[2025] KETAT 11 (KLR)

Pectoral Limited v Commissioner of Domestic Taxes (Tax Appeal E149 of 2024) [2025] KETAT 11 (KLR) (17 January 2025) (Judgment)

Neutral citation: [2025] KETAT 11 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E149 of 2024

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

January 17, 2025

Between

Pectoral Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act and a registered taxpayer within the Republic of Kenya whose principal activity is carrying on the business of supplies within the Republic of Kenya.

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. The Respondent carried out a tax return review of the Appellant's self-assessment return on i-Tax. The Respondent then issued Income Tax - Company additional assessments on 26th September 2023 with a total principal tax liability of Kshs 8,669,315. 63.

4. The Appellant objected to the additional assessments on i-Tax portal on 26th October 2023. The Respondent rejected the Appellant’s objection and issued an objection decision dated 18th December 2023 confirming the assessments.

5. The Appellant being aggrieved with the Respondent’s decision, filed its Appeal vide a notice of appeal dated 25th January 2024 on even date having been granted leave by the Tribunal to do so on 22nd February 2024.

The Appeal 6. The Appellant lodged memorandum of appeal dated 12th February 2024 and filed on 15th February 2024 wherein the Appellant raised the following grounds of appeal:a.That the Respondent erred in law and in fact by demanding corporation tax of Kshs 8,669,315. 63 and failing to recognise the costs and expenses incurred by the Appellant in the computation of income which it seeks to subject to tax in contravention of Section 3(2) (a) and Section 15 of the Income Tax Act, Cap 470 of the Laws of Kenya (hereinafter “ITA”).b.That the Respondent erred in law and in fact by failing to take into account that expenses were incurred in the production of income and should be allowable deduction when arriving at the taxable income of the Appellant in accordance with Section 15 of the ITA.c.That the Respondent erred in law and fact by disallowing the legitimate business purchases incurred by the Appellant in generation of its income amounting to the sum of Kshs 28,333,086. 27. d.That the Respondent erred in law and fact by concluding that the purchases claimed by the Appellant for the period covered by the assessment was not related to the sales made by the Appellant for the assessment period and therefore declining to deduct the purchases as allowable deductions.e.That the Respondent erred in law and in fact in blatantly disregarding and ignoring the evidence, explanations and supporting documentations by the Appellant and proceeding to issue its objection decision dated 18th December 2023.

Appellant’s Case 7. The the Appellant lodged its statement of facts dated 12th February 2024 on 15th February 2024. The Appellant also filed its written submissions dated 24th September 2024 and filed on 25th September 2024.

8. The Appellant stated that on 13th July 2023 the Respondent carried out a tax return review of the Appellant for the period 2019-2022 wherein it referred to the Appellant's self-assessment return declarations that indicated that the Appellant under declared its turnover for the period 2021-2022 and subsequently assessed Corporation Tax of Kshs. 10,449,825. 41 being 30% of the VAT declared for the years 2021 and 2022.

9. On 26th September 2023 the Respondent issued its Assessment wherein it demanded corporation tax amounting to Kshs 11,005,452. 30 in relation to VAT declared, Income Tax declared and the variances therein for the year 2021-2022.

10. The Appellant through its tax agents, Viva Africa Consulting LLP, objected to the said Assessment through its notice of objection dated 23rd October 2023 on the grounds that in arriving at its decision, the Respondent did not give an allowance and take into account the expenses and costs incurred by the Appellant in the production of the taxable income and provided proof of purchases made by the Appellant.

11. Following the objection, the Appellant stated that the Respondent wrote to it Appellant seeking for further documents and through electronic mails dated 10th October 2023, 15th November 2023, 17th November 2023, 23rd November 2023, 30th November 2023, 11th December 2023 and 15th December 2023. The Appellant stated that it provided all additional documents that had been requested by the Respondent including the Appellant's management accounts, bank statements, invoices and analysis of expenses. Consequently, the Respondent issued its objection decision dated 18th December 2023 confirming the assessments.

12. In relation to corporation tax of Kshs. 8,669,315. 63, the Appellant averred that the tax was imposed erroneously and arbitrarily at 30% of the total VAT sales declared in the year 2021 and 2022 without taking into account the expenses incurred in generation of the income.

13. That under section 3(2)(a) of the ITA which is the charging section in relation to income taxes states as follows:“income upon which tax is chargeable under the Act is income in respect of-(a) gains or profits from- (i) a business, for whatever period of time carried on..."

14. The Appellant therefore stated that the Corporation tax is therefore imposed on gains/profits and not on a company's sales or revenue. The Appellant stated that the Respondent failed to recognise expenses incurred by the Appellant and therefore subjected all the revenue to corporation tax amounting to Kshs 8,669,315. 63.

15. The Appellant stated that Section 15 of the ITA provides that in determining total income of a person there shall be deducted expenses wholly and exclusively incurred in the production of the income. It maintained that this is the main principle that governs the deduction of expenses in arriving at taxable profits.

16. It stated that through the objection dated 23rd October 2023 and the electronic mail correspondence between the Appellant and Respondent dated 10th October 2023, 15th November 2023, 17th November 2023, 23rd November 2023, 30th November 2023, 11th December 2023 and 15th December 2023, it provided the supporting information related to proof of expenditure/purchases such as Import Declaration Forms (hereinafter “IDF”) of purchase of materials, invoices for the supply of the purchased materials, bank statements and management accounts. All these were to demonstrate the costs incurred by the Appellant on the VAT sales declared.

17. The Appellant stated that the Respondent expressed in its objection decision that the purchases provided were not sufficiently supported and did not correspond to the nature of business/supplies made despite the Appellant providing all the additional information requested by the Respondent. The Respondent confirmed its decision without taking into account to the explanations and documents provided by the Appellant.

18. The Appellant stated that the action by the Respondent is not only against the fundamental principles under the ITA but it is against the right to fair administrative action as enshrined in the Constitution of Kenya, 2010 (hereinafter “the Constitution”).

19. The Appellant averred that the Respondent seemed to imply through its actions that the supplies and or sales made by the Appellant were made without any expenditure and more so by refusing to accept a single cost based on the information provided .To support the appeal, the Appellant relied on is management accounts reflecting the actual transactions and the gains or profits for the years of income 2021 to 2022.

20. The Appellant contended that the demand for corporation tax of Kshs 8,669,315. 63 is unlawful and was been arrived at by using methods which cannot be justified practically and legally as enshrined in the law.

21. In further support of its appeal, the Appellant relied on written submissions. In summary, the Appellant submitted that corporation tax is imposed on gains/profits and not on a company's sales or revenue yet the Respondent taxed the Appellant based on sales made as opposed to the Company's profits against the express provisions of section 3(2)(a) of the ITA. It also submitted that the Respondent failed to deduct expenses incurred which is contrary to section 15 of the ITA even though the Appellant provided the necessary supporting documents.

22. The Appellant submitted that having provided all the documents to demonstrate the expenses incurred in production of the income, it discharged its burden of proof, and the Respondent had a statutory duty to consider the documents provided in its objection decision. The Appellant relied on the case of Commissioner of Domestic Taxes v Karshah Ltd (income Tax Appeal E154 of 2021) 20221 KEHC16028(KLR) wherein the Court held as follows in part:“presumption of correctness arises from the Commissioner's determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes, and the case must be decided upon the evidence presented. "

23. The Appellant submitted that the Respondent misused its statutory powers and cited the case of Republic v Kenya Revenue Authority Jr Misc. Civil Application 478 of 2014 wherein the Court held that no statute ever allows any public officer to statutory power arbitrary or capriciously.

24. Finally, the Appellant submitted that the Respondent's actions of charging tax on VAT declared without taking into account the expenses incurred by the Appellant in production of the income, despite the Appellant providing such information was contra statute and unreasonable and within the ambit of Wednesbury unreasonableness which equated to a decision that is so outrageous in its defiance of logic that no sensible person applying their mind to the question to be decided would have arrived at it. The Appellant therefore prayed that the assessment be set aside.

Appellant’s Prayers 25. The Appellant urged the Tribunal to grant it the following reliefs:a.That the Appeal be allowed.b.That the Respondent's additional income tax assessment dated 26th September 2023 and Objection Decision dated 18th December 2023 be set aside.c.The costs of this appeal.

The Respondent’s Case 26. In response to the appeal, the Respondent filed statement of facts dated 21st March 2024 and filed on 17th April 2024. On 13th November 2024, the Tribunal directed that the Respondent’s case was to proceed on the basis of its pleadings since it failed to file its written submissions.

27. The Respondent averred that it disallowed the Appellant's business purchases in accordance with the provisions of the TPA. Based on review of the documents provided by the Appellant the Respondent established the following:a.The Appellant made sales of various goods and items worth Kshs 32,333,086. 27 in the period 2021 to 2022 and declared the same in the VAT return.b.That the Appellant failed to declare any income generated during the period.c.The Respondent charged income tax at 30% of the total VAT sales declared in the year 2021 and 2022.

28. The Respondents stated that its workings were based on the total sales (Kshs 32,333,086. 27) and income tax at 30% was computed to get a total revenue amount of Kshs 9,858,326. It added that the related costs incurred were not considered.

29. The Respondent averred that although the Appellant provided purchases invoices to support the various expenses incurred on the purchase of goods; the purchases provided for adjustment were not sufficiently supported and did not correspond to the nature of business/supplies made. Therefore, the Respondent argued that it was justified in disallowing the purchases in question.

30. The Respondent stated that the assessments in question were issued in conformity with on Section 29(2) of the TPA and averred that from the audit findings conducted it was established that the Appellant is a non-filer. It alleged that the Appellant made sales on various goods and items worth Kshs 32,333,086. 27 in the period 2021 to 2022 and declared VAT return but failed to declared any income generated during this period. This resulted to the Respondent charging income tax at 30% of the total VAT sales declared in the year 2021 and 2022 however the related costs incurred were not considered.

31. The Respondent posited that Section 56(1) of the TPA places the burden on the Appellant to prove that a tax decision is incorrect. The Respondent started that the Appellant has failed to discharge its burden of proving that the purchases it claimed for the period covered by the assessment was not related to the sales made by it for the assessment period contrary to Section 56 of the TPA and as such this appeal should fails on this ground.

32. In addition, the Respondent stated that the Appellant’s objection was not in compliance with the section 51 (3) of the TPA. The said section provides that“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) f-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;b.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); andc.All the relevant documents relating to the objection have been submitted.’’

33. The Respondent argued that the Appellant having failed to provide all the requested documentation in support of its objection or application failed to discharge its burden of proof as stipulated under Section 56(1) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).

34. The Respondent relied on Section 24(2) of the TPA which provides 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 liability using any information available to the Commissioner.’’

35. From the foregoing, the Respondent averred that based on the information in its system the Appellant having not provided all sufficient documentation to support its assertions the Respondent was justified in using its best judgement to disallow the Appellant’s objection application and in confirming the assessments herein.

36. Further, the Respondent noted that based on the provisions of Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal's Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) the Appellant failed to discharge its burden of proof by failing to provide sufficient documentation as requested by the Respondent to prove its assertions. It therefore maintained that the Appellant failed to discharge its burden of proof thus this appeal should fail.

Respondent’s prayers 37. The Respondent prayed for the Tribunal to find that its objection decision issued on 18th December 2023 was valid, and dismiss the Appeal with costs to the Respondent as the same lacks merit.

Issues for Determination 38. The Tribunal having considered the parties’ pleadings, documentation and written submissions, puts forth the following issue for determination:Whether the Respondent erred in confirming the assessment on 18th December 2023.

Analysis and Findings 38. The Tribunal will proceed to analyse the issue as hereinunder:

39. Whether the Respondent erred in confirming the assessment on 18th December 2023.

40. The Appellant’s case is that it provided documentary evidence to support its notice of objection. The Appellant stated that it discharged its burden of proof as required under section 56(1) of the TPA. The Appellant submitted that the Respondent erred in confirming the assessments. On the other hand, the Respondent argued that the Appellant failed provide sufficient documents in support of the notice of objection contrary to section 51(3) of the TPA therefore, the Appellant was not able to discharge the burden of proof as provided for under section 56(1) of the TPA. The Respondent therefore, urged the Tribunal to uphold the objection decision.

41. In the objection decision, amongst other findings, the Respondent stated as follows:“i.You provided invoices to support various expenses incurred on purchase of goods.’’ii.The purchase provided for adjustment were not sufficiently supported and did not correspond to the nature of business/supplies made.’’

42. At paragraph 14 of its statement of facts, the Respondent stated as follows:“The Respondent states that although the Appellant provided purchases invoices to support the various expenses incurred on the purchase of goods; the purchases provided for adjustment were not sufficiently supported and did not correspond to the nature of business/supplies made. Therefore, the Respondent was justified in disallowing the purchases in question.’’

43. At paragraph 23 of its statement of facts, the Respondent stated as follows:“The Appellant having failed to provide all the requested documentation in support of its objection or application failed to discharge its burden of proof as stipulated under Section 56(1) of the Tax Procedures Act, 2015. ’’

44. The Tribunal reviewed the documentary evidence that the Appellant filed in support of this appeal to find out whether the Respondent’s assertions were justified. The Tribunal noted that the Appellant filed a number of invoices together with corresponding fiscal receipts; bank statements and Single Administrative Document (SAD). It is important to note that the Respondent did not attempt to impeach any of these documents. It then follows that these documents remained unchallenged by the Respondent at this appellate stage.

45. The Tribunal noted that whereas the Respondent admitted that the Appellant provided invoices to support various expenses incurred on purchase of goods, the Respondent rejected the entire notice of objection and confirmed the assessment dated 26th September 2023 in its entirety. Whereas the Respondent found that the Appellant had provided invoices to support various expenses, the Respondent failed to adjust the assessments on the basis that the nature of purchases was different from the nature of business of the Appellant without articulating where the differences arose.

46. The Tribunal notes that whereas the Respondent stated in its statement of facts that the Appellant failed to provide ‘‘all the requested documentation’’ in support of its objection, the Respondent did not state what documents it requested that the Appellant failed to provide. Further, the Tribunal has already pointed out above that the Respondent did not attempt to discredit the documents that the Appellant filed in support of this Appeal which could also be interpreted to mean that the documents are sufficient.

47. The Tribunal notes that in view the Respondent’s own admissions that the Appellant provided some invoices in support of the expenses, the Respondent ought to have automatically adjusted the assessments. Perhaps the Respondent ought to be reminded of the provisions of section 51(8) of the TPA which provides an avenue to allow the objection in whole or in part, or disallowing it depending on available material. Section 51(8) of the TPA provides that;“(8)Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".’’

48. The Respondent having established that the Appellant had adduced some documentary evidence to support some expenses, ought to have allowed those in light of section 51(8) of the TPA. Failure to do so meant that the Respondent was subjecting the Appellant to unlawful tax obligations. In Republic v Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR the High Court held as follows:“The approach to this case is that stated in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB as applied in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. stated, “…in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used… If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

49. The totality of the foregoing is that the Tribunal finds and holds that the Respondent erred in confirming the assessment dated 26th September 2023 and therefore, the objection decision dated 18th December 2023 is tainted.

Final Decision 50. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and makes the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 18th December 2023 be and is hereby set aside.c.Each party to bear its own cost.

51. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 17TH DAY OF JANUARY, 2025. …………………………………CHRISTINE A. MUGA - CHAIRPERSON…………………………BONIFACE K. TERER - MEMBER…………………………ELISHAH N. NJERU - MEMBER…………………………EUNICE N. NG’ANG’A - MEMBER…………………………OLOLCHIKE S. SPENCER - MEMBER