[2024] KETAT 1574 (KLR)

Orora v Commissioner of Domestic Taxes (Tax Appeal E645 of 2023) [2024] KETAT 1574 (KLR) (Commercial and Tax) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1574 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E645 of 2023

Grace Mukuha, Chair, GA Kashindi, E Komolo & AM Diriye, Members

November 22, 2024

Between

Fred Ntabo Orora

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is an individual taxpayer based in Kenya.

2. The Respondent is the Commissioner of Domestic Taxes appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1), the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) 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 Part 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 conducted a review of the Appellant’s business including the Appellant's tax returns to confirm whether the Appellant’s value added tax (VAT) and income tax liabilities were correctly declared. The review covered the period 2018 to 2021.

4. The Respondent subsequently issued an assessment to the Appellant on 29th May 2023 raising additional corporation tax and VAT amounting to Kshs. 4,458,961. 34 inclusive of accrued penalties and interest.

5. On 29th June 2023, the Appellant lodged an objection to the additional assessments and on 3rd August 2023, the Respondent vide email requested for additional documents to support the Appellant’s objection.

6. On 22nd August 2023, the Respondent issued an Objection Decision to the Appellant’s objection confirming the additional assessment raised.

7. The Appellant being dissatisfied with the Respondent’s Objection Decision, filed a notice of appeal on 20th September 2023, appealing the Respondent’s decision in whole.

The Appeal 8. The Appellant filed its Memorandum of Appeal dated 29th September 2023 setting out the following grounds of appeal:a.The Commissioner erred in law and in fact by making a decision to demand tax that is based on incorrect and erroneous information.b.The entire tax demanded by the Commissioner on 22nd August 2023 is not lawfully due for the reason that the Commissioner in making the assessments relied on incorrect information.c.The Commissioner erred in fact and in law in subjecting and charging the additional taxes upon the Appellant contrary to laws of natural justice and fair administrative action.d.The Commissioner's assessment is contrary to the law and is procedurally unfair and unreasonable in the circumstances of the case since the same is based on Commissioner's erroneous reconciliation of the Appellant’s records as held by the Commissioner.e.The Commissioner has acted ultra vires and misapprehensively raised assessments and demanded taxes from the Appellant unduly as they are not due or payable taxes by the Appellant to the Commissioner.f.The objection decision is erroneous as the Commissioner disregarded materials, evidence and documents availed to him, and, in addition, misinterpreted and misdirected himself as to the law and facts relating to the Appellant's case.

The Appellant’s Case 9. The Appellant set out its case in the following documents lodged with the Tribunal:a.Statement of Facts dated 29th September 2023 and filed on 2nd October 2023. b.Written Submissions dated 19th July 2024 and filed on 22nd July 2024

10. The Appellant stated that he duly filed all his self-assessment returns in accordance with the requirements of the law and has at all times remained a dutiful taxpayer.

11. The Appellant stated that sometimes around 22nd August 2023, the Respondent raised an Objection Decision against the Appellant demanding taxes amounting to Kshs. 4,458,961. 34, which the Appellant stated was wrongfully demanded without any legal justification.

12. The Appellant averred that the Respondent's treatment of and demand for taxes from the Appellant had no basis or justification in law whatsoever as it was based on incorrect information. The Appellant stated further that the Respondent had acted unfairly and in an oppressive and unjust manner, contrary to rules of fair administrative action.

13. The Appellant averred that it had discharged its burden of proof under the law by providing all relevant documents to the Respondent as requested but the Respondent failed to consider the same.

14. The Appellant stated that the Respondent is obliged by law to observe the rules of natural justice, to act lawfully, fairly, and reasonably in exercise of their statutory mandate and in this case, it was evident that the Respondent had misapplied the law in issuing the Objection Decision against the Appellant.

15. The Appellant submitted that the Respondent’s Objection Decision was improper and irregular since the Respondent used the same letter to communicate the rejection of the Appellant’s objection application and still called it an Objection Decision which is invalid in law.

16. The Appellant submitted that section 51 (4), (10) and (11) of the Tax Procedures Act 2015 provides that:(4) Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.10. An objection decision shall include a statement of findings on the material facts and the reasons for the decision11. 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.

17. The Appellant submitted that the above provisions imply that the communication for invalidating its objection should come first and not together with the Objection Decision itself. The Appellant submitted that the form of the Objection Decision jeopardizes the rules of natural justice and equity and ought to be expunged by the Tribunal.

18. The Appellant further submitted that the Respondent’s model used in arriving at the additional taxes was erroneous and that the Respondent’s assessment arose from the Respondent's inability to acknowledge the Appellant's formal analysis reconciliations relating to the Appellant's books.

19. The Appellant highlighted that there was no under-declaration of sales in its returns which were made in accordance with the law and the appropriate reconciliations were shared with the Respondent but the same were disregarded.

20. The Appellant submitted that the Respondent erred in fact and law by relying on unsupported variances to charge tax on the Appellant. The Appellant submitted that tax ought to be charged on gains from businesses and not unsupported variances, and to buttress his argument the Appellant relied on the case of PZ Cussons East Africa Ltd -vs- The Respondent (Petition No 309 of 2012 Milimani Law Courts, High Court, Human Rights Division) where the Court stated that that the Respondent should not arbitrarily charge tax based on information in its system, especially if it has not provided the details of the items picked and without it verifying.

21. The Appellant provided the financial statements for the years 2018, 2019, 2020 and 2021 to this Honourable Tribunal by annexing them to his submissions.

22. The Appellant relied on Reg -vs- Secretary of State for the Home Department ex parte Doody [1994] 1 AC 531, to submit that any enforcement measures the Respondent may take pursuant to the provisions of the Tax Procedures Act, 2015 must be accompanied by minimum standards of fairness, both substantive and procedural.

23. The Appellant faulted the Respondent’s Objection Decision on the basis that the Respondent failed, ignored, and/or rejected to consider the Appellant’s explanation as to the income tax and VAT demanded. Further, the Objection Decision was erroneous and irregular and that there was consequential breach of the Appellant’s legitimate expectation and right to equal treatment and protection of the law.

24. The Appellant submitted that imposition of the tax arising from the impugned Objection Decision is bound to have an impact on the Appellant’s rights under Article 43(1) of the Constitution. The Appellant stated that the tax unlawfully and irregularly infringes the Appellant’s right to fair administrative action, right to equality and non-discrimination.

25. The Appellant relied on several other cases to support its arguments on inter alia legitimate expectation; Wednesbury’s unreasonableness; procedural impropriety; fair hearing; and requirement for clear terms and unambiguity in taxing statutes namely:i.Fleur Investments Limited vs. Commissioner of Domestic Taxes & Another- Civil Appeal No. 158 of 2017 (unreported),ii.Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others Nairobi [2007] eKLR where the Court held that:iii.Republic v Public Procurement Administrative Review Board & 2 others [2019] eKLR; Nairobi HC Misc. Civil Application No. 187 of 2018iv.Republic v Kenya Revenue Authority Ex Parte Jaffer Mujtab Mohamed [2015] eKLR:v.Kenya Revenue Authority Versus Man Diesel and Turbo Se, Kenya (2021) eKLRvi.Republic versus Kenya Revenue Authority (2014) eKLRvii.Republic v Kenya Revenue Authority (KRA) & 4 others; New Flamingo Hardware & Paints Limited & 22nd others (Ex Parte) [2020] eKLRviii.Republic vs. Kenya Revenue Authority Ex. Parte Cosmos Limited (2016) eKLR,

Appellant’s Prayers 26. The Appellant prayed to the Tribunal for orders that:a.This Appeal be allowed.b.The Objection Decision of the Commissioner dated 22nd August 2023 be set aside and substituted with an order affirming/allowing the Appellant’s objection dated 29th June 2023c.The assessment made by the Commissioner be set aside in its entiretyd.Any other relief as may be fair and just in the circumstances be grantede.The costs of the Appeal be granted to the Appellant

The Respondent’s Case 27. The Respondent case is set out in the following documents lodged with the Tribunal;a.Statement of facts dated and filed on 27th October 2023b.Written submissions dated and filed on 23rd May 2024

28. The Respondent stated that it undertook a review of the Appellant’s business to ascertain if correct amount of tax liability was declared for 2018 – 2021 and upon conclusion, it was established that the Appellant had underdeclared income tax and VAT.

29. The Respondent averred that the assessment was confirmed due to failure by the Appellant to justify his grounds of objection by providing relevant documents/information to support its objection despite being requested to do so.

30. The Respondent relied on section 51(3)(1)(c) of the Tax Procedures Act which provides that a notice of objection is treated as validly lodged if all relevant documents relating to the objection have been submitted.

31. The Respondent stated further that the Tax Procedure Act under Section 59 requires production of such documents vide issuance of notice as deemed necessary in determination of the taxpayer’s tax liability and if the taxpayer defaults, then the Respondent can use their best judgment to make a determination. The said Section 59(1) reads:For the purpose of obtaining full information in respect of the income of a person or class of persons, the Commissioner may, by notice in writing, require, in the case of the income of a person, that person or any other person, and in the case of a class of persons, any person-a.To produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary, and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.

32. The Respondent stated that the Tax Procedures Act places the onus of proof on the taxpayer who in this case failed to avail evidence that would support a contrary position to the assessment or that would have guided the Respondent at arriving to a different Objection Decision.

33. Section 56 of the Tax Procedures Act provides that:1. In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

34. The Respondent contended that it is not bound by the Appellant's returns, information or self-assessment and it is empowered to vary the assessments using any available information in its possession relying on Section 24(2) of the Tax Procedures Act which provides: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.

35. The Respondent averred that the grounds lack merit, and the Appellant had not demonstrated any error in the decision.

36. On whether the Appellant discharged its burden of proof to disprove the assessment and Objection Decision, the Respondent submitted that the basis of the assessment was clearly laid out in the Respondent’s notice of assessment and its Objection Decision.

37. The Respondent submitted that that in its email dated 3rd August 2023, the Respondent requested for audited financial statements for the period 2018 to 2021, sales and purchases ledger and invoices for the period 2018 to 2021, bank statements for the period under review, in cases where the purchases were done on cash, evidence of petty cash vouchers and cash book, a listing that links cash book/petty cash vouchers to the bank statements, delivery notes endorsed by both parties, contracts awarded for the period and any other supporting documentation.

38. The Respondent submitted that the Appellant did not provide the requested documents to the Respondent and the Tribunal.

39. The Respondent submitted that having not provided the requested documents, the Respondent had no choice but to issue an objection decision fully confirming the assessment issued.

40. The Respondent submitted that in the appeal filed before the Tribunal, the Respondent has not provided the documents specified in the objection decision and those requested.

41. The Respondent submitted that the Appellant failed to discharge his burden of proof to demonstrate that the Respondent’s assessment was erroneous or in any way excessive.

42. The Respondent also relied on the following cases to demonstrate that in tax cases, the burden lies on the taxpayer to produce relevant and competent evidence to prove its case and challenge the assessments by the Commissioner and to show what the true incomes actually are.a.Kenya Revenue Authority vs Man Diesel & Turbo Se, Kenya [2021] (supra)b.Mulheim vs Commissioner of Taxation (2013) FCAFC 115c.Gashi vs Commissioner of Taxation (2012) FCA 38

43. The Respondent submitted that there is already rich jurisprudence on this issue relating to burden of proof and urged the Tribunal not to depart from it.

44. The Respondent further highlighted the case of Ngurumani Traders -vs- Commissioner of Investigations and Enforcement (TAT No. 125 of 2017) where the Tribunal held that:“From the foregoing, the Appellant’s failure to lodge a proper objection meant that the Respondent was at liberty to confirm the assessment… It would be fundamentally non-justifiable for this Tribunal to entertain this preliminary objection, taking into account the Appellant’s flagrant non-compliance with the law on raising objections.”

45. The Respondent further relied on the case of Primarosa Flowers Limited vs Commissioner of Domestic Taxes [2019] eKLR where the Court agreed with the reasoning in Mulherin vs Commissioner of Taxation (2013) FCAFC 115 on satisfaction of burden of proof.

46. The Respondent also relied on the case of Subaru Motors vs Commissioner of Investigations and Enforcement (TAT 109 of 201) on the importance of adducing evidentiary documents to demonstrate how figures ought to be calculated, where the Tribunal held that the duty rested with the Appellant until discharged.

Respondent’s Prayers 47. The Respondent prayed that the Tribunal:a.Upholds the Respondent's objection decision as proper and in conformity with the provisions of the law.b.The Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issues For Determination 48. Based on the pleadings and submissions filed by parties, the Honourable Tribunal has framed the following issue for determination:Whether the Objection Decision dated 22nd August 2023 is justified

Analysis And Findings 49. The Appellant averred that the additional assessment was based on misapplication of the law as the Respondent’s objection decision dated 22nd August 2023 was improper and irregular because the Respondent used the same letter to communicate the rejection of the Appellant’s objection.

50. Section 51 of the Tax Procedures Act clearly outlines the process of lodging an objection, communicating the invalidity of an objection, and issuing an Objection Decision.

51. In the current case, the Appellant lodged his objection on 22nd July 2023 and an Objection Decision was issued by the Respondent on 22nd August 2023. The basis of the Objection Decision confirming the Respondent’s assessment was that the Appellant did not provide the documents requested.

52. From the Objection Decision, this Honorable Tribunal notes that the Respondent communicated the statement of findings on the material facts and the reasons for the decision to the Appellant hence complying with section 51(10) of the Tax Procedures Act.

53. The Tribunal notes that in the email dated 3rd August 2023 with the subject ‘‘Request for Information-Fred Ntabo Orora (A001237518L)’’, the Respondent requested from the Appellant the following additional documents to support the Appellant's objection: audited financial statements for the period 2018 to 2021, sales and purchases ledger and invoices for the period 2018 to 2021, bank statements for the period under review, in cases where the purchases were done on cash, evidence of petty cash vouchers and cash book, a listing that links cash book/petty cash vouchers to the bank statements, delivery notes endorsed by both parties, contracts awarded for the period and any other supporting documentation.

54. However, the Appellant did not provide evidence to this Honourable Tribunal showing that the requested documents were provided to the Respondent.

55. The Appellant was therefore given an opportunity to dispute the additional assessment by the Respondent and there was, therefore no infringement of the Appellant’s rights under Article 47 of the Constitution of Kenya 2010 and the Fair Administrative Action Act.

56. The Appellant submitted to a great extent that the Respondent failed to consider documents provided by him as well as reconciliations that he shared with the Respondent to support his objection. Unfortunately, the Appellant has not exhibited any such documents and or reconciliations which he alleges were submitted to the Respondent in support of his appeal before us.

57. Additionally, and most importantly, the Appellant has not exhibited the objection he lodged with the Respondent to enable the Tribunal appreciate the grounds raised therein as well as the accompanying documents in support of those grounds.

58. The Tribunal notes that it is the taxpayer’s responsibility to keep all the relevant documents within their custody to ascertain their tax position. The power to request these documents by the Commissioner is provided under Section 59 of the Tax Procedures Act. Looking at the documents requested by the Respondent, such as the Appellant’s financial statements, sales and purchases ledgers, bank statements and petty cash vouchers, these are documents the Appellant is required to be in possession of in their ordinary business operations in order to assess their taxable income for income tax and VAT purposes.

59. In appeals before the Tribunal, the burden of proof lies on the Appellant to demonstrate that the assessment is erroneous and or excessive. As noted above, the Appellant has not provided evidence to this Honourable Tribunal showing that the requested documents were provided, therefore he did not discharge the burden of proof.

60. The Tribunal notes that the Appellant has provided its audited financial statements for the years 2018, 2019, 2020 and 2021 to this Honourable Tribunal at the submission stage. However, he has not demonstrated that the same, together with the other documents requested by the Respondent were provided to the Respondent during the objection stage for the Respondent to arrive at a justifiable and equitable conclusion on its Objection Decision. He has not also demonstrated to the Tribunal how those financial statements render the impugned assessment and or the Objection Decision erroneous, if at all.

61. Having considered the facts above and the law, this Honourable Tribunal finds and holds that the Respondent’s objection decision was justified and the Respondent was justified in confirming the additional assessments as the Appellant did not sufficiently support its objection.

Final Decision 62. For the reasons set out above, the Tribunal finds that this Appeal has no merit and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection Decision dated 22nd August 2023 be and is hereby upheld.c.Each party to bear its own cost

63. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER 2024. .............................................GRACE MUKUHACHAIRPERSON……………..…………… ……………………………GEORGE KASHINDI DR. ERICK KOMOLOMEMBER MEMBER…..............……………ABDULLAHI DIRIYEMEMBER