[2025] KETAT 179 (KLR)

Palm Builders Limited v Commissioner of Domestic Taxes (Tax Appeal E602 of 2024) [2025] KETAT 179 (KLR) (Civ) (14 March 2025) (Judgment)

Neutral citation: [2025] KETAT 179 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E602 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members

March 14, 2025

Between

Palm Builders Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a private limited liability Company incorporated in Kenya and is engaged in investment in a residential property located in Kilimani area in Nairobi.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 Parts 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. The Respondent carried out investigations on the Appellant for the period 2016 to 2020 and thereafter issued additional assessments dated 13th February 2024.

4. The Appellant objected to the assessments vide a letter dated 27th February 2024. The Respondent subsequently issued its Objection decision vide a letter dated 26th April, 2024

5. Dissatisfied with the Respondent’s Objection decision, the Appellant lodged a Notice of Appeal dated 24th May 2024 and filed on the same date.

The Appeal 6. The Appellant lodged its Memorandum of Appeal dated 5th June 2024 and filed on 6th June, 2024 in which it raised the following grounds of Appeal:Income Tax Companyi.That the Respondent failed to consider that for the year 2018, the Appellant received no income as the residential apartment block project was incomplete. The Respondent's assessment of tax of Ksh. 16,679,388. 73 was not based on any income earned but funds received for the development of the project from investors. That the company had no units ready to sell and had no other sources of revenue.ii.That the Respondent failed to consider that the project was substantially complete in 2019 and only six apartments out of twenty-four units were sold, all income declared, and respective taxes paid.iii.That the Respondent failed to acknowledge that income received by the Appellant amounting to Ksh.150,000,000 from sales of residential units in 2019 was fully declared and subjected to tax.iv.That the Respondent erroneously introduced and assessed unknown amount of Kshs.238,702,180. 00 additional income yielding an additional assessment of Ksh 29,014,416. 33 in the year 2019. v.That The Respondent disallowed genuine travel, rent & accommodation expense that was used wholly and exclusively in facilitating the construction amounting to Ksh.3,268,189. 00 for the year 2018. vi.That the Respondent's introduction of unknown amounts and errors in the additional assessment and objection decision manifestly compromised the analysis and rendered it defective in all respects.Income Tax Resident Individual For Directorsvii.That the Respondent failed to consider that shareholders' contribution is a cumulative figure which is reported in the financial statements as at the end of the accounting period and balances at the end of the financial year is not the annual increment.viii.That the Respondent erroneously introduced and assessed the income of Ksh.1,410,738,426. 00 on the Appellant's Directors far exceeds the total cost of the project of Ksh. 511,078,108. 00. That total funds received in the Appellant Bank Accounts for the period under review of Ksh. 332,053,102. 00 and the highest total shareholders contribution balance reported in the period under review of Ksh. 513,711,016. 00. ix.That the Respondent failed to consider that the Appellant's directors were not the sole financiers of the business and that they were promoters of the project representing investors known to them personally as friends and relatives to finance the project.x.That the Respondent failed to consider that the land the project sits on was family owned and formed part of the financing where the owners' received shares in the project and their share formed part of the shareholder contributions.xi.That the Respondent’s basis of computation of Income Tax Resident Individual for the directors is manifestly erroneous rendering the computation of taxes mathematically inaccurate arrived by adding up annual balance in the account rather than incremental amounts.xii.That the Respondent failed to take into consideration the credit suppliers to the project as a source of financing as the Appellant had entered an arrangement with the suppliers to supply materials in exchange for share allocation in the project and supplier's ledger accounts were periodically debited with a corresponding credit to shareholders contribution account

Appellant’s Case 7. The Appellant filed its Statement of Facts dated 5th June 2024 and the Written Submissions were filed on 21st December 2024

8. The Appellant stated that this tax dispute commenced following additional assessment issued on Itax relating to Income tax for the years of income 8th September 2016 to 31st December 20216, 1st January, 2017 to 31st December 2017, 1st January, 2018 to 31st December, 2018 and 1st January, 2019 to 31st December, 2019.

9. That the Appellant in accordance with Section 51 of The Tax Procedures Act, objected to the additional assessments orders on Itax on 26th February 2024.

10. That the Respondent, reviewed the objection notice and supporting documents lodged by the Appellant and confirmed a total tax liability of Kshs. 442,616,515. 00 as summarized in the Table Below;Name Tax Head Total PrincipalAmount

Palm Builders Income Tax Company 45,043,029

Withholding Tax 30,000

Abdukarim Elmi Income Tax Resident Individual 198,724,747

Dhagane Mustafa Income Tax Resident Individual 198,818,739

Total 442,616,515

On Income Tax Company. 11. The Appellant submitted that the Respondent failed to consider that for the year 2018, the Appellant received no income as the residential apartment block project was incomplete. That the Respondent's assessment of tax of Ksh. 16,679,388. 73 was not based on any income earned but funds received for the development of the project from investors. That the company had no units ready to sell and had no other sources of revenue.

12. That the Respondent failed to consider that the project was substantially complete in 2019 and only six apartments out of twenty-four units were sold, all income declared, and respective taxes paid.

13. That the Respondent failed to acknowledge that income received by the Appellant of Ksh.150,000,000. 00 from sales of residential units in 2019 was fully declared and subjected to tax.

14. That the Respondent did not demonstrate the source of Kshs.238,702,180. 00 additional income yielding an additional assessment of Ksh 29,014,416. 33 in the year 2019.

15. That the Respondent disallowed genuine travel, rent & accommodation expenses that was used wholly and exclusively in facilitating the construction amounting to Ksh.3,268,189. 00 for the year 2018.

On Income Tax Resident Individual (Directors) 16. The Appellant submitted that the Respondent failed to consider that shareholders' contribution is a cumulative figure which is reported in the financial statements as at the end of the accounting period and balances at the end of the financial year is not the annual increment. The Appellant provided the table below to demonstrate the shareholders contribution movement;Year Amount onFinancialStatements. Correct CalculationOf AdditionalShareholdersContribution(Increase/Decrease) KRAErroneouscalculation KRAErroneousAllocation toeach director

2018 376,330,044 376,330,044 376,330,044 188,165,022

2019 513,711,016 137,380,972 522,727,376 261,363,688

2020 494,942,461 (18,768,555) 511,681,008 255,840,504

Total 434,942,461 1,410,738,428 705,369,214

17. That the Respondent erroneously introduced and assessed income of Ksh 1,410,738,426. 00 on the Appellant's directors which far exceeds the total cost of the project of Ksh 511,078,108. 00. It averred that total funds received in the Appellant Bank Accounts for the period under review of Ksh 332,053,102. 00 and the highest total shareholders contribution balance reported in the period under review of Ksh 513,711,016. 00. The Appellant demonstrated shareholders contribution inconsistencies in the table below;AmountAssessed Total Cost ofProject TotalShareholdersContribution Total BankCredit

Ksh 1,410,738,426 Ksh 511,078,108 Ksh 513,711,016. Ksh 332,053,102

18. That the Respondent failed to consider that the Appellant's directors were not the sole financiers of the business and that they were promoters of the project representing inventors known to them personally as friends and relatives to finance the project. The Appellant provided the project financing summary in the table below;Item Amount comments

Land 80,074,495 This Land was given by family and was not paid in cash but in kind and the family transferred to Palm Builders.

Investors 236,384,800 Investment by 3 investors

Material Suppliers /Creditors 46,406,512 Negotiation by suppliers for a share of the Project.

Pre-Sales initially reportedas Shareholders 150,000,000 2019 Sales

Total· 511,078,108

19. That the investor contribution is as per the table below;Investors Passport/ID Allocation Contribution

Ahmed Maalin A05460052 105,775,200. 00 210,000,000. 00

Amal Hassan 501549062 7,528,400. 00 7,528,400. 00

Abdi Adan 675652176 18,856,400. 00 18,856,400. 00

Total 132,160,000. 00 236,384,800. 00

20. That the Respondent failed to consider that the land the project sits on was family owned and formed part of the financing where the owners' received shares in the project and their share formed part of the shareholder contributions.

21. The Appellant tabulated the land contributors which it averred were the family of Hyder Mohamed as follows;Investors Share Amount

Alhad Mohamed Hyder 20% 16,014,899. 00

Fatma Ahmed Hyder 20% 16,014,899. 00

Nasra Ahmed Hyder 20% 16,014,899. 00

Munira Jahazi 20% 16,014,899. 00

Sound Alhad Hyder 20% 16,014,899. 00

Total 80,074,495. 00

22. It submitted that the Respondent failed to take into consideration the credit suppliers to the project as a source of financing as the Appellant had entered an arrangement with the suppliers to supply materials in exchange for share allocation in the project and supplier's ledger accounts were periodically debited with a corresponding credit to shareholders contribution account.

Appellant’s Prayers 23. The Appellant prayed for the following ordersa.That the adjusted Income tax of Ksh.45,043,029. 00 for the company, Withholding tax of Ksh.30,000. 00, and Income tax resident individual for the directors that is Abdikarim Elmi and Dhagane Mustafa with total tax of Ksh.198,818,739. 00 each totaling to Kshs.431,005,768. 00 as indicated by the Respondent be vacated in its entirety.b.That the Tribunal direct the Respondent to correct, amend and otherwise recompute all manifest errors in the tax assessment and objection decision against the Appellant.c.That the Respondent and/or its agents be stopped from demanding or taking further steps to enforce recovery of the principal tax, penalties, and interest as stipulated.d.That the Tribunal give leave to the parties to resolve the dispute through Alternative Dispute Resolution mechanism as provided for by law.e.That the Tribunal be at liberty to make any such orders as it deems necessary in the circumstances.

Respondent’s Case 24. The Respondent relied on its Statement of Facts dated 4th July 2024 and filed on 5th July 2024. together with its Written submissions filed on 14th January 2025 to respond to the Appeal.

25. The Respondent pleaded that it carried out investigations on the Appellant for the period 2016 to 2020.

26. The Respondent submitted that during the investigations, it was unable to ascertain the sources of funds since no unique identifiers were provided to contributors towards the construction projects carried out by the Appellant and given the amount identified could not be confirmed to be income to the company, the same was charged equally to the Appellant's directors.

27. The Respondent noted that the Appellant claimed audit expenses in the years 2017 to 2020 and as per the Appellant's response. That it was observed that the Appellant indeed withheld from the auditor; Josiah, Salah and Associates a sum of Kshs.30,000. 00. That the Respondent adjusted the same in the final withholding tax computation.

28. The Respondent stated that there were unexplained securities/liabilities previously charged to the company and were equally distributed between the two directors and subjected to tax.

29. That the Respondent issued additional assessments to the Appellant on 13th February. 2024 for the period 2016 to 2020 as tabulated below:-Name Summary Principal Tax

Palm Builders Income Tax Company 66,545,753

Withholding 55,000

Abdikarim Elmi Income Tax Resident Individual 224,219,899

DhaganeMustafa Income Tax Resident Individual 198,818,739

Total Taxes 489,639,391

30. The Respondent stated that it conceded on the assessments for the period 2016 to 2017 and vacated them.

31. The Respondent pleaded that upon careful consideration of the objection and the documents availed by the Appellant it issued an objection decision on 26th April,2024 partially accepting the objection and amending the assessment from Kshs.489,639,391. 00 to Kshs. 442,616,515. 00.

32. The Respondent stated that the crux of its decision was that it upheld most of the assessment on the basis that the Appellant failed to avail documentation in support of the Objection.

33. That despite the Appellant alleging that in the period 2016-2018 it was undertaking development of the apartment block and thus no income was earned, the Appellant did not provide any documents in support of the assertion.

34. That the Appellant further alleged that the additional taxable income for the period 2016 to 2019 was not income but contributions from investors solely to finance the construction project. It averred that in support of this assertion, the Appellant availed a listing of investor's contributions.

35. The Respondent contended that upon review of the list availed and consideration of the explanation provided, it concluded that it could not rely on the documents to justify the veracity of the matter.

36. That the Appellant claimed the following expense; travel, rent and accommodation costs, availed air travel tickets, ledger, and rent ledger in support. That the Respondent relied on Section 15 of the Income Tax Act in review of the documents and noted that the expenses were not wholly and exclusively incurred in the production of income as provided for by the law.

37. The Respondent pleaded that as a result of the Appellant's failure to avail relevant documents rendered the Respondent in a position where it was unable to consider all of the claims raised in the objection.

38. That the Appellant neither raised the ground of Appeal that the land the project sits on was family owned in its objection nor adduced any documents in support as provided for under Section 51(3) of the Tax Procedures Act.

39. The Respondent submitted that Section 51(3) of the Tax Procedures Act mandates the Appellant to support its Objection with all relevant documents.

40. That the burden of proof that an assessment is excessive and/or erroneous lies with the Appellant.

41. The Respondent pleaded that in the absence of documents it was left with no option but to rely on information available to it. That as such therefore it was the Respondent's case that its decision was not flawed as alleged by the Appellant.

42. That pursuant to the provisions of Section 24(2) of the Tax Procedures Act the Respondent is empowered to assess any taxpayer based on information available to it.

43. That Section 23 of the Tax Procedures Act enjoins a taxpayer to maintain records for inspection by the Commissioner.

44. The Respondent submitted that Section 59 (1) of the Tax Procedures Act also provides that a taxpayer shall produce records when required to do so by the Commissioner.

45. The Respondent in conclusion pleaded that the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent were unfounded.

46. The Respondent pleaded that its conduct was in adherence to the law and the resulted objection decision cannot be faulted.

Respondent’s Prayers 47. The Respondent prayed that;a.The Appeal be dismissed with costs.b.The assessment raised by the Respondent amounting to Ksh 442,616,515. 00 be confirmed and the principal taxes and interest be found due and payable as per the Objection decision.

Issue For Determination 48. Having considered the parties’ pleadings, submissions and documents presented, the Tribunal puts forth the following single issue for determination:

- Whether the Respondent erred in confirming the assessment of taxes on the Appellant and its directors. Analysis And Findings 49. Having identified the issue falling for its determination, the Tribunal proceeds to analyse the same as hereunder.

50. The Tribunal notes that in the Objection decision, the Respondent confirmed Income Tax Company and Withholding tax for the Appellant and further confirmed Income Tax Resident Individual for its two directors.

51. The Respondent submitted that during the investigations, it was unable to ascertain the sources of funds since no unique identifiers were provided to contributors towards the construction projects carried out by the Appellant and given the amount identified could not be confirmed to be income to the company, the same was charged equally to the Appellant's directors.

52. The Respondent stated that there were unexplained securities/liabilities previously charged to the company and were equally distributed between the two directors and subjected to tax.

53. The Appellant on its part averred that the Respondent failed to consider that for the year 2018, the Appellant received no income as the residential apartment block project was incomplete. That the Respondent's assessment of tax of Ksh. 16,679,388. 73 was not based on any income earned but funds received for the development of the project from investors. That the company had no units ready to sell and had no other sources of revenue.

54. That the Respondent failed to consider that the project was substantially complete in 2019 and only six apartments out of twenty-four units were sold, all income declared, and respective taxes paid.

55. That the Respondent did not demonstrate the source of Kshs.238,702,180 additional income yielding an additional assessment of Ksh 29,014,416. 33 in the year 2019.

56. That the Respondent disallowed genuine travel, rent & accommodation expense that was used wholly and exclusively in facilitating the construction amounting to Kshs.3,268,189. 00 for the year 2018.

57. The Tribunal has gleaned through the Appellant’s Statement of Facts and notes that in support of its objection it attached the following documents:a.Land transfer documents.b.Supplier statements.c.Investor listing

58. The Tribunal notes that these documents were the same presented to the Respondent during the objection process. The Respondent in its objection decision had stated in part as follows;“3. 0 Statement of Findings…2. 5 You averred that in 2016-2018, you were undertaking development of residential apartment block project and no income was earned. However, you failed to provide any supporting documents.2. 6 In the circumstances, the Commissioner made no adjustments to that effect.2. 7 You further averred that the additional taxable income for the period 2016-2019 was not income but contributions from investors solely to finance the construction project.2. 8 In support of the same, you provided a listing of investors’ contributions.2. 9 The Commissioner reviewed the list you provided and based on the explanation provided we could not rely on them to justify the veracity of the matter. In this regard, no adjustment has been made on the same.…”

59. The Appellant has not addressed in its pleadings the issue of failure to provide documents in relation to funds it alleged to have received for construction of the alleged apartment block as raised by the Respondent in the objection decision. Further the Tribunal notes that apart from what the Appellant termed as investor listing with amounts, it failed to demonstrate how it received the funds and utilized in the said project.

60. Regarding the Director’s assessments, the Tribunal notes that this was in relations to unexplained securities/liabilities which the Respondent equally distributed between the Appellant’s two directors and subjected the same to tax.

61. The Tribunal notes that in its pleadings, the Appellant averred that the Respondent failed to consider shareholders’ contribution which was reported in the financial statements. In support of this the Appellant attached investment agreements dated 8th January 2020, land transfer documents and bank statements.

62. The Appellant however did not demonstrate any nexus with the alleged apartment project it had averred to have constructed in the period.

63. Additionally on expenses, although the Appellant provided air travel tickets, accommodation and rent ledgers, it did not demonstrate any link to any production of income as provided for under Section 15(1) of the Income Tax Act which provides as follows;“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

64. As provided for under Section 15(1) of the Income Tax Act cited above, it was not enough for the Appellant to just provide documents. It ought to link the receipts and documents provided to demonstrate that the same were expenditures that were wholly and exclusively incurred by it in the production of income during the period under assessment which it has failed to do.

65. In the circumstances the Tribunal concludes that the Appellant did not demonstrate to the Tribunal that the Respondent fell into error in the process of issuing the Objection decision.

66. The question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56(1) of the Tax Procedures Act states that:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

67. Section 30 of the Tax Appeals Tribunal Act similarly provides that:“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.”

68. The law at Sections 30 of the TAT Act and 56(1) of the TPA has placed the burden of proof in tax matters on the taxpayer. The Appellant was thus behooved to prove to the Tribunal that it provided relevant documents to the Respondent and the Respondent disregarded or failed to consider them or the Respondent used extraneous information in arriving as its assessment.

69. The Tribunal is thus of the view that the Appellant did not discharge its burden of proof in showing that the Respondent used extraneous considerations, disregarded its documents and or relied on documents other than those prescribed in the law. The averments made in its Statement of Facts did not amount to much and are incapable of helping it discharge its burden of proof as was affirmed in Digital Box Limited vs Commissioner of Investigations and Enforcement (2020) eKLR, where the court stated as follows regarding averments in Statement of Facts:“The averments made by the Appellant did not amount to evidence.”

70. Once the taxpayer fails to prove its case the Respondent was legally allowed to make the assessments as per the information in its possession as provided for in Section 24 (2) of the Tax Procedures Act which states as follows: -“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”

71. Consequently, the Tribunal finds and holds that the Appellant failed to discharge its burden of proof and therefore the Respondent did not fall into error in confirming the assessments on it and its directors.

Final Decision 72. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal is unmeritorious and accordingly makes the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 26th April 2024 be and is hereby upheld.c.Each party to bear its own costs.

73. It is so ordered

DATED and DELIVERED at NAIROBI this 14th day of March, 2025ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERABRAHAM K. KIPROTICH GLORIA A. OGAGA MEMBER MEMBER