[2024] KETAT 1483 (KLR)

Oraro v Commissioner of Domestic Taxes (Appeal 308 of 2023) [2024] KETAT 1483 (KLR) (25 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1483 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 308 of 2023

Grace Mukuha, Chair, E Komolo, Jephthah Njagi & G Ogaga, Members

October 25, 2024

Between

Elisha Jack Oraro

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under Subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. On 16th September 2022, the Respondent issued the Appellant with additional assessments for VAT amounting to principal tax of Kshs. 754,180. 25 for the periods May 2017, January 2019, March 2019 and December 2019.

4. That the additional VAT assessments were based on the failure by the Appellant to provide the relevant documents to confirm that the input tax claimed in the periods May 2017, January 2019, March 2019 and December 2019 met the requirements of Section 17 of the VAT Act 2013.

5. On 7th February 2023, the Appellant lodged a late objection which was acknowledged by the Respondent on the same day.

6. That the Respondent reviewed the Appellant's late objection received on 8th February 2023 and on 9th February 2023, the Appellant's late objection was approved and he was invited to validate the objection by providing supporting documents by 16th February 2023.

7. That the Appellant failed to provide the documents requested for by the Respondent and the Respondent wrote a follow up letter dated 3rd March 2023 listing all the documents that it required to review the Appellant's objections and requested him to provide the evidence by 10th March 2023.

8. That the Respondent made follow ups to the Appellant via emails dated 13th March 2023 and 24th March 2023 requested the Appellant to avail supporting records to support their grounds of objection but the Appellant failed to do the same despite several reminders.

9. The Respondent consequently issued its objection decision on 28th March 2023 confirming the VAT assessments and the Appellant aggrieved by the decision lodged its Notice of Appeal on 5th May 2023.

The Appeal 10. The Appeal is premised on the Memorandum of Appeal dated 28th April 2023 and filed on 5th May 2023 which raised the following grounds:a.That the Respondent erred in both law and fact in not recognizing and complying with duly filed VAT returns of May 2017, January 2019, March 2019 and December 2019. b.That the Respondent erred in both law and fact in not acting on VAT input original documents submitted as requested and instead kept on asking for the Appellant’s submission later after having received them.c.That the Respondent erred in both law and fact in insisting on reconstructing VAT input documents which documents originated from suppliers of the Appellant and therefore not possible.d.That the Respondent violated the Appellant’s right to fair administrative action and laws of natural justice by summarily and arbitrarily issuing additional assessments without affording him any reasonable opportunity to be heard on the assessments.e.That the Respondent erred in fact and law by openly manifesting biasness, unfairness and unfair action of misplacing VAT input evidence documents submitted and imaginarily confirming arbitrarily determined VAT additional assessments.f.That the Respondent erred in law by denying the Appellant his right to be subjected to administrative action from a public body, Kenya Revenue Authority, which is expeditious, efficient, lawful, reasonable and procedurally fair as provided under Article 47 of the Constitution of Kenya.

Appellant’s Case 11. The Appellant’s case is premised on the following documents:a.Appellant’s Statement of Facts dated and filed on 28th April 2023 and filed on 5th May 2023. b.Appellant’s written Submissions dated and filed on 18th December 2023 and filed on 19th December 2023.

12. The Appellant averred that the Respondent initiated tax investigation on the Appellant and during the process of investigation, asked for the relevant records and which the Appellant provided.

13. That the investigation resulted into a demand notice by the Respondent to the Appellant dated 30th March 2023 for Kshs. 11,766,100. 95 composed of income tax, VAT together with interests and penalties.

14. That the Respondent’s objection decision dated 28th March 2023 set out the Respondent’s views. That the income tax amount demanded comprising business and employment income were analyzed and differences between the Respondent and the Appellant got sorted. That the unpaid tax on employment income was PAYE that had been deducted from the Appellant’s employment income but had not been remitted to the Respondent by the Appellant’s employer. That business records for income and expenses were verified and proper net taxable business income was agreed on.

15. That the VAT portion of Kshs. 1,114,317. 68 was not adjusted by the Respondent despite the fact that the records asked for were submitted to the Respondent.

16. That the Respondent claimed that VAT input tax records were not submitted by the Appellant. That VAT input tax records (purchases invoices, ETR receipts, delivery instructions, payment acknowledgments etc.) form a major part of business expenses before arriving at a net taxable income. That the fact that net taxable income was agreed on as explained above meant that the records claimed to have not been submitted were available because their absence was not raised by the Respondent.

17. The Appellant averred that he submitted the records asked for by Respondent in compliance with the law and when he was pressured to submit the records again he sent email messages to the Respondent.

18. That in view of the email messages mentioned above it is clear that the records in question were received by the Respondent and they are still in its custody. That to deny the Appellant deduction of VAT input tax resulting to additional VAT is an infringement of his constitutional right as articulated in Section 47 of the Kenyan Constitution 2010.

19. That the said VAT input records were part of the records on which income tax adjustments were made as per the Respondent’s objection decision document. That this undermines the dictates of logic that the documents are not available when it comes to VAT input tax issue.

20. That custodianship of the records submitted to the Respondent is his responsibility until they are returned to the taxpayer as per the provisions of Section 59 of the TPA.

21. The Appellant also submitted that as a registered tax payer of both income tax and VAT he has a right to have VAT input deductions as provided in Section 17 of the VAT Act.

22. The Appellant in support of its case relied on the holding in Silver Chain Ltd v Respondent Income Tax & 3 Others [2016] Eklr.

Appellant’s prayers 23. The Appellant prayed to the Tribunal to: -a.Amend the assessments in accordance with the filed VAT returnsb.The award the costs of the Appeal to the Appellant.

Respondent’s Case 24. The Respondent’s case is premised on the following documents:a.Respondent’s Statement of Facts dated 29th May 2023 and filed on 30th May 2023. b.The Written Submissions dated and filed on 9th January 2024.

25. The Respondent stated that it had the right to verify the accuracy of the taxpayer’s self-assessment to confirm that they met the requirements of the law.

26. That Section 17 of the VAT Act requires that the input VAT claimed must be supported by the original tax invoice issued for the supply and the Appellant failed to provide the documents that were requested for by the Respondent despite several reminders contrary to Section 51(3) of the Tax Procedures Act and therefore the Respondent rightly confirmed the assessment in its objection decision.

27. The Respondent stated that via an email dated 14th March 2023, the Appellant wrote to state that in 2021/2022, he had availed invoices, receipts and suppliers’ statements on the same to the Respondent.

28. That the Appellant failed to confirm that the documents were actually provided and that they related to the same period and the VAT obligation being verified given that he did not have any confirmation to show the documents were received and related to the same issue being demanded.

29. That it is also noteworthy that if the Appellant had provided the documents as alleged in the email, nothing could have been easier than for the Appellant to forward the documents to the Respondent.

30. The Respondent stated that during the period 2021/2022 highlighted by the Appellant, he had income tax assessments that were issued on iTax on 30th March 2021 to which he objected and an objection decision issued on 25th August 2021. That the Appellant did not clarify whether the documents he was referring to also addressed the VAT assessments issued on 16th September 2022 which was the point of contention.

31. The Respondent stated that the Appellant was requested to avail documents including and not limited to proof of payment from bank statements, suppliers’ confirmations and suppliers’ statements, original or copies of the invoices or local purchase orders to confirm whether the supplies took place and the same could not be retrieved from the Appellant.

32. The Respondent further averred that the Appellant was never asked for reconstruction of documents and that the Respondent only requested the Appellant to provide records to confirm that the supplies took place and met the requirement of section 17(2) of the VAT Act.

33. The Respondent averred that the Appellant did not provide detailed supporting documentation and records to counter the assertions of the Respondent in the various engagements at assessment stage as well as objection stage contrary to Section 59(1) of the Tax Procedures Act.

34. That every opportunity was extended to the Appellant to present its case and support its objection with the requisite documents but the Appellant failed to comply with Section 51(3)(c) of the Tax Procedures Act.

35. The Respondent asserted that its competence to assess, demand and collect taxes is established from the audit from Section 24(2) of the Tax Procedures Act,2015 which gives the Commissioner the power to assess a taxpayer’s tax liability using information available to him.

36. The Respondent stated that its decision was based on Section 31 of the TPA which allows it to assess taxes based on the information available and best judgment.

37. That the Respondent also relied on Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act which provide that the burden of proving that the tax assessment is wrong lies with the taxpayer. The Appellant has failed to demonstrate how the Respondent’s decision was excessive or erroneous.

Respondent’s prayers 38. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s objection decision as proper and in conformity with the lawb.Dismisses the appeal with costs to the Respondent as the same is devoid of merit

Issue for Determination 39. The Tribunal has considered the pleadings, the evidence and the submissions made by the parties, and considers the issue for determination to be as herein below set out.Whether the Respondent’s assessment of the Appellant on VAT was justified

Analysis and Findings. 40. Having identified the issue that fell for its determination, the Tribunal proceeded to analyze it as hereunder.

41. The genesis of this dispute is the Respondent’s rejection of the Appellant’s input VAT3 tax claim from several transactions in May 2017, January 2019, March 2019 and December 2019 with the Respondent claiming that the application did not meet the requirements of Section 17 of the VAT Act.

42. The Respondent issued the Appellant with additional assessment on 16th September 2022 in regard to the period(s) of May 2017, January 2019, March 2019 and December 2019 declaring that the same was due to the Appellant’s failure to meet the requirements of Section 17 of the VAT Act.

43. The Appellant objected to the assessment but the Respondent rejected the objection and made an objection decision requiring the Appellant to pay additional VAT amounting to Kshs. 1,080,137. 00 for the four months above stated.

44. The law in Section 17 of the VAT Act provides for the claims of input tax and also highlights the obligations of the tax payer in applying for the same. It provides as follows:“17. Credit for input tax against output tax(1)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.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)-(a)the person does not hold the documentation referred to in subsection (3) or(b)the registered supplier has not declared the sales invoice in return the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.(3)The documentation for the purposes of subsection (2) shall be-(a)an original tax invoice issued for the supply or a certfied copy:(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under section 16(2):”(e)a debit note in the case of input tax deducted under section 16(5) or

45. In determining whether the Respondent’s decision to disallow the input VAT by the Appellant was proper as per the provisions of the VAT Act, 2013 the Tribunal set to establish whether the Appellant had furnished sufficient proof of purchase.

46. The right to claim input VAT is premised on the assumption that the taxpayer had paid VAT during the purchase of its supplies. In this regard, the taxpayer is required to prove that it purchased taxable supplies. The proof is in transaction documents and it is for the taxpayer to discharge this burden.

47. The Tribunal found it appropriate to refer to Judge Krieger in the South African Case Metcash Trading Limited –vs- Commissioner for the South African Revenue Service and Another Case CCT 3/2000 reasserted that the onus and burden of proof are on the taxpayer by submitting all the necessary documentation to support their VAT refund claim. When he stated that:“But the burden of proving the Commissioner wrong then rests on the vendor under section 37. Because VAT is inherently a system of self-assessment based on a vendor’s own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor’s records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner’s precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

48. The Respondent on its part must demolish any evidence furnished by the Appellant. This view was held in Supreme Court of Canada’s decision in (Hickman Motors Ltd- vs- Canada, 1997 CanLII 357 (SCC), [1997] 2 S.C.R. 336 at paragraphs 92 to 94; House –vs- Canada, 2011 FCA 234 (CanLII), 2011 FCA 234, 422 N.R.144 where at paragraph 30 states inter alia that:“The taxpayer’s initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least prima facie case… Where the Minister’s assumptions have been “demolished by the appellant, “the onus…. shifts to the Minister to rebut the prima case” made out by the appellant and to prove the assumptions…The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions; …Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed; and even if the evidence contained “gaps in logic, chronology, and substance”, the taxpayer’s appeal will be allowed if the Minister fails to present any evidence as to the source of income.”

49. The Tribunal noted that the Appellant in its submissions stated that in its application for the VAT input claim it provided all the necessary documents to support its claim. That this was in the form of invoices, receipts and suppliers’ statement. The Respondent on the other hand stated that it never received any documents from the Appellant and hence was compelled to rely on Section 24 TPA to make its assessment on the information available.

50. The issue as to whether the Appellant supplied support documents for its refund claims application is the gist of the matter. Although the Appellant stated that it did supply the same, the Respondent vehemently refutes the claim.

51. The Appellant and the Respondent have annexed to their statement of facts three emails dated 14th March 2023 in which the Appellant claims that he had given the Respondent its supporting documents and the Respondent’s officers admit to have the same.

52. The Tribunal noted that the Respondent did not dispute the provision of the documents by the Appellant but continued demanding for the documents in support of the Appellant’s claim after the date of 14th March 2023 its admission of having the same as per the emails aforestated notwithstanding.

53. The Tribunal observes that it is a common principle that a taxable person who makes transactions in respect of which VAT is deductible may deduct the VAT in respect of the goods or services acquired by him, provided that such goods or services have a direct and immediate link with the output transactions in respect of which VAT is deductible. In the Kenyan VAT system, this principle is found in Section 17(1) of the VAT Act.

54. The Tribunal is of the view that the only obligation upon the Appellant was to furnish sufficient proof of purchase. That the evidence provided by the Appellant through the emails established prima facie that he indeed supplied documents to the Respondent.

55. Despite the foregoing, the Tribunal notes that the Appellant did not attach the documents in issue or copies of the same and in the circumstances could not peruse the same and make a conclusive determination.

56. In the circumstances the Appeal partly succeeds. In the interest of justice the Tribunal determined that the best position on the matter is to send the same back to the Respondent to consider the documents that the Appellant supplied to the Respondent, and that are in the Respondent’s custody.

Final Decision 57. The upshot of the foregoing is that the Appeal is merited. Consequently, the Tribunal makes the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 28th March 2023 be and is hereby set aside.c.The matter is referred back to the Respondent to review the Appellant’s documents and make a determination within sixty days of the date of this judgment.d.Each Party to bear its costs.

58. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 25TH DAY OF OCTOBER 2024…………………………GRACE MUKUHA - CHAIRPERSONDR ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERGLORIA A. OGAGA - MEMBER