[2024] KETAT 12 (KLR)

Mwaniki v Commissioner of Domestic Taxes (Appeal 1043 of 2022) [2024] KETAT 12 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 12 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1043 of 2022

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich, E Ng'ang'a & B Gitari, Members

January 26, 2024

Between

Stanley Wamui Mwaniki

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a sole trader registered in Kenya with income tax resident obligation and the principal business activities include dealing in livestock, cereals and liquor sale, public transport, and transportation in general under his own name.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority 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. The Respondent conducted an assessment on the Appellant income tax resident returns for the year 2015, 2016, 2017, 2019 and 2020.

4. On 16th December 2021 the Respondent assessed additional total sales amounting to Kshs 409,803,554. 00 as additional revenue.

5. The additional sales resulted in an incremental principal tax liability of Kshs 167,531,887. 50 plus penalty and interest.

6. The Appellant objected to the Respondent's additional assessment and the Respondent issued an acknowledgement receipt of the objection on 17th January 2022.

7. The Appellant submitted the relevant documents to the Respondent on 18thJanuary 2022 to support its objection.

8. The Respondent reviewed the objection grounds together with the supporting documents but the same were rejected.

9. In a letter dated 19th August 2022 the Respondent confirmed the assessment of Kshs 205,867,969. 00 together with resultant penalties and interests

10. The Appellant aggrieved by the Respondent’s decision lodged a Notice of Appeal with the Tribunal on 21st September 2022.

The Appeal 11. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 20th September 2022 and filed on 21st September 2022. a.The Respondent erred in fact and in law in assessing the tax payable.b.The Respondent erred in fact and in law in failing to consider the Appellants nature of business thereon.c.The Respondent erred in fact and in law in failing to consider authentic assessment of taxes for the Appellant.

Appellant’s Case 12. The Appellant’s case is premised on the Statement of Facts dated 20th September 2022 and filed on 23rd September 2022 together with the documents attached thereto.

13. That the Respondent did an assessment on the Appellant income tax resident returns for the year 2015, 2016, 2017, 2019 and 2020 additional assessment numbers KRA202122776933, KRA202122777056, KRA202122777127, KRA202122777235, KRA202122777297 and KRA202122777442 respectively dated 16th December 2021.

14. That the additional assessment introduced additional sales of Kshs 409,803,554. 00 for the additional assessment number KRA202122776933, KRA202122777056, KRA202122777127, KRA202122777235, KRA202122777297 and KRA202122777442.

15. That the assessment made by the Respondent resulted to an incremental principal tax liability of Kshs 167,531,887. 50 plus penalty and interest for the additional assessment KRA202122776933, KRA202122777056, KRA202122777127, KRA202122777235, KRA202122777297 and KRA202122777442.

16. That the Appellant objected the respondent’s additional assessment and the respondent issued an acknowledgement receipt for the objection. The Appellant was issued with acknowledgement receipts number numbers KRA202200717559, KRA202200718799, KRA 202200795400, KRA202200796010 and KRA202200796380, dated 17th January 2022 for the objection to the additional assessment for the years of income 2015, 2016, 2017, 2019 and 2020, respectively.

17. That the Appellant submitted the relevant documents to the representative of the Respondent on 18th January 2022 to support the objection.

18. That the Respondent reviewed the objection grounds together with the supporting documents provided by the Appellant and issued a decision through a letter dated 19th August 2022 rejecting application for extension of time to lodge a late objection against income tax resident additional assessment for the period 2015,2016,2017,2018,2019 and 2020.

19. That the Respondent erred in the method and model used in arriving at the additional assessments KRA202122776933, KRA202122777056, KRA202122777127, KRA202122777235, KRA202122777297 and KRA202122777442.

20. That the Respondent did not understand the Appellant’s industry, its working models, and contractual obligations of the Appellant.

21. That the Appellant filed a Notice of Appeal as per Section of 52 of the Tax Procedures Act 2015 to the Tax Appeals Tribunal.

22. That it is against the Respondent’s decision/order of assessment that this Appeal is being referred with a request to deduct the amount arising from the additional assessment.

23. That it is in the interest of fairness and justice that the Appeal herein be allowed.

Appellant’s Prayers 24. The Appellant’s prayers are that:-a.That this Appeal be allowed with costs.b.That the decision of the Respondent with regards to the tax payable by the Appellant be discharged and set aside with costs to the Appellant.c.That the additional assessments KRA 202122776933, KRA202122777056, KRA202122777127, KRA202122777235, KRA202122777297 and KRA202122777442 issued by the Respondent for the periods under review, together with penalties and interest, were unlawful and improperly assessed and as such the same should be set aside.d.That the Honorable Tribunal be pleased to assess the tax payable by the Appellant to be commensurate with the actual transactions and the evidence tendered.e.That the Tribunal consider vacating the additional assessments accordingly so that the going concern of the company is not threatened.f.That the objection decisions under review be declared null and void and quashed in its entirety.g.Any other relief that this Honorable Tribunal deems fit.

25. The Appellant did not submit any submissions to the Tribunal.

Respondent’s Case 26. The Respondent’s case is premised on the documents set out hereunder-.a.The Respondent’s Statement of Facts dated 17th October 2022 and filed on 18th October 2022 and documents attached thereto.b.The Respondent’s written submissions dated 28th April 2023 and filed on 29th April 2023.

27. That the Appellant is registered in Kenya with income tax resident obligation and whose principal business activities include dealing in transportation of smuggled goods from Tanzania into Kenya, for which he is a repeat offender.

28. That the Appellant owns five motor vehicles KCA 206D, KBU 447H, KBT 423E, KCG 906Q and KAW 6499P.

29. That On 14th March 2021, the Appellant's vehicle registration No. KBU 447H was intercepted along Namanga-Athi River road carrying smuggled alcoholic drinks from Tanzania by officers from the Respondent's I&SO Department, which had been affixed with Tanzanian Revenue Authority Excise stamps.

30. That according to the Respondent the goods were valued at Kshs 4Million with a tax estimate of 2 Million and were seized under Seizure Notice F89 no.207314.

31. That the Respondent served the Appellant with the investigation findings for the years 2015 to 2020 vide a letter dated 21st June 2021.

32. That the above letter established that the Appellant had committed the following offences based on the investigation findings:-a.Omission of income from returns contrary to Section 97(a) of the Tax Procedures Act 2015 by omitting income from returns to lower his tax liability.b.Defaulting on an obligation imposed under a tax law contrary to Section 97(e)of the Tax Procedures Act, 2015 by deliberately failing to apply for VAT obligation, which he ought reasonably to have applied.c.Failure to apply for registration for VAT obligation contrary to Section 34 as read with Section 37 of VAT Act, 2013.

33. Further, the Respondent stated that on 16th July 2020, the Appellant was found in possession of concealed goods in his compound on-board motor vehicle registration no. KBJ 654J which were impounded by the Respondent's I&SO Department with tax revenue implication of Kshs 275,198. 00

34. That the investigation conducted on the Appellant, covered business transactions by the Appellant for the period-2015 to-2020-with-a view of establishing any violations of tax laws and tax implications thereof.

35. That the Appellant in filing his returns did so only for 2016 and 2019 while filing Nil returns for the other years.

36. That the Appellant lodged an objection on iTax but failed to submit the grounds of objection and the necessary documentary evidence in support.

37. That subsequently the Respondent confirmed the assessments of Kshs 205,867,969. 00 in its objection decision dated 19th August 2022.

38. The Respondent averred that the onus of proofing erroneous assessments lies with the taxpayer. In addition, the Appellant has a proven record of habitual tax offences. Thus, the Appellant Appeal is a mere attempt to defeat justice.

39. That the Tax Procedure Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision. The Respondent quoted Section 56(1) of the Tax Procedures Act which provides as follows:-“In any proceedings under this part the burden shall be on the taxpayer to proof that a tax decision is incorrect”.

40. The Respondent submitted that the Appellant was required to register for VAT since his businesses had met the threshold stated under Section 34 of the VAT Act which states as follows regarding registration 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.”

41. That the Appellant’s nature of business is that of smuggling goods at the border in a bid to evade taxes. That the Appellant has therefore failed to approach the Respondent with clean hands and therefore this Appeal lacks merit.

42. That the Appellant failed to provide the necessary documentations to support his objection despite numerous requests from the Respondent. The Respondent submitted that the Tax Procedures Act under Section 51 empowers the Respondent to notify a party where an objection as lodged is invalid and the Appellant was notified and requested to provide documents but failed to provide documents as requested. The relevant portions of Section 51 provide as follows regrading validity of an objection:“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)the notice of objection stales precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

43. That the Respondent based his assessment on the documentary evidence that was availed which include iTax records and bank records. That the Appellant is put to the strict proof to provide evidence to the contrary.

44. That the Respondent reviewed the Appellant’s filed returns; vis-a vis his expected income as revealed by his credit income from his bank account No. 0020100021393 held at Equity Bank and the investigations revealed a great variance between income declared and actual income earned from the business.

45. That due to the foregoing the Appellant was found to have violated Section 97(a) and (e) of The Tax Procedures Act 2015 and Section 34 and 37 of the VAT Act 2013.

46. That Section 97 of The Tax Procedures Act provides as follows“Any person who, in relation to a tax period, knowingly—(a)omits from his or her return any amount which should have been Included………(b)……………….(c)……………………..or(d)…………………..(e)deliberately defaults on any obligation imposed under a tax law commits an offence.”

47. That Section 37 of the VAT Act provides as follows in relation to offences relating to registration.“A person who—(a)fails to apply for registration as required under this Act.(b)applies for cancellation of registration when still required to be registered.(c)fails to apply for cancellation of registration as required under this Act.or(d)fails to comply with section 35 or 36(7)(a), commits an offence and shall be liable on conviction to a fine not exceeding two hundred thousand shillings or to imprisonment for a term not exceeding two years or both.”

48. That the Respondent further asserted that the Appellant carried on business in contravention of the Tax Procedures Act which requires such documents to be maintained and for the purposes of taxation. The Section provides as follows.“Section 93- Failure to maintain documents.(1)A person commits an offence if the person fails to keep, retain, or maintaina document that may be required to be kept, retained, or maintained in accordance with a tax law without reasonable excuse during a reporting period.”

49. The Respondent submitted the following issues for determination: -a.Whether the Respondent’s additional assessments were proper in law.b.Whether the Respondent considered the Appellant’s nature of businessc.Whether the Respondent took into consideration all additional information availed before making the decision.

50. On the issue of whether the Respondent’s additional assessments were proper in law the Respondent submitted that Section 50(1)a of the Tax Procedure Act no 29 of 2015 states that:-“the production of a notice of assessment or a document under the hand of the Commissioner shall be conclusive evidence of making of the assessment and the amount and the particulars of the assessment are correct”.

51. The Respondent submitted that there is a rebuttable presumption in tax matters that an assessment by the Respondent is correct, as provided by Section 50(1)(a) of the Tax Procedures Act.

52. The Respondent cited the decision in Kenya Revenue Authority V Man Diesel & Turbo Se, Kenya [2021] eKLR, where the court held that Section 56 of the Tax Procedure Act places the burden of proof in tax cases on the taxpayer. The Respondent averred that the taxpayer must demonstrate that the Commissioner's assessment is incorrect and that the shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The Commissioner's determinations of tax deficiencies are presumptively correct.

53. The Respondent’s argued that although the presumption created by the above provisions is not evidence in itself, the presumption remains 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.

54. The Respondent submitted that the Appellant did not provide any evidence that would have altered the assessment. The Tax Procedures Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

55. Section 56(1) of the Tax Procedures Act, provides that.“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.'

56. Further, the Respondent borrowed from PZ Cussons East Africa Limited v Kenya Revenue Authority[2013] eKLR, where Learned Judge D.S Majanja quoted the case of Pearson v Belcher which stated as follows;“...there is an assessment made by the Additional Commissioners upon the Appellant; it is perfectly clearly settled by cases such as Norman v Golder, 26 T.C. 293, that the onus is upon the Appellant to show that the assessment made upon him is Ordinarily, it excessive and incorrect; and of course he has completely failed to do so. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs.”

57. On whether the Respondent considered the Appellant’s nature of business the Respondent stated that the Appellant was required to register for VAT since his business had met the threshold stated under Section 34 of the VAT ACT -which provides as follows in relation to application for registration“(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.”

58. The Respondent argued that the Appellant’s alleged nature of business is smuggling goods at the border in a bid to evade taxes. That the doctrine of equity is that he who comes to equity must come with clean hands. This doctrine requires the court to deny equitable relief to a party who has violated good faith with respect to the subject of the claim. The Appellant has therefore failed to approach the Respondent with clean hands and therefore this Appeal lacks merit and deprives him of coming to equity with clean hands. The Responded urged the court to consider the Appellant as having violated good faith with respect to subject claim.

59. On whether the Respondent took into consideration all additional information availed before making the decision the Respondent submitted that the Appellant failed to provide the necessary documentation to support his objection despite numerous requests from the Respondent hence the Respondent proceeded to make an objection decision based on the available information. As a result, the assessments were made based on the only available information and on the best judgment by the Respondent.

60. The Respondent submitted that the Tax Procedures Act under Section 51, empowers the Respondent to notify a party where an objection as lodged is invalid and the Appellant was notified and requested to provide documents but failed to provide as requested.

61. Section 51(3) of the TPA states as follows regarding validity of an objcetion decision: -“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)the notice of objection stales precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.”

62. The Respondent submitted that it based its assessments on the documentary evidence that was availed, which include iTax records and bank records and asked that the Appellant to strictly proof or to provide evidence to the contrary.

63. The Respondent submitted that the Appellant failed to produce the relevant documents to validate his objection.

64. The Respondent placed reliance on the case of Osho Drappers Ltd Vs Commissioner of Domestic Taxes, TAT No. 159 of 2018 where it was held that the taxpayer has to produce documents to discharge of its burden of proof.

65. Further, the Respondent argued that the Appellant failed to demonstrate to the satisfaction of the Respondent that money credited into his account was not income. The Respondent relied on Miao Yi v Commissioner of Investigations & Enforcement TAT no 441 of 2019 where this Tribunal asserted that:“the burden of proof squarely lay on the Appellant to disprove the Respondent's tax assessment.

66. Further, the Respondent cited Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where the court further held:-“The uniqueness of tax laws is underscored by the fact that even where the constitutionality of such provisions has been challenged, courts have consistently held that placing the burden upon the taxpayer is not unconstitutional nor is it contrary to Parliament's intent. This is because there is a distinction between the legal burden of proof and the evidential burden of prove. These are two different concepts. The Evidence Act places the burden of proving the existence any fact in issue on the party who asserts. The evidential burden exists in the form of a tactical onus to contradict, weaken, or explain away the evidence that has been led. It is the latter form of burden which may shift from one party to the other.”

67. The Respondent submitted that in the above case the court distinguished itself on the issue and stated that:-“Placing the burden of proof in tax cases on the taxpayer reflects the unique nature of the tax system. This is evident from the three-fold justifications for placing the burden on the taxpayer. These are: - (a) the presumption of correctness; (b) the government's need for revenue' and (c) the taxpayer's possession of evidence. The taxpayer's burden of proof comprises two parts: -- establishing, with evidence, the underlying facts on which the law is to operate (and in this regard, the standard of proof to which each fact must be proved is relevant); and-that the operation of the law when applied to those facts establishes that the assessment is excessive or erroneous,”

68. The Respondent submitted that in light of the foregoing analysis and on the issues arising in this matter, it is evident that the Respondent did not err in assessing the tax payable and it considered all the documents produced as the Appellant had failed to discharge its burden of proof and challenge the Respondent's assessment with unchallenged and uncontradicted evidence to prove the incorrectness of the tax assessments.

Respondent Prayers 69. That in the upshot the Respondent prayers are.a.The Honourable Court to dismiss this Appeal and uphold the assessments and resultant interest and penalties as issued.b.Uphold the objection decision as issued.c.Award costs of this Appeal be issued to the Respondent.

Issues For Determination 70. The Tribunal upon due consideration of the pleadings of the parties is of the considered view that the issue for determination is:Whether the Respondent was justified in confirming the assessment dated 19th August 2022.

Analysis And Findings 71. The Appellant challenged the decision of the Respondent dated 19th August 2022 of rejecting the Objection to the assessment. The Appellant argued that the Respondent erred in fact and law in the assessment.

72. The Appellant also maintained that it submitted all documents to the Respondent on 18th January 2022 to support his Objection.

73. The Respondent on the other hand argued that the Appellant did not submit the necessary documents. Vide its decision, the Respondent decried failure of the Appellant to submit the documentations despite numerous reminders.

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

75. The Respondent stated that The Tax Procedures Act No 29 of 2015 places the onus of proof in tax objections to the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different finding.

76. In Tax Appeal Number 291 of 2021 Hasus Energy Limited Vs Commissioner of Domestic Taxes the Tribunal stated that for an objection to be considered validly lodged a notice of objection must contain the following elements:a.It must be in writing.b.It must be lodged with the Commissioner within thirty days of the taxpayer being notified of the tax decision.c.It must state the grounds of objection.d.It must state the amendments required to be made to correct the decision; ande.It must state the reasons for the amendments.

77. In the case of Republic v Kenya Revenue Authority Ex-Parte Funan Construction Limited [2016] eKLR the court laid emphasis on the decision made in the case of Nairobi H.C. Misc. Civil Application No. 534 of 2007; Republic –vs- Kenya Revenue Authority & 2 Others, Ex-parte Arrow Hi-fi (E. A.) Limited which held that:-“An objection that does not conditionally state a clear and unambiguous position of the taxpayer and which suggests a discussion, or a meeting is not an application under S229 (2) …For it to be effective it must unequivocally deal with all aspects of the assessment and specify the taxpayer’s position on each with clear answers and figures admitted or not admitted….”

78. The Tribunal noted that in his objection, the Appellant is duty bound to prove that the assessment arrived at by the Respondent was incorrect and provide evidence on the contrary.

79. This position was stated in Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2022] KEHC 52 (KLR) (Commercial and Tax) (4 February 2022) (Judgment), where the court stated that:-“In line with section 56(1) of the TPA, the taxpayer bears the burden of proving that assessment made by the Commissioner is incorrect. This also fits in with the principles of the law of evidence that he who asserts must prove encapsulated in sections 107 of the Evidence Act which provides, inter alia, that whoever desires any court to give judgment as to any legal right dependent on the existence of facts which he assets, must prove those facts exist But the burden imposed on the taxpayer does not exist in a vacuum, it also buttressed by the obligation on the taxpayer to maintain records. Section 54A of the ITA provides that:54A (1) A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deed, contracts, and vouchers which in the opinion of the Commissioner, are adequate.”

80. The duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self- assessment. This system relies on the taxpayer making full and good faith disclosures in its tax declaration and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer.

81. Whether the taxpayer has provided sufficient evidence to meet the threshold of proof required to discharge its burden must of course depend on the nature of the subject or transaction and the circumstances of the case bearing in mind the aforesaid duty placed on the taxpayer to keep records.

82. A thorough perusal of the Appeal reveals that the Appellant did not submit any supporting documentation to show that the assessment by the Respondent was wrong. It merely filed an objection with no grounds adduced, no explanation on the assessment.

83. As correctly submitted by the Respondent, it was incumbent upon the Appellant to dispute the method used by the Respondent and demonstrate that by using that method used by the Respondent the assessment is wrong.

84. The Appellant had the opportunity to challenge the issues raised by the Respondent on him being obligated to register for VAT and only declaring returns for 2016 and 2019.

85. The Tribunal notes that the Appellant did not support its case at all.

86. The inescapable consequence is that the burden of proof did not shift, and the confirmation of assessment dated 19th August 2022 is valid in law as no evidence has been adduced to challenge its legal basis.

Final Decision 87. In view of the foregoing analysis, the Tribunal finds that the Appeal has no merit, and the Tribunal accordingly makes the following Orders:a.The Appeal be and is hereby dismissed.b.The Objection decision dated 19th August 2022 be and is hereby upheld.c.Each party to bear its own costs.

88. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF, JANUARY, 2024. ERIC NYONGESA WAFULACHAIRMANDR RODNEY O. OLOUCH CYNTHIA B. MAYAKAMEMBER MEMBERABRAHAM K. KIPROTICH EUNICE NG’ANG’AMEMBER MEMBERBERNADETTE GITARIMEMBER