[2022] KEHC 196 (KLR)

Osho Drapers Limited v Commissioner of Domestic Taxes (Income Tax Appeal E147 of 2020) [2022] KEHC 196 (KLR) (Commercial and Tax) (18 March 2022) (Judgment)

Neutral citation: [2022] KEHC 196 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Income Tax Appeal E147 of 2020

A Mabeya, J

March 18, 2022

Between

Osho Drapers Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

(Being an appeal from the Judgment of the Tax Appeals Tribunal at Nairobi delivered on 9/10/2020)

Judgment

1. The respondent carried out an investigation on the appellant’s financial records, results of which the respondent assessed the appellant’s VAT tax liability at Kshs. 1,795,881. 00 and Kshs. 3,367,278. 00 for corporation tax for the period July, 2015 to May, 2017.

2. The appellant objected to the assessment via a Notice of Objection dated 20/5/2018 and an objection decision was made on 11/7/2018 confirming the assessed amount for both VAT and corporation tax. The appellant appealed against the said decision to the Tax Appeals Tribunal (“the Tribunal”) on 10/8/2018.

3. In its Judgment of 9/10/2020, the Tribunal dismissed the appeal and upheld the said objection decision.

4. Being dissatisfied with that judgment, the appellant appealed to this Court setting out 6 grounds of appeal which can be summarized as follows: -a)That the tribunal erred in finding that the appellant did not furnish sufficient proof of purchase, hence failed to discharge its burden to the satisfaction of the respondent of proving that it purchased supplies.b)The Tribunal misdirected itself and therefore arrived at the wrong conclusion on the doctrine of proof under section 30 of the Tax Appeals Tribunal Act.c)The tribunal erred in upholding the respondent’s assessment of both VAT and Corporation tax.

5. The respondent opposed the appeal vide its statement of facts dated 24/2/2021. It contended that the appellant claimed input VAT from invoices acquired from “missing traders” who were under investigation for tax fraud. That investigations revealed that the appellant was involved in a tax fraud by claiming purchases and the input tax thereto on goods not delivered by the said missing traders.

6. That the payments were recorded in the books of the appellant as cash, whilst no actual cash pay-out was made to conceal the trail, notwithstanding the substantial amounts. That the tribunal correctly found that the documents submitted by the appellant had inconsistencies in that the receipts indicated that payments were in cash, whereas some of the corresponding invoices were indicated as having been paid by cheque, and no other details on the cheques were provided. That the tribunal hence correctly found that there was no proof of payment, and that the appellant had failed to discharge its burden.

7. The Court has carefully considered the record and the submissions of the parties on record as well as the impugned judgment.

8. The three grounds are related and will be determined together. They are to the effect that the Tribunal erred in finding that the appellant did not sufficiently satisfy the respondent that it had purchased the supplies, and that the tribunal wrongly interpreted section 30 of the Tax Appeals Tribunal Act by placing the burden of proof on the appellant. Thus the tribunal wrongly upheld the respondent’s assessments for both VAT and Corporation Tax.

9. In paragraphs 56 and 57 of the judgment, when considering section 17(1) of the VAT Act, the Tribunal found that for a person to claim input VAT, there must be a purchase of taxable supply. It also found that it was not enough to have the documentation listed in section 17(1) of the VAT Act, as those documents needed to have been supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase.

10. The Tribunal held that, section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case. The tribunal relied on the case of Metcash Trading Limited vs Commissioner for the South African Reveneu Service and Another Case CCT 3/200.

11. The Tribunal then found that in as much as the appellant furnished the respondent with documents including delivery notes, ETR invoices and payments acknowledgment receipts from its suppliers, there was doubt as to the credibility of the documents. This was because the documents indicated that all the payments were made by cash to the suppliers whereas the invoices were stamped as paid by cheque, and there were no other details of the said cheques. Consequently, the Tribunal found that the appellant failed to discharge its burden and thus did not prove that it indeed purchased the said documents.

12. This Court’s view is that the appeal is based on the premise that the Tribunal erred in its interpretation of section 30 of the Tax Appeals Tribunal Act. That section provides: -“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; orb)In any other case, that the tax decision should not have been made or should have been made differently”.

13. This section, together with section 56 of the Tax Procedures Act impose the burden of proof on the tax payer to prove that an assessment is excessive or a tax decision is incorrect. These provisions place the burden upon the taxpayer to submit all the necessary documentation to support his/its case.

14. In the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR, it was held that tax laws are unique as they are contrary to the usual legal position that he who alleges must prove. The Court stated: -“Further, the tax Laws reverse the well-known principle of evidence of “he who alleges must proof”. In this regard, the tax authorities would assess what it considers to be the tax due from a taxpayer and the tax laws would burden the tax payer to disprove that the assessment or tax demanded is wrong or incorrect. This is borne by the fact that the assessment and demand is ordinarily made way after the tax payer has assessed himself and made a declaration of what according to him is the tax payable and has already paid such tax. The burden is therefore shifted to the tax payer because, the tax authority has to rummage through the documents of the tax payer years after the tax payer assessed himself and paid what he considered to be his tax liability.”

15. It is on The foregoing basis that this Court will now consider whether the appellant sufficiently proved its case before the Tribunal.

16. The issue before the Tribunal was whether the respondent was justified in declining the appellant’s claim to VAT input and the resultant assessment of corporation tax. VAT input is claimable under section 17 of the VAT Act. The basis of a claim thereunder is proof of a taxable supply to or purchase by a tax payer.

17. In this regard, it was for the appellant to prove that the respondent was wrong in its objection decision because, there had been a taxable supply to it. That is, that the appellant had made taxable purchases.

18. The appellant properly supplied the documents set out in section 17(3) of the VAT Act. However, there was some discrepancies in the documents that it produced to support the taxable supplies. According to those documents, some payments indicated that they were made in cash, but the invoices were stamped as paid in cheque. No further cheque details were provided.

19. When requested for additional documents, the appellant was unable to provide the same. This Court has carefully perused documents furnished, the discrepancies on the mode of payment is all apparent. Additional documents such as stock control records and bank statements of the respective payments made vide cheques ought to have been supplied. Without provision of such documents, the suspicion raised by the varying mode of payments persisted, hence both the respondent and Tribunal justly found that the appellant failed to sufficiently discharge its burden of proof.

20. Sections 59 of the Tax Procedures Act and section 43 of the VAT Act empowers the respondent to request for more and additional information to satisfy himself on the taxable income declared or matters tax. The respondent was therefore well within its right to request for additional information. In the same breath, the appellant was under a duty to keep all records of every transaction made for a period of five years from the date of the transaction. It was also upon the appellant to sufficiently proof all purchases and payments made to the satisfaction of the Tribunal.

21. It was thus reasonably expected that the appellant would have produced further documents to satisfy the respondent that payments were indeed made in cash or cheque. It was also incumbent upon the appellant to establish a proper trail of the payments for the alleged purchases. Without such documents and evidence, the appellant cannot be said to have proved that it made the alleged purchases.

22. In the upshot, the Court finds no merit in the appeal and the same is hereby dismissed with costs to the respondent.

It is so decreed.DATED AND DELIVERED AT NAIROBI THIS 18TH DAY OF MARCH, 2022. A. MABEYA, FCIArbJUDGE