[2023] KEHC 23196 (KLR)

Rahima Traders Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E042 of 2021) [2023] KEHC 23196 (KLR) (Commercial and Tax) (6 October 2023) (Judgment)

Neutral citation: [2023] KEHC 23196 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts)

Commercial and Tax

Income Tax Appeal E042 of 2021

FG Mugambi, J

October 6, 2023

Between

Rahima Traders Limited

Appellant

and

Commissioner of Investigations And Enforcement

Respondent

Judgment

Background 1. This is an appeal against the decision of the Tax Appeals Tribunal (‘the Tribunal’) delivered on 16th April 2021. The background facts are that the Commissioner investigated the affairs of the appellant for the period between January 2015 to December 2017. On 18th April 2018, the Commissioner assessed VAT at Kshs. 148,289. 809. 11. The appellant issued a notice of objection on 21st June 2018 and an objection decision was issued by the Commissioner on 24th July 2018 confirming the assessment. The appellant, dissatisfied with the decision, lodged an appeal at the Tribunal culminating to a judgment on 16th April 2021 dismissing the appeal.

2. Dissatisfied by that decision, the appellant lodged the present appeal vide a Memorandum of Appeal dated 11th May 2021 laying out 11 grounds of appeal. The appellant took issue with the Commissioner for not addressing its grounds of objection and not giving a legal and factual basis of the objection decision and assessment.

3. Furthermore, having provided the Commissioner with invoices, corresponding ETRs, delivery notes, payment records and store records which were acknowledged, the appellant felt that there was no obligation for it to produce further records. It took issue with the request to produce import entries and transfer notices which documents belonged to the supplier.

4. Counsel acknowledged that the burden of proof in tax matters lay with the taxpayer. That notwithstanding, the appellant’s view was that the Commissioner was required to demonstrate that the evidence adduced by the appellant was insufficient to prove that it was not part of the alleged missing trader tax fraudulent scheme.

5. In opposition to the appeal, the Commissioner reiterated its position that the input VAT was disallowed because the appellant’s suppliers did not exist and did not sell or supply anything to the appellant. From its investigations, the Commissioner noted that the alleged imports were also fictitious and had entry numbers which did not belong to the alleged suppliers. The Commissioner further took issue with the appellant for having made sales but failing to disclose all its sales while filing the VAT returns.

Analysis 6. I have carefully considered the pleadings, evidence and submissions of the rival parties as well as the impugned judgment. The first issue that arises for determination is the validity of the Commissioner’s objection decision. The appellant contends that the same was defective.

7. I have considered the law and in particular sections 49, 51(8), (9) and (10) of the Tax Procedures Act (‘the TPA’). I have also considered the impugned decision and I concur with the Tribunal that the Commissioner gave sufficient reasons for the objection decision to put the appellant on notice. In any case, it is these reasons that have led to the present appeal meaning that the appellant was well aware of the grounds of the decision by the Commissioner. The objection decision is therefore upheld as valid.

8. The next issue is whether the appellant had proved that the Commissioner was wrong in the tax assessment delivered vide the objection decision of 24th July 2018.

9. Section 17 of the VATAct provides for credit for input tax. Sub-section (3) thereof provides for the documentation that is required for purposes of the credit on input tax. It provides in part as follows:“The documentation for the purposes of subsection (2) shall be:-(a)an original tax invoice issued for the supply or a certified copy;(b)…(c)…(d)a credit note in the case of input tax deducted under section 16(2);(e)a debit note in the case of input tax deducted under section 16(5).”

10. Once the appellant provided the documents set out in section 17(3) of the Act as it did, this amounted to prima facie evidence of purchase. The evidentiary burden of proof then shifted to the Commissioner. It was incumbent on the Commissioner to prove that the respondent’s decision was right.

11. The Commissioner challenged the veracity of the evidence produced by the appellant and asked for more documents to prove that there had indeed been purchases and supplies made by the appellant from the alleged suppliers and that the companies making the supplies actually existed.

12. This Court has consistently pronounced itself on this matter. Once the Commissioner presented its case as aforesaid, the evidentiary burden of proof shifted back to the appellant to prove the purchases so as to make a claim for expenses and to prove that the alleged suppliers did exist, that the alleged commercial transactions for VAT input were genuine and that its documentation was legitimate.

13. In Commissioner of Domestic Taxes V Trical and Hard Limited, (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR), the Court described the burden of proof in tax matters as a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.

14. The pendulum in this case had stalled at and lay with the appellant as no further evidence was provided in rebuttal. The law recognizes that evidence required in support of transactions for tax purposes is ordinarily in the possession of the taxpayer and that the Commissioner cannot sustain the burden.

15. The justification for this unique position that appears to depart from the general principle that he who alleges must prove was expounded by the Court in the case of Commissioner of Domestic Services V Galaxy Tools Limited, [2021] eKLR. The Court explained that:“This country operates under a self-assessment tax regime. Under this regime, the tax payer assesses self and declares what he considers to be taxable income on which he then pays tax to the authorities. For this reason, the tax laws are coached in a manner that gives the tax authorities wide powers and discretion in ascertaining ex-post facto, what taxable income is.Further, the tax Laws reverse the well-known principle of evidence of “he who alleges must proof”. In this regard, the tax authorities would assess what it considers to be the tax due from a taxpayer and the tax laws would burden the tax payer to disprove that the assessment or tax demanded is wrong or incorrect. This is borne by the fact that the assessment and demand is ordinarily made way after the tax payer has assessed himself and made a declaration of what according to him is the tax payable and has already paid such tax. The burden is therefore shifted to the tax payer because, the tax authority has to rummage through the documents of the tax payer years after the tax payer assessed himself and paid what he considered to be his tax liability.”

16. This position is in tandem with section 112 of the Evidence Act which in turn provides that:“In civil proceedings, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him.”

17. In fact, section 30 of the Tax Appeals Tribunal Act (the TATA) and section 56 of the TPAboth impose the burden of proof on the tax payer to prove that an assessment is excessive or that a tax decision is incorrect.

18. The appellant acknowledges that section 59 of the TPAand section 43 of the VATAct empowers the Commissioner to request for additional information so as to satisfy the respondent on the taxable income declared by a taxpayer. The additional information and documents requested must of course be those which are reasonably expected to be in the hands of the tax payer as a business entity carrying out the business that it does.

19. The power of the Commissioner to request for additional documentation was confirmed by the Court in Commissioner of Domestic Taxes V Priyguru Company Limited (Income Tax Appeal E085 of 2020) [2021] KEHC 132 (KLR). In this case the Court disagreed with the submission that section 17 of the VAT Act only required a taxpayer to produce certain documents. These, the Court held, were only a bare minimum. I would therefore disagree with the submission by the appellant that in order to claim input VAT, it was only required to produce tax invoices and corresponding ETRs.

20. In any case, section 59 of the TPA and section 43 of the VAT Act imposes a duty on tax payers to keep tax related documents for a period of up to five (5) years. These must be produced when required by the tax authorities. In order to discharge its burden, the appellant ought to have produced additional documents such as letters from its suppliers, supplier invoices, payment vouchers, delivery notes, stock records and import records, to prove that indeed the suppliers existed and that they supplied the goods alleged.

21. These, in my view, are documents that a diligent and prudent trader who is genuinely undertaking honest business, would be expected to keep so as to demonstrate how goods purchased were ordered, recorded and sold.

Determination 22. For all the foregoing reasons, I find that the appellant failed to discharge its burden of proving that the assessment by the Commissioner was wrong. This appeal is therefore devoid of merit and the same is dismissed. The decision of the Tribunal dated 16th April 2021 upholding the objection decision of 24th July 2018 issued by the respondent, is upheld. There shall be no orders to costs.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 6TH DAY OF OCTOBER 2023. F. MUGAMBIJUDGE