[2023] KETAT 1022 (KLR)

Nawasa Enterprises v Kenya Revenue Authority (Tax Appeal 696 of 2022) [2023] KETAT 1022 (KLR) (Commercial and Tax) (8 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1022 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 696 of 2022

RM Mutuma, Chair, BK Terer, M Makau, EN Njeru & W Ongeti, Members

September 8, 2023

Between

Nawasa Enterprises

Appellant

and

Kenya Revenue Authority

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly registered under the Companies Act within the Republic of Kenya. Its main form of business is in construction.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the 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 raised additional income tax assessments via a letter dated 7th December 2021 to the Appellant for Kshs. 2,595,960. 25 for the years 2021 and Kshs. 4,862,497. 72 for the year 2020 based on variances between income tax returns and VAT returns.

4. The Appellant objected to the assessments on 22nd December 2021. On 27th April 2022 and 4th May 2022, the Respondent requested for further additional information from the Appellant and its agent.

5. The Respondent consequently issued an Objection decision confirming the assessments through a letter dated 23rd May 2022.

6. Aggrieved by the decision, the Appellant filed a Notice of Appeal on 7th July 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 30th June 2022; -a)The Commissioner did not take into account all the expenses incurred during the contract period before raising the additional assessment. The Commissioner only accounted for expenses filed under the VAT return yet it is true that the partnership incurred expenses that are non-vatable.b)The Commissioner did not take into account that the contract is ongoing and the partnership was only being paid partly hence accounts would not be prepared until the contract is completed.c)The Commissioner did not provide a pre-assessment notice; the partnership only got to know of the assessment once it was already posted in the iTax ledgers.

The Appellant’s Case 8. The Appellant set down its case in its Statement of Facts dated 30th June 2022 and filed on 7th July 2022.

9. The Appellant averred that the contract is an ongoing contract hence the accurate taxable profit can only be obtained after the completion of the contract.

10. The Appellant averred that the Respondent is compelled to allow non-vatable expenses.

11. The Appellant averred that it had provided ledgers that were fully supported.

The Appellant’s Prayers 12. The Appellant prayed for orders that the Tribunal to;a)Set aside the Respondent’s confirmed adjustment for additional VAT.

The Respondent’s Case 13. The Respondent’s case is premised on;a)The Respondent’s Statement of Facts dated 24th August 2022 and filed on 30th August 2022.

14. The Respondent stated that the Notice of Appeal dated 30th June 2022 and subsequent Appeal are defective.

15. It averred that the assessment was done according to the law as the Appellant’s Objection was disallowed due to a lack of supporting documentation as required by Section 15 of the Income Tax Act and Sections 51 (3), 56 (1), and 59 of the Tax Procedures Act to prove that the expenses were incurred in the generation of the Appellant’s income.

16. It maintained that it allowed expenses as per VAT inputs declared in line with the provisions of Section 17 of the VAT Act and the non-vatable expenses could not be allowed as the Appellant filed nil income tax returns and had not provided the financials for 2020 and 2021 at the time of raising the additional assessments.

17. That the Respondent relied on Section 3 (1) and (2) (a) (i) of the Income Tax Act and asserted that the Appellant did not account for sales made during the year of income when filing the return.

18. The Respondent was of the view that the issue for determination in this Appeal is as follows-;

On whether the Respondent’s Objection Decision dated 23rd May 2022 was validly issued 19. The Respondent submitted that the Appellant filed nil income tax returns for 2020 and 2021 despite conducting transactions.

20. The Respondent asserted that the Appellant also provided expense ledgers that did not capture the suppliers’ names, invoice dates and numbers, or the description of goods transacted.

21. The Respondent maintained that the Appellant lumped up invoices under the expense ledger necessitating the Respondent to inform the Appellant that the expense ledger required additional information and clarification.

22. The Respondent reiterated that it requested audited accounts from the Appellant which was not forthcoming as the invoices availed made it impossible for the Respondent to link the invoices provided with the expense ledger and cash book entries or the payments made through the bank per the bank statements provided. It added that the Appellant failed to provide any ledgers or invoices relating to the year 2021.

23. The Respondent stated that it relied on Section 17 (2) (a) of the VAT Act to submit that the Appellant did not present the tax invoices from its suppliers to support its VAT claims prompting it to query the Appellant’s invoices for the period 2014 to 2017, without which it could not determine the validity of the Appellant’s objection as required by law.

24. The Respondent cited holding in the case of Commissioner of Domestic Taxes vs. Priyguru Company Limited (Income Tax Appeal E085 of 2021) [2021] KEHC 132 where it was held as follows:-“From the foregoing, the appellant was well within the law to demand for the additional information. The Respondent was under a legal obligation to provide the additional information and discharge its burden of proving that there had been commercial transactions that resulted in the alleged input VAT or the invoices produced. There was a genuine expectation that as a reasonable businessman, the Respondent must have had the custody of all transaction details concerning the trade relations between it and its suppliers.Having failed to provide those transaction details, its appeal before the Tribunal could not have been successful. Its case before this court cannot be successful as well.”

25. The Respondent further cited Section 43 of the VAT Act and argued that the Appellant was under a duty to keep full and true records of every transaction and cannot fault the Respondent for failing to allow the input VAT after it failed to support its claims using the requisite documents.

26. The Respondent relied on Section 51 (3) of the Tax Procedures Act, 2015 and reiterated that the Appellant failed to provide evidence to explain the inconsistencies and the Appellant’s assertions that it had provided all necessary invoices, bank statements, demand letter, subcontractor’s agreement and account transfer slip to support its case is false.

27. The Respondent further cited the holding in the case of TAT Appeal No. 55 of 2019 Boleyn International Limited vs. Commissioner of Domestic Taxes where the court quoted the case of Digital Box Limited vs. Commissioner of Investigations and Enforcement (2020) in which it was held that:-“... on 8th March 2018, the Appellant lodged an Objection with the Respondent. However, the said Objection did not reiterate the grounds of Objection, the corrections required to be made and the grounds of Objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide the relevant documents in support of its alleged objection. Therefore, there was no conceivable way the Respondent would have considered the Appellant’s objection as the same did not place itself within the parameters of Section 51 (3) of the Tax Procedures Act.”

28. The Respondent also cited the case of TAT Appeal No. 70 of 2017 Afya X-Ray Centre Limited vs. Commissioner of Domestic Taxes where the Tribunal held that:-“From the 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…”

29. The Respondent argued that the Appellant failed to discharge the burden of proving that the taxes assessed are excessive as per Section 56 (1) of the Tax Procedures Act and cited Section 31 (1) of the Tax Procedures Act to assert that it relied on the available information and best judgment in making the assessment order and confirming the assessment.

30. It submitted that the Appellant was the only party that can help know with certainty what the true position was of the Appellant yet the Appellant is unable to help the Respondent to accurately determine the tax liability when called upon to do so.

31. The Respondent also cited the holding in the case of Ngurumani Traders Limited vs. Commissioner of Investigations and Enforcement, TAT Appeal No. 125 of 2017 where the Honourable Tribunal held that:-“From the foregoing, the Appellant’s failure to lodge a proper objection meant that the Respondent was at liberty to confirm the assessment. Measured against the provisions of Section 51(3) of the Act, the Appellant’s conduct and manner of lodging the objection fell considerably short of the permissible statutory requirements under Section 51 (3) of the Tax Procedures Act 2015. It would be fundamentally non-justifiable for this Tribunal to entertain this preliminary Objection, taking into account the Appellant's flagrant non-compliance with the law on raising objections.”

32. It also quoted the decision of the Tax Appeals Tribunal in the case of Digital Box Limited vs. Commissioner of Investigations and Enforcement (2020) where it was stated ass follows:-“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.”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; or(b)in any other case, that the tax decision should not have been made or should have been made differently.” In this case the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment. Thus, according to the provisions of the Evidence Act, the burden of proof falls upon the Appellant… the Tribunal is of the view that the Appellant did not discharge its burden of proof in showing that the Respondent used extraneous considerations and documents other than those prescribed by law. The averments made by the Appellant did not amount to evidence.”

33. The Respondent asserted that the Appellant has not discharged its burden of proof by providing the documents to explain the inconsistencies between its suppliers’ VAT declarations and the Appellant’s VAT declarations and the Respondent has demonstrated what it considered in arriving at the assessment and objection decision and reasons for its findings which are within the law.

The Respondent’s Prayers 34. The Respondent, therefore, prayed for:a.The Appeal to be dismissed with costsb.The Objection decision dated 23rd May 2022 to be upheld.

Issues For Determination 35. Gleaning through the Memorandum of Appeal, the parties’ Statements of Facts, and the Respondent’s submissions, the Tribunal puts forth the following issue for determination:a.Whether the Appellant’s Objection is valid.b.Whether the Respondent’s Objection Decision of 23rd May 2022 is justified.

Analysis And Findings 36. The Tribunal wishes to analyse the issue as herein-under.

a. Whether the Appellant’s Objection is valid. 37. The Appellant averred that the Commissioner did not take into account all the expenses incurred during the contract period before raising the additional assessment only accounting for expenses filed under the VAT return yet the partnership incurred expenses that are non-vatable. It added that the Commissioner did not take into account that the contract is ongoing and the partnership was only being paid partly hence accounts would not be prepared until the contract is completed.

38. The Appellant reiterated that the Commissioner did not provide a pre-assessment notice and the partnership only got to know of the assessment once it was already posted in the iTax ledgers.

39. The Respondent averred that the Notice of Appeal dated 30th June 2022 and subsequent Appeal are defective and the assessment was done according to the law as the Appellant’s Objection was disallowed due to a lack of supporting documentation as required by Section 15 of the Income Tax Act and Sections 51 (3), 56 (1), and 59 of the Tax Procedures Act to prove that the expenses were incurred in the generation of the Appellant’s income.

40. The Respondent maintained that it allowed expenses as per VAT inputs declared in line with the provisions of the VAT Act and the non-vatable expenses could not be allowed as the Appellant filed NIL income tax returns and had not provided the financials for 2020 and 2021 at the time of raising the additional assessments.

41. The Appellant did not address the issue cited herein above in its pleadings.

42. Section 51 of the Tax Procedures Act of 2015 provides as follows:-“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.(11)Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objectionshall be allowed.”

43. The Amendment to this Act was made in 2022 where it was provided in Section 51:-“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1).(c)all the relevant documents relating to the objection have been submitted.(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

44. The Tribunal observes that there are no documents provided by either party alluding to when the assessment was raised. The Tribunal cannot therefore determine the exact dates with certainty whether the Respondent’s averments are correct as the only document provided with respect to the current dispute is the objection decision reiterating the Respondent’s position in the current matter.

45. The Tribunal further observed that the Respondent having proceeded to issue a decision on the objection, the objection was deemed validated by the Respondent.

b. Whether the Respondent’s Objection Decision of 23rd May 2022 is justified. 46. With regard to burden of proof Section 30 of the Tax Appeals Tribunal Act provides as follows:-“the Appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

47. Further when lodging an Appeal, Section 56 of the Tax Procedures Act provides that:-“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

48. Additionally, Section 38 (b) of the Tax Appeals Tribunal Act posits: -“the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax;”

49. The Tribunal observed that the Appellant did not address the issue of insufficient documents at the appeal stage and since that is what formed the gist of the Respondent’s decision as outlined in the objection decision dated 23rd May 2022, the same should have formed part of the Appellant’s case in the ensuing matter.

50. The Tribunal noted that the Appellant has not adduced any evidence before it to show that the Respondent’s objection decision was wrong and that there was failure to provide documentation requested by the Respondent to enable the Respondent make an considered decision.

51. The Tribunal in the circumstances finds that the objection decision was proper in law and therefore justified.

Final Decision 52. The upshot to the foregoing is that the Appeal lacks merit and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby dismissed.b.The Objection decision dated 23rd May 2022 be and is hereby upheld.c.Each party to bear its own costs.

53. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF SEPTEMBER, 2023ROBERT M. MUTUMA...................CHAIRPERSONBONIFACE K. TERER.....................MEMBERMUTISO MAKAU...........................MEMBERELISHA N. NJERU..........................MEMBERDR. WALTER ONGETI..................MEMBER