[2025] KETAT 192 (KLR)

Natures Limited v Kenya Revenue Authority (Tax Appeal E639 of 2024) [2025] KETAT 192 (KLR) (Civ) (28 February 2025) (Judgment)

Neutral citation: [2025] KETAT 192 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E639 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members

February 28, 2025

Between

Natures Limited

Appellant

and

Kenya Revenue Authority

Respondent

Judgment

1. The Appellant is a private limited liability company incorporated in Kenya whose principal activity is the manufacture of soft drinks, production of mineral water and other bottled water.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 Parts 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 issued the Appellant with a notice of audit findings and assessments vide a letter dated 31st January 2024 for VAT, Income Corporation tax, excise duty, PAYE and Withholding tax totaling Kshs 117,579,662 for the period January 2018 to December 2023.

4. The Appellant objected to the assessments vide an objection dated 16th March 2024 and the Respondent issued its Objection decision dated 14th May 2024 reviewing the assessments to Kshs 84,261,593. 00.

5. Dissatisfied with the Respondent’s decision, the Appellant lodged a Notice of Appeal dated and filed on 12th June 2024.

The Appeal 6. The Appellant lodged its Memorandum of Appeal on 12th June 2024 in which it raised the following grounds of Appeal:i.That the assessments are not in accordance with the returns and supporting documents submitted to the Department.ii.That the Appellant had validly objected to the assessments made.iii.That the Appellant provided the supporting documents requested by the Department.iv.That to the best of the Appellant's knowledge, the documents provided to the Department reflects a true and fair position of the company’s affairs.v.That the Appellant argued the Tribunal to vacate the assessments in full and relook into the supporting documents provided that fully supports the returns submitted and the taxes paid thereon.

Appellant’s Case 7. The Appellant filed its Statement of Facts on 12th June 2024 and Written Submissions dated 30th December 2024 and filed on 13th January 2025.

8. The Appellant acknowledged that the Respondent requested for documents being audited accounts and trial balances, bank statements and cashbooks, sales and purchases invoices, ledgers in the excel format, wear and tear schedules and loan agreements. The Appellant alleged that these documents were provided as evidenced in the email communications and letters that it had attached.

On VAT 9. The Appellant submitted that the Respondent disallowed the input VAT claimed since the suppliers had not declared the same in their VAT returns. It stated further that this is contrary to Section 17(2) of the VAT Act which allows input VAT to be claimed if a valid tax invoice of the supply is held by the person or if the supplier has declared input VAT in their returns. It maintained that it provided valid purchases invoices and receipts supporting the input VAT for the periods 2018 to 2022.

10. It also stated that the assets disposed were correctly declared in the VAT returns and grossed up in the income and hence the reason why VAT returns was high in comparison to the income declared in Income tax returns as per the analysis provided by the Commissioner for the year 2018 and 2019.

11. The Appellant also asserted that VAT was not charged for assets that were disposed in year 2020 and 2021, since they were bought without any VAT being charged as evidenced in the purchase and sale agreements provided.

On Corporation tax 12. The Appellant submitted that the variance between the sales in the Income tax returns and the VAT returns filed was due to the fact that in year 2018 and 2019 variance of 180,715. 00 and 1,461,786. 00 respectively, was attributed to the sale of a company assets declared in VAT returns but was not taxable in Income tax. That the gain was however declared as other incomes; while in year 2022 the variance was due to erroneous duplication of December 2022 sales in the VAT return as both vatable sales under 16% and 8% as evidenced by the VAT3 return filed on iTax. It submitted that an application for data correction was made to KRA and it is still under process.

13. Regarding expenses review, the Appellant submitted that the variance between the purchases and expenses declared in the Income tax returns and the VAT returns filed was due to some of the expenses being expensed in full without input VAT being claimed and that some of the expenses were acquired from non-VAT registered suppliers. The Appellant also submitted that the invoices and schedules have been provided and proof of payment and hence no VAT was charged and therefore none was claimed.

14. Regarding bad debts, the Appellant submitted that the bad debt of Kshs 285,452. 00 was unrecoverable and was supported by the documents showing the efforts to recover the amounts through the legal process without success.

15. In relation to depreciation, the Appellant submitted that it was a presentation error in the 2022 return whereby the depreciation of Kshs 11,850,803. 00 was not added back and the wear and tear allowance of Kshs 9,697,044 was as well not deducted as an allowable expense. That it had urged the Respondent to allow it to amend the Income tax returns to reflect the correct tax position.

16. Regarding assets additions, the Appellant submitted that it provided all the supporting documents being invoices, purchases agreements and import documents for the assets acquired during the period amounting to Kshs 51, 656,245. 00. That the additions totaling to 8,020,035. 00 should thus be allowed.

17. Regarding written down value, the Appellant argued that this was an error in presentation in the Income tax return whereby the additions were directly, added to the opening written down value and not shown under the additions tab. That it relied on audited report to support this assertion.

Excise Duty 18. The Appellant submitted that in the year 2020 discrepancies arose due to erroneous activation and affixing of the stamps. That this happened in April during the Covid lockdown when a new staff was operating the system. It alleged that the company's plant also did not have the capacity to produce the 694,550 litres of water as alleged. It also submitted that even from an analysis of the company sales the company performance declined since most of the clients were in hospitality industry and they were shut down due to the Covid 19 pandemic.

19. The Respondent further submitted that a site visit was made during the previous KRA audit conducted in 2022 and additional assessment tax was charged and paid amounting to Kshs 1,053,820. 84 for any variances.

20. The Appellant asserted that the Respondent erred in computing Excise duty using the VAT turnovers. It contended that for the years 2018, 2019 and 2020 there were empty bottle sales which were vatable but not excisable. It asserted that the margin of 30% used in the computation was also very punitive and did not reflect the true position of the company performance.

21. According to the Appellant, only an Excise amount of Kshs 11,224,676. 00 was payable as evidenced by partial ADR agreement signed with a payment plan of twelve instalments for the years 2022 and 2023.

On Withholding tax: 22. Regarding deemed interest, the Appellant submitted that this was a classification and a presentation error in the Income tax return that the company had submitted. It asserted that the company does not have foreign loans but it has director loans as shown in its audit report.

23. On Withholding tax deduction, the Appellant argued that Withholding tax on audit fees had been paid as evidenced by the Withholding tax certificates in the iTax system.

24. It asserted that motor vehicle expenses amounts were of small value accumulated from acquisition of spare parts and mechanical repairs as per summary ledgers and invoices and that Income tax files were provided to support this position.

25. In relation to repairs and maintenance, the Appellant stated that it included casuals, minor repairs and minor replacement items which were acquired as per invoices in the purchases and Income tax files. It stated that it relied on a ledger for the motor vehicle expenses and repairs and maintenance to support its position.

On Pay as You Earn 26. The Appellant noted that the variance in the P10 return analysis against the salaries declared in the income tax accounts was due to reduction of the PAYE threshold in year 2020 during the Covid 19 period. It asserted that those who were below the threshold were not declared in the P10 returns as shown in its reconciliation and payrolls.

Appellant’s Prayers 27. The Appellant’s prayed that the additional assessments should be vacated.

The Respondent’s Case 28. The Respondent relied on its Statement of Facts dated and filed on 10th July 2024. together with its Written submissions dated 20th January 2025 and filed on 21st January 2025 to respond to this Appeal.

29. The Respondent stated that it received intelligence information alleging that the Appellant was involved in a tax evasion scheme which included under declaration of output, concealment of income earned, fictitious claim of input VAT and processing of Excise stamp deliveries despite having tax liabilities contrary to EGMS Regulations of 2017. That it subsequently proceeded to issue the Appellant with a notice of audit dated the 25th July 2023 and subsequently issued a pre-assessment notice dated 23rd January 2024.

30. In response to ground one of the Memorandum of Appeal, the Respondent averred that the assessments on the Appellant were correctly raised as a result of variances on the turnover declared in the Income tax Company returns against those declared in the VAT returns and that the assessments were raised as a result of inconsistency declared by the Appellant.

31. In response to ground two of the Memorandum of Appeal, the Respondent averred that the validity of the objection was not in question and despite the fact that the objection had been validly lodged, the same failed to discharge the burden placed on the Appellant to dislodge the Respondent's assessment as wrong.

32. In response to grounds three and four of the Memorandum of Appeal, the Respondent averred that the supporting documents availed by the Appellant were insufficient to prove that the assessments were wrong.

33. In response to ground five of the Memorandum of Appeal, the Respondent admitted that indeed the Tribunal will have an opportunity to relook into the supporting documents presented at the objection stage and arrive at an independent judgment.

On VAT 34. The Respondent averred that it compared the Appellant’s sales per VAT returns and the sales per Income tax returns and it established that there was under declaration which the Appellant failed to reconcile.

35. The Respondent averred that it was established that the claims for input VAT had not been declared as output by the suppliers as required under Section 17(2) of the VAT Act. It alleged that during the objection, the Appellant intimated that its input claims met all the conditions of Section 17 of the VAT Act but failed to provide any documentation relating to the input claimed in their returns.

36. The Respondent stated that it established that the Appellant disposed some assets but failed to account for VAT and that at no point did the Appellant account for VAT on the disposal of the said assets.

On Corporation Tax 37. The Respondent averred that it compared the Appellant’s sales per VAT returns and the sales per Income returns and established under declaration in the Income tax returns for the years 2018, 2019 and 2022 and the same were charged accordingly. That the Appellant had also admitted that there was an error in the 2022 returns.

38. That the Appellant failed to reconcile the variances established by the Respondent for the years of income 2018-2019 or to provide evidence as to the accuracy that the same was an error.

39. The Respondent asserted that it compared expenses claimed by the Appellant in the Income tax returns with the purchases claimed in the VAT returns and established that the Income tax had been overstated. It maintained that the Appellant failed to provide supporting documents for the purchases claimed and that the same did not meet the conditions under Section 15(1) of the Income Tax Act (ITA).

40. The Respondent submitted that it added back bad debt claimed by the Appellant in 2018 because the Appellant had failed to provide any documents to support the bad debts written off.

41. That the Appellant also failed to add back depreciation in the tax computation and it thus disallowed wear and tear relating to assets additions which were not supported.

42. In relation to Excise tax, the Respondent stated that it established variances between the litres activated under EGMS and the litres declared in the Excise returns. It averred that the Appellant failed to provide reconciliation to dispute these variances.

On Withholding Tax 43. The Respondent argued that it established that the Appellant had a foreign loan which was interest free and hence the reason why it had indicated that it had foreign loans. That it is for this reason that it computed the deemed interest based on Treasury rates and applied Withholding tax on the same.

44. Additionally, the Respondent alleged that it ascertained that the Appellant paid for certain expenses to which Withholding tax applies but failed to deduct and remit the same.

45. The Respondent posited that the Appellant provided a generic response and also failed to provide evidence that it did not have any foreign loan and as such it was not obliged to account for Withholding tax on the alleged deemed interest and the payments to which Withholding tax was charged.

On Paye 46. The Respondent stated that it compared staff cost per ITax and PAYE monthly returns to staff cost expenses in the audited accounts and the same revealed that emoluments in the PAYE returns had been understated and hence the taxation.

47. That whereas the Appellant contended that it had engaged casual workers as loaders and paid them a wage on a daily and weekly basis and that the same was below the PAYE threshold no evidence to provide the reconciliation or a schedule of payments was provided to support that argument.

48. The Respondent relied on the case of Republic v Kenya Revenue Authority Exparte Bata Shoe Company (Kenya) Limited [2014] eKLR to submit that payment of tax is an obligation imposed by the law to which the Appellant is obliged to comply.

49. The Respondent also submitted that the Appellant failed to discharge its burden of proof. In this regard, it cited the case of Metcash Trading Limited v Commissioner for the South African Revenue Service and Another Case CCT3/2000; Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] KEHC4148 (KLR); and Primarosa v Commissioner of Domestic Tares [2019] eKLR.

50. Consequently, the Respondent prayed that the Tribunal be pleased to dismiss the Appeal and uphold the Objection decision dated 14th May 2024.

Issues For Determination 51. Having considered the parties’ pleadings, the Tribunal puts forth the following issues for determination:a.Whether the assessments were time barred under Section 31(4)(b) of the TPA andb.Whether the Respondent erred in assessing VAT, Corporation tax, Excise tax, Withholding tax and PAYE,

Analysis And Findings 52. The Tribunal having established the issues falling for its determination proceeds to analyse it as hereunder.

a. Whether the Assessments are time barred under Section 31(4)(b) of the TPA 53. The Respondent issued the audit assessment dated 31st January 2024 amending the Appellant’s returns and seeking to recover taxes from 2018 to 2022.

54. Section 31(4) (b) of the TPA requires assessments to be issued within five years. It provides that:‘‘The Commissioner may amend an assessment——(b)In any other case, within five years of—(i)For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)For any other assessment, the date the Commissioner notified the taxpayer of the assessment.’’

55. Section 52B of the ITA, provides as follows regarding time for submitting returns:‘‘52B. Final return with self-assessment(1)Notwithstanding any other provision of this Act—(b)every person, other than an individual chargeable to tax under the Act, shall for any accounting period commencing on or after 1st January, 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax on such income, not later than the last day of the sixth month following the end of the year of income.’’

56. It is thus clear under Section 52B (1) (b) of the ITA that the Appellant was required to file its returns within 6 months from the date following the end of the year of income. Accordingly, the assessment for 2023 were still not due until June 2024 and should thus not be included in computation of time in this assessment by the Respondent.

57. The Respondent did not thus fall into error when it issued assessments for Corporation tax, WHT and Excise duty for the period 2018 to 2022 which were within the statutory time limit.

58. The reporting date for PAYE is on or before the tenth day of the month following the end of the tax period. The Respondent issued PAYE assessments for the period 2020 to 2022 on 31st January 2024. The Tribunal thus finds that the Respondent issued the PAYE assessments within the statutory time limit.

59. Regarding VAT, WHT and Excise duty, the Tribunal notes that the reporting date is on or before the twentieth day of the month following the end of the tax period. On 31st January 2024, the Respondent issued the VAT and WHT assessments covering the years 2018 to 2022, and Excise duty assessments covering the years 2018 to September 2023.

60. Having noted that the assessment was issued on 31st January 2024, it follows that whereas the date for filing the December 2023 returns was on 20th January 2024, the date for filing the January 2024 returns was not due until 20th February 2024. The month of January 2024 should thus not be included in calculating time limit under Section 31(4)(b) of the TPA because the reporting period for its returns had not lapsed. Calculation of statutory time will hence run from December 2023 to December 2019. Meaning that the 2018 assessment for VAT, WHT and Excise Duty were unlawful for being issued beyond the statutory limit period.

61. On WHT, the Tribunal points out that the WHT assessment from January 2019 to 6th November 2019 was not collectible due to the deletion of Section 35(6) of the Income Tax Act. The Respondent could therefore only collect WHT from 7th November 2019.

62. PAYE was issued from the period 2020 to 2022 and it is thus equally within the statutory time limit period.

63. This position on invalidity of time barred assessments was supported in the case of Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) where the High Court stated as follows regarding the issue on timeframe:‘‘In this regard, under section 31(4) of the Tax Procedures Act, an amendment outside the 5-year period can only be permitted if there is evidence of willful neglect, evasion, or fraud by or on behalf of the tax payer…The legal position is that, all assessments ought to be made within 5 years except when there is evidence of gross or willful neglect, evasion or fraud on the part of the taxpayer. This also goes hand in hand with the provisions of section 23 of the Tax Procedures Act, which requires a taxpayer to retain documents for the same period. The implication is that, after 5 years, since no assessment can be made, the taxpayer is absolved of his burden of maintaining such records.’’

64. The Respondent did not demonstrate why it issued the VAT, Excise duty and WHT assessments beyond the prescribed 5 years after the Appellant filed his returns in 2018. It then follows that the 2018 assessments for VAT, WHT and Excise duty are beyond 5 years and hence unlawful.

b. Whether the Respondent erred in assessing VAT, Corporation tax, Excise tax, withholding tax and PAYE. 65. The Respondent stated that the Appellant did not supply it with the documents required to support its objection and hence its reason for upholding the assessment. The Appellant on its part, averred that it had supplied the documents required.

66. The Tribunal has gleaned through the Appellant’s Statement of Facts and noted the following as the documents that were attached thereto:a.Notice of intention of Appeal.b.Copies of objection decisionc.Memorandum of Appeal

67. On the face of it, the Appellant did not provide any document to demonstrate to the Tribunal that the Respondent:a.was biased in its decision making;b.did not consider or ignored looking at the documents that it had supplied; orc.confirmed the assessment despite the fact that the Appellant had provided the documents that had been requested.

68. The question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56(1) of the Tax Procedures Act states that:‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect’.

69. Section 30 of the Tax Appeals Tribunal Act similarly provides that:“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.”

70. The law at Sections 30 of the TAT Act and 56(1) of the TPA has placed the burden of proof in tax matters on the taxpayer. The Appellant was thus behooved to provide the Tribunal with the documents it had shared with the Respondent to enable the Tribunal to make a determination whether its averments that the said documents were disregarded is true.

71. In this case, the Appellant was the one seized of the desire to prove that the Respondent used extraneous information in arriving as its assessment. Thus, according to the provisions of Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon it.

72. Based on the foregoing, the Tribunal is of the view that the Appellant did not discharge its burden proof in showing that the Respondent erred in its assessment. The averments made in its Statement of Facts did not amount to much and was hopelessly incapable of helping it discharge its burden of proof as was affirmed in Digital Box Limited v Commissioner of Investigations and Enforcement [2020] eKLR, where the court stated as follows regarding averments in Statement of Facts:-“The averments made by the Appellant did not amount to evidence.”

73. Once the taxpayer fails to prove its case the Respondent was legally allowed to make the assessments as per the information in its possession as provided for in Section 24 (2) of the Tax Procedures Act which states as follows: -“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer’s tax liability using any information available to the Commissioner”

74. The Tribunal notes that the Appellant attached documents running up to about 170 pages in its written Submission. It was a blatant attempt to introduce fresh documents after the hearing of the case which would amount to reopening the objection process all over again. This would be prejudicial to the Respondent. It would also mean that the Tribunal could end up considering documents that the Respondent did not view or have a chance to respond to. Further it should not be at the whim of a party to wake up from its deep slumber and opt to whimsically ambush the other party with documents in utter disregard to Tax Appeal Tribunal Rules, due process and the consequences of such an action.

75. As it is, the Appellant came to the Tribunal blind and hoped to persuade the Tribunal on the basis of its mere averments that the Respondent had erred in its assessment. Accordingly, the Tribunal holds that the Appellant having failed to discharge its burden of proof bears the tax liability in issue and its Appeal lacks merit and therefore has to fail.

Final Decision 76. The upshot of the foregoing analysis is that the Appeal is partially merited merit and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 14th May 2024 be and is hereby varied in the following terms:i.The Corporation tax assessments for the years 2018 to 2022 be and are hereby upheld.ii.The Value Added Tax (VAT) assessment for the year 2018 be and is hereby set aside.iii.The Excise duty assessment for the year 2018 be and is hereby set aside.iv.The Withholding tax (WHT) assessments for the year 2018 to 6th November 2019 be and are hereby set aside.v.The Value Added Tax (VAT) assessments for the years 2019 to 2022 be and are hereby upheld.vi.The Excise duty assessments for the years 2019 to September 2023 be and are hereby upheld.vii.The Withholding tax (WHT) assessments from 7th November 2019 to the year 2022 be and are hereby upheld.c.The Respondent is hereby directed to recompute the tax assessments based on the Tribunal’s findings under Orders b) (i), (ii), (iii), (iv), (v), (vi) and (vii) above within Thirty (30) days from the date of delivery of this Judgment.d.Each party to bear its own costs.

77. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF FEBRUARY, 2025ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERABRAHAM K. KIPROTICH GLORIA A. OGAGA MEMBER MEMBER