[2025] KETAT 218 (KLR)

Nzila v Commissioner Legal Services & Board Coordination (Tax Appeal E1157 of 2024) [2025] KETAT 218 (KLR) (2 May 2025) (Judgment)

Neutral citation: [2025] KETAT 218 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E1157 of 2024

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

May 2, 2025

Between

Mulei Nzila

Appellant

and

Commissioner Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer in the business of general supplies in Kenya.

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 vide a letter dated 14th May 2024, issued income tax and VAT additional assessment with a total tax liability of Kshs 19,545,860. 00 for the period 2019 to 2023. The Appellant objected to the assessment on i-Tax on 26th June 2024.

4. Upon several meetings and correspondences, the Respondent issued the objection decision dated 20th August 2024 wherein the Respondent fully rejected the notice of objection. Aggrieved by the decision of the Respondent, the Appellant filed a notice of appeal dated 16th September 2024.

The Appeal 5. The appeal is founded on the Memorandum of Appeal dated 30th September 2024 wherein the Appellant raised the following grounds of appeal:a.That the Respondent erred in law and the fact by wrongfully deeming the bank credits as sales and charging Tax.b.That the Respondent is in violation of Section 3 (1) Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).c.That the Respondent is in violation of Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) First Schedule section B on exempted services.d.That the Respondent erred in law by ignoring Section 51(7), 51(11) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) on validity of the objection decisions.e.That the Respondent is in violation of Section 15(1) of ITA.f.That the Respondent erred in law by wrongfully ignoring Section 29(1) TPA on the use of best judgement.g.That the Respondent erred in fact by failing to acknowledge the reconciliations availed by the Appellant which clearly showed how sales were accounted for by the Appellant.

Appellant’s Case 6. The Appellant filed his Statement of Facts dated 30th September 2024 on even date and filed his written submissions dated 23rd February 2025 on even date.

7. The Appellant stated that he is in a business of buying and selling cereals within Kenya and East Africa region.

8. The Appellant averred that he filed self-assessment returns for both and income tax in the year 2015 to 2020 and that he provided the sales ledger, z-report and other supporting documents in support of his objection. The Appellant therefore disputes the assessment made by the Respondent for the period of 2016 to 2020.

9. The Appellant contended that all the bank credits ought to be the turnover/sales for the income tax. He relied on the definition of Income as provided for by the ITA. The Appellant relied on Section 3(1) of the ITA which provides that income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in, or was derived from Kenya.

10. Further, the Appellant relied on Section 3(2) [sic] which states the following:“Subject to this Act, income upon which tax is chargeable under this Act is income in respect of –“(a)gains or profits from –(i)a business, for whatever period of time carried on.”

11. The Appellant noted that the VAT Act also outlines how to charge VAT as follows:“A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on—(a)a taxable supply made by a registered person in Kenya;(b)the importation of taxable goods; and(c)a supply of imported taxable services…”

12. According to the Appellant, the income tax and VAT should be entirely dependent. He asserted that the income tax is charged on gain, the Respondent charged the bank credits what the Respondent referred to as sales at the rate of 30% without determining the gain. The Appellant asserted that this scenario was well explained during the meetings and the supporting documents presented to the Respondent during objection stage which showed that the Appellant was dealing in both vatable and exempt services.

13. The Appellant averred that the Respondent use of bank credits to determine tax was excessive. He stated that bank credits consist of different transactions e.g. Loans, personal deposits, Customers deposit etc.

14. The Appellant accused the Respondent of failing to recognize the provisions of VATA on exempted services. The Appellant averred that he clearly showed that some bank credits were from betting and gaming proceeds. According to the Appellant, the Respondent assumed that all the bank credits were Vatable sales which violates the basis of charging income, contradicts with the provisions of VATA and general accounting principle on revenue recognition. The Appellant stated that in the course of business, he deals with VAT exempted services.

15. The Appellant asserted that the banking analysis was misapplied in arriving at the assessment. He argued that the Respondent requested for the supporting documents and reconciliation analysis which but failed to rely on them. To prove this allegation, the Appellant referred the Tribunal to paragraph Note 2. 4 and 2. 5 on the objection decision.

16. To support his case, the Appellant was guided by Hole v The Queen,2016 TCC 5 where it was held as follows:“there are two primary ways in which a taxpayer can challenge a bank deposits analysis. The first is to prove that his/her records were adequate and thus that his or her income should have been determined using those records.’’

17. The Appellant cited the case of Digital Box Ltd v Commissioner of Investigation & Enforcement TAT 115 OF 2017 which gave orders compelling Respondent to consider costs from the Appellant’s record for the years 2015 and 2016 years of income. The Appellant asserted that this case was a clear indication to show that all business records should be considered.

18. The Appellant raised the issue of the validity of the objection decision and averred that he raised an objection application online on 21st May 2024 as per the objection decision yet the objection decision was issued on 20th August 2024 , 90 days later.

19. The Appellant also averred that the Respondent failed to recognize documents availed. The Appellant stated that the Respondent requested list of documents which were availed to it. He asserted that the documents were sent via electronic mail and the Respondent who is the designated recipient did not confirm receiving them. The Appellant cited the following provisions of Section of the 76 TPA:“In any proceedings under this Act, a statement contained in a document in electronic form shall be admissible as evidence of any fact stated in that document if the document is produced in the manner prescribed by this Act or any other tax law.’

20. According to the Appellant, the additional assessment did not follow the due laid out procedures by deeming exempt income and charging. He stated that the Respondent acted in bad faith by disregarding the documents reconciliations presented therefore, the Respondent action is violation of the following provisions of Article 47 of the Constitution:“1. Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedural fair2. If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action.’’

21. According to the Appellant, the Respondent, while demanding revenue, should demonstrate sufficiently that a certain payment forms the basis of tax. He relied on Republic v Commissioner of Income Tax ex parte SDV Transami (Kenya) Limited where it was held that taxes must be consistent with the law. The Appellant also relied on Republic v Commissioner of Domestic Taxes Large Tax Paver's Office Ex Parte Barclays Bank of Kenya Ltd for the proposition that the decision to tax must have a legal basis.

22. The Appellant therefore, submitted that the Respondent ignored his documents and denied him fair hearing.

23. In written submissions, the Appellant submitted that the objection decision was invalid as was issued beyond 60 days contrary to Section 51(11) of the TPA. He cited the case of Associated Battery Manufacturers Limited v. Commissioner of Customs Services (Tax Appeal No. 1 of 2015) to support its case.

24. The Appellant also submitted that the Respondent erred in deeming the entire bank Credits as sales and charge Tax on the same. He also submitted that the Respondent was not right in ignoring the First Schedule, Part II of the VAT Act. Apart from that, the Appellant submitted that the Respondents erred in failing to consider documents availed by the Appellant.

25. The Appellant relied on the following cases to buttress his case: Hole v The Queen, 2016 TCC 5’

Commissioner of Domestic Taxes v. Standard Chartered Bank Limited (2018) and Digital Box Ltd v Commissioner of Investigation & Enforcement TAT 115 OF 2017;

Republic v Commissioner of Income Tax ex parte SDV Transami (Kenya) Limited; and

Republic v Commissioner of Domestic Taxes Large Tax Paver's Office Ex Parte Barclays Bank of Kenya Ltd.

26. Based on the foregoing, the Appellant prayed for the following reliefs:i.That the appeal be allowed;ii.That the Respondent’s confirmed assessment be set aside; andiii.The costs of the appeal be awarded to the Appellant.

The Respondent’s Case 27. In opposition to the Appeal, the Respondent filed its Statement of Facts dated 22nd November 2024 together with written submissions dated 4th March 2025.

28. The Respondent in response to grounds (a); (b) and (c) of the appeal, stated that the Appellant failed to discharge his burden of proof pursuant to the provisions of Section 56(1) of the TPA to the extent that he did not provide detailed supporting documentation and evidence to counter the additional assessment. The Respondent relied on the case of Alfred Kioko Muteti vs. Timothy Miheso and another [2015] eKLR where the court held that a party can only discharge its burden upon adducing evidence and that merely making pleadings is not enough. It also cited the case of Mulheim v Commissioner of taxation (2013) FCAFC 115 to support the proposition that the taxpayer has to demonstrate that the Respondent’s decision is incorrect.

29. The Respondent referred to the whole of Section 51 of the TPA to state that the Appellant did not furnish any grounds whatsoever for objection nor bring any documents whatsoever to support the objection to the assessment. The Respondent further stated that in absence of grounds of objection and supporting documentation, the objection in itself did not meet the threshold of a proper objection as envisioned in Section 51 of the TPA.

30. The Respondent reiterated that no documents were availed by the Appellant to the Respondent for consideration and in absence of such documents, there was nothing for the Respondent to allow.

31. It added that in as much as Section 15 of the ITA allows for expenses wholly and exclusively incurred in the production of income to be factored in the computation of taxes, such expenses can only be considered upon provision of sufficient evidence to support the same. In light of the above, the Respondent asserted that the Appellant cannot fault the Respondent in confirming the taxes since the Appellant failed to discharge its burden of proof under Section 56(1) of the TPA.

32. In response to allegation that the Respondent erred in law by wrongfully ignoring TPA Section 29(1) on the use of the best judgement, the Respondent stated that pursuant to Section 31(1) (b) and Section 29 of the TPA, the Respondent is empowered to amend the assessment based on the information available to it and to the best of its judgement. The Respondent added that it is not bound by the Appellant’s returns or self - assessment and it is empowered to vary the assessments using any available information in the Respondent’s possession as provided under Section 24(2) of the TPA.

33. Further, the Respondent stated that pursuant to Section 59(1) of the TPA, it is empowered to request for documents from the Appellant for purposes of determination of their true tax liabilities.

34. In response to assertion that the Respondent erred in fact by failing to acknowledge the reconciliations availed by the Appellant which clearly showed that how sales were accounted for by the Appellant, the Respondent stated that in arriving at its decision, the Respondent informed the Appellant the main reason for confirmation of the assessment was that the Appellant failed to provide documents to support the objection.

35. The Respondent averred that the Appellant did not discharge its burden of proof, as he did not adduce sufficient evidence to rebut the Respondent’s assessment. From the foregoing, the Respondent maintained that the decision to arrive at the additional assessments was justified and had basis in law as required under the TPA thus this appeal fails on this ground.

36. The Respondent reiterated that the Appellant failed to discharge his burden of proof in providing that the its tax decision is incorrect as pursuant to the provisions of Section 56(1) of the TPA.

37. In its written submissions, the Respondent submitted that the Objection Decision was proper in law.

38. It submitted that the Appellant herein failed to discharge burden of proof in challenging the additional assessments as the Appellant failed to adduce supporting documents. It relied on the cases of Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR; Mulheim v Commissioner of taxation (2013) FCAFC 115; Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR; and Digital Box Ltd v Commissioner Investigations and Enforcement (TAT Act 115 of 2017) to support the position that the taxpayer has to demonstrate the Respondent’s decision was incorrect by adducing supporting documents.

39. The Respondent submitted that the Appellant failed to discharge his burden of proof in providing that its tax decision is incorrect as pursuant to the provisions of Section 56(1) of the TPA.

40. Consequently, the Respondent urged this Tribunal to dismiss this appeal with costs to it and uphold the decision issued on 20th August 2024.

Issues for Determination 41. The Tribunal having considered the parties’ pleadings puts forth the following issues for determination:a.Whether the objection decision dated 20th August 2024 was time barred pursuant to the provisions of Section 51(11) of the TPA.b.Whether the Appellant discharged his burden of proving that the decision of the Respondent dated 20th August, 2024 was incorrect.

Analysis and Findings 42. The Tribunal wishes to analyse the issues as hereunder:(a)Whether the objection decision dated 20th August 2024 was time barred pursuant to the provisions of Section 51(11) of the TPA.

43. The Appellant submitted that the objection decision issued was invalid as it was issued beyond 60 days contrary to Section 51(11) of the TPA on the basis that the Appellant lodged notice of objection online on 21st May 2024. On the other hand, the Respondent maintained that it issued the objection decision within the confines of the law.

44. The Appellant submitted that the objection decision was invalid as was issued beyond 60 days contrary to Section 51(11) of the TPA. He cited the case of Associated Battery Manufacturers Limited v. Commissioner of Customs Services (Tax Appeal No. 1 of 2015) to support its case. However, the Tribunal noted that this case is inapplicable as it relates to East African Community Customs Management Act, 2004 (EACCMA) and not TPA. Section 51(11) of the TPA provides as follows:“(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.’’(Emphasis is ours).

45. Time under Section 51(11) of the TPA starts running from the date of receipt of a valid notice of objection and not from the date that the taxpayer lodged the objection unless the Respondent acknowledges receipt of the objection the same date when the objection is filed.

46. The Tribunal has only sighted the Objection Application Acknowledgement Receipts dated 26th June 2024. However, the Tribunal has noted that in its Objection Decision dated 20th August 2024, the Respondent acknowledges receipt the Appellant’s objection dated 21st May 2024. The Tribunal can therefore infer that the Appellant filed his objection on 21st May 2024. Accordingly, pursuant to Section 51(11) of the TPA, time started running from 21st May 2024 and therefore, the objection decision dated 20th August 2024 was issued after 90 days contrary to the provisions of Section 51(11) of the TPA.

47. The finding of Tribunal is that the objection decision dated 20th August 2024 was time barred pursuant to the provisions of Section 51(11) of the TPA and consequently, the objection of the Appellant dated 21st May 2024 is deemed to be allowed by operation of the law pursuant to Section 51 (11) of TPA.

48. This finding by the Tribunal on its first issue for renders the second issue moot.

Final Decision 49. The upshot to the foregoing is that the Tribunal finds that the Appeal succeeds and consequently makes the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 20th August 2024 be and is hereby set aside.c.Each party to bear its own cost.

50. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 2ND DAY OF MAY, 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER