[2024] KETAT 1650 (KLR)

Ndungu v Commissioner, Investigations and Enforcement (Tax Appeal E808 of 2023) [2024] KETAT 1650 (KLR) (Commercial and Tax) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1650 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E808 of 2023

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

November 21, 2024

Between

Simon Kamau Ndungu

Appellant

and

Commissioner, Investigations And Enforcement

Respondent

Judgment

Background 1. The Appellant is an individual carrying out business within the Republic of Kenya and is one of the directors of Nairobi Fairly Timbers & Hardware Ltd.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted tax investigations into the tax affairs of Nairobi Fairly Timber & Hardware Ltd with a view of establishing whether the Company was tax compliant. The Respondent reviewed the company's bank statements and the Appellants bank statements for the tax period 2017 to 2021.

4. The Respondent issued additional Income Tax and VAT assessments vide a notice of assessment dated 19th July, 2023 amounting to Kshs 30,491,726. 00.

5. The Appellant objected to the additional tax assessments vide a notice of objection dated 16th August 2023 and 28th August 2023. The Respondent subsequently issued its objection decision dated 17th October 2023.

6. Aggrieved by the objection decision, the Appellant lodged its Notice of Appeal dated 14th November, 2023 on 16th November, 2023.

The Appeal 7. The Appeal is predicated on the following grounds as outlined in the Memorandum of Appeal dated 14th November 2023 and filed on 16th November 2023:a.That having assessed the Appellant from the years 2016 to 2022 and issuing the assessments in 2023, the Respondent erred in law and fact in issuing statutory time barred tax assessments contrary to section 29(5) and 31 (4)(b) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”). Consequently, the investigations issued through the letter dated 6th March 2023, the assessments dated 19th July 2023 and the resultant objection decision dated 17th October 2023 are all illegal, unlawful, null and void ab initio.b.That the Respondent erred in law and fact by issuing tax assessments for the year 2017, 2018 and part of 2019 in July 2023. Those assessments are statutory time barred, therefore, are all illegal, unlawful, null and void ab initio.c.That the Appellant has never been charged or convicted for gross or wilful neglect to pay tax, tax evasion or fraud in relation to taxes therefore, the Respondent cannot find refuge under section 29(6) or 31(4)(a) of the TPA and that therefore, the Respondent had no justification in law to assess and demand payment of statutory time barred taxes hence, the assessments and the resultant objection decision are illegal, unlawful, null and void ab initio.d.That the Respondent erred in law and fact by demanding the Appellant to provide documents contrary to section 23 (1)(c) of the TPA since the assessment are beyond the 5-year rule therefore, the assessments and the resultant Objection Decision are all illegal, unlawful, null and void ab initio.e.That the Respondent has unlawfully treated the appellant and Nairobi Fairly Timber & Hardware Limited as one and inseparable legal entity contrary to the tenets in Salomon vs Salomon [1896] UKHL 1, [1897] AC 22 by treating funds from Nairobi Fairly Timber & Hardware Limited as funds belonging to the Appellant yet the Appellant is just a director of Nairobi Fairly Timber & Hardware Limited.f.The Respondent vide a letter dated 19th July 2023 unlawfully found that the Appellant operates timber sales from January 2017 yet the Appellant has never operated timber sales. Instead, Nairobi Fairly Timber & Hardware Limited operates timber sales which company is registered for VAT and has been paying for VAT religiously. The Respondent erred in treating the Appellant and Nairobi Fairly Timber & Hardware Limited as one legal entity which is contrary to tenets in Salomon vs Salomon [1896] UKHL 1, [1897] AC 22. g.That the Respondent vide a letter dated 19th July 2023 unlawfully registered the Appellant for VAT obligation by unlawfully finding that the Appellant operates timber sales from January 2017 yet the Appellant has never operated timber sales. Instead, Nairobi Fairly Timber & Hardware Limited operates timber sales which company is registered for VAT and has been paying for VAT religiously.h.That the Respondent erred in law and fact in finding that the Appellant had qualified for VAT responsibility yet the deposits in the Appellant’s bank account were not his, but the funds were for received on behalf of Nairobi Fairly Timber & Hardware Limited pursuant to a resolution of the Nairobi Fairly Timber & Hardware Limited of 2nd January, 2015. i.That the Respondent erred in law and facts by subjecting the funds in Appellant’s bank account to taxation when part of the funds do not belong to the Appellant. The Respondent assumed that all deposits in the Appellant’s bank account were Appellant’s incomes yet huge chunk of the deposits in the bank account were funds received on behalf of Nairobi Fairly Timber & Hardware Limited pursuant to a resolution of the said company of 2nd January, 2015. j.That the Respondent acted ultra vires and contrary to the provisions of Income Tax Act CAP 470 of the Laws of Kenya (hereinafter “ITA”) by failing to exclude interbank transfers, gifts and inter borrowing from spouse which amounts to capital, which transitions are not taxable.k.That demanding taxes on funds deposited in the Appellant’s bank account on behalf of Nairobi Fairly Timber & Hardware Limited is subjecting Nairobi Fairly Timber & Hardware Limited to double taxation when it already paid taxes on the same funds.l.That taxing funds held by the Appellant on behalf of Nairobi Fairly Timber & Hardware Limited amounts to unfair trial under Article 25(c) of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) amounts to unfair hearing contrary to Article 50(1) of the Constitution and amounts to unfair administrative action contrary to Article 47 of the Constitution because the Respondent did not give the said company a chance to be heard.m.That the Respondent erred in law and fact by treating the Appellant and a company called Property and Business Outlook Limited as one and the same entity yet a company and its directors are two separate legal entities and that the Appellant herein is not related to Property and business outlook Limited.n.That the Respondent in treating the Appellant and Property and Business Outlook Limited as one legal entity, the Respondent erred in law and fact by assessing the Appellant for taxes that ought to be accounted for not by the Appellant, but by Property and Business Outlook Limited.o.That whereas the Respondent issued assessment relating to the period from 2017 to 2022, the Respondent erred in law and fact in failing to issue assessments for the year 2022 since the assessments ends at the year 2021. p.That the Respondent erred in law and fact in demanding the Appellant to provide internal records for companies that the Appellant is associated with and for companies that the Respondent had not assessed for taxes.q.That whereas the Respondent issued a joint assessment against Teresia Wacuka Kamau and the Appellant, MRI tax is jointly assessed between the two taxpayers but in the objection decision, MRI is attributed to the Appellant only.

Appellant’s Case 8. The Appellant relied on its statement of facts dated 14th November 2023 and filed on 16th November 2023. The Appellant also filed his written submissions dated 5th July 2024 on filed on 19th July 2024 and the same were adopted by the Tribunal during a hearing held on 11th September, 2024.

9. The Appellant stated that the Respondent issued letter of investigation findings dated 6th March 2023 referring to Appellant’s taxes from 2016 to 2022. The Appellant also stated that whereas the Respondent sought to assesses Montana Guest Resorts Limited and the Appellant herein as outlined in a letter dated 6th March 2023, the Respondent did not issue tax assessments regarding Montana Guest Resorts Limited. However, the Respondent wants the Appellant to pay Kshs 313,397. 00 attributable to Montana Guest Resorts Limited as if the Appellant and the said company is the same legal entity. The Appellant was categorical that this is an illegality.

10. The Appellant averred that considering that the investigations related to taxes in respect of the period from 2016 to 2022 as stated in the letter dated 6th March 2023, the investigations and the resultant findings are statutorily time barred for infringing the 5-year rule. Therefore, the investigations assessments and objection decision are all illegal, null and void ab initio. The Appellant asserted that the Respondent issued tax assessment through a letter dated 19th July 2023 against the Appellant in respect of the years 2017 to 2022.

11. It was the Appellant’s view that since the assessments were issued in the year 2023 through a letter dated 19th July 2023 wherein the taxes were in relation to the period 2017 to 2022, the tax assessment and the resultant finding are statutorily time barred for infringing the 5-year rule. Therefore, the investigations and assessments are illegal, null and void ab initio.

12. The Appellant asserted that he filed his response to the investigations and assessments vide a letter dated 15th May 2023 and objection dated 16th August 2023. The Appellant stated that despite the objection and evidence provided, the Respondent disregarded the evidence then issued its objection decision dated 17th October 2023 concerning income tax and VAT.

13. It was the Appellant’s case that since Respondent’s assessments commenced from the year 2016 to 2022 as indicated in the letter dated 6th March 2023 and letter dated 19th July 2023, the Respondent erred in law and fact in issuing statutorily time barred tax assessments. Consequently, the investigations issued through the letter dated 6th March 2023, the assessments dated 19th July 2023 and the resultant objection decision dated 17th October 2023 are all illegal, unlawful, null and void ab initio.

14. The Appellant stated that the Respondent has neither charged the Appellant nor has the Appellant been convicted for gross or wilful neglect to pay tax, tax evasion or fraud in relation to taxes therefore, the Respondent cannot find refuge under section 29(6) or 31(4)(a) of the TPA. The Appellant therefore, averred that the Respondent had no justification in law to assess and demand payment of statutory time barred taxes hence, the assessments and the resultant objection decision are illegal, unlawful, null and void ab initio.

15. The Appellant stated that the Respondent erred in law and fact by demanding the Appellant to provide documents that over 5 years. He stated that this is contrary to section 23 (1) (c) of the TPA since the assessment are beyond the 5-year rule. The Appellant wondered how the Respondent expected the Appellant to obtain documents that are not in his possession due to the effluxion of time. The Appellant stated that since he could not place his hands on documents due to effluxion of time, the Respondent purported to invalidate the his notice of objection. The Appellant was of the view that since the assessments call for records that span over 5-year rule contrary to section 23 (1)(c) of the TPA, the assessments and the resultant objection decision are all illegal, unlawful, null and void ab initio.

16. The Appellant affirmed that he is one of the directors of Nairobi Fairly Timber & Hardware Limited. The Appellant averred that the Respondent unlawfully treated him and Nairobi Fairly Timber & Hardware Limited as one and inseparable legal entity contrary to the tenets in Salomon vs Salomon [1896] UKHL 1, [1897] AC 22 by treating funds from Nairobi Fairly Timber & Hardware Limited as funds belonging to the Appellant. The Appellant further stated that it appeared him that the Respondent has zero interest in laws and principles governing principals and agents.

17. It was the Appellant’s case that the Respondent erred in law and fact by subjecting part of funds in Appellant’s bank account to taxation when part of the funds do not belong to the Appellant. The Appellant maintained that the Respondent assumed that all deposits in the Appellant’s bank account were his income yet a huge chunk of the deposits in the bank account were funds received on behalf of Nairobi Fairly Timber & Hardware Limited pursuant to a company resolution of the said company of 2nd January, 2015. The Appellant explained that the purpose of the deposits was to facilitate purchase of materials for and on behalf of Nairobi Fairly Timber & Hardware Limited. He added that despite these explanations, the Respondent ignored these facts and proceeded to subject the deposits from Nairobi Fairly Timber & Hardware Limited to taxation.

18. According to the Appellant, since Nairobi Fairly Timber & Hardware Limited has paid all taxes due, and the company is tax compliant as there no pending tax assessment against it, and bearing in mind that the Respondent is attempting to tax again funds in its director’s account, then, the Respondent is unlawfully subjecting the company to double taxation.

19. The Appellant maintained that subjecting the deposits from Nairobi Fairly Timber & Hardware Limited in his bank account meant that the Respondent subjected Nairobi Fairly Timber & Hardware Limited to double taxation without assessments. He averred that it also translated to unfair trial contrary Article 25 (c) of the Constitution because Nairobi Fairly Timber & Hardware Limited is being forced to pay taxes when it has not been assessed for the same. The Appellant further stated that the Respondent also denied the company fair hearing contrary to Article 50(1) of the Constitution because its funds have been subjected to double taxation without assessments therefore, Nairobi Fairly Timber & Hardware Limited cannot rebut the assessments. In addition, without assessments on the company, the Appellant asserted that the Respondent infringed Article 47 of the Constitution because the Respondent subjected the funds from the company to double taxation without adhering to dictates of fair administrative action leading to unlawful demand of taxes.

20. It was the Appellant case that demanding taxes on funds deposited in the Appellant’s bank account on behalf of Nairobi Fairly Timber & Hardware Limited is subjecting Nairobi Fairly Timber & Hardware Limited to double taxation when Nairobi Fairly Timber & Hardware Limited already paid taxes on the same funds while subjecting the Appellant to unlawful taxation because funds in the Appellant’s bank account belonged to Nairobi Fairly Timber & Hardware Limited and from the highlighted evidence have long been transferred to the company, and no funds are in Appellant’s accounts.

21. The Appellant stated that vide a letter dated 19th July 2023 the Respondent unlawfully found that he operates timber sales from January 2017 yet the Appellant has never operated timber sales. Instead, Nairobi Fairly Timber & Hardware Limited operates timber sales and is registered for VAT and has been paying VAT religiously. The Appellant therefore, asserted that the Respondent erred in treating the Appellant and Nairobi Fairly Timber & Hardware Limited as one legal entity which is contrary to tenets in Salomon vs Salomon [1896] UKHL 1, [1897] AC 22.

22. The Appellant submitted that due to the Respondent’s misapprehension and misunderstanding of the law, treated the Appellant and Nairobi Fairly Timber & Hardware Limited as one legal entity; therefore, the Respondent unlawfully slapped the Appellant with VAT taxes and penalties since 2017.

23. The Appellant was of the view that the Respondent erred in law and fact in finding that the Appellant had qualified for VAT responsibility yet the deposits in the Appellant’s bank account were not his, but the funds were for received on behalf of Nairobi Fairly Timber & Hardware Limited pursuant to its resolution of 2nd January, 2015. He argued that if the Respondent had considered that he was holding the funds on behalf of Nairobi Fairly Timber & Hardware Limited, the Respondent would have established that the Appellant was and is not qualified for VAT registration. Therefore, the Appellant stated that the Respondent totally misdirected itself.

24. The Appellant maintained that he paid all taxes due therefore; no tax has been lost. To establish this point, the Appellant relied on e-Return Acknowledgment Receipts.

25. The Appellant stated that he provided all documents in relation to the assessments. The documents included excel sheet for all bank account transfers, cash deposits, unpaid cheques, information on rent and all appendices to enable the Respondent to make accurate decision but the Respondent ignored the documents in favour of estimations resulting to a wrong and unlawful tax decision. The Appellant was categorical that Instead of analysing the documents keenly, the Respondent resorted to cherry picking what document to analyse hence the Respondent rejected other documents without justification. The Appellant argued that if the Respondent had taken time to analyse the documents, the Respondent would have noticed that no tax was lost.

26. The Appellant averred that the Respondent erred in law and fact by treating the Appellant and a company called Property and Business Outlook Limited as one and the same entity yet a company and its directors are two separate legal entities. The he argued that the Appellant and Property and business outlook Limited are not related at all. It is the Appellant case that in treating the Appellant and Property and Business Outlook Limited as one legal entity, the Respondent erred in law and fact by assessing the Appellant for taxes that ought to be accounted for not by the Appellant, but by Property and business outlook Limited.

27. The Appellant further averred that the Respondent erred in law and fact in demanding that the Appellant provide internal records for companies that the Appellant is not associated with and for companies that the Respondent had not assessed for taxes. He argued that this mess begun through the Respondent’s letter dated 6th March 2023 when the Respondent issued investigations findings concerning the Appellant and Montana Guest Resorts Limited. The Appellant did not issue tax assessments against Montana Guest Resorts Limited neither did the Respondent issue tax assessments against Nairobi Fairly Timber & Hardware Limited yet the Respondent expected the Appellant to produce documents in relation to those companies.

28. The Appellant stated that according to him, the only reason that the Respondent advanced in failing to adjust monthly rent income is that the Appellant did not provide documents to warrant adjustments. The Appellant wondered how he would produce documents that were not in his possession due to effluxion of time. He averred that the assessments covered the years from 2017 to 2022 but assessed in 2023. The Appellant maintained that this request to produce documents goes against the provisions of section 23 (1) (c) of the TPA since the assessments are beyond the 5-year rule. The Appellant wondered how the Respondent expected the Appellant to obtain documents that are not in his possession due to effluxion of time. The Appellant therefore, maintained that the Respondent’s assessments are unlawful.

29. In addition, the Appellant stated that he was unable to defend himself effectively because the Respondent issued joint assessments for two taxpayers that is the Appellant herein and another taxpayer called Terecia wacuka Kamau. Consequently, the Appellant argued that the assessment does not reveal how the Appellant is the one liable for monthly rent income tax liability but not Terecia wacuka Kamau. The Appellant questioned the criteria for subjecting the Appellant to MRI and argued that the criteria are still unknown. Based on these facts, the Appellant therefore, stated that he was unable to defend himself effectively. The Appellant pointed out that the Respondent should not have issued joint tax assessment, which led to confusion.

30. The Appellant accused the Respondent of failing to adjust funds in the bank account to consider the facts that funds that the Respondents terms as ‘income’ includes fund transfers from his account to his own accounts, transfers of funds from Appellant’s wife and transfers from Nairobi Fairly Timber & Hardware Limited. In addition, the Appellant averred that some of the funds in his bank accounts are savings and loans from his SACCO and incomes earned as a senior Standard Chartered employee. The Appellant stated that these interbank transfers are not incomes for the purposes of VAT therefore, are not taxable. It was the Appellant case that the Respondent ought to have adjusted these transfers but the Respondent failed to do so.

31. It was the Appellant case that whereas the Respondent acknowledged that some of the funds in the bank account were deposits emanating from disposal from sale of personal properties, the Respondent still failed to deduct entire amounts in relation to disposal of personal property.

32. The Appellant noted that whereas the Respondent issued assessment relating to the period from 2017 to 2022, the Respondent erred in law and fact in failing to issue assessments for the year 2022 since the assessments ends at the year 2021. The Appellant also averred that whereas the assessments runs to 2021, the Respondent demanded the Appellant to produces documents in relation to 2022 taxes. He argued that when he could not produce documents in relation to the year 2022, the Respondent invalidated the objection. Therefore, the Appellant opined that this makes the assessments and the objection decision erroneous in law.

33. The Appellant insisted that it was not in dispute that the Respondent requested for documents in relation to time barred assessments. The Appellant was not in possession of those documents due to section 29(5) and 31 (4) (b) of the TPA. He added that since section 23 (1) (c) of the TPA requires a taxpayer to retain tax documents for not more than 5-year, the Respondent could not expect the Appellant to produce documents when the assessments in relation to taxes of 2016, 2017, 2018 and 2019 were requested in 2023.

34. The Appellant instead that the Respondent ignored documents that the Appellant provided such as company resolution of 2nd January, 2015 and workings that the Appellant provided. This ignorance of facts let the Respondent into unlawfully treating the Appellant and Nairobi Fairly Timber & Hardware Limited as one and the same legal entity.

35. The Appellant filed its written submission which the Tribunal reviewed. The Appellant submitted that the the Respondent’s tax assessments dated 19th July 2023 was contrary to section 29(5) and 31 (4)(b) of the TPA and therefore, null and void because the assessments are statute time barred. The Appellant relied on the case of Gitere Kahura Investments Ltd v Commissioner of Domestic Taxes TAT no. 16 of 2019, wherein the Tribunal stated that the Respondent has to issue assessments within five years.

36. The Appellant submitted that the Respondent had no justification whatsoever in treating the appellant and Nairobi Fairly Timber & Hardware Limited as one and inseparable legal entity. In this regard, the Appellant the case of Salomon vs Salomon [1896] UKHL 1, [1897] AC 22 to argue that a company and its directors are two separate legal entities yet the Respondent treated the Appellant Nairobi Fairly Timber & Hardware Limited as one entity. To substantiate the fact that the Appellant was holding funds on behalf of the company in issue, the Appellant produced a resolution to that effect.

37. The Appellant also submitted that the Respondent was not justified in law to register the Appellant for VAT obligation because the Respondent unlawfully used data on funds from Nairobi Fairly Timber & Hardware Limited in Appellant’s bank account to find that the Appellant had qualified for VAT.

38. The Appellant submitted that the assessments for year 2022 as indicated in the objection decision are invalid because the Respondent did not issue assessment for the said year yet there are tax computations under table 7 of the objection decision. The Appellant therefore, urged the Tribunal to expunge tax computations under table 7 from the objection decision.

39. The Appellant further submitted that the Respondent acted ultra vires and contrary to the provisions of the ITA by failing to exclude interbank transfers, gifts and inter borrowing from spouse which amounts to capital and is not a taxable transaction. The Appellant therefore, urged the Tribunal to take cognisance of the Respondent’s handling of the matter because the assessments offends section 15 of the ITA. Finally, the Appellant submitted that the tax demanded in the objection decision is unlawfully computed.

Appellant’s Prayers 40. The Appellant urged the Tribunal to nullify the objection decision dated 17th October 2023 and that the Respondent be compelled to deregister the Appellant from VAT obligation.

Respondent’s Case 41. The Respondent’s case was premised on its Statement of facts dated 14th November 2023 and filed on 18th December 2023. The Respondent’s written submissions dated 22nd July 2024 and filed on 23rd July 2024 were adopted by the Tribunal during the hearing on 11th September, 2024.

42. The Respondent stated that it conducted tax investigations into the tax affairs of Fairly Timber & Hardware Ltd with a view of establishing whether the Company was tax compliant. It also stated that it reviewed the bank statements of Nairobi Fairly Timber & Hardware Limited and the Appellant’s bank statements for the tax period 2017 to 2021. It averred that the gross profit margin was then applied to the net banking income tabulated above to determine the gross profit. This gross profit was then compared with the income declared by the Appellant in his annual income tax returns. The undeclared income was charged income tax.

43. The Respondent stated that the net banking income was higher than VAT threshold of Kshs 5,000,000. 00 for all the years under review.

44. The Respondent stated that the Appellant contended that he received income on behalf of Nairobi Fairly Timber and Hardware Ltd and proposed adjustments be made to the gross banking deposits. The Respondent averred that the Appellant only provided hard copy schedules to support the adjustments thus the same were insufficient for the adjustments to be made. The Respondent also maintained that the Appellant did not provide documents in support of his assertion that the income he received was on behalf of Nairobi fairly Timber and Hardware Ltd. The Respondent therefore, issued its objection decision dated 17th October 2023.

45. In response to the memorandum of appeal, the Respondent stated that Section 24 and 28 of the TPA allow a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information.

46. The Respondent relied on Section 77 of the ITA and Section 31 of the TPA which according to it, allows it to issue additional tax assessments where a taxpayer has been assessed of a lesser amount based on any additional available information and to the best of his judgement.The Respondent averred that the additional tax assessments were based on bank deposits, which the Respondent deemed as income earned by the Appellant based on banking analysis.

47. The Respondent averred that the additional tax assessments were issued within the statutory 5 years and adhered to Sections 29(5) and 31(4)(b) of the TPA as the tax period under review was years 2019 to 2021. The Respondent also stated that the documents that the Appellant was requested to avail were within the 5 years statutory limit thus in line with Section 23 of the TPA.

48. According to the Respondent, it applied the best judgement as provided for under Section 29 of the TPA in computing the taxes payable by the Appellant using a Gross Profit Margin. The Respondent stated that the burden of proof is upon the Appellant to prove that the additional tax assessments are wrong.

49. The Respondent maintained that it is not bound by the Appellant's filed tax returns and can issue additional tax assessments based on available information and best judgement. It argued that it is empowered under Section 31 of the TPA to amend original assessments based on available information and his best judgement

50. Based on the foregoing, the Respondent stated that the objection decision dated the 17th October 2023 is proper based on the information available to it and was issued within the statutory timelines.

51. The Respondent’s submission were substantially the same as the Respondent’s statement of facts. In its submissions, the Respondent submitted that it relied on the Commissioner's best judgment as provided for under section 31 of the TPA. The Respondent relied on the case of The Commissioner for her Majesty's Revenue and Customs TC/201y/o2292 Saima Khalid Appellant v The Commissioners for Her Majesty's Respondents Revenue & Customs to support the position that the commissioner has to make a decision based on best judgment which involves among other things, fair consideration of all material placed before the commissioner to make a decision which is reasonable and not arbitrary.

52. The Respondent submitted that it is now trite law that banking deposit analysis is an accepted method of computing income tax. The Respondent relied on the case of Digital Box Ltd v Commissioner of Investigation and Enforcement Tax Appeals Number 115 of 2017 where it was held as follows:“Further, the courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment. This was held to be so in the case of Bachmann v The Queen, 2015 TCC 51 where the court stated that: "This Court has recognized that in an appropriate case a bank deposit analysis is an acceptable method to compute income.’’

53. The Respondent submitted that the burden of proof is upon the Appellant to prove the interbank transfers, gifts and inter borrowing from spouse. It relied on the case of Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal E028 of 2020) [2 022] KEHC 52 (KLR) where the court held that the taxpayer has to adduce documents to support its case.

54. The Respondent further submitted that the expenses have to be supported with documents not just averments. The Respondent relied on Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKLR where it was held that the only way the Commissioner could have allowed deductions of expenses as per section 15(1) of the ITA is if they were supported to the Respondent’s satisfaction.

55. In attempt to correct errors, the Respondent submitted that the tax period under review was years 2017 to 2021 and not 2019 to 2021 as indicated in paragraph 22 of the Respondent's Statement of Facts erroneously indicating year 2019 which is a typological error as the tabulation for the years under review is clearly indicated from paragraph 6 to 11 of the Respondent's Statement of Facts.

56. The Respondent, finally submitted that the Appellant failed to discharge his burden of proof. It cited the following cases wherein the courts held that the burden of proof in tax matters falls on the taxpayer: Pearson v Belcher CH.M Inspector of Taxes, Tax Cases Volume 38,

PZ Cussons East Africa Limited v Kenya Revenue Authority (2013) eKLR,

Intime Stone Age Limited v Commissioner of Domestic Taxes (Appeal 714 of 2022) [2023] KETAT 1002 (KLR)

Grace Njeri Githua v Commissioner of Investigations & Enforcement (Tat No. 102 of 2018)

Respondent’s prayers 57. The Respondent prayed that the Tribunal be pleased to uphold the objection decision dated 17th October, 2023 and that the appeal be dismissed with costs to it.

Issues For Determination 58. The Tribunal having reviewed the parties’ pleadings documents and submissions puts forth the following three (3) issues for determination:a.Whether the Appellant received income on behalf of Nairobi Fairly Timber and Hardware Limited and Property Outlook Limited.b.Whether the assessments were statutorily time barred.c.Whether the Objection Decision dated 17th October 2023 was justified.

Analysis And Findings 59. The Tribunal wishes to analyse the three issues as hereinunder:a.Whether the Appellant received income on behalf of the Nairobi Fairly Timber and Hardware Limited and Property and Business Outlook Limited.

60. The Appellant’s case was that the Respondent misdirected itself in finding that the Appellant had qualified for VAT responsibility on grounds that the Appellant received income from Nairobi Fairly Timber & Hardware Limited but the Appellant did not declare the same. The Appellant admitted that it received funds from Nairobi Fairly Timber & Hardware Limited but submitted that the deposits in the Appellant’s bank account were not his but the funds were received for and on behalf of Nairobi Fairly Timber & Hardware Limited pursuant to the company’s resolution of 2nd January 2015. The Appellant submitted that had the Respondent considered that the Appellant was holding the funds on behalf of Nairobi Fairly Timber & Hardware Limited, the Respondent would have established that the Appellant had not qualified for VAT registration and that therefore VAT assessments could not arise.

61. The Tribunal notes that in its pleadings, the Respondent did not challenge the averment that it treated the Appellant and Nairobi Fairly Timber & Hardware Limited as one and the same legal entity. From its failure to controvert the averment by the Appellant that it treated the Appellant and Nairobi Fairly Timber & Hardware Limited as one and the same legal entity, the Tribunal can infer that it was an admission of the fact. Be that as it may, the Tribunal must satisfy itself that indeed the Appellant was holding funds for Nairobi Fairly Timber & Hardware Limited.

62. The Tribunal examined an annexure marked SKN-5 consisting of documents adduced by the Appellant to defend its case and noted that the said annexure was composed of two documents, namely; the Commission Agency Agreement dated 10th January 2015 and signed by Simon K. Ndungu and Teresia W.Kimani. Secondly, the said annex also contained company’s resolutions dated 2nd January 2015 and dully signed by the directors. The Respondent did not challenge the documents and its failure to do so amounts to an admission and concession on part of the Respondent. Resolution no. 06/2015 indicated that Nairobi Fairly Timber & Hardware Limited authorised its directors to their personal Mpesa and bank accounts to transact business of Nairobi Fairly Timber & Hardware Limited. The Appellant herein is one of the directors of the said company therefore; from the resolution the Appellant was receiving the funds from Nairobi Fairly Timber & Hardware Limited to purchase its stock for purposes of Trade. The Appellant also received the income of Nairobi Fairly Timber & Hardware Limited.

63. Pursuant to the Companies Act , CAP 486 of the Laws of Kenya , a company makes its decision by passing resolutions. Since there is a resolution on record, which is unchallenged by the Respondent, the Tribunal has no difficulty in inferring that the Appellant received the income on behalf of Nairobi Fairly Timber & Hardware Limited.

64. The Respondent at paragraph 13 of its statement of facts stated that, ‘‘the Respondent avers that the Appellant did not provide documents in support of his assertion that the income he received was on behalf of Nairobi fairly Timber and Hardware Ltd.’’ In the contrary, The Tribunal finds that the Appellant produced a resolution which the Respondent did not challenge at all.

65. The Tribunal notes the agreement of both parties that the Respondent accessed the Appellant on VAT based on deposits in the Appellant’s bank account received from Nairobi Fairly Timber & Hardware Limited. In addition, the Appellant averred that the Respondent erred in law and fact by treating him and a company called Property and Business Outlook Limited as one and the same entity yet a company and its directors are two separate legal entities. The Appellant also stated that he was not related to Property and business outlook Limited and therefore, the Appellant maintained that he was not responsible for its Monthly Rental Income.

66. The Tribunal notes the Appellant’s submission that the Respondent erred in law and fact by assessing the Appellant for taxes that ought to be accounted for by the Appellant but by Property and Business Outlook Limited. The Tribunal also notes the exception to the principles of incorporation as set out in the case Salomon v Salomon [1896] UKHL 1, [1897] AC 22 that directors and the company may only be treated as one and the same entity when the company is used by directors as a conduit to commit illegalities. In such cases, the veil of incorporation must be pierced by a court of competent jurisdiction.

67. The Tribunal notes that there is no evidence on record that the Respondent obtained orders from a court of competent jurisdiction to lift the veil of incorporation of Nairobi Fairly Timber & Hardware Limited or Property and Business Outlook Limited which could justify its treatment of the Appellant herein and Nairobi Fairly Timber & Hardware Limited and Property and Business Outlook Limited as one and the same person. It therefore follows that the Respondent acted ultra vires by attempting to lift that veil of incorporation by itself, as it does not possess such powers.

68. At paragraph 8 of the Respondent’s statement of facts, the Respondent stated as follows: ‘‘the Respondent avers that the net banking income was higher than VAT threshold of Kshs 5,000,000 for all the years under review.’’ The Respondent then registered the Appellant for VAT obligation vide a letter dated 19th July 2023. The Tribunal observes, in view of the fact that the Respondent relied on the funds the Appellant received from Nairobi Fairly Timber & Hardware Limited to register the Appellant for VAT obligation, that the VAT assessments are unlawful. It follows that the Respondent’s recruitment of the Appellant for VAT through a letter dated 19th July 2023 was unlawful.

69. The Tribunal’s reiterates its decision in Digital Box Ltd v Commissioner of Investigation and Enforcement Tax Appeals Number 115 of 2017 where it was held that banking analysis method can be used by the Respondent. The Tribunal does not depart from this decision but points out its view that the use of the banking method ought not be misused to oppress taxpayers by the assumption that all funds received are income chargeable to taxation especially when the taxpayer has provided sufficient explanation and adduce evidence of the purpose of the deposits.

70. Besides subjecting the Appellant to VAT, the Respondent also subjected the Appellant to income tax based on the income received by the Appellant on behalf of Nairobi Fairly Timber & Hardware Limited. The Respondent in objection decision claimed that the Appellant deals in timber sales when it is Nairobi Fairly Timber & Hardware Limited that sells timber. After considering the Appellant’s ‘income from timber sales’ the Respondent unlawfully issued the Appellant with income tax assessments. The Respondent at paragraphs 6 and 7 of its statement of facts stated as follows:‘‘The Respondent reviewed the company's bank statements and the Appellants bank statements for the tax period 2017 to 2021. The Respondent avers that the gross profit margin was then applied to the net banking income tabulated above to determine the gross profit. This gross profit was then compared with the income declared by the Appellant in his annual Income Tax returns.’’

71. The Tribunal finds that the Respondent in assessing the income of Nairobi Fairly Timber & Hardware Limited and Property and Business Outlook Limited on the Appellant, acted illegally and unlawfully and treated the Appellant and Nairobi Fairly Timber & Hardware Limited and Property and Business Outlook Limited as one and the same person yet that was not the case.

72. The Tribunal other finding is that taxing the income of Nairobi Fairly Timber & and Hardware Limited and that of Property and Business Outlook Limited on the Appellant would in any case amount to double taxation of the Companies because the Respondent did not assess the said entities. The Tribunal further finds on this issue that each and every decision undertaken by the Respondent informed by income of the respective Nairobi Fairly Timber & and Hardware Limited and Property and Business Outlook Limited were unlawful.

73. The Tribunal takes the position that a company and its directors are two separate legal persons and cannot be treated as one as was held by the House of Lords in Salomon v Salomon [1896] UKHL 1, [1897] AC 22. Subsequently, the Tribunal finds that the Respondent unlawfully assessed the Appellant based on income received on behalf of Nairobi Fairly Timber & Hardware Limited and Property and business outlook Limited.

74. Consequently, the Tribunal’s finding is that the Appellant received income on behalf of Nairobi Fairly Timber and Hardware Limited and Property Outlook Limited.

75. The Tribunal has herein identified two other issues for its determination and will not delve into their determination as the same have been rendered moot.

Final Decision 76. The upshot to the foregoing is that the Appeal succeeds and consequently the Tribunal makes the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s letter dated 19th July 2023 registering the Appellant for VAT be and is hereby expunged.c.The Appellant’s VAT obligation be and is hereby annulled.d.The objection decision dated 17th October 2023 be and is hereby set aside.e.Each party to bear its own cost.

77. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER