[2025] KETAT 243 (KLR)

Mwangi v Commissioner of Domestic Taxes (Tax Appeal E031 of 2024) [2025] KETAT 243 (KLR) (9 May 2025) (Judgment)

Neutral citation: [2025] KETAT 243 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E031 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

May 9, 2025

Between

Julias Karanja Mwangi

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a taxpayer residing in Kakamega County with various tax obligations including Income Tax, VAT and PAYE. He is the Director and Shareholder of Julika Automobiles Limited and engaged in the business of supplying petrol.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 and 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. Upon conducting a compliance check on the Appellant which compared VAT3 returns and withholding tax credits in the Appellant’s ledger, the Respondent issued a pre-assessment notice on 15th March 2023 against the Appellant.

4. On 23rd March 2023, the Respondent issued default VAT assessments amounting to Ksh 3,973,732. 00 for the January 2021 to February 2023 review period followed by Income Tax assessments on 24th March 2024 totaling Ksh 51,446,698. 00 for the years 2019 and 2020 review period.

5. On 9th August 2023, the Appellant’s banker was issued with Agency notice based on 23 assessments leading to a freeze of Appellant’s bank accounts on 4th October 2023

6. On 5th October 2023, the Appellant lodged an application seeking enlargement of time within which to file an objection. On 9th October 2023, the Respondent requested for validation of objection through supportive documentation. The application was allowed by the Respondent on 11th October 2023 who again requested for validation of the objection by providing requisite documents.

7. The Appellant validated the same by submitting requested documents on 25th October 2023.

8. On 1st December 2023, the Respondent confirmed the assessments through an objection decision citing Appellant’s failure to provide relevant supporting documents.

11. Aggrieved by the Respondent’s objection decision dated 1st December 2023, the Appellant filed its notice of appeal dated 29th December 2023 at the Tribunal.

12. The Tribunal having rendered its judgement on 21st November 2024, the Appellant on 28th November 2024 filed a notice of motion pursuant to Section 29 Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) seeking the Tribunal to review the Judgement on the basis that the Judgement inadvertently failed to consider all documents filed by the Appellant and that the Judgment contained errors and mistakes apparent on the face of the record. An Application that was allowed by the Tribunal in a Ruling dated 4th April 2025.

The Appeal 13. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 10th January 2024 and filed on 12th January, 2024:i.That the Respondent erred in law and fact by failing and refusing to amend Appellant’s assessments in full despite the Appellant having lodged valid objection application in accordance with Section 51 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).ii.That the Respondent erred in fact and law by issuing an objection decision with glaring errors and failing to ensure that the Appellant was liable to pay the correct amount of tax in respect of the assessed period.iii.That the Respondent erred in fact and in law by holding that the Respondent had raised objections against assessments on both income tax and VAT despite the Appellant having raised objections against VAT assessments only.iv.That the Respondent erred in fact and in law by failing to acknowledge that the Appellant’s registered business had ceased existing and that the business was now under a limited liability company. Thus, erroneously issuing additional assessments to the Appellant’s business which had ceased existing since July 2019 after its closure.v.That the Respondent erred in fact and in law by issuing the subject additional assessments to the Appellant’s business yet the same had already been accounted for and paid by Julika Automobile Limited in 2021. vi.That the Respondent erred in fact and in law by issuing additional assessments based on wrong petroleum tax rate of 16% instead of the official petroleum tax rate of 8%.vii.That the Respondent erred in fact and in law by failing to consider all of the evidentiary documents supporting the Appellant’s VAT case and objection raised.viii.That the Respondent erred in fact and in law by making and issuing an objection decision that failed to give adequate reasons on why its objections raised were rejected.ix.That the Respondent erred in fact and in law by finding and holding that the Appellant raised objections against assessments on income tax.x.That the Respondent further erred in fact and in law by making and issuing the objection decision with respect to additional assessments on income tax prematurely before and just as the Appellant was in the process of filing objections on the same.xi.That the Respondent erred in fact and in law by making and issuing an objection decision that addressed assessment that had not been objected by the Appellant.xii.That the Respondent erred in both fact and law by breaching the mandatory provisions of the TPA on raising objections and the making of objection decisions.

Appellant’s Case 14. The Appellant’s Statement of Facts were dated 10th January 2024 and filed on 12th January, 2024.

15. The Appellant averred that he registered Julika Automobiles Limited in the year 2003 but never traded with it choosing instead to conduct his businesses through another company, Julika Automobiles, a sole proprietorship, until it was formally deregistered by the Registrar of Companies on 9th July 2019.

16. The Appellant stated that at the point of closure of the sole proprietorship, he had ongoing contracts with various organizations including government ministries/agencies and individual persons for the supply of petrol and begun trading with Julika Automobiles Limited in the year 2019.

17. The Appellant asserted that the Respondent failed to acknowledge the business change-over and erroneously issued additional assessments to the previous business which had ceased to exist in the year 2019 and declining to allow the Appellant to cancel the withholding certificates and transfer them to Julika Automobiles Limited ledgers leading to the current dispute.

18. The Appellant stated that he was surprised by the Respondent’s Agency notice of 9th August 2023 to his banker which contained 23 assessments which had been raised previously on 23rd and 24th March 2023 respectively and had been given without prior notice. Subsequently on 4th October 2023, the Appellant was informed by his bank that his bank accounts had been frozen by the Respondent through the Agency notice.

19. The Appellant stated that on 5th October 2023, the Respondent granted the Appellant’s Application to object out of time. In their objection, the Appellant stated that the VAT assessments were based on withholding tax certificates from Appellant’s customers (government ministries/agencies and businesses) despite the same having been declared and accounted for in the accounts of Julika Automobile Limited during the relevant transactions.

20. It was the Appellant’s case that the Respondent erred by raising VAT assessments using the standard rate of 16% instead of the appropriate rate of 8% for petrol which was a violation of Section 31(1)(c) of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act).

21. The Appellant challenged the Respondent’s assessment of Income Tax stating that he had not objected to the same as he was in the process of preparing his objection when the Respondent rendered its objection decision.

Appellant’s Prayer 22. The Appellant’s prayers were that;a.This Appeal be allowed with costs.b.The whole objection decision dated 1st December 2023 be set aside.c.The Appellant be discharged from paying the VAT and income taxes, plus any penalties and interest thereof and arising from the subject assessment orders and the objection decision.d.Any other orders as the Tribunal may deem fit.

The Respondent’s Case 23. The Respondent replied to the Appeal through its Statement of Facts dated and filed on 15th February 2024.

24. The Respondent asserted that its compliance check on the Appellant established that the Appellant had not filed returns for both income tax and VAT. As a result, the Respondent made assessment for VAT based on hanging withholding tax credits which were in the Appellant’s ledger and had no corresponding income declaration for the January 2021 to February 2023 review period. Similarly, income tax assessment was because the Appellant was established to be a non-filer who despite having traded as evidenced by VAT3 returns and withholding tax credits in their ledger failed to declare income for the 2019 to 2020 years of income.

25. The Respondent asserted that it notified the Appellant of the identified variances through a pre-assessment notice sent on 15th March 2023 which the Appellant failed, refused and neglected to address concerns raised therein leading to issuance of default and additional assessments.

26. The Respondent asserted that the Appellant’s objection only challenged an amount of Ksh 8,612,296. 00 comprising both VAT and income tax as captured by the Agency Notice. A position that the Respondent clarified in their electronic mail of 30th October 2023 reiterating that whereas VAT was Ksh 3,973,732. 00, income tax amounted to Ksh 51,446,698. 00.

Respondent’s Prayer 27. The Respondent Sought the following reliefs:i.That the Tribunal finds the objection decision dated 1st December 2023 as proper in law; andii.That the Tribunal dismisses the Appeal with costs for want of merit.

Parties’ Written Submissions 28. The Appellant’s written submissions dated 28th August 2024 were filed on even date and were adopted by the Tribunal during the hearing on 11th September, 2024. The Appellant submitted as hereinunder:

29. The Appellant asserted that the impugned withholding tax credits were as a result of withholding VAT certificates that had erroneously been issued to the Appellant’s Sole Proprietorship’s PIN A001325754T instead of the Julika Automobiles Limited PIN P05130637O. That this was a position that the Appellant sought to correct by having the withholding certificates cancelled and properly issued to Julika Automobiles Limited as advised by the Respondent’s agents during the Alternative Dispute Resolution (ADR) process pursuant to Section 42 (a) of the TPA and Paragraph 4,5 and 6 of the KRA Tax Payer Guidelines for Appointed VAT withholding. It was the Appellant’s submission that this being the case, the cancelled withholding tax certificates were now void as they lacked factual and legal foundation.

(i) Whether the assessments were raised against the right party 30. The Appellant submitted that as previously alluded to, the Respondent willfully or negligently issued assessments to Appellant’s business that had ceased to exist instead of the one that was in operation at the time. Moreover, that contrary to Respondent’s claim that the Appellant and its businesses failed to demonstrate tax compliance, the Appellant asserted that in both instances tax obligations were complied with fully but instead it was the Respondent who did not provide legal justification why it failed to recognize the legal separation and independence of the Appellant from Julika Automobiles Limited regarding tax matters as was held in Salomon v Salomon [1896]UKHL 1, [1897] AC 22.

(ii) Whether due process was followed in raising the subject assessments 31. The Appellant submitted that the Respondent violated Section 29(2) of the TPA in issuing agency notices without notifying the Appellant and never substantiated how it met the requirements of service to the Appellant of the impugned agency notices as required by Section 74 of the TPA.

(iii) VAT errors 32. The Appellant submitted that the Respondent incorrectly calculated VAT liability using 16% rate instead of 8% in clear violation of Section 31(1) (c) of the TPA.

(iv) Income Tax 33. The Appellant stated that the Respondent issued an objection decision rejecting Appellant’s non-existent income tax objection yet the Appellant had not raised any objection against income tax assessments as he was in the process of preparing his objection which was an obstruction of due process pursuant to Section 50(4) and 51 of the TPA both of which provide as follows;“Section 50 Conclusiveness of tax decisions4. In this section, "proceedings under this Part" means—a.an objection made under section 51;b.an appeal made to the Tribunal under section 52 in relation to an appealable decision;c.an appeal made to the High Court under section 53 in relation to a decision of the Tribunal; ord.an appeal made to the Court of Appeal under section 53 in relation to a decision of the High Court.”“Section 51. (1)A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.”

(v) Supporting documents 34. The Appellant submitted that contrary to Respondent’s allegations, it delivered all the relevant documents including but not limited to his bank accounts, receipts and invoices which were sufficient proof of his case and objection.

35. The Respondent’s written submissions dated 28th August 2024 were filed on 30th August, 2024 and adopted by the Tribunal on 11th September, 2024. The Respondent submitted on two issues as herein under:

(a) Whether the Respondent was justified to make the additional assessments 36. The Respondent submitted that whereas VAT assessments was as a result of hanging withholding tax credits on Appellant’s ledgers, Income Tax assessment was as a result of under declaration of income by the Appellant who was a non-filer. It was the Respondent’s assertion that Section 24(2) of the TPA allows it to assess a taxpayer’s liability using any information available and that Section 31 of the TPA allows for the Respondent to make additional assessments based on the available information and to the best of his judgement. Thus, the Respondent was justified to make assessments based on Appellant’s ledger in particular VAT3 returns and withholding tax credits.

(b) Whether the Appellant discharged their burden of proof 37. The Respondent submitted that it advised the Appellant to regularize his objection dated 6th October 2023 pursuant to Section 51(6) and (7) of the TPA the same having been lodged out of time. That upon receipt of the regularized objection, the Respondent allowed it and after consideration advised the Appellant to validate the same by providing requisite documents in support of their position.

38. It was the Respondent’s case that it requested the Appellant to avail detailed breakdown of sales ledger for Julika Automobiles Limited showing that the specific incomes as reflected in the withholding certificates under Julius Karanja were part of the total sales. This was because VAT assessments were based on withholding income tax credits in Appellant’s ledgers that did not have corresponding income declarations. That in support of income tax assessments, the Appellant ought to have presented audited financial statements accompanied by source documents. The Respondent acknowledged receipt of the following documents from the Appellant: Sample VAT withholding certificates.

Transaction list by customer.

Sales invoices

Daily cash analysis

Bank statements

39. The Respondent submitted that Section 54(1) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ ITA”) provides as follows:“a person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for purposes of computing tax.”

40. The Respondent further cited Section 56 of the TPA and Section 30 of Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya(hereinafter “TATA”) in reiterating that the Appellant bears the burden to demonstrate that it has discharged a tax liability.

41. The Respondent submitted that whereas it directed the Appellant to provide audited financial statements with source documents which included audited accounts, detailed breakdown of sales ledgers/ purchases ledger, complete personal and business certified copies of bank statement, ETR monthly Z report, stock movement sheets, sales/purchases invoices, any contractual agreement with suppliers, proof of payment for the expenses and contracts awarded for the period under review. The Appellant provided bank statements in partial support of their objection thus failed to discharge their burden of proof as was held by the Tribunal in the case of AFYA X-RAY Centre Limited vs Commissioner of Domestic Taxes [TAT No. 70 of 2017]“From then 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 counter the Respondent’s finding after the preliminary finding and 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…”

42. The Respondent further submitted that the Appellant’s application to produce additional documents was granted by the Tribunal but the Respondent did not have the privilege to sight the documents at the objection stage so as to establish their effect on the objection decision. That in absence of sufficient supporting documents from the Appellant at the objection stage, the Respondent was constrained to issue the objection decision.

43. It was the Respondent’s submission that the Tribunal being an appellate forum, it was prudent that the matter be referred back to the Respondent so that the additional documents can be reviewed and an objection issued. In the alternative, the Tribunal upholds the objection decision of 1st December 2023. In buttressing its position, the Respondent relied on the case of Commissioner of Domestic Taxes v Structural International Kenya Limited (Income Tax Appeal No. E089 of 2020) [2021] KEHC 152 (KLR) where the Court held as follows:“For the avoidance of doubt, the Tribunal is reminded that in matters where the issue is supply of goods, be it for VAT purposes or Corporation Tax, the burden is always on the trader/tax payer to show that, the documentation set out in the statute and in which he relies on arose out of a commercial transaction. Period. If additional documents, which would be reasonably expected to be in his possession is requested for to verify the alleged transactions, he should produce the same to the commissioner. That is what is expected of a keen and diligent trader.”

Issues for Determination 44. The Tribunal having carefully considered the parties’ pleadings, submissions, and additional bundle of documentation admitted following its Ruling dated 4th April 2025 notes that a single issue falls for its determination as follows:Whether the Appellant discharged his burden of proving that the decision of the Respondent dated 1st December 2023 was incorrect

Analysis and Determination 45. The Tribunal having established a single issue for determination will proceed to analyze it as follows:Whether the Appellant discharged his burden of proving that the decision of the Respondent dated 1st December 2023 was incorrect.

46. The Tribunal observes that the instant dispute emanated from a compliance check by the Respondent which identified the Appellant as a non-filer for both income tax and VAT. On its part, the Appellant held that the Respondent issued assessments for his previous business that had closed shop and had ceased sometimes in July 2019 wherein the business transactions were transferred from a sole proprietorship (Julika Automobiles) to Julika Automobiles Limited.

47. The Appellant stated that this resulted in two distinct legal entities with independent tax obligations and that it was erroneous for the Respondent to issue additional assessments to the previous business that had ceased to exist. On its part, the Respondent held that its compliance audit identified hanging withholding tax credits in the Appellant’s ledger which had no corresponding income declaration for the review period leading to the Respondent’s default assessment.

48. The Tribunal notes that while on one hand, the Respondent held that variances identified in the compliance audit were shared with the Appellant who was requested to amend them, the Appellant stated that he only challenged the VAT default assessment which had been issued without prior notice and that he was issued with an objection decision that addressed an assessment that he was in the process of objecting to.

49. The Tribunal notes that whereas the Respondent issued its default assessment and confirmed the same vide the objection decision, the Appellant was of the opinion that the Respondent ought to have issued a “prior notice” informing the Appellant in advance of the upcoming objection decision and agency notice which should have been challenged before confirmation of the assessments or ultimately the issuance of the objection decision.

50. The Tribunal notes that the Appellant did not controvert the Respondent’s assertion that he was a non-filer who had hanging tax credits in his ledgers. Moreover, the Tribunal notes that the Appellant did not challenge the Respondent’s assertion that he only lodged an objection against an amount of Ksh 8,612,296. 00 comprising both VAT and income tax as captured by the Agency notice whereas the assessment as issued by the Respondent and as clarified in the electronic mail of 30th October 2023 was for VAT of Ksh 3,973,732. 00 and income tax amounting to Ksh 51,446,698. 00.

51. The Tribunal notes that whereas the Respondent requested for audited accounts, detailed breakdown of sales ledgers, purchases ledger, complete personal and business certified copies of bank statement, ETR monthly Z report, stock movement sheets, sales/purchases invoices, any contractual agreement with suppliers, proof of payment for the expenses and contracts awarded for the period under review. The Appellant merely stated that it supplied the Respondent with all relevant documents including but not limited to bank accounts, receipts and invoices.

52. The Tribunal notes that even after being allowed to file documents which it stated to have filed at the objection stage, the Appellant availed the following bundle of documents: Objection decision dated 1st December 2023;

Julika Automobiles Limited’s PIN certificate dated 30th December 2022, with Income tax, PAYE & VAT obligations;

Certificate of incorporation for Julika Automobiles Limited proving that the company was incorporated on 6th May 2003;

Official search for Julika Automobiles Limited confirming date of incorporation of 6th May 2003 and Julius Karanja Mwangi being the majority shareholder/director holding 800/900 shares in the company ;

Financial statements for the years ended 31st December 2019 and 2020 for Julius Karanja Mwangi trading as Julika Enterprises;

Audited financial statements for year ended 31st December 2019 and 2020 for Julius Karanja Mwangi trading as Julika Enterprises;

A schedule of untitled list of transactions numbering 17- 176 stamped by the Respondent;

Cessation of business name (form BN6) certificate for Julika Automobiles;

Delivery notes stamped by the Respondent on 25th October 2023 showing all relevant documents submitted by the Appellant during the objection stage; and

Notice of Appeal dated 29th December 2023 intending to appeal the decision of the commissioner of domestic taxes given on 1st December 2023

53. The Appellant in its application filed on 28th November 2024 averred that the judgement delivered on 21st November 2024 had errors and mistakes on the face of it because the Tribunal failed to consider all documents it had adduced in evidence. In addition to the list outlined in paragraph 52 above, the Appellant stated that it had produced the following documents which the Tribunal did not sight: Statements, invoices, sales summaries and a transaction list of customers.

Detailed bank statements of Equity Bank, Spire bank and KCB bank.

Delivery notes and cash sales receipts

Flash disk containing documentation.

54. The Appellant made assertions denying taxes but failed to show the nexus between the Respondent’s assessment and the supplied bundle of documents. The Appellant did not provide a VAT reconciliation detailing how various withholding certificates issued under their individual accounts compared to corresponding sales declarations made by their limited company. The Appellant also failed to adduce source documents to support their attached financial statements even sales ledger supplied could not be established was for the Appellant or the limited company. More specifically, the Appellant did not provide a detailed breakdown of which incomes reflected in withholding certificates were issued under individual PIN and were part of the limited company.

55. The Tribunal notes that an Appellant’s duty in discharging its burden of proof in tax matters is not just the production of any document but such documents must support and act as proof of an underlying transaction. The Tribunal notes that the Appellant neither challenged nor controverted the Respondent’s assertion that he only provided sample VAT withholding certificates, transaction list by customer, sales invoices, daily cash analysis and bank statements which were not sufficient to defray the tax liability as assessed. The Tribunal further notes that the Appellant provided the documents at the objection stage but failed to produce them at the appeal stage.

56. In that case of Kenya Revenue Authority Vs. Man Diesel & Turbo SE Kenya [Income Tax Appeal No. E125 of 2020] the court held as follows:“32. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioners assessments or determinations of deficiency. [10] The commissioner’s determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumptions remain until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

57. From the foregoing the Tribunal notes that the Appellant endeavored to mount a defense in support of its case against the Respondent’s decision. Indeed, it supplied the Tribunal with some documents as here before mentioned, albeit extraneous to its case.

58. The Tribunal therefore finds that the Appellant failed to discharge his burden of proving that the decision of the Respondent dated 1st December 2023 was incorrect.

Final Decision 59. The upshot of the foregoing is that the Appeal herein lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 1st December 2023 be and is hereby upheld.c.Each party to bear its own costs.

60. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 9TH DAY OF MAY 2025. …………………………………CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER