[2025] KETAT 74 (KLR)

Onyango v Commissioner of Domestic Taxes (Tax Appeal E942 of 2023) [2025] KETAT 74 (KLR) (31 January 2025) (Judgment)

Neutral citation: [2025] KETAT 74 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E942 of 2023

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

January 31, 2025

Between

Edward Onyango

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Kenyan citizen and proprietor operating a bar and restaurant trading as Ram XB Bar & Restaurant in Kisumu City and is registered for both Income Tax and Value Added Tax (VAT) obligations.

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. On 9th May 2023, the Respondent issued a letter informing the Appellant of intention to carry out a verification its operations for the 2018 to 2021 review period.

4. Upon conducting an audit against Appellant, the Respondent issued an assessment notice on 25th September 2023 for principal tax of Ksh 6,541,725. 45 comprising VAT for the month of December of each year from 2018 to 2021 and income tax for 2018 to 2021 years of income based on unsupported purchases and expenses.

5. Subsequently, the Appellant objected to the assessments on 10th October 2023 and on 5th December 2023 the Respondent issued its objection decision confirming principal income tax and VAT of Ksh 6,541,725. 45.

6. Aggrieved by the Respondent’s objection decision, the Appellant lodged its Notice of Appeal dated 19th December 2023.

The Appeal 7. In the Memorandum of Appeal dated 19th December 2023 and filed on even date the Appellant cited the following grounds;a.That the Respondent confirmed the notice of assessment without due regard to all records, explanations and information provided by the Appellant thereby failing to appreciate all issues presented by the Appellant before confirming the assessment.b.That Section 51(3) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) provides for the conditions that need to be fulfilled for a notice of objection to be treated as validly lodged by a taxpayer; and that the Appellant precisely stated the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments as provided in the TPA.c.That it was the responsibility of the Respondent to involve and direct the Appellant on additional documentation needed.

Appellant’s Case 8. The Appellant case was premised on its statement of facts dated 19th December 2023 and filed on even date.

9. The Appellant stated that he was trading as a sole proprietor and that his principal business activity was a bar and restaurant in Kisumu County.

10. It was the Appellant’s case that all the inputs and expenses could be accounted for and supported and should not have been disallowed but ought to have been taken into consideration for the Respondent to arrive at the correct tax position.

Appellant’s Prayer 11. The Appellant’s made the following prayers:a.That the Tribunal allows the Appeal.b.That the Tribunal annuls or varies the Respondent’s decision in such a manner as it is just and reasonable.

Respondent’s Case 12. The Respondent replied to the Appeal through its statement of facts dated 5th April 2024 and filed on even date where it identified a single issue for determination which it proceed to analyse as hereinunder:Whether the Appellant provided supportive evidence for its objection

13. The Respondent averred that despite the Appellant objecting and contesting the assessments as excessive and not reflective of the right tax position, he failed to address variances assessed and instead only shared comprehensive statement of income for the year 2020 and Equity bank statements for years 2018 to 2021 whereas the Respondent had expected the following documents;a.Expenses and Purchase ledgers for years 2018 to 2021 together with supporting receipts and invoices.b.Expenses and purchase payment reconciliations for the assessment period.c.Copies of invoices for unsupported expense and purchase expenses for the assessment period.d.Supplier statements for the assessed period.

14. It was the Respondent’s case that since it could not verify the accuracy of Appellant’s business income, purchases and expenses declared, it resorted to assessing tax liability based on available information as provided for by Section 24(2) of the TPA as it is empowered under Section 29 and 31 of TPA to issue additional assessment based on information available and to its best judgement contrary to Appellant’s averments that the Respondent failed to consider documents adduced. As a result, the Respondent confirmed the assessments.

15. In buttressing this position, the Respondent relied on the case of Ocean Freight (E.A) Limited vs Commissioner of Domestic Taxes [TAT No. 101 of 2015) where the court held as follows:“…in that respect there was some merit in the Appellant’s arguments that because of severe constrains in cash flow, a declaration of a dividend could adversely affect its business. However, the Appellant was obliged to provide further proof that it could not make out such payment through any other means, for instance borrowing, without hurting the Company. By not going that extra mile the Appellant failed to make out its case. This Court comes to the conclusion that the Appellant had not discharged its onus of proving that distribution of dividends would imperil the business of the company.”

16. The Respondent asserted that it issued the objection decision after due consideration of all documents provided and applicable law, that it was the Appellant who failed to avail supporting documentations after the Respondent had reviewed their income tax returns and established inconsistencies.

17. According to the Respondent, the Appellant failed to discharge their burden as couched under Section 56(1) of the TPA by availing supportive documentation despite electronic mail reminders and telephone follow up.

Respondent’s Prayer 18. The Respondent’s made the following prayers:i.That the Tribunal upholds the objection decision dated 5th December 2023. ii.That the Tribunal dismisses the Appeal with costs to the Respondent as the same was devoid of any merit.

Parties’ Written Submissions 19. On 13th November 2024, the Tribunal adopted the Appellant’s written submissions which the Appellant filed on 2nd October 2024 together with those of the Respondent which were filed on 12th August 2024.

20. In its submissions, the Appellant stated that the Respondent failed to issue it with an assessment notice as required for the Appellant to respond on the issues before the assessments were raised despite several engagements on reconciliation which was contrary to Section 2(1) of the TPA which provides as follows:“(1)The object and purpose of this Act is to provide uniform procedures for-a)consistency and efficiency in the administration of tax laws;b)facilitation of tax compliance by taxpayers; andc)effective and efficient collection of tax.”

21. It was the Appellant’s submission that the Respondent’s application of a 40% ratio to allow expenses was not backed by any law, was subjective and could not be relied upon by the Respondent to raise tax since taxes are raised using tax laws and regulation not arbitrary judgements yet the presumption in tax matters is that the taxpayer should pay the correct and not excess with even one cent. The Appellant submitted that the Respondent’s calculations were excess and ought to be set aside. That as a result the Appellant suffered because the demanded taxes were excessive and if the Respondent was allowed to collect, this would cripple the Appellant’s business financially.

22. The Appellant buttressed this stance by citing Section 50(1)(a) of the TPA which provides as follows:“The production of a notice of an assessment or document under the hand of the Commissioner shall be conclusive evidence of the making of the assessment and that the amount and particulars of the assessments are correct.”

23. It was the Appellant’s case that it provided the Respondent with its comprehensive statements of income which to its best knowledge contained all that the Respondent required yet despite acknowledging the same in the objection decision, the Respondent failed to consider the same at the second stage of review. The Appellant relied on the case of Osho Drappers Limited vs Commissioner of Domestic Taxes [TAT No. 159 of 2018] in asserting as follows:“…the taxpayer has to produce documents to discharge of its burden of proof. The Respondent has confirmed that the Appellant provide a comprehensive statement of income and bank statements which to the best of his knowledge was sufficient.”

24. The Respondent’s written submissions were dated and filed on 12th August 2024 wherein the Respondent submitted on two issues that it had identified for determination as hereinunder;

a. Whether the objection decision dated 5th December 2023 was proper in law 25. It was the Respondent’s case that having requested for documents to justify the Appellant’s expenses as having been wholly, exclusively, reasonably and necessarily incurred in making sales during the period, and the same having not been availed, the Respondent disallowed the expenses and justified this by relying on Section 31(1) of the TPA which provides as follows:“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of Commissioner’s judgement, to the original assessment of a taxpayer for a reporting period...”

26. According to the Respondent, the assessment was based on documentary evidence availed which included i-Tax and bank records which were not sufficient documentation to support its objection as a result the assessment was confirmed based on available information and to the best judgement of the Respondent. The Respondent in firming up this position relied on Section 24(2) of the TPA which provides as follows:“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 liability using any information available to the Commissioner.”

(b) Whether the Appellant discharged its burden of proof 27. The Respondent was adamant that the Appellant failed to provide evidence that would have altered the assessment despite several requests yet Section 56(1) of the TPA as well as Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) places the onus of proof in tax objections on the taxpayer who in this case failed to avail a supporting contrary opinion. The Respondent further relied on the following authorities in buttressing its position: Miao Yiv Commissioner of Investigations & Enforcement [TAT No. 441 of 2019]

Kenya Revenue Authority v Man Diesel & Turbo SE, Kenya[2021]eKLR

28. The Respondent asserted that it did not err in confirming the assessments as issued since it considered all documents produced that instead it was the Appellant who failed to adduce relevant documents to prove that the assessments were incorrect whereas it is trite law that he who alleges must prove which the Appellant failed to do.

29. Further, the Respondent held that the Appellant failed to prove the assessments as wrong and why the objection decision was unjustified thus failed to discharge their burden of proof by availing unchallenged and uncontradicted evidence to prove incorrectness of the tax assessments.

Issues For Determination 30. The Tribunal having carefully considered the parties’ pleadings, submissions and documentation adduced before it notes that a single issue distills for its determination as follows;Whether the Respondent’s objection decision dated 5th December 2023 was justified.

Analysis And Determination 31. The Tribunal having established a singular issue for determination proceeds to analyze it as hereinunder:Whether the Respondent’s objection decision dated 5th December 2023 was justified.

32. The Tribunal observes that the genesis of the instant dispute was a verification audit conducted against the Appellant’s operations that led to tax assessment in relation to VAT for the month of December for each year of income from 2018 to 2021 as well as income tax for same review period.

33. The Tribunal observes that the principal tax yield of Ksh 6,541,725. 45 was as a result of disallowed purchases and expenses which were contested by the Appellant who insisted that the disallowed purchases were cost of sales for the period assessed. This was challenged by the Respondent who termed the same as having been disallowed as they had not been wholly, exclusively, reasonably and necessarily incurred in making sales.

34The Tribunal notes that Section 16(1) of Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) provides as follows:“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.”

35. Additionally, Section 17 (1) of the Value Added Tax, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) provides as follows:“Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies”

36The Tribunal observes that tax statutes as framed foresaw that it was inherent that conducting business would ultimately lead to expenses and or cost which must be taken into consideration when arriving at business income that should be subject to tax. The duty therein of a diligent taxpayer is to show proof that it indeed incurred such expenses when generating the income that is subject to tax charge. The Tribunal reminds the Appellant herein that burden is not a shared it was his burden to discharge.

37. The Tribunal notes that whereas both Section 56(1) of the TPA as read with Section 30 of TATA places the odious burden of proof squarely on the Appellant, the same is discharged once relevant and positive evidence has been adduced. The Tribunal notes that the Respondent had requested the following:a.Expenses and Purchase ledgers for years 2018 to 2021 together with supporting receipts and invoices.b.Expenses and purchase payment reconciliations for the assessment period.c.Copies of invoices for unsupported expense and purchase expenses for the assessment period.d.Supplier statements for the assessed period

38. The Tribunal notes that the Appellant did not controvert the Respondent’s assertion that out of the requested documents, it only adduced a comprehensive statement of income for year 2020 and Equity bank statements for years 2018 to 2021.

39. The Tribunal’s firm view is that supporting documentation as adduced as evidence should not only be positive but relevant to dispel the Respondent’s decision. The same ought to have been demonstrated to the Tribunal as well, but the Appellant’s bundle of documents did not have any documents supporting their assertions that the disallowed amounts related to expenses or cost of sales.

40. When faced with a similar matter, the Tribunal in the case of Joycott General Contractors Limited –VS- Kenya Revenue Authority [TAT No 28 of 2018] held as follows:“…we find that the Appellant seems to forget that it bears the burden of proof, in law, to demonstrate to this Tribunal that the Respondent’s assessment was wrong. Especially with regards to the under declarations and variance in respect of VAT and income sales. On the contrary, the Appellant has not bothered to substantially traverse the assessment raised. All it has done is to make sweeping and expansive accusations without substantial support.”

41. In the instant matter at hand, the Tribunal firm view is that the Appellant ought to have fully supported its averments by adducing documentation in support that would have discharged its burden of proof and contradicted the Respondent’s tax assessments. Accordingly, the Tribunal holds that the objection decision of 5th December 2023 was justified in the circumstances.

Final Decision 42. The upshot of the foregoing is that the Appeal herein is lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissedb.The Respondent’s decision dated 5th December 2023 be and is hereby upheld.c.Each party to bear its own costs.

43. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 31ST DAY OF JANUARY, 2025. ………………………………….CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER- MEMBEREUNICE N. N’GANGA- MEMBEROLOLCHIKE S. SPENCER- MEMBER