[2024] KETAT 545 (KLR)

Nextgen Mall Management Company Limited v Commisioner of Domestic Taxes (Tax Appeal 1496 of 2022) [2024] KETAT 545 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 545 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1496 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

April 26, 2024

Between

Nextgen Mall Management Company Limited

Appellant

and

Commisioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated under the Companies Act whose main activity is the management of revisionary interest for the members who purchased business premises and office space from Nextgen Office Suites Limited.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The issue in dispute in this Appeal arose when the Respondent carried out an audit of the Appellant’s affairs to verify the correctness of its returns. This exercise led to the issuance of additional assessments dated 18th August 2022 amounting to Kshs 119,873,193. 00

4. Appellant objected to this assessment vide its letter dated 23rd August 2022 and the Respondent issued its objection decision on 3rd November 2022.

5. The Appellant being dissatisfied with the Respondent’s objection decision lodged the Notice of Appeal herein on 29th November 2022.

The Appeal 6. The Appellant in its Memorandum of Appeal dated 3rd December 2022 and filed on 9th December 2022 has set out the following grounds of Appeal, that:-a.The Respondent erred in fact and law by treating members' contributions towards costs incurred on common areas as income.b.The Respondent erred in fact and law by failing to consider the submission of the Appellant during verification.c.The Respondent erred in fact and law by treating an entity formed to hold revisionary interest on behalf of members who purchased business premises and office space from the developer as a trading company.d.The Respondent erred in fact and law by not giving a fair hearing for the taxpayer before deciding on the objection.e.The Respondent used the wrong e-mail address to request for the documents for a review purpose.f.The Communications from the Respondent never reached the Appellant resulting in the decision being reached without verification of the documentary evidence.g.The management company being referred to, although registered under the public limited company is not for trading but the correct position is that the entity is a members association by nature of its operations.

Appelant’s Case 7. The Appellant grounded its Appeal on its Statement of Facts dated 3rd December 2022 and filed on 9th December 2022.

8. The Appellant stated that upon the conclusion of the audit that was carried against it, the Respondent proceeded to forcefully register it for VAT obligations in regard to members’ contributions for common areas. Consequently, it was issued with an additional assessment of Kshs 38,550,556. 00 as income tax and Kshs. 81,322,637. 00 as VAT.

9. It was its position that, the Respondent ignored the fact that it is not a trading Company because its main objective is to hold revisionary interest for the members who are stakeholders.

10. That the Respondent did not take into consideration the fact that members' contribution towards the common areas are determined at the Annual General Meeting. That non-members do not make payments for these services and therefore this amount cannot be treated as income.

11. The Appellant averred that the Respondent used the wrong email address when it requested it for additional documents. That as such the said request never reached it and the Respondent opted to issue its objection decision without affording it a chance to be heard. That the eventual decision also ignored the issues it had raised in its objection.

12. That the objection decision was invalid because it did not receive the email requesting it for information.

Appellant’s Prayer 13. The Appellant made the following prayersa.That the annual assessment by the Respondent be set aside.b.That the tax computation as per audited accounts be adopted since the Appellant is not a trading company:-c.That the additional obligation on VAT forced registration be cancelled.

Respondent’s Case 14. The Respondent has relied on its Statement of Facts dated 3rd December 2022 and filed on 9th December 2022 and Written submissions dated 8th August 2023 and filed on 9th August 2023 to oppose this Appeal.

15. That it served the Appellant with a list of documents that it required to facilitate the audit process in the letter dated 28th July 2021. Consequently, the Appellant reverted vide letter dated 4th August 2021 requesting for more time to avail the documents.

16. The Respondent postulated that the Appellant availed the documents requested and the Respondent issued its preliminary audit vide letter dated 9th December 2021 based on the documents availed. That the response and explanations of the Appellant to the audit findings were unsatisfactory prompting the issuance of additional assessment amounting to Kshs. 119,873,193. 00 vide letter dated 18th August 2022.

17. That Appellant objected to the additional assessment on the 23rd August 2022 and it was requested by email to submit the following documents in support of the objection.a.Memorandum and Articles of Association detailing the company's Activities.b.Exemption certificate from VAT for the Company or any basis for placing the company under the exempt categoryc.Detailed clarification on the company’s activities from the income to expenditure as well as treatment of surplus and deficits in the company bookd.Copy of the general ledger for the year 2017 to 2020 demonstrating income & expenditures for the yearse.Copies of sample agreements, subleased agreements as well as AGM Minutes for 2017 to 2020

18. The Respondent predicated that the Appellant provided some of the supporting documents which it reviewed and issued an objection decision confirming the assessment vide letter dated 3rd November 2022.

19. The Respondent averred that contrary to the Appellant’s allegation that it was incorporated to deal with the revisionary interest, the Memorandum of Association (MoA) stated as follows in paragraph 3 (e) that;“The Appellant shall undertake direct management of 49 units in the commercial Centre and provide services and facilities for the purchasers or occupiers. These services include garbage collection, providing security among other servicesIt further lists the responsibility to collect proportionate Land rent and Rates, services charge garbage collection etc.”

20. The Respondent took the position that the services listed in the MoA are services offered to the occupants of the Mall and constitute taxable services and are thus taxable.

21. That further the Appellant described itself as a firm dealing in real estate activities. That paragraph 3(a) & (e) of the MoA have listed its objectives to include managing forty-nine (49) units in the commercial centre.

22. That the fact the Appellant charges and is paid a service fee for the services rendered means that such services are taxable supplies under Sections 2 and 5 of the Value Added Tax Act, 2013.

23. That further, an examination of the Appellant’s records indicated that the Appellant was charging a service fee of Kshs. 35 per square foot for its management service. That the said services were vat-able and ought to have been declared for VAT purposes under Section 5 of the VAT Act and hence its reason for forceful registration of the Appellant.

24. The Respondent avowed that the Appellant was offering taxable services and it had also met the threshold for VAT registration and hence its reason to register it for VAT under Section 34(6) of the VAT Act. It supported its decision to forcefully register the Appellant with the case of Cephas Ventures Enterprises Limited vs Commissioner of Domestic Taxes TAT Appeal No. 242 of 2021.

25. That it relied on the income declared in the Appellant’s income tax returns as well as the records provided by the Appellant to arrive at the gross turnover and the subsequent additional Corporation tax and VAT.

26. It cited Section 3 (2) (i) of the Income Tax Act (ITA) which indicates that tax is due on gains or profits from any business from whatever period of time carried on. That the definition of business in Section 2 of ITA included any trade, profession or vocation, and every manufacture, venture and concern in the nature of trade.

27. The position taken by the Respondent was that the Appellant’s transactions are ventures that deal in trade because they are offering services and charging a fee for them.

28. That it disallowed a 2016 claim for unsupported office expenses amounting to Kshs. 2,669,071. 00 for lack of supporting documents.

29. The Respondent averred that for VAT purposes, the Appellant was receiving funds well over the VAT threshold and it was expected to account for VAT accordingly while claiming input VAT where applicable.

30. The Respondent averred that contrary to the Appellant’s allegation that the wrong email was used and its documents were not reviewed, the Respondent stated that the Appellant received the communication which they have even annexed as part of their documents before the Tribunal.

31. The Respondent predicated that the Appellant had not discharged its burden of proof under Section 56 (1) of the TPA to demonstrate that the assessment was not accurate.

32. The Respondent avowed that the Appellant did not provide any evidence to prove that its managerial services (its core objective/business) are an exempted supply of services under the Value Added Tax Act, 2013. That Section 62 of the Value Added Tax Act, 2013 places the burden on the Appellant to prove that a supply of goods or services is exempt from VAT.

33. The Respondent submitted that the Appellant made incorrect declarations in its income tax returns including the following:a.The Appellant over-claimed office expenses in the income tax return for the year 2016. That this is evident from the variances established between expenses of Kshs. 67,971 claimed in its 2016 audited Financial Statement and Kshs. 2,737,042 were claimed in the 2016 corporation tax return. The variance of Kshs. 2,669,071 was charged to tax being the over-claimed office expenses for 2016;b.The Appellant also claimed unallowable costs associated with providing various services to its business occupants with a view of reducing the taxable income and the tax payable. This is from the 2018 tax return where the Appellant claimed a deficit brought forward of Kshs. 9,400,814 as an allowable expense; andc.In the year 2016, the Appellant claimed a depreciation cost of Kshs. 203,651 as an allowable deduction contrary to section 16(1) (b) of the Income Tax Act, Cap. 470 Laws of Kenya.

34. Flowing from the above examples, the Respondent submitted that the Appellant made incorrect statements and it was thus justified in raising the tax assessment to ensure that the Appellant’s correct taxable income was charged to tax.

35. The Respondent submitted that looking at the totality of this case, it acted within Section 31 of the Tax Procedures Act, 2015 in amending the Appellant’s tax returns to ensure that the Appellant is liable for the correct amount of tax payable in respect of the reporting period January 2016 to December 2020.

36. The Respondent posited that the Appellant has not stated which one is the correct email address and which one is the wrong email address for the Tribunal to make a finding. Similarly, the Appellant has not explained where it got the filed email correspondences.

37. That the Appellant has also not explained how it came to know of the assessment and letters sent to it including the notice of intention to audit, Preliminary findings, and tax decision amongst other documents. That the Appellant is being selective on the issue of request for documentation and yet at the same time confirms service of other documents.

38. That the Appellant charges fees for its business in the real estate management industry and it was thus liable to pay tax.

39. That the money received from members for costs incurred in common areas was payments for the services rendered.

40. In the premises, the Respondent asserted that it was justified to confirm the amended assessments. That its assessment also enjoyed the presumption of correctness and this can only be vacated by the Appellant providing evidence to the contrary or discharging the burden of proof imposed by law. It supported this argument with the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR Nairobi High Court Income Tax Appeal No. E125 of 2020.

41. Based on the above averments, the Respondent concluded that the Appellant has not discharged its burden of proof and thus the Respondent’s assessments as confirmed in the objection decision of 3rd November 2022 enjoy the presumption of correctness under Section 50 of the Tax Procedures Act, 2015.

Respondent’s Prayer 42. The Respondent prayed that the Appellant’s Appeal be dismissed with costs, the additional VAT and Income tax assessment raised by the Respondent be confirmed and the principal taxes, interest and penalties be found due and payable as per the objection decision rendered by the Respondent.

Issues For Determination 43. The issue that has presented itself for determination from the evidence submitted by the parties before the Tribunal is Whether the Respondent’s additional tax assessment was justified.

Analysis And Determination 44. The Tribunal having identified the issue falling for its determination proceeded to analyze the same as hereunder.

45. Regarding additional assessment, the Appellant asserted that it was not allowed the chance to present its documents for consideration by the Respondent before the issuance of the objection decision because the letter that requested these documents was sent to the wrong email address.

46. It further submitted that the said decision was thus unfair to the extent that the Appellant was not given a chance to present documents to support its objection.

47. The Respondent, on the other hand, asserted that the Appellant’s objection was considered before the issuance of the objection decision. That the argument that it never received the email requesting for documents was unfounded because the Appellant has not explained how it came to know of the assessment and letters sent to it including the notice of intention to audit, preliminary findings, and tax decision amongst other documents.

48. The Respondent further urged that the Appellant is being selective on the issue of request for documentation and yet at the same time confirms service of other documents. That the allegations herein are therefore unfounded.

49. The Tribunal has noted that the Appellant was on the 7th September, 2023 granted leave by the Tribunal to file additional documents and the documents that it had annexed to its Notice of Motion application dated 29th August 2023 were deemed as properly filed.

50. The Tribunal has noted that the Respondent had requested the Appellant to provide the following documents to support its objection.a.Memorandum and Articles of Association detailing the company's Activities.b.Exemption certificate from VAT for the Company or any basis for placing the company under the exempt category.c.Detailed clarification on the company’s activities from income to expenditure as well as treatment of surplus and deficits in the company book.d.Copy of the general ledger for the year 2017 to 2020 demonstrating its income & expenditures for the years.e.Copies of sample agreements, subleased agreements as well as AGM minutes for 2017 to 2020.

51. Upon consideration of its aforesaid application dated 29th August 2023 the Appellant was granted leave by the Tribunal on 7th September 2023 and it filed the following documents:-a.Sale and lease agreementsb.Minutes of resolutions with service charge areasc.Water billsd.Debit notese.Security notesf.KPLC billsg.Cleaning invoicesh.Common kitchen gas billsi.Insurance demandj.Management invoicesk.Generator fuel invoicesl.Garbage collection invoicesm.General expenses invoices

52. The Tribunal has noted that the Appellant did not address itself to the documents that were requested of it by the Respondent even though it was granted leave by the Tribunal to file additional documents. It only filed the sale and lease agreements out of the list of 5 documents that it had been requested to supply.

53. The following documents were not supplied:a.Memorandum and Articles of Association detailing the company's Activities.b.Exemption certificate from VAT for the Company or any basis for placing the company under the exempt category.c.Detailed clarification on the company’s activities from income to expenditure as well as treatment of surplus and deficits in the company book.d.Copy of the general ledger for the year 2017 to 2020 demonstrating its income & expenditures for the years.

54. It is now settled that the burden to prove that the assessment by the Respondent was erroneous rested with the Appellant as is provided under Section 30 of the TAT Act which provides as follows:-“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."

55. The Appellant was thus required to prove that the assessment was erroneous by providing evidence that the tax assessed ought not to have been levied. Alternatively, it was required to provide a plausible explanation as to why it could not provide the documents that had been requested by the Respondent.

56. None of these was done by the Appellant. The outcome of this failure is that the Appellant failed in its duty to prove that the Respondent’s assessment was erroneous. The said assessment thus stood unchallenged and hence proved.

57. This view was affirmed in Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR where the court stated as thus:-“A significant factor adding to the taxpayer's burden in tax cases is the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provision is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

58. The Tribunal has looked at the list of documents that the Appellant was requested to supply and is of the view that these were documents which essentially ought to have been in its custody. Its failure to provide the said documents or offer an explanation for its failure was its waterloo in this Appeal. The documents produced subsequent to being granted leave could not answer to the purport of the documents requested by the Respondent and could not be conceivably deemed to be alternate to the requested documents.

59. Flowing from the above-stated events, the Tribunal finds and holds that the Appellant failed to discharge its burden of proof in this Appeal.

Final Decision 60. Accordingly, the Tribunal finds that the Appeal lacks merit and it hereby proceeds to make the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 3rd November 2022 be and is hereby upheld.c.Each Party to bear its own costs.

61. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER