[2024] KETAT 748 (KLR)

Parkngo Limited v Commissioner of Domestic Taxes (Appeal 222 of 2023) [2024] KETAT 748 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 748 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 222 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

May 9, 2024

Between

Parkngo Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company duly incorporated in the Republic of Kenya and carrying on business as a provider of parking services and landscape activities.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. 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 & 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 issued the Appellant with a preliminary audit findings assessment letter dated 3rd August 2022 relating to years of income 2015 to 2019. The total assessment was for Ksh 44,867,973. 00 relating to Corporation tax, PAYE, VAT and Withholding taxes.

4. On 8th August 2022, the Appellant through its tax agents requested for extension of time by 30 days to respond to the preliminary audit findings which was partially granted by the Respondent in its letter of 16th August 2022.

5. The Appellant’s letter of 19th September 2022 addressed the Respondent’s audit findings for the 2017 to 2019 period and was accompanied by copies of supporting documents. This was followed by the Respondent’s email of 4th October 2022 where the Respondent requested for clarification/provision of outstanding documents.

6. On 7th October 2022, the Appellant requested for seven (7) days from date of Respondent’s electronic mail to provide pending records owing to the absence of its Director who was out of the Country. The Respondent granted the extension of time vide an email of 13th October 2022 with the deadline for the same set on 14th October 2022.

7. On 14th October 2022, the Appellant provided copies of invoices and explanations as requested by the Respondent in its respective emails of 4th and 13th October 2022.

8. On 10th November 2022, the Respondent raised assessments totaling to Ksh 14,298,806. 00 in relation to Corporation tax, VAT, PAYE and Withholding taxes for the 2017 to 2019 years of income.

9. The Appellant objected to the entire 2017 to 2019 assessment through its notice of objection dated 7th December 2022.

10. On 15th December 2022 via email, the Respondent informed the Appellant that it had not provided reasons for its late objection; subsequently, the Appellant explained the reasons, provided supporting documentation for the late objection and sought extension of time to pay taxes not in dispute in a letter dated 21st December 2022.

11. In a letter dated 18th January 2023, the Respondent informed the Appellant that a maximum of six (6) equal installments were allowable to pay taxes not in dispute and requested the Appellant to furnish a payment plan for the same.

12. On 3rd February 2023, the Respondent issued its objection decision confirming the entire principal assessment of Ksh 14,298,806. 00 relating to Corporation tax, VAT, PAYE and Withholding tax.

13. Aggrieved by the Respondent’s objection decision, the Appellant filed its Notice of Appeal at the Tribunal on 2nd March 2023.

The Appeal 14. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 15th March 2023 and filed on even date;a.That the Respondent erred in law and in fact by confirming assessment of Ksh 3,322,369. 00 which were allowable legal expense incurred with respect to revenue share/ parking site costs in the years of income incurred from Haim Cohen.b.That it was not open in law for the Respondent to disallow purchases of Ksh 5,239,279. 00 relating to year 2019 yet the Appellant had provided uncontroverted evidence in form of invoices issued by Cominfo and Skidata AG. That this was contrary to Section 15(1) of the Income Tax Act CAP 470 of Kenya’s Laws (hereinafter ‘ITA’)since the expense was incurred wholly and exclusively by the Appellant in the production of income in the year 2019. c.That the Respondent was misguided both in law and in fact by finding that the Appellant had not provided supportive documents for wear and tear claim totaling Ksh 11,087,161. 00 relating to year 2018 yet the Appellant had furnished the invoices to the Respondent which related to EL-GO Teams Ltd, Cominfo A.S and Skidata.d.That the Respondent misguided itself in both law and fact by confirming its assessment of VAT of Ksh 678,675. 00 arising out of alleged variance between the Appellant’s turnover in its income tax returns and VAT3 returns of Ksh 4,242,716. 00 in the year of income 2017. It was the Appellant’s assertion that the VAT variance arose from an advance invoice issued to Amiran Communications Ltd in the year of income 2015 for the sum of Ksh 4,556,581. 00 but declared in 2017 accounts, that the variance in amounts in the letter of assessment and invoice was due to foreign exchange difference and a copy of the invoice furnished to the Commissioner in support of the Appellant’s objection, it was not permissible for the Respondent to allow the invoice and purport to charge VAT on the alleged variance.e.It was not open for the Respondent to blatantly disregard and purport to revoke the six(6) installments already granted to the Appellant to pay the tax not in dispute and the allowance of the installments communicated through email to the Appellant’s tax agents thereby offending the provisions of Section 33 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’). With the Appellant’s tax agents having confirmed amenability to paying the taxes in six(6) equal installments granted by the Respondent , commencing 15th February 2023, the Respondent could not in any circumstance whatsoever purport to disallow the same without any legal basis. By so doing, the Respondent thwarted the Appellant’s legitimate expectation granted by express stipulations of the law.f.That the Respondent erred in law and in fact by willfully failing to consider relevant information and documentation availed by the Appellant to support its objection to the assessments in the years of income 2017 and 2019 thus arriving at an erroneous and unjustified tax assessment.g.That the Respondent misguided itself in finding that the Appellant’s supporting documents did not persuade the Commissioner as the same were limited in scope as per Section 59 of the TPA since at no point to issuance of the objection decision and following submission of the remaining documents on 21st December 2022 was the Appellant informed that the documents were not satisfactory/limited in scope. The only concern raised by the Respondent prior to validation of the Appellant’s objection on 18th January 2023 was furnishing the Commissioner with a payment plan for the taxes not in dispute amounting to Ksh 7,391,215. 00. In any event, this alleged limitation of scope of documents is denied by the Appellant.

Appellant’s Case 15. The Appellant’s case is premised on its Statement of Facts dated and filed on 15th March 2023;

16. The Appellant stated that it requested for extension of 30 days to respond to preliminary audit findings because the deadline provided by the Respondent in its letter dated 3rd August 2022 was highly unworkable. Further, the audit covered a period of 5 years and involved major tax heads that required reconciliation and time to retrieve all the relevant documentation to enable the Appellant respond to the audit findings.

17. The Appellant controverted some of the Respondent’s audit findings by providing copies of supporting documents and conceded to some of the Respondent’s audit findings. That the request for extension of time by seven days was based on the fact the Appellant’s Director who handles crucial documents like rental agreement was out of the Country and was expected to be back on 10th October 2022.

18. That having got the nod for extension of time, the Appellant provided copies of invoices relating to cost of sales, promenade building contract and explanations relating to PAYE housing benefits.

19. The Appellant contested the Respondent’s assertions that it had lodged a late objection by providing explanations and reasons for the same stating that there was neither deliberate delay, failure or neglect on its part nor unreasonable delay in lodging the objection once it came to its attention.

20. The Appellant further stated that when it lodged its notice of objection, it provided supporting documentation and also sought extension of time to pay taxes not in dispute amounting to Ksh 7,391,215. 00 relating to income tax, PAYE and VAT pursuant to Section 33(1) of the TPA.

21. The Appellant stated that it agreed to the terms in an email of 19th January 2023 proposing to commence payments on 15th February 2023; and that despite accepting to commence payment of taxes not in dispute by 15th February 2023, the Respondent rejected its objection and confirmed the entire assessment.

Appellant’s Prayer 22. The Appellant’s prayer to the Tribunal was that it allows the Appeal.

The Respondent’s Case 23. The Respondent’s case is premised on its Statement of Facts dated 15th April 2023 and filed on 18th April 2023.

24. That the Appellant’s Corporation tax assessments were based on the failure by the Appellant to provide vital documents and explanations to support various tax issues. On the other hand, VAT assessments were as a result of;a.Variance between sales declared in the VAT returns versus those declared in the financial statements.b.Company claimed input VAT on non-ETR generated invoices.c.Appellant’s twice input tax claim on an invoice from Rajni Shah & Co.d.The Appellant had not declared and paid VAT on the under declared.

25. That the withholding income tax assessment raised by the Respondent was based on Appellant’s failure to charge WHT at the rate of 5% on maintenance fees.

26. That PAYE assessments were based on the following grounds:-a.Appellant’s failure to charge directors housing benefit amounting to Ksh 1,250,000. 00 and Ksh 2,996,500. 00 for the years 2018 and 2019 respectively, pursuant to Section 5(2) and Section 37(1) of the ITA.b.Failure to provide any verifiable evidence to support 50% premises equipment and document storage utilization.

27. That the Respondent relied on Section 5(2)(e) of the ITA which provides that;“For the purposes of Section 3(2)(a)(ii), gains or profits includes-(e) the value of premises provided by an employer for occupation by his employee for residential purposes.”

28. In disallowing deductions, the Respondent relied on Section 15(1) of the ITA which provides as follows;“For the purpose of ascertaining the total income of a person for a year of income there shall, subject to Section 16, be deducted all expenditure incurred in that year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under Section 27 any income of an accounting period ending on some day other than the last day of that year of income is, for the purpose of ascertaining total income for a year of income, taken to be income for a year of income, then the expenditure incurred during that period shall be treated as having been incurred during that year of income….”

29. In firming up this position regarding allowable deductions while ascertaining income, the Respondent cited Sections 35 and 37(1) of the ITA.

30. Further, the Respondent relied on Sections 51 and 59 of TPA in asserting that the Appellant failed to provide relevant documentation to validate its objection to the assessments. Moreover, the Respondent averred that the Appellant failed to discharge its burden of proof contrary to Section 56(1) of the TPA which provides that;“In any proceedings under this part, the burden shall be on the Appellant to prove that a tax decision is incorrect.”

31. It was the Respondent’s assertion that the burden of proof was on the Appellant and until the same was discharged to the satisfaction of the Respondent, the Appeal should be dismissed.

Respondent’s Prayers 32. The Respondent prayers to the Tribunal were that;a.The Tribunal dismisses the Appeal with costsb.The Tribunal upholds the objection decision dated 3rd February 2023 as proper and in conformity with the provisions of the law

Parties Written Submissions 33. The Appellant’s written submissions were dated and filed on 11th August 2023. The Appellant submitted on 4 issues as stated hereunder.a.Whether the expenses incurred by the Appellant with respect to the purchases from Cominfo and Skidata AG, expenses incurred from Haim Cohen and the wear and tear claim met the requirements of Section 15(1) of the ITA.

34. That contrary to Section 15 of ITA, the Respondent disallowed genuine expenses incurred by the Appellant and for which supporting documentation had been provided in form of invoices yet the expenses had been wholly and exclusively incurred in production of income. In particular, the Appellant cited revenue/parking site cost incurred from Haim Cohen of Ksh 3,322,369. 00, disallowable purchases of Ksh 5,239,279. 00 and wear and tear claim of Ksh 11,087,161. 00. The Appellant relied on the case of Mars Logistics Limited v Commissioner of Domestic Taxes [2021].

35. It was the Appellant’s assertion that it extinguished the Respondent’s averments by availing invoices that the Respondent had specifically requested that had been issued to the Appellant by Haim Cohen, Cominfo, Skidata AG and EL-GO Team Ltd. That the particularity of the requested invoices had listed their numbers and the Appellant had availed the same as requested and it was the Appellant’s assertion that the Respondent could not reprobate on this since it was the Respondent who provided the particulars of invoices and their numbers.b.Whether the Respondent erred by confirming its assessment of Ksh 678,675. 00 by failing to take into account the time of supply of goods and services under the Value Added Tax Act and recognition of revenue under the revenue recognition principle stipulated under IFRS 15.

36. That despite the Appellant explaining in its objection that VAT variance arose from an advance invoice issued to Amiran Communications Ltd in September 2015 but declared in 2017 accounts in accordance with revenue recognition principle, the Respondent went ahead to confirm the impugned assessment. It was the Appellant’s assertion that the Respondent failed to take into account the time of supply of goods and services under the VAT Act and recognition of revenue under the revenue recognition principle. To buttress its position, the Appellant relied on Sections 12, 19 and 44 of the VAT Act.

37. The Appellant averred that it declared and paid the Amiran Communication Ltd invoice within the timeframe provided in law i.e. by 20th day of the following month of October 2015. That however, in line with revenue recognition principle which provides that revenues are recognized on the income statement in the period when the service or product is considered delivered to the customer-not when cash is received, the Appellant recognized the revenue in the year 2017 after the satisfactory obligation performance which was cabling installation and commissioning as provided for under IFRS 15. c.Whether the Respondent thwarted the Appellant’s legitimate expectation by its willful failure to document the payment plan for the tax not in dispute.

38. The Appellant conceded that it owed taxes amounting to Ksh 8,612,854. 00 that were not in dispute. That however, the Respondent reneged on the agreed six (6) equal installments payment plan for the undisputed taxes that the Appellant had proposed to commence payment on 15th February 2023 when it issued its objection decision on 3rd February 2023 way before even the first installment had been made. That the objection decision did not incorporate the six installments already granted for undisputed tax which was contrary to Section 33 of the TPA which grants a taxpayer an extension of time for payment of tax or requires the taxpayer to pay the tax in such installments as the Commissioner may determine.

39. The Appellant averred that the Respondent blatantly disregarded and purported to revoke the agreed six installments contrary Section 33(4) of the TPA thereby thwarting the Appellant’s legitimate expectation granted by express provisions of the law. The Appellant submitted that legitimate expectation arose because the Respondent made express, clear and unambiguous representation granting the Appellant six installments to clear undisputed taxes. The Appellant cited the Supreme Court case of Kenya Revenue Authority v Export Trading Company Limited (Petition 20 of 2020)[2022] where it was held that;“Respectfully, we take the view that the question of whether a legitimate expectation arose is more than a factual question. It is not merely confined to whether an expectation exists in the mind of an aggrieved party, but whether viewed objectively, such expectation is in a legal sense, legitimate. This is the position taken by this court in the CCK case where it was held that legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfill. For an expectation to be legitimate therefore, it must be founded upon a promise or practice by a public authority that is expected to fulfil the expectation. We then went on to find the emerging principles on legitimate expectation to be that;a.There must be an express, clear and unambiguous promise given by a public authority;b.The expectation itself must be reasonable;c.The representation must be one which it was competent and lawful for the decision-maker to make;d.There cannot be a legitimate expectation against clear provisions of the law or the Constitution.”e.Whether the Appellant discharged its burden to prove that the tax decision was incorrect by providing supporting documentation to the Respondent.

40. It was the Appellant’s assertion that it aligned with Sections 5 and 59 of the TPA as well as Section 107 of the Evidence Act, CAP 80 of the laws of Kenya (hereinafter ‘Evidence Act’) by providing supporting documentation in its possession as called for by the Respondent in the assessment letter. That based on the evidence adduced, the evidentiary burden shifted to the Respondent; in buttressing this position, the Appellant cited the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] paragraph 39 where it was held that:-“39. The Supreme Court of Canada in Johnston v Minister of National Reserve decided that the onus is on the taxpayer to demolish the basic fact on which the taxation rested”. Also, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd v Canada that the onus is met when a Taxpayer makes out at least a prima facie case, Prima facie is another legal term that literally means “on its face.” To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed”

41. The Respondent’s written submissions dated 23rd August 2023 were filed on 8th September 2023 wherein the Respondent submitted on a single issue for determination namely:Whether the Respondent erred in the computation and confirming the additional assessment.

42. The Respondent submitted that whereas Sections 5(2)(e), 15(1), 35 & 37(1) of the ITA guide on what is taxable income and what should be deducted in arriving at a taxable income, Section 31 of the TPA empowers the Respondent to amend, make alterations or additions to assessments using available information and to the best judgment. Additionally, the Respondent averred that Section 56(1) of the TPA provides that the burden shall be on the taxpayer to prove a tax decision incorrect upon receipt of additional assessment. In buttressing this position, the Respondent reiterated the Tribunal’s decision in the case of Grace Njeri Githia v Commissioner of Investigations & Enforcement (TAT No. 102 of 2018) where it was held that;“…It is trite that the burden of proof is on the taxpayer to show that the tax so assessed is not due from her.”

43. The Respondent was adamant that in order for the burden to shift from the Appellant, it had to raise an objection against the assessment as provided for under Section 51(3) of the TPA which the Appellant failed to do by providing the specific relevant documents relating to the objection thus the grounds of objection remained mere averments without basis. That the confirmation of the assessment was due to Appellant’s non-compliance in the provision of documents sought by the Respondent. To firm up this position, the Respondent quoted the following authorities;a.Boleyn International Limited vs Commissioner of Domestic Taxes[TAT No. 55 of 2018]b.Afya Xray Centre Limited vs Commissioner of Domestic Taxes[TAT No. 70 of 2017]

44. Further, the Respondent relied on Section 24 of the TPA in asserting that even though the taxpayer is allowed to submit returns in the approved form and manner, the Respondent was not bound by information provided therein and can assess for additional taxes based on any available information in full exercise of its mandate as bestowed to it under Article 210 of the Constitution of Kenya, 2010 (hereinafter ‘the Constitution’). The Respondent relied on the following cases in buffering its position;a.Holland vs United States of America 121(1954)b.Republic v Commissioner of Customs & Excise Ex-Parte Abdi Gulet Olus[2014] eKLR

45. In buttressing this position, the Respondent asserted that there was no error in the additional assessment or the objection decision as both were right in law; that instead it was the Appellant who failed to discharge its burden of proof as provided for under Section 107 of the Evidence Act which reads;“Burden of proof 1. Whoever desires any court to give judgement 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.”

Issues For Determination 46. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that there is a single issue calling for its determination as follows:-Whether the Respondent’s objection decision dated 3rd February, 2023 was justified

Analysis And Determination 47. Having identified the single issue that call for its determination, the Tribunal proceeds to analyse the same as hereunder.

48. The Tribunal notes that the Respondent issued its objection decision on 3rd February 2023. Prior to this, the Tribunal notes that the Respondent had communicated and directed the Appellant vide email of 18th January 2023 to settle taxes not in dispute through a maximum of six (6) installments. The Tribunal notes that Section 51 (3)(b) of the TPA provides that an Appellant’s objection is validly lodged where, among other things, the Appellant has applied for an extension of time or entered into an agreement to pay taxes not in dispute.

49. The Tribunal notes that the Appellant alluded to its own electronic mail of 19th January 2023 allegedly proposing to pay taxes not in dispute. However, the the said electronic mail communique regarding the Appellant’s acceptance of the Respondent’s proposal nor explanation or documentation indicative of a payment plan or any installment payment done was not sighted by the Tribunal. The averments by the Appellant that it replied to the Respondent vide an email on 19th January 2023 remained mere averments that were not backed by evidence. The Tribunal reiterates the Court’s holding in the case of Trust Bank Limited vs Paramount Universal Bank Limited & 2 others (2009)eKLR that;“…It is trite where a party fails to call evidence in support of its case that party fails to substantiate its pleadings.”

50. The Tribunal’s view that equity aids the vigilant and not the indolent, therefore, the Appellant ought to have demonstrated to the Tribunal its diligence and commitment as a taxpayer through payment plan or any installment paid since the law dictates under Section 30 of the Tax Appeals Tribunal Act No. 40 of 2013 and Section 56 of the TPA that in any tax dispute the burden shall be on the taxpayer to show that an assessment is incorrect or ought to have been done differently. The Tribunal relies on the case of Republic v Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited [2014] eKLR where it was held that;“…payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obligated to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.”

51. The Tribunal is convinced that the Respondent’s objection decision dated 3rd February, 2023 was justified in the circumstances.

Final Decision 52. The upshot of the foregoing analysis is that the Appeal 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 3rd February 2023 be and is hereby upheld.c.Each party to bear its own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024CHRISTINE A. MUGA -CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K NGALA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE - MEMBER