[2024] KETAT 723 (KLR)

Ogola t/a Tisa Suites & Lounge v Commissioner of Investigation & Enforcement (Tax Appeal E205 of 2023) [2024] KETAT 723 (KLR) (24 May 2024) (Judgment)

Neutral citation: [2024] KETAT 723 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E205 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

May 24, 2024

Between

Stephen Ogola t/a Tisa Suites & Lounge

Appellant

and

Commissioner of Investigation & Enforcement

Respondent

Judgment

1. The Appellant is a Kenyan citizen trading as a Tisa Suites & Lounge.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. 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 Parts 1 & 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 commenced investigations against the Appellant upon receiving reports that the Appellant had failed to declare Income and VAT tax individual returns. The investigations carried out sought to establish whether the Appellant declared all taxable income earned for the period under review and whether all taxes due for the period under review were accounted for.

4. On 30th November 2022, the Respondent issued a notice of tax assessments to the Appellant assessing income tax and VAT of Kshs 13,717,514. 00. The Appellant objected to the notice of tax assessments vide a notice of objection dated 27th January 2023.

5. The Respondent considered the grounds raised in the notice of objection, the documentation and further information provided in support and issued its objection decision on 24th March 2023.

6. The Appellant being aggrieved by the Respondent's decision filed this Appeal.

The Appeal 7. The Appellant filed the Memorandum of Appeal on 8th March 2023, raising the following grounds:i.That the assessment did not take into consideration the requirements of Section 15 of the Income Tax Act, CAP 470 of the laws of Kenya (hereinafter ‘ITA’) by allowing expenses incurred during the year of income which expenses were wholly and exclusively incurred by him in the production of the said assessed income.ii.That the assessed income did not take into consideration any reconciliation from his bank account thereby charging all the income from the two bank statements (KCB Account No 1266693181 and KCB Account No 1265771014) to both Income tax and VAT obligations.iii.That the assessment did not take into consideration the legal grounds of qualifying for VAT obligation as per the 6th Schedule of the Value Added Tax Act no. 35 of 2013 (hereinafter ‘VAT Act’) thereby charging VAT on the year 2019 income which does not meet requisite threshold and or relate to taxable goods or taxable services.iv.That the VAT assessment did not take into consideration zero rated or taxable goods by charging all the said income at standard rate.v.That the assessment did not take into consideration the requirements of Section 17(1) and (2) of the VAT Act by allowing the claim of inputs that falls within 6 months from the period which the supply or importation occurred.

Appellant’s Case 8. In support of its Appeal, the Appellant filed its Satement of Facts on 8th March 2023. In its Statement of Facts, the Appellant stated that the Respondent commenced investigations against it after receiving intelligence that it had not declared income and VAT individual tax returns. The investigations carried out sought to establish whether the Appellant declared all taxable income earned for the period under review and whether all taxes due for the period under review were accounted for.

9. On 30th November 2022, the Respondent issued a notice of tax assessments to the Appellant requiring tax payment of income tax assessment and VAT assessment of Kshs 13,717,514. 00.

10. According to the Appellant, the income tax assessment was estimated on gross income without considering purchases and expenses covered in earning the income. The Appellant added that the VAT assessment was based on assumption that the gross income resulting from the bank statements were all taxable sales without taking into consideration any bank reconciliations, exempted or zero-rated sales.

11. The Appellant objected to the notice of tax assessments vide a notice of objection dated 27thJanuary 2023. Consequently, the Respondent issued its objection decision on 24th March 2023.

12. The Appellant’s submissions are not on record as the same were struck out by the Tribunal for late filing, therefore the Tribunal shall rely on the Memorandum of Appeal and the Appellant’s Statement of Facts.

Appellant’s Prayers 13. The Appellant prayed for the following orders:a.The Tribunal do adopt the audited accounts filed and submitted to the Respondent and the requisite taxes paid thereon.b.The Tribunal be pleased to declare the objection decision to have been made in error as it contravened the provisions of the VAT Act and the ITA.c.The Tribunal do compel the Respondent to rescind the objection decision and withdraw the additional assessments to enable the Appellant file self-assessment returns and reinstate the appellant’s original returns filed for VAT and Income Tax.d.The Tribunal grants an alternative dispute resolution mechanism between the Appellant and Respondent.

Respondent’s Case 14. In response to the Appeal, the Respondent relied on its Statement of Facts dated and filed on 8th June 2023 and its written submissions dated 17th January 2024 and filed on 18th January 2024

15. The Respondent commenced investigations against the Appellant upon receiving reports that the Appellant had failed to declare Income and VAT tax individual returns. The investigation exercise for the period under review sought to establish whether the Appellant declared all taxable income earned for the period under review; whether the Appellant accounted for all taxes due for the reviewed period; and assess, demand and collect taxes established from the investigations.

16. The Respondent alleged that in conducting the tax investigations, it did a comparative test on the VAT and Income turnovers on the Appellant. From the analysis, the Respondent observed that the Appellant never declared all the income for purposes of Income tax to a tune of Kshs 2,695,723. 00.

17. In order to ascertain the total earning by the Appellant, the Respondent analysed the credits into the Appellant’s (Tisa Suites & lounge) bank accounts. The gross banking was then adjusted for VAT and movement in trade receivables in order to arrive at the correct income earned. The Respondent argued that the established income was compared to the Appellant’s IT2C declarations.

18. The Respondent averred that years 2019 and 2020 revealed an over declaration of income. This was due to an additional assessment issued by Kisumu TSO against the Appellant at the time when the income was banked at the KCB A/c No 12666993181 operated by one of the proprietors of the Appellant i.e. Mr. Stephen Odhiambo Ogola T/A Tisa Suites & Lounge Business Registration Number BN-GVC5K6A. This is what formed the basis of the income earned by the Appellant. The Respondent alleged that the Appellant never declared its income for the years 2018 and 2021.

19. The Respondent stated that the under-declared incomes for account numbers 1266693181 and that of 1205771014 were consolidated and brought to charge. Consequently, the Respondent served the Appellant a notice of tax assessment dated 30th November 2022. The Appellant objected to the assessment followed by the Respondent’s objection decision dated 24th March 2023.

20. In response to ground (i) that the assessment did not take into consideration the provisions of Section 15 of the ITA, the Respondent stated that in determining whether an income qualifies for a deductible cost, the Respondent averred that the following conditions must be met:a.The cost ought to be incurred wholly and exclusively in the generation of the income. Section 15 of the ITA stipulates that all expenses that have been used entirely in the generation of profits are allowable deductions.b.Section 15 of the ITA provides that for an expenditure to qualify for a deduction, in addition to satisfying the “trade requirement,” it should be incurred wholly in the generation of the income. The Respondent stated that this means that the only deduction that should be allowed, are those that are directly incurred in the generation of income.c.The allowability of a deduction in the view of the Respondent is also determined by the nature of the business, deductions of the expenses from the total income provides the total taxable income. The guiding provisions are Section 15 to 28 of the ITA.d.Section 56 of the Tax Procedures Act no. 29 of 2015 (hereinafter ‘TPA’) places the onus on the taxpayer; in this case the Appellant; to prove that the assessment by the Respondent was wrong. In the instant case was the issue of disallowing the costs associated with missing suppliers from the Respondent’s data. The Appellant was required to prove by adducing positive evidence that demonstrates the taxable income on which tax ought to have been levied. In this case the Appellant provided only the audited financial statements that were insufficient to show that the expenses were incurred in the generation of income and as such no adjustments would be made.

21. In response to second ground that the assessment did not take into consideration any reconciliation from the Appellant’s bank account thereby charging all the incomes from the two bank accounts to income tax and VAT, the Respondent stated that the assessment was based on the information available to it at the time of making the assessment. The Respondent stated that it requested for supporting documents from the Appellant in vain.

22. The Respondent relied on Section 31 of the TPA which allows the Respondent an opportunity to use their best judgement and available information to reach the decision. The Respondent also averred that Appellant has to date not provided any information and or evidence to counter the Respondent’s decision.

23. In response to the ground that the assessment did not take into account the legal ground for qualifying for VAT obligations under the 6th Schedule of the VAT Act, thereby charging VAT on the 2019 income which does not meet the requisite threshold and or relate to taxable goods or services, the Respondent averred that Section 34(1) and 34(6) is to the effect of registration of taxpayers for VAT individually and by the Commissioner, respectively, for the taxpayers who have made or intends to make supplies amounting to five million shillings.

24. The Respondent also averred that the Appellant was assessed for VAT on the basis that it met the threshold outlined under Section 34. However, the Respondent noted that the Appellant had not met the threshold hence vacated the assessment for Kshs 66,830. 00.

25. In response to the ground that the VAT assessment did not take into consideration zero rated or taxable supplies by charging all the taxable income at the standard rate, the Respondent contended that the Appellant did not provide any information to show that they supplied zero rated goods and as such, there was no basis to apportioning the VAT at a zero rate. The Respondent argued that it had no option but to charge VAT at a standard rate.

26. In response to the ground that the assessment did not take into consideration the provisions of Section 17 (1) and (2) of the VAT Act by allowing the claims of input that fall within 6 months from the period which the supply or importation occurred, the Respondent stated that the Appellant filed the VAT returns under the self-assessment regime and that the Respondent only sought to determine if the Input VAT claimed met the threshold as provided under Section 17 of the VAT Act.

27. In addition, the Respondent relied on the many decided cases where it has been held that a taxpayer must provide documentation to support any transaction and further furnish proof that there were actual purchases.

28. The Respondent noted that the Appellant only provided its audited financial statements, which did not support the contentions as far as the claim for input VAT was concerned.

29. The Respondent identified five issues for determination:i.Whether the Respondent erred in considering bank statements in determining taxable income during the assessment period;ii.Whether the Respondent erred in disallowing expenses incurred by the Appellant during the assessment period;iii.Whether the Respondent did not take into consideration zero rated or taxable supplies by charging all income at standard rate;iv.Whether the Respondent erred in disallowing input VAT; andv.Whether the Appellant should be allowed orders as prayed.

30. With regard to the first issue, the Respondent submitted that the Appellant did not provide evidence or information to dispute the its decision.

31. It submitted that the investigation, findings and objection decision was based on information available as provided under Section 24(2) of the TPA which provides that the Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.

32. The Respondent relied on TAT 551 of 2021 Atronix Limited-vs- Commissioner domestic taxes wherein the Tribunal stated as follows:“...upon the Appellant failing to provide sufficient documents to prove its objection it gives the Respondent the leeway to invoke and take into consideration and rightly so the provisions of Section 24(2) of the TPA. The Tribunal finds that the Appellant failed to provide material information for the Respondent to determine the appropriate taxes payable on its part and to that extent the Respondent appropriately resorted to alternative information for taxation. The Tribunal therefore finds that the Respondent did not misapply the law in making the assessments in issue...”

33. On second issue, the Respondent submitted that section 15 of the ITA provides for deductions allowed in ascertainment of total income. The said section provides that,“for the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

34. The Respondent relied on Section 54 A (1) of the ITA which states as follows: “A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.” The Respondent submitted that it granted the Appellant an opportunity to provide to support its expenses, but none of the documents have been placed before the Tribunal as well.

35. The Respondent relied on Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKRL wherein the court held that the burden of proving a tax decision is incorrect rests on the taxpayer.

36. On whether the Respondent erred in disallowing input VAT, the Respondent submitted that the Appellant did not provide documents are required under Section 17(3) of the VAT Act. The Respondent also relied on Section 43 of the VAT Act which provides for the requirement that a taxpayer is to maintain records.

37. On whether the Appellant should be allowed orders as prayed, the Respondent submitted that the Appellant does not deserve the orders prayed for.

Respondent’s Prayers 38. The Respondent requested the Tribunal to uphold the Respondent’s objection decision dated 24th March, 2023 and dismiss the Appeal with costs.

Issues For Determination 39. The Tribunal having considered the parties’ pleadings documents and submissions puts forth the two issues for determination:a.Whether the Appellant discharged its burden of proof pursuant to provisions of Section 56(1) of the TPA and Section 30 of Tax Appeal Tribunal Act No. 40 of 2013 (hereinafter ‘TATA’).b.Whether Respondent’s objection decision dated 24th March 2023 was justified.

Analysis And Findings 40. The Tribunal wishes to analyse the issues as hereinunder:a.Whether the Appellant discharged its burden of proof pursuant to provisions of Section 56(1) of the TPA and Section 30 of Tax Appeal Tribunal Act No. 40 of 2013 (hereinafter ‘TATA’).

40. The Tribunal examined the Appellant’s pleadings and notes that in support of the Appeal, the Appellant filed audited financial statements. However, the Appellant did not file any other document to support the financial statements or the Appeal. The Appellant did not file bank statements, invoices, credit notes, debit notes, receipts or any other primary or source document supporting the financial statements.

41. The Tribunal is of the view that audit reports and financial statements have limited evidentiary value when they are not presented with their source documents. Audit reports and financial statements are documents that are secondary in nature and the Appellant ought to have filed the source documents together with audit reports and financial statements. The source documents that would have been expected to be reviewed include ledgers, bank statements and various reconciliations among other source documents.

42. Section 13(2) (b) of the TATA requires an Appellant to file Statement of Facts. The Statement of Facts should support and expound the contents of the Memorandum of Appeal. The Statement of Facts should explain why and how the Respondent’s decision is incorrect. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 supports this position.

43. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 provides as hereunder:‘‘(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’[Emphasis added]

43. The Tribunal notes that although the Appellant satisfied Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015, the documentary evidence that he adduced was insufficient and could not be used to support his assertions. The Appellant did not file any primary or source document but would want to to rely on secondary documents such as audit reports and financial statements to discharge its burden of proof.

44. Therefore, the Appellant has failed to discharge the burden of proof pursuant to provisions of Section 56(1) of TPA which provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

45. These provisions were reiterated in Section 30 of the TATA 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...”

46. The Tribunal in the case of Digital Box Limited v Commissioner of domestic investigations and Enforcement [2020] affirmed that the burden of proving that the Commissioner’s decision is wrong falls on the taxpayer. The way to discharge this burden is to adduce positive evidence to that effect. The High Court in Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR held that the taxpayer has the burden to proving that the decision of the Respondent is wrong.

47. The Appellant adduced insufficient evidence and the Tribunal was unable to consider any of its assertions. Consequently, the Tribunal finds and holds that the Appellant failed to discharge its burden of proof pursuant to the provisions of Section 56(1) of the TPA and Section 30 of the TATA. Having so determined that the Appellant failed to discharge its burden of proof, the Tribunal finds that the Respondent’s objection decision dated 24th March, 2023 was justified but will not delve further on the analysis of this second issue for determination as the same has been rendered moot.

Final Decision 48. The upshot to the foregoing is that the Appeal lacks merit. Consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated March 24, 2023 be and is hereby upheld; andc.Each party to bear its own costs.

49. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF MAY, 2024CHRISTINE A. MUGA...............CHAIRPERSONBONIFACE K. TERER........................MEMBERDELILAH K. NGALA................................MEMBERGEORGE KASHINDI ............................MEMBERSPENCER S. OLOLCHIKE...................................MEMBER