[2023] KETAT 869 (KLR)

Njue v Commissioner of Domestic Taxes (Tax Appeal 1400 of 2022) [2023] KETAT 869 (KLR) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 869 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1400 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

December 8, 2023

Between

Julie Magwi Njue

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background. 1. The Appellant is an individual and a registered taxpayer. The Appellant is engaged in business of passenger transport vehicles and residential rental property.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, 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 assessment for Income tax and monthly rental income on 22nd April 2022. The Appellant filed a late objection on 22nd August 2022.

4. The Respondent issued its objection decision vide a letter dated 9th October 2022.

5. The Appellant being dissatisfied with the Respondent’s decision filed a Notice of Appeal on 7th November 2022.

The Appeal 6. The Appeal as stated in the Memorandum of Appeal was premised on the following grounds:-i.The Commissioner erred in law and in fact in holding that the Appellant had failed to accurately disclose its revenue and related transactions for tax purposes.ii.The Commissioner erred in law and in fact in by upholding the additional assessments for what it termed as lack of supporting information at the objection review stage.iii.The Commissioner erred in law and in fact in imposing additional principal tax based on the above erroneous estimates.iv.The Commissioner erred in law and in fact in disallowing the Appellant's objection to the assessment dated 22nd March 2022v.The amount of Kshs 50,741,063. 50 is not due and payable by the Appellant on account of taxes.vi.The Commissioner's refusal to vacate the additional assessment in the face of documentary information and explanations/clarifications given by the Appellant is a violation of the Appellant's rights under Article 47(1) of the Constitution of Kenya.

Appellant’s Case 7. The Appellant’s case is premised on the following documents filed at the Tribunal;a.The Appellant’s Statement of Facts filed on 11th November, 2022 and filed on 21st November 2022 together with the documents attached theretob.The Appellant’s written submissions filed on 25th July 2023 and 5th September 2023.

8. The Appellant stated that the nature of its business includes a 5-floor apartment in Umoja Part of Nairobi County and a passenger transport business operating between Nairobi and Kikuyu township under City Shuttle Sacco. That the Appellant inherited the family businesses from the family patriarch John Njue Njagi.

9. That the family patriarch run a successful passenger's transport business from the year 2014 up to the year 2016. That in the year 2016, he fell ill, his health deteriorated and was promoted to glory.

10. The Appellant stated that on the unfortunate death of the patriarch, and having run the business and the apartment sole handed, the business and management of the apartment all but died upon his demise.

11. That the apartment is in a wanting state of repairs due to poor management, a fact occasioned by the void left upon the demise of the patriarch.

12. The Appellant submitted that its transactions require a dedicated staff as the main assets in the transport business are ramshackle and decrepit. That the assets have been managed poorly from the year 2016 to date thus affecting the realized income and inadvertently, the relevant taxes from a historical point of view.

13. It stated that the Respondent issued a demand notice dated 22nd March 2022 where it laid out a myriad of assertions regarding the appellant's business and tax liabilities for the years of income starting years 2017 up to the year 2021, and assessed additional tax amounting to Kshs 61,175,945 under Income Tax

14. That the Respondent failed or otherwise refused to appreciate/understand the Appellant's business operations and tribulations as presented in the subsequent objection dated 4th August 2022 and related correspondence in support of the same.

15. It averred that the Respondent further failed to apply generally accepted accounting principles which would inevitably require an in-depth understanding of the Appellant's business.

16. That on 7th October 2022 the Respondent issued the Appellant with a tax decision upon review of objection.

17. That the tax decision indicated that the Appellant's objection had been partially successful, and the tax due had been minimally reduced to Kshs 50,741,063. 50

18. That to comprehend the prejudice visited to the Appellant, a visit to the site will be of the essence to ascertain the most unfortunate and deluded image the Commissioner has in mind of the Appellant's business

19. The Appellant identified the following issues for determination;i.Whether the Appellant earned and failed or otherwise refused to declare income from operating the fleet of buses in the period under audit, being the years of income 2017, 2018,2019,2020 and 2021. ii.Whether the rental income declared by the taxpayer and on which monthly rental income tax was paid was properly declared.iii.Whether the Respondent's handling of the Appellant's tax matters including the estimated assessment, rejected objection and the refusal or failure to actively engage in ADR engagement goes against the objects of the Tax Procedures Act (2015)iv.Whether the entire additional tax results from an erroneous estimate based on information or intelligence howsoever obtained.v.Whether documentary information already provided to the respondent was sufficient to facilitate an exhaustive examination of the Appellant's Objection.

20. The Appellant stated that the primary subject of the assessment (over 95%) is attributable to income alleged to have been earned on buses owned by the taxpayer.

21. That the said buses were in a poor state of neglect and abandonment during the audit period. That the photographic evidence to prove this was shared with the Respondent, who declined an invitation to physically inspect the vehicles.

22. It averred that the fact that the vehicles were dormant is further supported by the fact that no advance tax or insurance was paid against any of the vehicles during the specified period.

23. That the officers of the Respondent proceeded on the mistaken assumption that the Appellant was the owner of the entire fleet of buses known as Metro Shuttle Limited, while in fact she was a dormant member of the transportation SACCO.

24. The Appellant stated that this dormancy is supported by a bill in the amount of Kshs 2,800,000. 00 from the Sacco, attributable to parking charges for the yard when the vehicles were parked for an extended period of time.

25. That this has not changed and may be physically verified. The Appellant contended that where any of the buses had been restored into operable state, there was a record of when inspection was arranged as well as insurance and advance tax was paid to enable them be on the road.

26. The Appellant submitted that the Commissioner failed or otherwise refused to engage in the ADR process which it had previously consented to. That officers assigned were not responsive during the engagement window, and there were several transfers necessitating a fresh start every now and then.

27. That the assertion in the assessment that the Appellant earned a net of Kshs 10,000. 00 (ten thousand) per bus per day was simply incomprehensible.

28. That there is no trace of such monies in the records or living circumstances of the taxpayer who is an ailing pensioner.

29. The Appellant stated that she objected to the assessment, noting that the Respondent had made material errors in adjudging the Appellant to have earned such substantial income from operating the buses, and failed to declare the income derived there from for tax purposes, amounting to Kshs 46,693,391. 00.

30. The Appellant confirmed being the beneficial owner of the buses as per their respective registration information. That the Appellant’s position is that the buses have not earned her any income for the period under audit.

31. The Appellant relied of the findings of this Honorable Tribunal in Appeal No 373 of 2019, Norwood Gardens Limited v Commissioner of Domestic Taxes, where it was found that estimated and default assessments should have a supportable rationale, consistent with the law and generally accepted accounting standards, and which, prima facie, requires exercise of due diligence by the agents of the Respondent. That it appears that the Commissioner considered passage of time as evidence that the taxpayer earned taxable income from operating the vehicles.

32. That in the referenced Appeal, the Tribunal established one issue for determination as follows namely: Whether the taxpayer failed to declare income earned

33. That the circumstances and issues for determination are substantially relatable, if not similar. That the Respondent's case is built on non-existent facts and mistaken assumptions. That the agents of the Respondent clearly failed to address their minds to the evidence, facts and applicable legal framework in assessing the income and tax payable by the appellant.

34. That the Court of Appeal in Fleur Investments Limited v Commissioner of Domestic Taxes &another-Civil Appeal No 158 of 2017 (unreported), while considering the absence of a rational explanation for a conduct/decision in question, such as in this case, adopted with approval the High Court's decision in Republic v Institute of Certified Public Accountants of Kenya ex parte Vipichandra Bhatt T/A JV Bhatt &Company Nairobi HCMA No 285 of 2006.

The Appellant’s Prayer 35. The Appellant prayed that;a.The tax decision that arrived at the values for tax payable for the periods 2017 to 2021 be found to be erroneous as it is neither founded in law nor fact;b.The tax computations, reconciliations, explanations and related returns supplied to the Respondent be found to be sound, accurate and reasonable.c.The tax decision dated on 7th October 2022 be quashed and declared null and void in its entirety.d.The Commissioner makes appropriate adjustments to reverse this additional assessment in its /Tax system.e.The Appeal be allowed with costs.f.Any other remedies that the Honorable Tribunal deems just and reasonable.

Respondent’s Case 36. The Respondent’s case is premised on the hereunder filed documents before the Tribunal:i.The Respondent’s Statement of Facts dated 23rd December 2022 and filed on 28th December 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 1st August 2023.

37. The Respondent stated that it carried out investigations into the business of the Appellant for the period year 2017-2021 with a view of confirming its tax compliance under income and monthly rental Income tax obligations.

38. That the Appellant was audited upon realization that it had paid advance tax on commercial vehicles in the year 2016 but ceased paying effective year 2017 for each of the motor vehicles owned by the Appellant respectively. In addition, the Appellant failed to declare rental income for the period under audit.

39. That the information from the Itax data base on non-filers showed that the Appellant provided services to various customers but failed to declare the business income for year 2017-2019 and monthly rental income for year 2019-2021.

40. The Respondent stated that the commercial vehicles were identified from the i-tax ledger based on the advance tax declared for year 2016 when the Appellant last declared and payments for advance tax were done. That subsequently, the Appellant filed Nil returns for years 2017-2019 and failed to file any return for period 2021 hence default assessments for Kshs 6. 760,976 were issued as a result.

41. The Respondent contended that during the aforesaid investigations, it was discovered that the Appellant had overstated expenses while others were unsupported and her income was underdeclared respectively.

42. That further to the review, compliance check was conducted by examining the records and audited accounts of the Appellant to establish the correctness of her rental income declarations. That upon examining the records, it was established as follows;a.The taxpayer had under declared rental income as per the availed audited accounts form year 2014 to 2021 hence the Respondent issued additional assessment for period 2019 -2021 based on variances between the expected annual income and the annual gross income declared by the Appellant.b.Variances existed between rental income declared by the Appellant for the period under audit.

43. The Respondent stated that the adjustments were brought to charge for income tax together with unsupported expenses and under-declared income by issuing additional assessments for year 2019-2021

44. That as a result, the Respondent thereafter issued additional assessments dated 22nd April,2022 for income tax totaling to Kshs 46,693,391 and monthly rental income and including interest and penalty.

45. That the Appellant filed a late objection on 12th August,2022 which was duly acknowledged by the Respondents. However, the Appellant failed to provide all supporting documents for her objection as requested within stipulated timelines.

46. The Respondent stated that the Appellant only provided ;a)Audited financial statementsb)Rental schedulesc)Sworn Affidavit on status of the motor vehiclesd)Schedule of estimated net income from the commercial vehiclese)Photos of the motor vehicles groundedf)Accumulated parking fees demand letter for the grounded vehicles

47. The Respondent averred that in consideration of the objection noted that the estimated daily income of Kshs 1500. 00 per bus as indicated in the income schedules and financial statements was not explained and was highly understated given that the capacity of each bus is 51 passengers per advance declarations of 2016. That the Respondent estimated income per bus at Kshs 10,000. 00 based on the marked rate.

48. That the Respondent noted that the value of the motor vehicles as per balance sheet availed was inconsistent in light of motor vehicles registered under the Appellants' name as per the expected marked value of each bus as of year 2017.

49. That the Respondent upon considering the objection thereafter issued an objection decision dated 9th October, 2022 confirming the said income taxes as assessed and partially accepting rental income for Kshs 50,741,063. 50.

50. The Respondent averred that the assessments were correctly issued and conform to the Income Tax Act. That the Appellant did not provide any evidence that would have altered the assessment. It stated that the Tax Procedure Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

51. The Respondent further averred that examination of the Appellant's records, audited accounts and Income tax returns established that the Appellant failed to declare business income and all their incomes for years of income 2019-2021 respectfully. That the Respondent is empowered under Section 73(1) & (2) of the Income Tax Act 2013 to bring to charge income where the same is established due. The Section provides:

52. The Respondent submitted that the tax was reached at based on the information available and provided by the Appellant and the Commissioner is empowered under Section 29(1) of the Tax Procedure Act to make such decisions. That the assessment was based on the information provided.

53. The Respondent asserted that the Appellant in lodging her objection failed to state the reasons precisely to be addressed in the assessments raised. That in addition, the Appellant failed to properly lodge her objection as provided by Section 53(1) of the Tax Procedures Act.

54. The Respondent submitted that the taxpayer despite declaring some income knowingly continued to declare nil returns for the period under review contrary to the provisions of the law. The Respondent averred that according to Sections 54A(1) and 55(2) of the Income Tax Act it is the responsibility of any person carrying on business to maintain records of all transactions.

55. The Respondent averred that it is empowered by Section 31 of the Tax Procedures Act 2015 to carry out amendments on assessments where adjustments are due to bring to charge the correct amounts.

56. The Respondent submitted that the Appellant did not file income tax returns for the accounting period 2019-2021 in contravention of the requirements of Sections 94 &95 of the Tax Procedures Act and that the estimated assessment were correct.

57. The Respondent reiterated that the Appellant failed to provide signed financial statements and books of account to support her allegations. That Section 24 of the Tax Procedure Act empowers the Respondent to carry out assessment based on the information available. The Respondent averred that the assessment was issue based on information provided.

58. The Respondent averred that the Appellant failed to provide the documents requested in support of her objection hence the input VAT was disallowed. The Respondent insisted that Section 17 of the Value Added Tax Act empowers it to disallow such input VAT where the necessary documents are not provided.

59. The Respondent denied that the Appellant had paid all its tax dues and reiterated that because of the under-declaration, the Appellant was in debt of Kshs 50,741,063. 50

Respondent’s Prayers 60. Based on the above, the Respondent prayed that the Tribunal considers the case and finds that:a.That the Respondent's objection decision be upheld.b.The outstanding tax arrears of Kshs 50,741,063. 50 are due and payable by the Appellant.c.The confirmed assessments dated 22nd April,2022 were proper in law.d.That the Appeal herein be dismissed with cost to the Respondent.

Issue for Determination 61. The Tribunal upon due consideration of the pleadings, documents and the written submissions filed on the part of both parties was of the view that the only issue that crystalized for its determination was: -Whether the Respondent was justified in confirming the assessment.

Analysis And Determination 62. The Tribunal having appropriately ascertained the issue that fell for its determination shall proceed to make an analysis on the issue as hereafter.

63. The genesis of this dispute is the Respondent’s Objection decision issued on 9th October 2022 issued following the Appellant’s earlier objection to assessments for Income tax and monthly rental income.

64. According to the Appellant, the Respondent failed to apply generally accepted accounting principles which would inevitably require an in-depth understanding of the Appellant's business.

65. The Appellant stated that the primary subject of the assessment (over 95%) is attributable to income alleged to have been earned on buses owned by the taxpayer.

66. That the said buses were in a poor state of neglect and abandonment during the audit period. That the photographic evidence to prove this was shared with the Respondent, who declined an invitation to physically inspect the vehicles.

67. The Respondent on the other hand submitted that the Appellant was audited upon realization that she had paid advance tax on commercial vehicles in the year 2016 but ceased paying effective year 2017 for each of the motor vehicles owned by the Appellant respectively. That in addition, the Appellant failed to declare rental income for the period under audit.

68. That the information from the iTax data base on non-filers showed that the Appellant provided services to various customers but failed to declare the business income for year 2017-2019 and monthly rental income for year 2019-2021.

69. The Respondent stated that the commercial vehicles were identified from the i-tax ledger based on the advance tax declared for year 2016 when the Appellant last declared and payments for advance tax were done. That subsequently, the Appellant filed Nil returns for years 2017-2019 and failed to file any return for period 2021 hence default assessments for Kshs 6. 760,976 were issued as a result.

70. The Respondent contended that during the aforesaid investigations, it was discovered that the Appellant had overstated expenses while others were unsupported and her income was under declared respectively.

71. That further to the review, compliance check was conducted by examining the records and audited accounts of the Appellant to establish the correctness of her rental income declarations. That upon examining the records, it was established as follows;i.The taxpayer had under declared rental income as per the availed audited accounts form year 2014 to 2021 hence the Respondent issued additional assessment for period 2019 -2021 based on variances between the expected annual income and the annual gross income declared by the Appellant.ii.Variances existed between rental income declared by the Appellant for the period under audit.

72. The Respondent stated that the adjustments were brought to charge for income tax together with unsupported expenses and under-declared income by issuing additional assessments for year 2019-2021

73. The Tribunal noted that in the objection decision, the Respondent accepted the Appellant’s objection regarding default assessment for 2020 to 2021, partially accepted objection in relations to MRI assessment but rejected the Appellant’s objection with regards to income tax for the years 2017 to 2019. In arriving at the confirmed taxes, the Respondent also disallowed some of the Appellant’s input costs.

74. In regards to income tax, it was noted that the taxes were raised by the Respondent following the Appellant’s failure to file income tax returns for several years despite having previously filed in the year 2016 for advance taxes for the fleet of motor vehicles she owns prompting the Respondent to raise default assessment.

75. The Tribunal noted that although the Appellant in her pleadings averred that the motor vehicles were in a poor state of neglect and abandonment she did not provide any evidence that the same had been notified to the Respondent or deregistered for income tax in relation to the income from the buses as required by law. Section 10 of the Tax Procedures Act provides as follows regarding deregistration for tax purposes;“(1)A person who ceases to be required to be registered for the purposes of a tax law shall apply to the Commissioner for deregistration under that specific tax law.(2)A registered person shall apply for deregistration under subsection (1)—(a)in the prescribed form; and(b)within thirty days of ceasing to be required to be registered under that tax law. (3) Where a tax law requires a registered person to apply for deregistration in addition to the requirement under this section, that person shall also apply for deregistration in accordance with the provision of that tax law.”

76. Regarding rental income assessment, the Tribunal noted that the Appellant only stated that the apartment was in a wanting state of repairs due to poor management. The Appellant did not plead against the disallowed expenses and further did not provide any analysis to controvert the Respondent’s variance analysis or even to demonstrate the actual incomes earned during the period assessed given that the Respondent had stated that it had used the availed documents to assess her.

77. Section 23 of the Tax Procedures Act provides as follows regarding record keeping;“(1)A person shall—(a)maintain any document required under a tax law, in either of the official languages;(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.(2)The unit of currency in books of account, records, paper registers, tax returns or tax invoices shall be in Kenya shillings.(3)When, at the end of the period specified in subsection (1)(c), a document—(a)relates to an amended assessment, the person shall retain the document until the period specified in section 31(7) has expired; or(b)is necessary for a proceeding commenced before the end of the five year period, the person shall retain the document until all proceedings have been completed.”

78. Going by the provisions of the law above, it was upon the Appellant to keep proper record and produce them as required by law in order for her actual tax liability to be ascertained at any time. In the instant case the Tribunal noted that the Appellant did not provide any evidence in support of its assertion that the Respondent’s assessments were unreasonable despite confirming being the beneficial owner of the buses and the apartment.

79. From the pleadings and the objection decision, the Tribunal noted that the Respondent confirmed the assessment following the gaps it identified from the documents supplied by the Appellant in support of her objection. The Respondent only accepted partially the objection where documents were provided in support. The provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act which provides as thus:“In a proceeding before the Tribunal, the appellant has the burden of proving –Where an appeal relates to an assessment, that the assessment is excessive; orIn any other case, that the tax decision should not have been made or should have been made differently.”

80. The Tribunal reiterates the finding in the case of Boleyn International Ltd v Commissioner of Investigations and Enforcement, Nairobi TAT Appeal No 55 of 2018 where the Tribunal held that:-“We find that the Appellant’s at all times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The tribunal is guided by the provisions of Section 56(1) of the TPA, 2015 which states: “In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

81. Further the Tribunal finds the following paragraph from Pierson v Belder(H.M. Inspector of Taxes)(1956-1960) 38 TC 387 to be persuasive;“but the matter may be disposed of, I think even more shortly in this way: there is an assessment made by the additional Commissioner upon the Appellant; it is perfectly clearly settled by cases such as in the case of Norman v Golder 26 T.C, 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive or incorrect; and of course he has completely failed to do so. That is sufficient to dispose of the Appeal, which is accordingly dismissed with costs”

82. Consequently, the Tribunal finds that the Appellant failed to discharge the burden of proof placed upon it in demonstrating that the Respondent erred in confirming the assessments.

Final Decision 83. Based on the foregoing analysis the Tribunal finds that the Appeal is not merited. The Orders that accordingly recommend themselves are as follows: -i.The Appeal be and is hereby dismissed.ii.The Objection decision dated 9th October, 2022 be and is hereby upheld.iii.Each party to bear its own costs.

84. It is so ordered.

DATED ANDDELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULA............CHAIRMANCYNTHIA B. MAYAKA..............MEMBERDR. RODNEY O. OLUOCH........MEMBEREUNICE NG’ANG’A....................MEMBERABRAHAM K. KIPROTICH......MEMBERBERNADETTE GITARI..............MEMBER