[2024] KETAT 882 (KLR)

Nanyuki Equator Savings & Credit Society Ltd v Commissioner of Domestic Taxes (Tax Appeal 6 of 2023) [2024] KETAT 882 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 882 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 6 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

June 28, 2024

Between

Nanyuki Equator Savings & Credit Society Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Savings and Credit Society registered under the Co-operative Societies Act Cap 490 Laws of Kenya (hereinafter “Co-op Act”) and licensed by the SACCO Societies Regulatory Authority (SASRA) to carryout deposit taking business. Its main business is the provision of savings and credit services to its members.

2. The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5(1), the Respondent is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) with respect to performance of its functions under subsection (1), it 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. The Respondent raised additional Income tax assessment of Kshs 11,390,246. 88 on 6th December 2018 for the years of Income 2015, 2016 and 2017 under the following assessment orders: -2015 KRA20181xxxxxx 3,967,694. 422016 KRA20181xxxxxx 4,923,074. 612017 KRA20181xxxxxx 2,499,477. 85

4. The Appellant objected to the additional assessments on 1st March 2019. The Respondent then requested for specific documents vide an electronic mail communication of 7th March, 2019 and letter dated 11th March, 2019.

5. The Respondent then issued a confirmation Assessment Notice dated 30th September 2019 confirming the additional assessment.

6. Aggrieved by the Respondent’s decision, the Appellant, with leave from the Tribunal filed its late Notice of Appeal dated 26th September, 2022 on 5th January, 2023.

The Appeal 7. The Appeal was premised on the following grounds of appeal as stated in the Appellant’s Memorandum of Appeal dated 26th September, 2022 and filed on 5th January, 2023:a.That the tax assessed is erroneous and excessive and was based on review of expense claims, all of which were incurred in the generation of the declared returns of the SACCO.b.That the objection decision renders us exposed to payment of taxes and interests therefrom which is unjust as it is based on an erroneous evaluation and assessments.

The Appellant’s Case 8. The Appellant’s Statement of Facts was dated 26th September 2022 and filed on 5th January 2023 stated as follows:

9. The Respondent conducted an analysis of the Appellant’s filed Income Tax returns for the years 2015, 2016 and 2017 and disallowed several expenses that had been allowed in the Appellant’s original returns with reason that the Appellant’s claims were excessive.

10. The Appellant therefore prayed for orders from the Tribunal that:a.The Respondent reviews the assessment in consideration that all the claimed expenses were allowable and all supporting documents in support of the same had been forwarded to the Commissioner for review.b.The Respondent vacates the tax liabilities assessed as per assessment orders dated 6th December 2018. c.The Respondent vacates all penalties and interests accrued arising from these erroneously assessed tax liabilities.d.The Respondent waives all other penalties and interests accrued on the Appellant’s tax ledger.

Respondent’s Case 11. In responding to the Appellant’s grounds of Appeal, the Respondent’s Statement of Facts dated and filed on 23rd June, 2023 raised two issues for determination both of which were analysed concurrently as follows:a.Whether the confirmation assessment notices for Income Tax for the tax period 2015 to 2017 were proper in law.b.Whether the Appeal herein should be allowed.

12. The Respondent averred that Sections 24 and 28 of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”) allows a taxpayer to file returns and further provides that the Respondent is not bound by information provided therein and can assess the tax liability based on any other available information. It averred further that Section 73 of the Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”) and Section 31 of the TPA empowers it to issue additional assessments where a taxpayer has declared a less amount in the returns based on any additional available information and to the best of its judgement.

13. It was the Respondent’s averment that the additional Income Tax assessment for the tax period 2015 to 2017 were based on disallowed expenses which could not be proved with documentation that the Appellant failed to provide at the objection stage.

14. The Respondent therefore averred that the confirmed Income tax assessment notices for years of Income 2015 to 2017 were proper in law and based on the information available to it and prayed thus that:a.The confirmed additional Income tax assessments for the tax period 2015 to 2017 be upheld.b.The Appeal be dismissed with costs to the Respondent as the same is without merit.

Submmissions Of The Parties 15. In its Written Submissions dated 23rd August,2023 and filed on 25th August,2023, the Appellant submitted that it had several offices within its area of operation in Laikipia County and that part of the information and documents relating to SACCO’s member information, loans data and other privileged information was not available to be taken to or shared with the Respondent.

16. The Appellant further submitted that Section 59 (2) of the TPA requires that the Respondent request for access of the documents at the Appellant’s premises. It submitted therefore that it was the prerogative of the Respondent to seek the access to ascertain any information specific to the affairs of the Appellant, where such information and documents are exclusively held within the control of the Appellant.

17. The Appellant submitted that in compliance with Section 54 of the ITA, it engaged professional and registered accounting firms for the preparation of its books of accounts and the subsequent filing of the Income tax returns with the Respondent for the period 2015 to 2017. Further, that copies of the audited accounts were also shared with the Respondent as confirmed by the Respondent’s Statement of Facts and vide letters dated 6th December 2018 and 11th March 2019.

18. The Appellant asserted that in the letter dated 6th December 2018, the Respondent disallowed the Appellant’s claimed expenses, being Board allowances and Administration expenses whereas in the letter dated 11th March, 2019 the Respondent sought clarity on information relating to 2015 incomes only, withholding taxes on legal expenses, consulting fees and dividends, PAYE deductions for Directors allowances and details of excise duty levied for the period 2015 to 2017. It stated further that from the spirit of the quoted letters and correspondence above, the Respondent sought to ascertain if the Appellant had made withholding tax deductions on expenses incurred by the SACCO to generate its revenue

19. It was the Appellant’s submission that Section 15 of the ITA provides for allowing for tax purposes expenses incurred in the generation of any income and that the governing principle under this provision was that all expenses incurred by a business should be wholly and exclusively incurred for the production/ generation of income.

20. The Appellant submitted that the Board and Administration expenses as captured in the returns are account headers constituting several related expenses under the header/classification hence the Respondent’s decision to disallow these expenses in totality is not only excessive and non-objective, but was also unfair, unjust and unreasonable.

21. The Appellant relied on the case of Judicial Review 2 of 2016 Silver Chain Limited vs Commissioner Income Tax & 3 others (2016) eKLR where Judge S.J Chitembwe noted in the matter of taxing business against sales (read bank deposits):“Although the respondents are empowered by the law to assess what a taxpayer ought to pay, it is prudent that while undertaking such an exercise, the taxpayer be given an opportunity to explain its position.”

22. It was the Appellant’s submission that the Respondent made a demand on Withholding taxes not done on legal expenses, audit and consulting fees as per the letter dated 6th December 2018 and that by dint of this demand, the Respondent insinuated that the expenses then were incurred but the Appellant committed an offence for not deducting withholding taxes as per the Income Tax (Withholding Tax) Rules, 2001.

23. The Appellant argued that withholding tax was actually not strictly a tax but merely a mechanism for collecting tax. It argued further that for the Respondent to acknowledge the need for the Appellant to collect tax on its behalf and placing a statutory obligation on the Appellant as an agent on one hand and on the other hand disallowing the object expenses upon which it was to make the collection was quite unreasonable and impossible. It relied on Section 37A of the TPA which provides as follows:“where a person has no documentation to support expenditure, such person shall be allowed a deduction of forty percent of the expenditure.”

24. It was the Appellant’s submission that apart from disallowing the expenses, the Respondent also increased the returned Income for the years 2016 and 2017 with an additional Kshs. 3,000,000. 00 each year with no justification and/or explanation. It submitted further that whereas it is not disputable that Section 31 of the TPA allows the Respondent to make amendments to any return by making alterations or additions from the available information and to the best of the Commissioner’s judgement, it averred that such administrative action ought to be lawful, as provided for under Article 47 of the Kenyan Constitution.

25. The Appellant argued about the unreasonableness of the Respondent and cited the De Smith’s Judicial Review (Sixth edition) which addresses unreasonableness in decisions as those decisions that are apparently illegal or arbitrary or decisions that are supported by inadequate evidence or which are made on the basis of a mentioned mistake or material disregard of facts.

26. It submitted therefore that it did not have any correspondence and or explanation to the reason of and/or logic behind increasing the incomes of the Appellant by Kshs 3,000,000. 00 for the years 2016 and 2017. The Respondent’s action was therefore casual and unreasoned.

27. The Appellant acknowledged that some of the data that the Respondent had asked it to provide was beyond its statutory period of its data retention procedures and that due to the transition of staff in the company as well as change of business premises along the course of time, the retrieval of some crucial documents and information was affected. It therefore sought the Respondent’s consideration that the estimation of an income of Kshs 3,000,000 for each of the years 2016 and 2017 was excessive and unreasonable and pleaded for a quashing of the said estimation.

28. The Appellant submitted that being a financial institution, it was guided by Section 19A (4) of the ITA which qualifies the exemption of 50% of its interest income from the ambits of taxation. Hence the Respondent’s decision to disallow such income and subject it to taxation was unfair and illegal.

29. The Appellant submitted that it is a public body owned by members who periodically elect amongst themselves, directors to act on their behalf in managing the affairs of their SACCO. It submitted further that the current board of directors was not aware of the existence of any decision and or demand of taxes by the Respondent. However, upon scrutinizing the records provided by the Respondent and the returns through the Respondent’s i-Tax system together with the Appellant’s audited accounts, it concluded that the additional assessments by the Respondent were unlawful, unreasonable and procedurally unfair.

30. The Appellant termed as unfair and excessive the disallowing of Board expenses in totality without the fair consideration that the management of SACCOS is governed by a board as per the provisions of the Co-op Act. It therefore submitted that the Respondent’s decision to disallow the administration expenses while at the same time penalizing the Appellant for not withholding taxes while paying for the said expenses was a skewed decision by the Respondent.

31. In conclusion, the Appellant submitted that the addition of unexplained incomes to the declared income of the SACCO, and the furtherance of subjecting the entire incomes to taxation without regards to provisions of Section 19A of the ITA was irrational and unreasonably unfair.

32. The Appellant relied on the following other cases to buttress its argument. R v Inland Revenue Commission Ex-parte Preston (1985) A.C 835

Keroche Industries Limited vs Kenya Revenue Authority & 5 others (2007) 2 eKLR 240 at 278.

33. The Respondent’s Written Submissions dated 5th September, 2023 and filed on 6th September 2023 raised a single issue for determination.

Whether the confirmation assessment notices dated 30th September, 2019 are proper in law. 34. The Respondent submitted that under the Kenyan self-assessment regime, the Appellant is duty bound to declare its income tax returns as provided for under Section 52 B (1) of the ITA. It averred that although Section 28(I) of TPA stipulates that a taxpayer’s self-assessment return shall be treated as an assessment of the amount of tax payable, the Commissioner is not bound by the said assessment as provided for in Section 24 (2) of the TPA.

35. The Respondent submitted that the additional Income Tax assessments were based on disallowed board allowances and administrative expense as the Appellant failed to provide documentation in support of the expenses despite the same having been sought for vide letters and email correspondence on diverse dates in 2018 and 2019. The Appellant therefore failed to prove that it incurred the expenditure claimed contrary to Sections 15 and 16 of the ITA which provides that allowable expenditure has to be proved. In buttressing its argument that allegations have to be proven, the Respondent relied on Section 107(1) of the Evidence Act, CAP 80 of Kenya’s Laws (hereinafter “Evidence Act”) which provides as follows:“Whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that these facts exist.”

36. The Respondent submitted that it was mandated under Section 59 of the TPA to request for documents that relate to the tax liability of the Appellant and that Section 23 of the TPA and Section 54A of the ITA obligates the Appellant to maintain records of its business to enable the Respondent to easily ascertain the Appellant’s tax position.

37. The Respondent averred that the Appellant having failed to provide documentation in support of the expenditure, it based the additional assessment on the available information and its best judgement as it was well within the law in disallowing the expenses.

38. It was the Respondent’s submission that the Appellant failed to discharge its burden of proof as provided in Section 56(1) of the TPA which places onus on the Appellant in tax matters. It therefore submitted in conclusion that the confirmation assessment notices dated 30th September, 2019 were proper in law.

Issues For Determination 39. The Tribunal having considered the parties pleadings, documentation and submissions is of the view that this Appeal raises a sole issue for determination:Whether the demanded tax is due and payable.

Analysis And Findings 40. Having established the above issue for determination, the Tribunal will proceed to analyse it as herein under:Whether the demanded tax is due and payable

41. The Appellant had argued that the assessment was erroneous and excessive as it had incurred expenses in the generation of its income and which the Respondent failed to consider. The Respondent on the other had argued that it based the Income Tax assessment for the period 2015 to 2017 on disallowed expenses which the Appellant was unable to prove by way of documentation during the objection stage.

42. It is worth noting that Section 51 (3)(c) of the TPA requires the Appellant to attach all the relevant documents to support its objection, documents that are expected to be in its possession pursuant to Section 23(4) of the TPA and Section 54A of the ITA. Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of Kenya’s Laws (hereinafter “TATA”) places the onus on the Appellant to discharge the burden of proof as it is the custodian of all the relevant records pertaining to the business it operates. The Sections provide as follows:“56(1)TPA“In any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect”30TATA“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; orb.In any other case, that the tax decision should not have been made or should have been made differently”

43. The Tribunal notes that by the Appellant’s own admission, it stated that part of the information and documents was not available to be taken to or shared with the Respondent and that the Respondent ought to have requested for them in writing pursuant to Section 59 of the TPA. However, having the evidentiary proof to disprove the Respondent’s assessment, it would have been expected that the Appellant would have taken the initiative to ensure the information was availed to the Respondent.

44. The Tribunal relies on the case of Kenya Revenue Authority vs Maluki Kitili Mwendwa (2021) eKLR where Mativo J addressed the issue of onus of burden of proof as follows:“The pertinent issue in this appeal as I see it is the question of the taxpayer’s burden of proof in tax cases. The party with the obligation of persuasion- what Wigmore termed the risk of non-persuasion- is said to bear the burden of proof. The effect of non- persuasion on a party with the burden of proof is that the particular issue at stake in the litigation will be decided against the party. Generally, the taxpayer has the burden of proof in any tax controversy. The taxpayer must demonstrate that the commissioner’s assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. The position enjoys statutory backing courtesy of section 56(1) of the TPA which provides that in any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. As if to underscore the import of the above provision, the legislature deployed the word “shall” in the said section meaning that the provision is couched in peremptory terms.”

45. From the foregoing analysis, it is evident that the Appellant failed to discharge its burden of proof. Consequently, the Tribunal finds that the demanded tax is due and payable.

Final Decision 46. The upshot of the above is that this Appeal lacks merit and the Tribunal will therefore proceed to make the following final orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s Confirmation Assessment Notice dated 30th September, 2019 be and is hereby upheld.c.Each party to bear its own costs.

47. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE,2024CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBEROLOLCHIKE S. SPENCER - MEMBER