Appellant for VAT.b.Whether the Respondent’s Objection Decision dated April 4, 2022 is valid.

Analysis and Detrmination a. Whether the respondent acted lawfully in registering the appellant for VAT. 23. The crux of this dispute is whether the Appellant was registrable for VAT and the consequences that arise therefrom.

24. Section 34(1) ofVATAct provides as follows in regards to persons who are eligible and or are required to register for VAT:“(1)A person who in the course of a business—(a)has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; or(b)is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form.”

25. Section 34(6) of the VATAct gives the Respondent the power to register anyone for VAT. It provides as follows:“(6)If the Commissioner is satisfied that a person eligible to apply for registration has not done so within the time limit specified in subsection (1), the Commissioner shall register the person.”

26. It is clear from the above provisions of the law that anyone who deals in taxable supplies whose value exceeds five million shillings is required to register for VAT, failure to which the Respondent can register such a person for VAT.

27. Whereas the Respondent alleges that his business was below this minimum threshold, the Appellant alleges that the said business had sales of about Kshs 6,372,625. 00 for the year 2021, thereby exceeding the prescribed minimum requirement, and hence the reason for his registration for VAT.

28. The Appellant submitted that out of the alleged total sales of Kshs 6,372,625. 00, a total of Kshs 5,605,170/= related to test sales for the period January 2021 which was entered into its system during the training period as shown in receipt No KT-0200. In essence, he argued that his sales were below the threshold and were thus only inflated by the dummy exercise done during the installation of his new system.

29. The Tribunal has looked at the Appellant’s Exhibit 3 which showed how the dummy installation, test and training was done. A simple arithmetic of the figures provided on this document add up to Kshs 5,605,170. 00. The same figure as that which was relied on by the Respondent to register the Appellant for VAT.

30. The said Exhibit 3 also has a default date of January 1, 2021 with sales amounting to Kshs 5,605,17000 meaning that if the Respondent’s story is to be believed, then it would mean that the Appellant had carried out sales worth Kshs 5,605,170. 00 on the January 1, 2021.

31. Ordinarily the burden of proof lies with the Appellant under Section 56(1) of the TPA. In this case the Appellant provided proof that the document which was the subject matter of the VAT registration emanated from a dummy sales exercise. The Respondent was thus required to provide evidence affirming that the Appellant was wrong on its assertion that this were dummy sales. Such evidence was not presented and the Respondent did not dispute the exhibit confirming dummy sales (exhibit 3) which was presented by the Appelant. This view was affirmed in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya[2021] eKLR, where the court held as thus:“Burden of Proof” at the 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."

32. The Tribunal has looked at exhibit 3 and the photo of the sales presented to it by the Respondent and it is satisfied that the explanation by the Appellant that these figures emanated from the default/trial setting when the new system was being set up for this occurrence is plausible. The Appellant has therefore succeeded in proving his case within the remit of Section 56(1) of the TPA.

33. Flowing from the above, it follows that the Appellant’s business turnover for the period 2021 was way below the minimum threshold of Kshs 5 million. He did not therefore qualify for registration of VAT under Section 34(1) of the VATAct. The Respondents’ decision to invoke Section 34(6) of the VAT to register the Appellant for VAT was thus unlawful.

b. Whether the appellant’s objection decision dated April 4, 2022 is valid. 34. Having held that the Respondent erred in registering the Appellant for VAT, it follows that the Respondent’s Objection decision and tax consequences that emanated from the said illegal action are also a nullity.

Final Decision 35. The upshot of the above is that the Appeal is meritorious and therefore succeeds. The Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated April 4, 2022 be and is hereby set aside.c.Each party to bear its own costs.

36. It is so ordered

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY, 2023…………………………ROBERT M. MUTUMACHAIRPERSON………………………ELISHAH N. NJERUMEMBER.............................RODNEY O. OLUOCHMEMBER…………………………DELILAH K. NGALAMEMBER.........................EDWIN K. CHELUGETMEMBER