[2024] KETAT 833 (KLR)

Paleah Stores Limited v Commissioner of Domestic Taxes (Tax Appeal E568 of 2023) [2024] KETAT 833 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 833 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E568 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

June 28, 2024

Between

Paleah Stores Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the laws of Kenya and in the business of wholesale trade of goods.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of all the statutes set out under the schedule to the said Act.

3. The Respondent undertook a compliance check and analyzed the Appellant’s VAT returns for the period 2017 to 2021, and indicated that the Appellant had double claimed some of the invoices, and requested the Appellant to explain and provide documents to support the claim, which the Appellant failed to do.

4. The Appellant vide a letter dated 15th June 2023 objected to the assessments issued in respect of VAT returns for the years 2019 to 2021, and requested the Respondent to provide a breakdown of all the invoices that are related to the assessments to enable them prepare a comprehensive objection.

5. Following the Respondent’s review of the Appellant’s grounds of objection it issued its Objection Decision on 7th August 2023, and highlighted the disallowed invoices as per the iTax returns as the disallowed input. The Respondent confirmed the tax due in the sum of Kshs. 55,195,587. 40 inclusive of penalties and interest.

6. The Appellant aggrieved by the Respondent’s Objection Decision filed the Appeal herein vide the Notice of Appeal dated 5th September 2023 and filed on 7th September 2023.

The Appeal 7. The Appellant filed its Memorandum of Appeal dated 5th September 2023 on 7th September 2023 and set out the following grounds of Appeal;i.That the Respondent erred in law and fact by failing to consider the Appellant’s objection on merit and did not rely on the documents provided by the Appellant in support of its objection.ii.That the Respondent acted contrary to the principles espoused in Article 47 of the Constitution of Kenya by acting arbitrarily and issuing an Objection Decision without taking full cognizance of the documents provided by the Appellant.iii.That the Respondent erred in law and fact by failing to accord the Appellant an opportunity to be heard.iv.That the decision being contrary to the law or to some usage having the force of the law, is that of ignoring or dishonoring Fair Administrative Action, as per Article 47 of the Constitution of Kenya, 2010.

The Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated 5th September 2023 and filed on 7th September 2023 and the annexures thereto. The Appellant did not file any written submissions.

9. The Appellant stated that on 13th June 2023 the Respondent issued a VAT assessment order for the period June, July and September 2019, October and November 2020, and January 2021 amounting to Kshs. 36,940,831. 89. 00. It stated that subsequently, on 16th June 2023, the Appellant objected to the aforementioned assessment on the Respondent’s iTax system and uploaded a letter stating their grounds of objection and their willingness to cooperate with the Respondent’s review and requested an appointment for the Appellant to be able to provide documents in support of the objection.

10. The Appellant further stated that its claim of input VAT under Section 17 of the VAT Act that relate to credits for input tax against output tax are legitimate and conform to Section 17 (3) of the said Act.

11. It stated that the assertion by the Respondent that it failed or refused to provide documents in support of its objection are false, misguided and a feeble attempt by the Respondent to paint the Appellant in bad light and justify the Objection Decision issued.

12. It was asserted by the Appellant that it provided documents as requested by the Respondent as and when the same were requested, the documents provided included purchase invoices, bank statements and input claim analysis.

13. The Appellant also contended that it is the obligation of the Respondent to prove that the Appellant’s documents were not sufficient to support the objection, noting that having provided the documents in support of the objection, the burden of proof shifts to the Respondent to prove that the documents provided were not sufficient, which duty the Respondent failed to exercise.

14. The Appellant further stated that by merely dismissing the Appellant’s objection and documents provided by the Appellant, the Respondent showed total disregard for the law, more specifically, the legitimate expectation by the Appellant that the Respondent shall consider the documents provided and arrive at an informed and well-reasoned decision.

15. It was further contended by the Appellant that VAT being a consumption tax is borne by the final consumer, and it is arrived at by factoring input and output, and by disallowing input VAT claim on goods that were purchased and the VAT input legitimately claimed, the Respondent looks to collect VAT from the Appellant as well as the final consumer which goes against the principle of neutrality and double taxation.

16. The Appellant stated that by upholding the Respondent’s decision, it will suffer irreparable damage to its business operations.

17. It was stated that the Appellant is ready and willing to provide invoices in contention and any additional documents that may be required for verification by the Honourable Tribunal in order to verify the input VAT claimed.

18. It was the Appellant’s contention that the decision made by the Respondent to compel the Appellant to pay a total incremental liability of Kshs. 55,195,587. 40 without review is improper, unfair and unjust.

Appellant’s Prayers 19. The Appellant by reason of the foregoing, prayed that;a.The Appeal be allowed;b.The Respondent be and is hereby compelled to vacate the assessment and allow the Appellant’s objection in full;c.The Respondent be compelled to revise any penalties and interests payable; and,d.The cost of this Appeal be borne by the Respondent.

The Respondent’s Case 20. The Respondent’s case is premised on its;a.Statement of Facts dated 6th December 2023 and filed on 7th December 2023 together with the documents attached thereto; and,b.Written submissions dated 22nd March 2024 and filed on 23rd March 2024.

21. The Respondent stated that it analyzed Appellant’s VAT returns for the period 2017 to 2021 and established that the Appellant had double claimed some of the invoices, and gave the Appellant an opportunity to explain or provide supporting documents to support the claim, which the Appellant failed to provide.

22. The Respondent further averred that vide a letter dated 15th June 2023, the Appellant objected to the assessments issued in respect to VAT returns for the 2019 to 2021 and requested the Respondent to provide a breakdown of all invoices that are related to the assessments to enable them prepare a comprehensive objection.

23. The Respondent further averred that it reviewed the Appellant’s grounds of objection and issued its Objection Decision on 7th August 2023 highlighting the disallowed invoices in the total sum of Kshs. 268,015,946. 00 which were disallowed inputs which had been claimed in a different period.

24. The Respondent stated that it consequently rejected the Appellant’s objection application and confirmed the total tax due and payable in the sum of Kshs. 55,195,587. 00.

25. It was the Respondent’s assertion that it was carefully guided by all the relevant laws and followed the due procedure in raising and confirming the assessments against the Appellant.

26. It further stated that the Appellant failed to provide any explanation as to why the invoices were double claimed contrary to Section 17 of the VAT Act.

27. The Respondent states that the Kenyan tax system applies a self-assessment system where the taxpayer assesses itself in the approved form, but however, despite being a self-assessment system, the Respondent is not bound by the taxpayer’s self-assessment.

28. The Respondent stated that it relied on Section 24 (3) and Section 29 of the TPA. It further stated that it is empowered by Section 31 of the TPA to amend the original assessment based on the information available to it and to the best judgement.

29. The Respondent further averred that the Appellant failed to lodge the Objection contrary to Section 51 (3) (c) of the TPA, and consequently it informed the Appellant of the decision on grounds that the Appellant failed to provide supporting documentation.

30. It further stated that Section 59 (1) of the TPA mandates the Respondent to require the production of documents from a taxpayer for the purposes of obtaining full information.

31. The Respondent averred that the assessment was raised after it found inconsistencies in their returns in the records available on the iTax platform which the Appellant failed to provide evidence in support of the same. It therefore asserted that the assessment is justified and within the confines of various laws.

32. The Respondent further stated that pursuant to Section 56 of the TPA and Section 30 of the TAT Act, the onus is on the Appellant to discharge the burden of proof that the tax decision in incorrect which the Appellant has failed to discharge.

33. The Respondent submitted that that it relied on Section 17 of the VAT Act in raising its assessment against the Appellant based on the double claimed invoices found in the analysis of the Appellant’s VAT returns, Section 17 provides for Credit for input tax against output tax;“17(1)Subject to the provisions of this section 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, 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.”

34. It further submitted that following the analysis conducted, it allowed the Appellant explain or provide documents to support the claim which the Appellant failed to avail, and therefore the Appellant cannot purport that the Respondent did not accord it an opportunity to be heard.

35. It submitted that the Objection Decision was made under the guidance of Section 51 of the TPA, and the decision explained the disallowed invoices had been claimed in a different period as per the information available to it.

36. The Respondent cited the case of Commissioner for Her Majesty’s Revenue and Customs TC/2017/02292 Saini Khalid Appellant vs. The Commissioners for Revenue and Customs, where it was stated;“the very use of the word “judgement” makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before them.”

37. It submitted that the Appellant failed to provide documents that showed that the assessment was either erroneous or invalid, and in the absence of any evidence provided by the Appellant to support its position, the Respondent was proper in exercising its best judgement and rejecting the Notice of Objection.

38. The Respondent also cited the case of Afya X-Ray Centre vs. Commissioner of Domestic Taxes TAT 70 of 2017, where it was stated;“from the foregoing chain of events, it is our understanding that the Appellant failed in its duty of providing documents in order that a comprehensive analysis of its affairs is done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents.”

39. The Respondent also cited the case of GreenroadKenya Ltd vs. Commissioner for Domestic Taxes 538 of 2021.

40. The Respondent submitted that from the foregoing it has demonstrated that what was considered in arriving at the assessment and subsequently the Objection Decision within the law, and that it has explained in detail the reasons why and its findings.

41. The Respondent submitted that its assessment was hinged on the letter of the law, and it was upon the Appellant to provide evidence to support its assertions.

42. The Respondent further submitted that the Appellant had a duty under Section 51 (3) (c) of the TPA to provide all relevant documents to support its objection, and that Section 23 of the TPA mandates the Appellant to maintain documents required under any tax law and to provide the same upon request by the Respondent, to ensure the Taxpayer’s tax liabilities can be easily ascertained. It submitted that the Appellant failed to provide the relevant supporting documents to discharge the burden of proving the assessment as incorrect.

43. It was a further submission of the Respondent that it is empowered under Section 59 of the TPA to require production of such documents as deemed necessary in determination of a taxpayer’s liability. It stated that Section 56 (1) of the TPA places the onus of proof in tax objections on the Appellant who in the instant case failed to avail documentary evidence that would have guided the Respondent at arriving to a different objection decision. The section provides;“(1)In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

44. The Respondent also cited the case of Pearson vs. Belcher CH.M (Inspector of Taxes) TC VOL.38 referred to by Majanja, J. in PZ Cussons EA Ltd vs. KRA (2013) eKLR.

45. The Respondent submitted that the Appellant has failed to prove that the Respondent’s tax decision was in way inconsistent, based on extraneous factors, excessive or incorrect by failing to avail documents.

46. The Respondent maintained that in view of the foregoing it followed the due process and reviewed the documents availed by the Appellant in confirming the assessment.

47. The Respondent prayed that the Honourable Tribunal finds that;a.Upholds the Respondent’s decision dated 7th August 2023 as proper and in conformity with the provision of the law; and,b.This Appeal is devoid of merit and ought to be dismissed with costs to the Respondent.

Issues For Determination 48. The Tribunal having carefully considered the pleadings and submissions filed by the parties is of the considered view that the Appeal herein distils into one issue that commend for determination as follows:Whether the Respondent was justified in charging the Appellant to tax and assessing for additional VAT in the period 2017 to 2021.

Analysis And Determination 49. The issue in dispute arose out of a compliance review conducted by the Respondent on the Appellant’s VAT returns for the period 2017 to 2021, wherein it indicated that after analyzing the VAT returns it had established that the Appellant had double claimed for some of the invoices in its VAT returns whose details were provided to the Appellant. The inputs were disallowed and an assessment issued.

50. The Respondent has submitted that it shared the details of the impugned invoices with the Appellant and give it an opportunity to explain or provide documents to support the claim, which the Appellant failed to provide. The Appellant objected to the assessments issued in respect of the VAT returns for the period 2019 to 2021.

51. The Respondent submitted that it reviewed the Appellant’s objection and issued its Objection Decision on 7th August 2023 highlighting the disallowed invoices, which it noted had been claimed in a different period. Consequently, the Respondent rejected the Appellant’s objection application and confirmed the tax payable in the sum of Kshs. 55,195,587. 00.

52. It was a further submission of the Respondent that it relied on Section 17 of the VAT Act in raising an assessment against the Appellant based on double-claimed invoices found in the analysis of the Appellant’s VAT returns.

53. It was also a submission of the Respondent that it gave the Appellant an opportunity of explain or provide documents to support its claim which the Appellant failed to avail, therefore cannot purport that Respondent did not afford it an opportunity to be heard.

54. On its part, the Appellant submitted that its claim of input VAT under Section 17 of the VAT Act that relate to credits for input tax against output tax are legitimate and conform to Section 17 (3) of the Act.

55. It stated that it provided documents requested by the Respondent, including purchase invoices, bank statements and input claim analysis and therefore it was the obligation off the Respondent to prove that the Appellant’s documents were not sufficient to support the objection.

56. The Appellant further stated that by merely dismissing the Appellant’s objection and documents provided by the Appellant, the Respondent showed a total disregard of the law, more specifically, the legitimate expectation by the Appellant that the Respondent shall consider the documents provided and arrive at an informed and well-reasoned decision.

57. The Appellant contended that in the light of the foregoing, the decision by the Respondent to compel the Appellant to pay a total incremental liability of Kshs. 55,195,587. 00 without review is improper, unfair and unjust.

58. According to the Respondent’s averments and annexures to its statement of facts and submissions, it disallowed the Appellant’s invoices for input VAT because the same had been claimed again for a different period. The offending invoices were set out as:Afal - Kshs. 160. 287. 22ASL Ltd – Kshs. 51,171. 38Bamburi Cement – Kshs. 516,413. 79Bismark Ltd - Kshs 1,641. 38Kevote Autoparts – Kshs 47,612. 28Korbash – Kshs 17,594,524. 14Mabati Rolling Mills – Kshs 9,090,864. 51Metro Motor Spares – Kshs 10,811. 92National Cement – Kshs 71,613. 70Transmara Sugar – Kshs 9,388,965. 52Varsani Brakes Ltd - Kshs 7,197. 12Total - Kshs 36,941,102. 95.

59. The above principal sum was subjected to a penalty of Kshs. 1,847,041. 59, and interest of Kshs. 16,407,713. 92, making the total assessment Kshs. 55,195,587. 40.

60. The Appellant was requested by the Respondent to provide explanations and documents to support its claim on the invoices set out hereinabove, of which the Respondent has averred it failed to provide.

61. The Tribunal has reviewed the documents submitted by the Appellant and has not come across the said supporting documentation being submitted with this Appeal’s pleadings. Thus, the assertions by the Respondent in regard to the failure by the Appellant to submit documents are rendered credible.

62. The Tribunal reiterates the case of Afya X-Ray Centre Ltd vs. Commissioner of Domestic Taxes TAT 70 of 2017, where it was stated;“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing documents in order that a comprehensive analysis of its affairs is done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents.”

63. In the instant Appeal, the Tribunal is satisfied that the Appellant failed in its duty to provide documents, or explain its claim for VAT input on the disallowed invoices said to have been claimed in another period despite being afforded an opportunity by the Respondent to do so. The Appellant failed to disprove the Respondent’s assertion, hence the consequent assessment.

64. In light of the foregoing, the Tribunal is satisfied that the Respondent’s decision to disallow the VAT input claims on the disallowed invoices and charge the Appellant for tax thereon is proper and within the law.

65. The Tribunal consequently finds and holds that the Respondent was justified in charging the Appellant for tax for the period 2017 -2021, and the assessment for additional VAT in the sum of Kshs. 55,195,587. 40 was proper and justified .

66. The upshot of the foregoing is that the Appellant’s Appeal herein is found devoid of merit and therefore disallowed.

Final Dertermination 67. The Appellant’s Appeal having been disallowed, the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby disallowed.b.The Respondent’s Objection Decision dated 7th August 2023 be and is hereby upheld.c.Each party to bear their own costs.

68. It is so ordered.

DATED AND DELIVERED IN NAIROBI ON THIS 28TH DAY OF JUNE 2024ROBERT M. MUTUMACHAIRPERSONMUTISO MAKAU ELISHAH N. NJERUMEMBER MEMBERBERNADETTE M. GITARI ABDULLAHI M. DIRIYEMEMBER MEMBER