[2023] KETAT 964 (KLR)

Quadco Five Limited v Commissioner of Investigation and Enforcement (Tax Appeal 1254 of 2022) [2023] KETAT 964 (KLR) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 964 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1254 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

November 10, 2023

Between

Quadco Five Limited

Appellant

and

Commissioner of Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a private company incorporated in Kenya whose principal business activity is that of a tour operator and travel agency. Its core business activity is making reservations and organizing holiday accommodation and travel to various locations in Kenya for a commission.

2. The Respondent is appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued an assessment dated 14th March, 2022 on Corporation tax, VAT and Withholding tax for the period 2016 to 2020 to the tune of Kshs. 66,965,449. 00.

4. The Appellant issued a notice of objection dated 8th June, 2022 objecting to the Respondent's assessment.

5. The Respondent confirmed its assessment through its objection decision dated 6th September, 2022 adjusting the Appellant's total taxable income by Kshs. 35,985,446. 00 and subsequently confirming income tax amounting to Kshs. 10,795,634. 00 and withholding tax amounting to Kshs. 92,790. 00 resulting in an adjusted tax assessment of Kshs. 10,888,424. 00.

6. The Appellant being dissatisfied with the Respondent’s decision filed a Notice of Appeal on 5th October, 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal filed on 25th October, 2022:i.The Respondent erred in law and fact by seeking to disallow bad debts and assets write offs relating to 2016 and 2017 already disallowed in the Appellant's tax computations for the respective years of income;ii.The Respondent erred in law and fact by indiscriminately assessing withholding tax based on incorrect values without taking the Appellant's VAT exemption status into consideration;iii.The Respondent erred in law and in fact by disallowing staff costs based on employee costs which are not subject to PAYE relating to 2017; andiv.The Respondent erred in fact by adopting a banking analysis without reviewing the Appellant’s documents and information to explain and support the banking variance.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:i.The Appellant’s Statement of Facts dated and filed on 25th October, 2022 together with the documents attached thereto.ii.The Appellant’s written submissions dated 22nd May, 2023 and filed on 23rd May, 2023.

9. That the Appellant shared supporting documents with the Respondent via emails dated 2nd August, 2022, 24th August, 2022 and 25th August, 2022 to support its position.

10. That the Respondent's agent via an email dated 1st August, 2022, while reviewing the Appellant's notice of objection sought clarification from the Appellant stating that the computed earnings for the period under review availed by the Appellant did not support the fact that the Appellant is a tour operator who earns its revenue from the commission retained from selling safaris.

11. That the Respondent further stated that the cost of sales as per the Appellant's financial statements constituted a substantial portion of the computation. However, it was not broken down and maintained as a bulk figure which the Respondent could not verify.

12. That the Respondent requested that the Appellant share a breakdown of the cost of sales as per the financial statements along with supporting documents to support its assertion by Friday 5th August, 2022 to enable the Respondent finalize its review.

13. That the Appellant via an email dated 2nd August, 2022, responded to the Respondent's request for clarification providing supporting information and a reconciliation from Quickbooks with a systematic breakdown of revenue against cost of sales, supporting the Appellant's commission based revenue.

14. The Appellant through an email dated 2nd August, 2022, reiterated that the extract from Quickbooks provided a categorized breakdown of the overall figures and specific cost of sales breakdown for the same period with a year on year analysis on separate sheets relating to the period 2016 to 2020.

15. That the Appellant further noted that invoices for each cost of sales could be made available to the Respondent at its request.

16. That the Appellant further explained that it was incorporated to handle bookings and reservation for three separate legal entities with common directorship.

17. The Appellant stated that it on-boarded 3 additional separate legal entities with no common directorship to boost revenue for office sustainability and handles tour and travel bookings for the other entities in addition to its main clients.

18. The Appellant submitted that the bulk of its commission income is directly derived from the 6 companies.

19. The Appellant explained that it invoices the customers on behalf of the aforementioned entities, and thereafter pays the amount owed to 6 aforementioned companies at net rates less the Appellant's commission/handling fee having invoiced the customers for the gross amount at the end of every month.

20. The Appellant stated that its business model entails booking local flights, road transfers and accommodation in various destinations in Kenya.

21. The Appellant stated that it does not have ownership of the lodge, hotel, camp, aeroplanes or cars used for the operation of its business; it only operates as the invoicing unit for the locations that host the safari customers.

22. The Appellant further explained that commission is the Appellant’s income, despite the fact that income reported in the financial statements is the entire amount invoiced to customers on behalf of hotels, etc, anyway.

23. The Appellant further explained that the commission earned by itself meets its operating expenses including taxes paid to the Respondent with regards to VAT, PAYE and withholding tax.

24. The Appellant submitted that the Respondent's established income is not factual as it ignores significant deductions that directly affect profit and loss as well as the actual bankings.

25. The Appellant submitted that the Respondent used debtors’ balances in the tax computation and failed to take into account the nature of the Appellant's business in which income is derived from commissions.

26. That despite the Respondent's contention that non-income items were included in the tax computation and adjustments made accordingly, the Appellant stated that the Respondent did not make adjustments for refunds to customers, the effect of forex exchange fluctuations, inclusion of non-income items in the bankings, income cancelled against expenses, disallowed staff costs and alleged underpaid withholding tax.

27. The Appellant averred that the Respondent in its workings failed to consider that not all bankings are actually income and consequently included intercompany transfers in its workings as established by the Appellant’s sales to banking reconciliation for the period under dispute.

28. The Appellant further stated that the Respondent should consider the Appellant’s VAT exempt status as well as rectify the erroneously disallowed assets written off and bad debts written off to arrive at the correct tax liability owed by the Appellant.

29. That the bad debt and asset write offs relating to 2016 disallowed by the Respondent in the objection decision dated 6th September, 2022, were disallowed in the 2016 tax computation and therefore taxes have been paid to the Respondent on the same and should not be disallowed again.

30. That the asset write offs relating to 2017 were disallowed in the 2017 tax computation and therefore should not be disallowed again.

31. That the Respondent based its assessment on disallowed staff costs on the Kshs. 572,465. 00 variance on employee costs which were not subject to PAYE such as NSSF which is not subject to tax and erroneously used different figures from those reported in the financial statements to arrive at its final assessment on disallowed staff costs amounting to Kshs. 584,784. 00.

32. That with regard to the banking reconciliation for the years 2018 and 2019, the Appellant stated that the Respondent selected elements that should not form the basis of banking reconciliations such as advance payments and loans.

33. The Appellant reiterated that the banking variance assessed by the Respondent of Kshs. 31,095,984. 00 to be added back to the Appellant's taxable income for the year 2018 to 2020 can be attributed to debtor reclassifications which are account receivable reconciliations which can be reconciled on Quickbooks.

34. The Appellant further submitted that the variance arising from the Respondent's 2020 assessment is as a result of the Respondent's tally error as a consequence of the negative banking variance noted by the Respondent and therefore the additional assessment is not factual and should not have been assessed.

35. The Appellant stated that the withholding tax variance of Kshs. 1,390,367. 00 related to VAT on professional fees of Kshs. 20,466,249. 00 is as a result of the Respondent’s erroneous calculation using the total invoice value including VAT yet the Appellant is exempt for VAT purposes. The Appellant further stated that the Respondent justified using the total VAT invoice value on the fact that those were the figures reported in the financial statements.

36. The Appellant however submitted that withholding tax is deducted from the amount net of Value Added Tax, therefore it is clear that the Respondent while computing its assessment for withholding tax did not take into consideration the Appellant's VAT exemption status.

37. The Appellant further stated that the Respondent should consider the Appellant's VAT exempt status as well as rectify the erroneously disallowed assets written off and bad debts written off to arrive at the correct tax liability owed by the Appellant.

38. The Appellant maintained that the Respondent's assessment for disallowed bad debts amounting to Kshs. 3,744,737. 00 for the year 2016 and assets write offs amounting to Kshs. 244,520. 00 for the years 2016 and 2017 were disallowed in the tax computations relating to the respective years of income, 2016 and 2017, on which taxes were already paid.

39. The Appellant submitted that bad debts and assets written off are allowable deductions and should only be deducted in one year of income and relied on Section 15 of the Income Tax Act which provides that:“(1)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.(2)Without prejudice to subsection (1), in computing for a year of income the gains or profits chargeable to tax under section 3(2)(a), the following amounts shall be deducted -(a)bad debts incurred in the production of those gains or profits which the Commissioner considers to have become bad, and doubtful debts so incurred to the extent that they are estimated to the satisfaction of the Commissioner to have become bad, during that year of income and the Commissioner may prescribe such guidelines as may be appropriate for the purposes of determining bad debts under this subparagraph;”

40. The Appellant submitted that unless this Honorable Tribunal intervenes the Appellant will suffer irreparable economic loss at the hands of the Respondent.

Appellant’s Prayers 41. The Appellant prayed for orders that:i.The Objection decision of the Respondent contained in the letter dated 6th September, 2022 be set aside;ii.The assessment and demand of Kshs. 10,888,424. 00 imposed on the Appellant be set aside;iii.The Appeal be allowed with costs to the Appellant; andiv.The Tribunal issues any other orders that the Honourable Tribunal may deem fit.

Respondent’s Case 42. The Respondent’s case is premised on the following documents:i.The Respondent’s Statement of Facts dated 24th November, 2022 and filed on 29th November, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 6th June, 2023 and filed on 8th June, 2023.

43. That the company was investigated as an offshoot of Offbeat Safaris Limited to establish whether the Appellant declared all income earned for the period under investigation. That during the investigation the Respondent reviewed the Appellant's bankings and returns filed and noted various variances on the returns filed.

44. That with respect to the initial VAT assessment, the Commissioner vacated the same based on the representations made as well as the VAT exemption on tour operators’ services and entry fees to National Parks and Reserves that was introduced vide the Finance Act 2016 that was effective on 8th June, 2016.

45. That the Respondent further recomputed Withholding tax after the Appellant’s objection.

46. The Respondent averred that the records and documents provided by the Appellant were audited as well as reviewed and resulted in the decision communicated to the Appellant.

47. The Respondent averred that contrary to the Appellant's allegation that the disallowed bad debts and write offs were already paid, the Appellant has not produced any evidence before this Tribunal to demonstrate that the same were settled and that the Respondent ought not to have disallowed them again.

48. The Respondent averred that the Corporation tax due from the Appellant was adjusted after taking into account all the documents and reconciliation.

49. That contrary to the Appellant's allegations, the Respondent wished to reiterate that from the review of the documents that the Appellant provided, the Appellant demonstrated that it offered the services on behalf of the third parties cited, and as such, the company did not on its own, offer any ‘in house’ services' directly and that as a result, the VAT assessment was vacated and the tax assessments adjusted accordingly.

50. The Respondent averred that staff costs claimed by the Appellant in the income statement were compared to payroll declarations in iTax and variances noted. That the variances on which PAYE was not accounted were disallowed for Income tax purposes as they were not explained using documentation.

51. The Respondent averred that it had requested the Appellant for soft copies of the ledgers and financial statements for review. That from the documents provided by the Appellant, staff costs claimed in the income statement were compared to payroll declarations in iTax and variances were noted which variances the Appellant was unable to explain and justify using documentation.

52. The Respondent further averred that Section 23 of the Tax Procedures Act obligates the Appellant to maintain documents used to ascertain tax liability.“A person shall maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained”

53. The Respondent averred that upon review of the documents availed by the Appellant, the Respondent noted that some non-income items had been included in the tax computations and as such, adjustments were made to the computation to the extent that the same had been supported with evidence.

54. The Respondent averred that adjustments were made accordingly to the established income save for inter-account transfers which had already been adjusted at the assessment stage.

55. The Respondent averred that in line with Section 56 of the Tax Procedures Act, 2015, the burden of proof that an assessment is incorrect is on the Appellant. Section 56 states as follows:“.. the burden shall be on the Appellant to prove that a tax decision is incorrect.”

56. The Respondent averred and maintained that the Appellant has not discharged its burden to demonstrate that the Respondent's adjusted assessment is incorrect. 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 are unfounded in law and not supported by evidence.

57. The Respondent submitted that it accorded the Appellant an opportunity to provide supporting documents as well as reconciliation to explain the variance but the Appellant failed to provide the information required.

58. That from the record before the Tribunal, the Tribunal should note that the Appellant woefully failed in adducing a scintilla of evidence in terms of reconciliation to support the alleged excess assessment. That the Appellant simply perceived notions and imputations of incorrectness of the assessment without so much as lifting a finger to illustrate the incorrectness of the assessment.

59. To buttress its case on the burden of proof resting on the Appellant, the Respondent relied on the following cases:i.Digital Box Limited vs. Commissioner of Domestic Taxes (TAT No. 115 of 2017).ii.Diversity Distributors Ltd v Commissioner of Domestic Taxes

Respondent’s Prayers 60. The Respondent prays that this Tribunal considers the Appeal and finds as follows:i.The Objection decision dated 6th September, 2022 be upheld.ii.The Appeal be dismissed.

Issues For Determination 61. The Tribunal has carefully reviewed the pleadings and documentation filed by both parties and is of the respectful view that the singular issue for its determination is:-Whether the Respondent’s assessment was justified.

Analysis And Findings 62. The Tribunal having established the issue for its determination, proceeds to analyse it as hereunder.

63. The Respondent averred that it undertook an investigation that revealed variances in the Appellant’s books that necessitated adjustments for income tax that resulted in a tax liability amounting to Kshs. 10,888,424. 00.

64. The Appellant, on its part, averred that the Respondent did not consider bad debts and asset write-offs relating to the years 2016 and 2017 that had already been disallowed and taxed by the Respondent.

65. The Appellant further averred that the Respondent erroneously disallowed staff costs in arriving at its final assessment. Further, the Appellant stated that the Respondent did not consider certain non-income items in its bankings analysis.

66. The Appellant submitted that withholding tax should have been computed from invoice amounts net of value added tax.

67. The Tribunal gleaned through the parties’ pleadings and established that the Appellant, to its pleadings, attached tax computations for the years 2016, 2017, 2018, 2019 and 2020. Other than these tax computations, the Appellant did not produce documentation to support either its averments or its tax computations.

68. In this regard, the Tribunal was not able to establish the veracity of the Appellant’s claims that the Respondent did not consider the items outlined in its averments in arriving at the final adjusted tax liability of Kshs. 10,888,424. 00.

69. The law places the onus on the Appellant to prove its case. In this particular case, the Appellant has not proved that the final adjusted assessment by the Respondent was erroneous and this can only be done by providing documents that prove its case. In this regard, the Tribunal states that Section 30 of the Tax Appeals Tribunals Act provides as follows regarding the burden of proof in tax appeals:“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; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

70. Further, Section 56 of the Tax Procedures Act provides as follows regarding the burden of proof:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

71. Section 107 of the Evidence Act states that:“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

72. To the extent that the Appellant only provided explanations and its tax computations without supporting documents in its pleadings, the Tribunal was unable to confirm the different aspects of its financials that the Appellant claims were not considered in the Respondent’s assessment.

73. The Tribunal relied on the case of Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR where the court held that:-“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

74. The Tribunal therefore finds that the assessment raised by the Respondent was justified.

Final Decision 75. The upshot of the foregoing is that the Appeal is not merited and consequently, the Tribunal makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 6th September, 2022 be and is hereby upheld.c.Each Party to bear its own costs.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023ERIC NYONGESA WAFULA.....................CHAIRMANCYNTHIA B. MAYAKA....................MEMBERDR. RODNEY OLUOCH...................MEMBEREUNICE NG’ANG’A..........................MEMBERABRAHAM K. KIPROTICH............MEMBERBERNADETTE GITARI...................MEMBER