[2023] KEHC 24261 (KLR)

Rahisi Cash and Carry Traders Ltd v Commissioner of Investigations and Enforcement (Income Tax Appeal E053 of 2021) [2023] KEHC 24261 (KLR) (Commercial and Tax) (27 October 2023) (Judgment)

Neutral citation: [2023] KEHC 24261 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E053 of 2021

FG Mugambi, J

October 27, 2023

Between

Rahisi Cash and Carry Traders Ltd

Appellant

and

The Commissioner of Investigations and Enforcement

Respondent

Judgment

Brief Facts 1. This is an appeal against the decision of the Tax Appeals Tribunal (the Tribunal) delivered on 30th April 2021 which allowed the respondent’s objection decision dated 23rd July 2018. The appellant filed the Memorandum of Appeal dated 24th May 2021 as well as its written submissions dated 10th June 2022. The respondent on its part filed a statement of facts dated 24th June 2021, written submissions dated 27th June 2022 and supplementary submissions dated 11th April 2023.

2. The facts giving rise to this appeal are as follows. The respondent carried out investigations on the appellant and raised a VAT tax assessment on 23rd May 2018 of Kshs.154,038,297/=. The appellant filed a notice of objection to the assessment and consequently the respondent confirmed the assessment in its objection decision dated 23rd July 2018.

3. Aggrieved by the said decision the appellant lodged an appeal at the Tribunal which delivered its judgment confirming the appeal. Dissatisfied with the said decision, the appellant filed the present appeal. From the grounds of appeal, two issues arise. The first issue is with respect to the validity of the assessment and objection decision. The second issue is whether the Tribunal erred in holding that the appellant failed to discharge its burden of proof against the decision of the respondent.

Analysis 4. The Court has carefully considered the pleadings, submissions and authorities presented by the parties as well as the impugned judgment. The appellant takes issue with the objection decision and faults the Commissioner for not providing reasons for the assessment and evidence to back the objection decision. This was in contravention to sections 49, 51(9) and (10) of the Tax Procedures Act (TPA), article 47 of the Constitution and section 47 of the Fair Administration Act.

5. Like any administrative action, the Commissioner is required to give adequate reasons in writing for its actions. What is sufficient information for the purposes before the court is guided by sections 49, 51(9) and (10) of the (TPA) as pointed out by the appellant. The law requires that an objection decision should contain a statement of findings on the material facts and the reasons for the decision.

6. I would refer yet again to the South African decision of CSARS V Sprigg Investment 117 CC T/A Global Investment, [2010] JOL 26547 (SCA). In that case the court quoted with approval from the dictum of the Supreme Court of Appeal in Minister of Environmental Affairs & Tourism & Others V Phambili Fisheries (Pty) Ltd & Another, [2003] 2 All SA 616 (SCA) regarding what constitutes adequate reasons for purposes of a tax assessment or decision.The court found as follows:“[T]he decision maker [must] explain his decision in a way which will enable a person aggrieved to say, in effect:Even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging.”

7. The Court went on to state that the decision by the [Commissioner] ought to communicate several things which it set out as follows:“…Set out his understanding of the relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in dispute), and the reasoning processes which led him to those conclusions. He should do so in clear and unambiguous language, not in vague generalities or the formal language of legislation. The appropriate length of the statement covering such matters will depend upon considerations such as the nature and importance of the decision, its complexity and the time available to formulate the statement. Often those factors may suggest a brief statement of one or two pages only.”

8. Back to the case before the Court, the critical question is whether, against the threshold set out, the appellant was furnished with sufficient reasons by the Commissioner, to enable it to formulate its objection.

9. I have reviewed the record and I find that the objection decision of 23rd July 2018 was very clear in its reasons. The Commissioner communicated that the documents by way of purchase ledgers, stock sheets and payment documents which the Commissioner required to process the objection by the appellant were not received despite the appellant having been invited to present the same. As a result of the lack of evidence, the respondent stated that the tax assessment had been confirmed.

10. The appellant cannot therefore not say that it was not informed of the reasons for the assessment. The objection decision contained sufficient reasons and thus the reason why the appellant preferred an appeal before the Tribunal and ultimately before this court. Accordingly, I find that the Tribunal did not err in its finding that the decision was valid.

11. The second issue relates to whether the appellants had discharged the burden of proof required to reverse the Commissioner’s findings, to which the Tribunal’s held in the negative. The appellant’s case was that according to section 17 of the VAT Act read with regulation 7 of the VAT regulations, the production of tax invoices and corresponding ETRs was sufficient proof of supplies. This evidence had been furnished to the Commissioner and the appellant took issue with the Tribunal for overlooking this fact.

12. The appellant further argues that by providing this information, it had made out a prima facie case and it was for the Commissioner to rebut the evidence produced by the appellant. In default of this, the appellant as a taxpayer would then succeed. The appellant takes issue with any request by the appellant to produce documents from third parties, that it would not be privy to.

13. In opposing the appeal, the respondent submitted that the suppliers whom the appellant claimed to have been trading with were fictitious suppliers and that they existed only on paper. The respondent stated that the appellant was given an opportunity to present further evidence to support its objection and failed to do so, hence the objection decision.

14. Indeed, from the evidence before the Court, the respondent required the appellant to produce further evidence to prove how the alleged purchased goods had been ordered, recorded and sold. This evidence would have been by way of the documents stated in the correspondence from the Commissioner or even letters from the alleged suppliers confirming their supplies.

15. This Court has been very consistent in its decisions that the documents enumerated under section 17(3) of the VAT Act when provided by the taxpayer are sufficient to build a prima facie case in their favour. By furnishing copies of invoices and ETR receipts as provided for under section 17(3) of the Act, the appellant sought to disprove the Commissioner’s assessment.

16. The Commissioner however questioned the veracity of the documents produced by the appellant, and the burden again shifted to the appellant to demonstrate how the goods were ordered for, purchased and supplied and to furnish the records of the sales.

17. The basis for this finding lies in the decision of this court 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.

18. This argument finds support in the tax legislation and in particular section 56 of the Tax Proceedings Act (TPA) and section 30 of the Tax Appeals Tribunal Act (TATA). Both impose the burden of proof on the tax payer to prove that an assessment is excessive or that a tax decision is incorrect. The rationale for this is that 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.

19. I also find sound the reasoning in Commissioner of Domestic Taxes V Structural International Kenya Ltd, (Income Tax Appeal E089 of 2020) [2021] to be sound. The Court held that:“If additional documents, which would be reasonably expected to be in [his] possession is requested for to verify the alleged transactions, he should produce the same to the commissioner. That is what is expected of a keen and diligent trader.”

20. The Commissioner requested for more evidence from the appellant as empowered to do under section 59 of the TPA and section 43 of the VAT Act. This evidence was not availed meaning that the pendulum stalled on the appellant

21. I am also alive to the fact that section 59 of the TPA and section 43 of the VAT Act impose an obligation for tax payers to keep their records for a period of up to five (5) years and produce them when required by the tax authorities. I do not find anything unreasonable about the request for further evidence under the circumstances, which the appellant was at pains to produce hence the objection decision which the Tribunal confirmed.

Determination 22. For the foregoing reasons, the Court finds no merit in the appeal and the same is dismissed with costs. The decision of the Tribunal dated 30th April, 2021 upholding the objection decision of 23rd July 2018 issued by the Commissioner, is upheld. There shall be no orders to costs.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 27TH DAY OF OCTOBER 2023. F. MUGAMBIJUDGE