[2024] KETAT 1673 (KLR)

Oteba v Commissioner of Domestic Taxes (Tax Appeal E861 of 2023) [2024] KETAT 1673 (KLR) (Commercial and Tax) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1673 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E861 of 2023

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

November 21, 2024

Between

Elias Abelu Oteba

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a male Kenyan citizen and an employee of the County Government of Busia

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. Upon conducting an audit of the Appellant’s affairs in respect of income tax for January 2017 to December 2021, the Respondent issued a notice of assessment for Ksh 14,060,150. 00 on 31st October 2022 and entered into i-Tax on 9th November 2022.

4. In a letter dated 9th December 2022 and through iTax the Appellant lodged its notice of objection challenging Respondent’s assessment to income tax the same was acknowledged by the Respondent via iTax on even date

5. On 24th January 2023 the Respondent having amended it assessment rendered its objection decision confirming principal income tax of Ksh 8,690,756. 00 in respect to 2017, 2018 2019 and 2020 review period.

6. Aggrieved by the Respondent’s objection decision dated 24th January 2023 the Appellant filed its notice of appeal dated 23rd November 2023 on 29th November 2023 at the Tribunal having been granted leave to do so on 14th December 2023.

The Appeal 7. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 23rd November 2023 and filed on 29th November 2023;i.That the Respondent erred in law and fact by failing to determine the matter on substantive grounds despite the Appellant having availed all the necessary information to enable the substantive determination of the suit.ii.That the Respondent erred in law and fact by failing to accord the Appellant the opportunity to be heard fairly before the determination of the objection in breach of Article 50 of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) which guarantees the right to a fair hearing.iii.That the Respondent erred in law and fact by failing to find that the additional assessment of Kshs 8,690,756. 00 was erroneously and irregularly made and that the Appellant was not liable for the additional tax assessment.iv.That the Respondent erred in law and fact by failing to find that the Appellant had met the threshold for review of additional tax assessment of Kshs 8,690,756. 00. v.That the Respondent erred in law and fact by failing to consider the objection purposively and find that the Respondent had acted irregularly and unproceduraly when making the additional tax assessment of Kshs 8,690,756. 00.

Appellant’s Case 8. The Appellant’s Statement of Facts were dated 23rd November 2023 and filed on 29th November 2023.

9. The Appellant averred that the Respondent erred by failing to consider and apply Section 3(2)(a) of the Income Tax Act, CAP 470 of the laws of Kenya (hereinafter “ITA”) which provides that income shall be charged on gains or profits carried on employment or services rendered. Additionally, that the Respondent erred by disregarding reimbursements for subsistence, travelling, entertainment or other allowable expenses as provided for by Section 3(2)(a)(iii) of the ITA.

10. It was the Appellant’s case that the banking method adopted by Respondent was only a test but not proof that income had been earned yet the Appellant had procured loans from financial institutions as well as other non-financial institutions through his personal account.

11. The Appellant stated that he had been sick in the last one year and had requested for extension of time to resume his official duties. Therefore, the Respondent’s demand was a gross violation of Article 47 of the Constitution that guarantees the Appellant a right to fair administrative action that is reasonable and procedurally fair.

12. The Appellant was apprehensive that the Respondent’s demand for the purportedly unpaid tax if allowed would occasion a grave injustice and harm to Appellant’s business operations due to misapplication of Income Tax Act laws.

Appellant’s Prayer 13. The Appellant made the following prayers to the Tribunal:a.That the Tribunal sets aside the objection decision dated 24th January 2023. b.That the Tribunal sets aside the notice of assessment for Kshs 8,690,756. 00. for the 2017-2022 review period.c.That the Tribunal allows the Appeal in its entirety with costs.

Respondent’s Case 14. The Respondent replied to the Appeal through its Statement of Facts dated 14th January 2024 and filed on 15th January 2024.

15. The Respondent asserted that having established inconsistencies in Appellant’s income tax returns and pursuant to Section 24(2) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”), it assessed the Appellant’s tax liability using information available and subsequently issued additional assessment as couched under Section 29 and 31 of the TPA.

16. The Respondent asserted that despite Appellant’s claims that he solely relied on employment income from the County Government of Busia, tests done on his bank accounts in his Kenya Commercial Bank (hereinafter “KCB) salary Account and Diamond Trust Bank (hereinafter “DTB”) established an undeclared income of Ksh 36,828,824. 60 for the review period. Additionally, that there were no loans credited to both accounts yet net salary and rental income were deducted from total bank receipts while arriving at the total tax liability.

17. The Respondent asserted that documents presented only partially satisfied the Respondent’s assessed amount with the variance subjected to tax charge resulting in the principal tax amount of Kshs 8,690,756. 00. Thus, the Respondent could not be faulted for confirming the assessment for lack of documentation.

18. The Respondent stated that it did nor err in law or fact as the objection decision was issued after due consideration of documents and applicable law and that it was the Appellant who failed its duty as couched under Section 56(1) of the TPA.

Respondent’s Prayer 19. The Respondent made the following prayers:i.That the Tribunal upholds the Respondent’s objection decision dated 24th January 2024. ii.That the Tribunal dismiss the Appeal with costs as the same was devoid of merit.

Parties’ Written Submissions 20. The Appellant’s written submissions were dated and filed on 20th August 2024 were adopted by the Tribunal during the hearing on 11th September, 2024. The Appellant submitted on three issues that he had identified for determination as hereinunder set out:

Whether the Appellant provided a reconciliation and supporting documents for the income variances. 21. The Appellant submitted that he provided the reconciliation and the supporting documentation as proof of income variances.

Whether the Appellant’s reconciliation documents were justified 22. The Appellant submitted that he availed supporting documentation which showed that variances arose due to valid training and facilitation funds received from the County Government of Busia. That the funds were utilized for transport, lunch, trainings and seminars conducted for various agricultural topics throughout the County.

Whether the Appellant was justified to send an Appeal late. 23. The Appellant submitted that having been taken ill from August 2022, he was unable to attend to his many matters among them the present Appeal as proved by the medical records he attached in the pleadings noting that the Respondent ought to have considered the supporting documentation presented in the Appeal as they were sufficient to support and settle the matter.

24. The Respondent’s written submissions dated 24th July 2024 were filed on 25th July 2024 were adopted by the Tribunal on 11th September, 2024. The Respondent submitted on a single issue that it had identified for determination as herein under:

Whether the Appellant discharged its burden of proof by providing relevant documentation in support of its objection. 25. The Respondent asserted that whereas the Appellant claimed to have no business and relied solely on employment income from County Government of Busia, tests on his bank accounts showed that KCB bank account was for salary whereas the account at DTB bank indicated several cash deposits and withdrawals yet no loans had been credited to both accounts yet net salary and rental income was deducted from total bank receipts while arriving at the total undeclared income.

26. The Respondent stated that the documents presented by Appellant only partially satisfied the assessed amount and that the unsupported variance was what was subjected to tax. Further, that the Appellant’s objection failed the validity test as provided for by Section 51(3) of the TPA which provides as follows:“3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1);c.all relevant documents relating to the objection have been submitted”

27. The Respondent further averred that it fully complied with Section 51(8) of the TPA but instead it was the Appellant who failed to adduce documentation required to support their objection. In buttressing this position, the Respondent cited the case of Commissioner of Domestic Taxes vs Structural International Kenya Limited (Income Tax Appeal No E089 of 2020)[2021]KEHC 152(KLR) where the High Court held as follows:“For the avoidance of doubt, the Tribunal is reminded that in matters where the issue is supply of goods, be it for VAT purposes or Corporation Tax, the burden is always on the trader/tax payer to show that, the documentation set out in the statute and in which he relies on arose out of a commercial transaction. Period. If additional documents, which would be reasonably expected to be in his possession is requested for to verify the alleged transactions, he should produce the same to the commissioner. That is what is expected of a keen and diligent trader.”

28. The Respondent asserted that the Appellant failed to present any evidence to show that the assessment was incorrect, erroneous or excessive thus failed to discharge its burden of proof. Accordingly, the Respondent had no choice but to issue assessment against the undeclared income based on available information noting that the Appellant only made mere statements the implication of which was that the Respondent’s objection decision retained presumption of correctness. The Respondent relied on the following case law: Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR Nairobi High Court Income Tax Appeal No. E125 of 2020

TAT NO. 28 OF 2018- Joycott General Contractors Limited –VS- Kenya Revenue Authority.

29. It was the Respondent’s case that the Appellant failed to adduce supporting documents as required by Section 56 of the TPA and Section 30 of Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) both of which provide as follows:“Section 56(1): in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrectSection 30 “In any 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.”

30. It was the Respondent’s assertion that the documents and literature provided failed to provide any additional information that would have altered the assessment since the Appellant offered hospitality and conference services for the period under review which were not exempt services. The Respondent relied on the case of Commissioner of Domestic Taxes vs Golden Acre Limited (2021)eKLR where the Judge cited Sheria Sacco Society Limited v Commissioner of Domestic Taxes (2019)eKLR as follows:“The SACCO did not meet that burden of proof”In the Australian case of Mulheim v Commissioner of Taxation |2013| FCAFC 115 the Full Federal Court of Australia (PFC) ruled:“A taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The PFC held that it is not enough for a taxpayer to simply demonstrate that the assessment issued by the Commissioner is incorrect. Rather, the onus is on the taxpayer in proving that an assessment issued by the Commissioner is excessive can only be discharged by the taxpayer by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied. That onus requires the taxpayer to positively prove his or her 'actual taxable income' and in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer.”

Issues For Determination 31. The Tribunal having carefully considered the parties’ pleadings, submissions and documentation adduced before it notes that a single issue distill for its determination as follows;Whether the Respondent’s objection decision dated 24th January 2023 was justified

Analysis And Findings 32. The Tribunal having established a single issue for determination will proceed to analyze the same as follows;

Whether the Respondent’s objection decision dated 24th January 2023 was justified. 33. The genesis of the instant dispute emanated from the Respondent’s income tax audit on Appellant’s tax affairs in respect to the January 2017 to December 2021 review period. The Tribunal notes that the Appellant faulted the Respondent’s bank analysis approach that established its tax liability while conversely, the Respondent insisted that it considered salary and rental income and it was the Appellant who failed to adduce documents to fully support its transactions and the Respondent only confirmed the assessment for lack of supporting documents.

34. The Tribunal notes that the Respondent held that the audit established the Appellant had undeclared income emanating from hospitality and conference services which were not exempt services. On his part, the Appellant stated that he solely earned employment income from the County Government of Busia and that he had received from his employer reimbursements for transport, lunch, trainings and seminars conducted for various agricultural topics throughout the County. The Tribunal notes that Section 56(1) of the TPA as read with Section 30 of TATA places the odious burden of proving tax matters upon the Appellant who has to prove them as being erroneous, excessive or how they should have been done differently. It is not a shared burden.

35. In the instant Appeal, the Appellant’s averments could have been substantiated with a simple signed list of beneficiaries of the alleged training, seminar and transport facilitation. The Tribunal sighted two different documents from the County Government of Busia processed in Appellant’s name accompanied with supporting listed names of beneficiaries among them the Appellant who received a total of Ksh 84,000. 00 in his bank account at Co-operative Bank of Kenya Limited. The other beneficiaries were paid through their respective personal bank accounts. The Tribunal therefore notes the Appellant’s assertions that he was receiving funds on behalf of others is incorrect as evidenced by his own documents. The Tribunal reiterates the following holding in the case of Trust Bank Limited vs Paramount Universal Bank Limited & 2 others (2009)eKLR:“…it is trite where a party fails to call evidence in support of its case that party fails to substantiate its pleadings.”

36. The Tribunal notes that the Respondent asserted that in its tests on the Appellant’s bank accounts, it established that whereas the KCB bank account was a salary account, the Appellant’s DTB bank account had several cash deposits and withdrawals yet there were no loan credits to the account. On his part, the Appellant stated that he had procured loans from financial institutions as well as other non-financial institutions through his personal account and the same ought to have been considered when arriving at the tax liability. The Tribunal’s view is that nothing would have been as easy for a diligent taxpayer than to produce loan agreement with the said financial institutions and or loan repayment schedules. Without the proof of the alleged loans, the Appellant’s claims remain mere averments. The Tribunal observes that Section 107 (1) and (2) of the Evidence Act, CAP 80 of the Laws of Kenya provides as follows:“(1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

37. Additionally, the Tribunal notes that the Appellant did not demonstrate to the Tribunal what other different method would have been at the disposal of the Respondent in the circumstances to arriving at his tax liability.

38. From the foregoing, it is the Tribunal’s view that the Respondent’s objection decision dated 24th January 2023 was justified.

Final Decision 39. The upshot of the foregoing is that the Appeal herein lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 24th January 2023 be and is hereby upheld.c.Each party to bear its own costs.

40. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER