[2025] KETAT 140 (KLR)

Receiver Manager Mumias Sugar Company Limited v Commissioner of Legal Service and Board Coordination (Tax Appeal 295 of 2024) [2025] KETAT 140 (KLR) (21 February 2025) (Judgment)

Neutral citation: [2025] KETAT 140 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 295 of 2024

RM Mutuma, Chair, T Vikiru, Jephthah Njagi, M Makau & D.K Ngala, Members

February 21, 2025

Between

Receiver Manager Mumias Sugar Company Limited

Appellant

and

Commissioner of Legal Service and Board Coordination

Respondent

Judgment

Background 1. The Appellant is the receiver manager for Mumias Sugar Company, a public company limited by shares incorporated in Kenya with the principal activity of the manufacture of sugar with obligations for VAT, Income Tax, PAYE and Excise duty.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Appellant was appointed a receiver manager on 20th September 2019.

4. On 25th September 2019, the Appellant wrote to the Respondent to prove their debts in accordance with the law.

5. The Respondent wrote to the Appellant on 30th September 2019 notifying it to register tax arrears amounting to Kshs. 10,351,890,277. 00 for the period 2013 - 2019.

6. The Respondent on the 22nd August 2023 wrote to the Appellant on its intention to conduct an audit.

7. That on 31st October 2023, the Respondent issued assessment notice demanding tax covering the period 2016 to July 2023 amounting to Kshs.16,177,566,678. 00. The assessment was divided into two portions Kshs.13,855,257,864. 00 related to prior assessment before receivership and Kshs. 2,322,308,814. 00 covering the period after receivership.

8. The Appellant lodged its objection application on the 30th November 2023.

9. The Respondent issued its objection decision on the 23rd January 2024 confirming the assessments amounting to Kshs. 3,510,517,137.

10. The Appellant, being dissatisfied with the Respondent’s Objection Decision, lodged this Appeal at the Tribunal vide a notice of Appeal dated 21st February, 2024 and filed on 22nd February 2024.

The Appeal 11. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 11th March 2024 and filed on 12th March 2024;a.That the Respondent erred in law and fact in holding the Appellant is liable to account for tax for the period before his appointment in disregard to Section 311 (1) of the Companies Act Cap 486 Laws of Kenya;b.That the Respondent erred in law and fact in failing to appreciate that the Appellant could not file income tax, returns in the absence of pre-receivership period records which the company management declined to hand over. Further the Respondent failed to appreciate the fact that the iTax system could not allow filing of any returns when the first periods were not filed;c.That the Respondent has erred in law and fact in demanding withholding tax on purchase of molasses, transportation of molasses and bagasse, printing, stationary, insurance, chemicals, repairs and maintenance which are not liable to withholding tax;d.That the Respondent erred in law and fact in including the payments to persons earning below the threshold of tax and the preferential payment to staff of Kshs. 4,000. 00 per year worked as a compensation to salary arrears that remained unpaid during pre-receivership period as taxable;e.That the Respondent erred in law and fact in including in their assessment sales of industrial methylated spirit and technical alcohol which are not subject to excise duty;f.That the Respondent erred in law and fact in erroneously assessing VAT based on erroneously computed excise duty; and,g.That the Respondent erred in law and fact in issuing a vague Objection Decision without including statements of finding on material facts presented by the Applicant in the letter of objection and the ensuing reason for decision against the provision of Tax Procedure Act 2015 Section 51 (10).

The Appellant’s Case 12. The Appellant’s case is premised on its Statement of Facts filed before the Tribunal on 12th March 2024. The Appellant’s case was to be considered on the basis of its pleadings as was directed by an order of the Tribunal on 12th November 2024.

13. The Appellant averred that it wrote to the Respondent on 25th September 2019 informing it that the pending debts for the Company under receivership will be handled by the Appellant in accordance with the provisions of the law.

14. The Appellant averred that in response, the Respondent on 30th September 2019 notified it to register tax arrears for the period 2013 - 2019 totaling to Kshs. 10,351,890,277. 00.

15. The Appellant submitted that it acknowledged the receipt of the claims by the Respondent on 2nd October 2019 through email and requested to be provided with details by dividing each tax head for each year to identify the preferential portion of the debt as provided under Section 311 (1) (a) of the Companies Act Cap 486 of the Laws of Kenya. That the Respondent failed to provide the breakdown of debt as requested.

16. The Appellant averred that on 22nd August 2023, the Respondent wrote a letter of intention to audit under Section 59 (1) of the TPA Act 2015 whereupon the Appellant provided it with the documents to facilitate audit.

17. The Appellant averred that on 31st October 2023, the Respondent issued assessment notice demanding tax covering the period 2016 to July 2023 based on documents examined and information availed amounting to Kshs. 16,177,566,678. 00.

18. The Appellant submitted that assessment was divided into two portions Kshs. 13,855,257,864. 00 related to prior assessment before receivership and Kshs. 2,322,308,814. 00 covering the period after receivership.

19. The Appellant submitted that it could not comment on the period before receivership because the records were not handed over by the management; and for the period after receivership, the accounts could not be prepared because there were no records to provide information on the opening balance.

20. The Appellant averred that the itax system could not accept returns without filing returns for the earlier period when management was responsible but had defaulted in filing.

21. The Appellant submitted that the Respondent included items that were not subject to withholding tax including purchase of molasses, chemicals, transport of molasses and bagasse, printing, stationary, insurance and agricultural inputs despite the Applicant having provided a detailed computation of payments for services where withholding tax was applicable.

22. That the computation by the Respondent for PAYE failed to take into account the payments to employees whose earnings were below the threshold of PAYE and the employees whose salaries were in arrears and therefore fell within preferential payment for the period before receivership which was Kshs. 4000. 00 per employee for each year worked.

23. That the Respondent made a general assumption that all alcohols are subject to excise duty while among the alcohol are included industrial methylated spirit and technical alcohol which are not subject to excise duty.

24. The Appellant averred that it had admitted liability to pay excise duty which was declared but not paid due to the prevailing court battles and stay orders together with change in receivers and administration and that the same would be paid when funds become available.

25. The Appellant submitted that VAT was properly computed and paid on monthly basis.

The Appellant’s Prayers 26. The Appellant prays the Tribunal:a.That the entire assessment was erroneously issued and be set aside;b.To allow the Appeal; and,c.To provide for cost of the Appeal.

The Respondent’s Case 27. The Respondent’s case is premised on the following documents before the Tribunal it’s;a.Statement of Facts dated and filed on 11th March 2024 together with the documents attached thereto; and,b.Written Submissions dated 7th September 2024 and filed on 7th October 2024.

28. The Respondent submitted that ever since the Appellant was appointed as a receiver manager for the company on the 20th September 2019, the company continued to carry on business and in the process received income and dealt with taxable services and goods together with excisable goods.

29. The Respondent submitted that the basis of assessment was a result of the Respondent’s observation of variances from turnover as per the Appellant’s Income Tax and Value Added Tax, the Respondent further observed that there were non-deductible expenses that were never added back, salaries and wages, double claimed expenses, withholding tax, PAYE and excise duty.

30. Further the Respondent averred that the Appellant had failed to file its annual returns for the tax heads to which it ought to have filed and as such the Respondent was justified to raise assessments on the Appellant.

31. The Respondent submitted that Section 29 of the Tax Procedures Act provides that;29. Default assessment1. Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment") of—a.the amount of the deficit in the case of a deficit carried forward under the Income Tax Act (Cap. 470) for the period;b.the amount of the excess in the case of an excess of input tax carried forward under the Value Added Tax Act, 2013 (No. 35 of 2013), for the period; orc.the tax (including a nil amount) payable by the taxpayer for the period in any other case.2. The Commissioner shall notify in writing a taxpayer assessed under subsection (1) of the assessment and the Commissioner shall specify—a.the amount assessed as tax or the amount of a deficit or excess of input tax carried forward, as the case may be;b.the amount assessed as late submission penalty and any late payment penalty payable in respect of the tax, deficit or excess input tax assessed;c.the amount of any late payment interest payable in respect of the tax assessed;d.the reporting period to which the assessment relates;e.the due date for payment of the tax, penalty, and interest being a date that is not less than 30 days from the date of service of the notice; andf.the manner of objecting to the assessment.

32. The Respondent averred that the Appellant having been appointed as a receiver manager for the Company was liable to account for all debts and liabilities of the Company accrued before and after its appointment.

33. The Respondent posited that the duties of a receiver manager entail not only receiving rents and profits or getting in outstanding property, but also carrying on or superintending a trade, business or undertaking of the company.

34. It was the Respondent’s submission that the Appellant continued carrying on business for the company and this does not allow it to only receive income but also account for the taxes due while carrying on the said business.

35. The Respondent averred that the Appellant was not only an agent of the Company, but stood in a fiduciary relationship and owed duties to both parties. That given the very nature of the position of Receiver Manager who had control over the property of the company and was running the enterprise as a going concern as was the case here. It had a duty to account to the law, the creditors and the company.

36. The Respondent relied on the case of Surya Holdings Limited & 2 others vs. CFC Stanbic Bank Limited [2015] eKLR where the Court held that;“[28]…Receivers and Managers of a company have an equitable and legal duty to answer to the company for the conduct of its affairs as well as to keep or cause full accounts to be kept i.e. fuller than the abstracts of receipts and payments required under s. 351 of the Companies Act.”

37. The Respondent averred that the Appellant had not provided any evidence of the trouble or difficulties experienced in filing returns neither had it shown that it raised the same with the Respondent.

38. The Respondent submitted that the income was chargeable under Section 3 (2) (a) of the Income Tax Act which provides that“3. Charge of tax1. Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.2. Subject to this Act, income upon which tax is chargeable under this Act is income in respect of—a.gains or profits from—b.any business, for whatever period of time carried on;c.any employment or services rendered;d.any right granted to any other person for use or occupation of property”

39. The Respondent further submitted that the Appellant had not been exempted from paying taxes by Section 13 of the Income Tax Act as a result of the company being under receivership.

40. The Respondent averred that the Appellant ran a distillery and as such the company produced and sold ethanol as reported by the Appellant through receipts and payment reports and as such the said goods were excisable goods pursuant to the First Schedule of the Excise Duty Act.

41. The Respondent relied on the case of Republic vs. Kenya Revenue Authority Exparte Bata Shoe Company (Kenya) Limited [2014] eKLR where the learned Court 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 obliged 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.”

42. Thus, the Respondent submitted that the assessments issued to the Appellant were done in strict compliance to Section 29 of the Tax Procedures Act as the Appellant had failed to file its returns and that the Respondent used the available information to assess the Appellant.

43. The Respondent averred that the Appellant had not discharged its burden of proof in this Appeal as it failed to produce or provide any evidence to challenge the assessments. Further, the Respondent submitted that the same failure continued to exist even before the Tribunal as the Appellant failed to produce any documentation to challenge the Respondents assessments.

44. The Respondent averred that during the working meeting convened between the parties on the 4th December 2023, the Appellant was requested to provide supporting evidence to their grounds of objection.

45. Further, the Respondent averred that the Appellant clarified that the company was under receivership and as a receiver manager it did not have authenticated data relating to the financials of the Company for the period under review which is prior to the receivership.

46. The Respondent submitted that the Appellant had failed to discharge its burden of proof citing that it was just a receiver manager who had no access to the documents. The Respondent relied on the case of Surya Holdings Limited & 2 others vs. Cfc Stanbic Bank Limited [2015] eKLR where the Court held at paragraph 31 of its learned decision that;“(31)It should be noted that the statutory obligations of the directors are not displaced by the receivership and cooperation of the Receivers and Managers is needed for the directors to fulfil such obligations; for instance, auditing or causing audited accounts for the company to be done is one such obligation. Matters of taxation and filing tax returns are also relevant statutory duties of the directors which must be satisfied, (Emphasis) hence, need for preparation of audited accounts and financial statements. The conduct of the Receivers and Managers herein, on prima facie evidence produced is such that a court of law may be tempted or even impelled to terminate the appointment thereof and appoint a receiver and manager accountable also to the court, or make other necessary orders.”

47. The Respondent submitted that by failing to provide the supporting documents even after the Respondent had requested for the same the Appellant did not discharge its burden of proving that the Respondent’s tax decision was incorrect as required under Section 56 (1) of the Tax Procedure Act which states that;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect”

48. The Respondent also relied on the case of Primarosa vs. Commissioner of Domestic Taxes [2019] eKLR where the J A Makau relying on Mulherein vs. Commissioner of Taxation [2013] FCAFC 115 and opined as follows“The Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessment. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on what tax ought to have been levied”

The Respondent’s Prayers 49. The Respondent prayed the Tribunal for orders that;a.The assessments were raised in accordance with the law;b.The Respondent's Objection Decision dated 23rd January 2024 were proper in law and the same be affirmed; and,c.This Appeal be dismissed with costs to the Respondent.

Issue for Determination 50. The Tribunal, having considered the pleadings, evidence adduced, and the Respondent’s submissions, is of the considered view that the issue that crystalized for its determination is;Whether the Respondent was justified in confirming the tax assessed upon the Appellant.

Analysis and Determination 51. The dispute at hand relates to the Respondent’s tax assessment upon the Appellant for the period 2016 - 2023, the assessment covered various tax heads being CIT, PAYE, WHT, Excise Duty, VAT and Back Taxes.

Corporate Income Tax 52. The Appellant in its objection averred that part of the assessment related to the period before receivership and that it was unable to not provide the required documents as the management of the company under receivership were uncooperative in providing the same. The Appellant averred further that for the period after receivership, the accounts could not be prepared because there were no records to provide information on the opening balance.

53. The Respondent averred that the Appellant having been appointed as a receiver manager for the Company was liable to account for all debts and liabilities of the Company accrued before and after its appointment.

54. The Tribunal noted that it was the Appellant who upon appointment as a Receiver manager first contacted the Respondent to inquire about any obligations it was owed by Mumias Sugar Co. (In receivership).

55. The Appellant cannot then turn around and state that it cannot comment on any taxes owed prior to its appointment when it indeed invited the Respondent to state its claim.

56. The Tribunal observed further that the Appellant has not provided any evidence to support its averments either with regard to its correspondence with the Respondent or its correspondent with the management of Mumias sugar Co (In receivership) to demonstrate that it indeed made effort to fulfil its obligations with regard to preparation of accounts and statutory compliance.

57. The Appellant’s failure to support its averments by way of documentation renders the presumption of the correctness of the Respondent’s assessment valid as was stated in Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR where the Court observed that:“The Commissioner’s determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

58. Therefore, the Tribunal left without material upon which to interrogate the veracity of the Appellant’s assertions and objections is inclined to find and hereby does find that the Respondent’s assessment are uncontroverted hence justified.

Filing of Returns in iTax 59. The Appellant admitted not to have filed returns and contended that the itax system could not accept returns without filing returns for the earlier period when management of Mumias Sugar Co. was responsible but had defaulted in filing.

60. The Respondent submitted that the Appellant had not provided evidence that it attempted to seek intervention to resolve its inability to file returns as required by the law.

61. The Tribunal observed that no evidence was placed on record to show that the Appellant attempted but was unable to file returns and any measures it undertook in a bid to fulfil its statutory obligation to file returns.

62. The is the Tribunal’s view that the Appellant was indolent and failed to take necessary steps to achieve compliance with the law in the conduct of its tax affairs.

Withholding Tax 63. The Appellant contended that the Respondent included items that were not subject to withholding tax despite it having provided a detailed computation of payments for services where withholding tax was applicable.

64. The Tribunal observed that the Appellant did not attach evidence to show that it indeed provided the said computations to the Respondent neither did it present the said evidence for the Tribunal’s appreciation.

PAYE 65. The Appellant Averred that the computation by the Respondent for PAYE failed to take into account the payments to employees whose earnings were below the threshold of PAYE and the employees whose salaries were in arrears and therefore fell within preferential payment for the period before receivership which was Kshs. 4,000. 00 per employee for each year worked.

66. The Respondent countered that the Appellant did not present documentation to prove that the amounts were compensation for salary arrears and for staff earning below the tax threshold.

67. The Tribunal notes that the Appellant has not only failed to demonstrate that it provided the documents to the Respondent but it has also failed to present the same for the Tribunal’s appreciation. On this limb therefore, the Appellant has failed to discharge its burden of proof as mere averments are not evidence.

Excise Duty 68. It was the Appellant’s position that the Respondent made a general assumption that all alcohols are subject to excise duty while among the alcohol were included industrial methylated spirit and technical alcohol which were not subject to excise duty.

69. The Respondent retorted that as evidenced by receipts and payment reports it was established that during the running of the distillery the company produced and sold ethanol and as such, the same was due for excise duty.

70. While it was the Appellant’s burden to prove that the Respondent’s assessment for excise duty was inaccurate, the Appellant did not adduce any evidence before the Tribunal to show that some of its products from the distillery were indeed not subject to excise duty.

VAT 71. The Respondent posited that considering that the Appellant produced and sold ethanol, VAT was correctly assessed.

72. The Appellant on its part submitted that VAT was properly computed and paid on monthly basis hence the assessment was not correct, however it did not provide any evidence in support of this assertion neither did it demonstrate to have availed the same to the Respondent.

73. The Tribunal therefore finds that the Appellant did not dislodge the burden placed upon it by statute to disprove the Respondent’s VAT assessment.

74. It is commonplace that once the Commissioner has made a tax assessment or decision, the burden is on the Appellants to prove that the said assessments or objections were erroneous. This is supported by Section 56 (1) of the TPA which provides as thus:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

75. Further, Section 30 of the TAT Act provides that:“30. Burden of proofIn 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.”

76. The burden was thus on the Appellant to prove that the Respondent’s assessments were erroneous. The easiest way to discharge this burden would have been by presenting to the Tribunal the documents that it had supplied to the Respondent to prove that the Respondent’s assessments were inaccurate, excessive or should have been made in a different way with the Tribunal.

77. The Appellant did not provide any document to confirm that it had shared any documents with the Respondent documents which ought to have guided the Respondent to find that its tax assessment was wrong, erroneous and or excessive.

78. The documents presented by the Appellant before the Tribunal included the following:i.Appellant’s Notice of Appeal dated 21st February 2024;ii.Appellant’s Memorandum of Appeal dated 11th of March 2024; and,iii.Statement of Facts dated 11th March 2024 without any attachments.

79. It is clear and not in doubt that none of the aforementioned documents could have aided the Appellant in discharging the onerous burden of proof placed on it to persuade the Tribunal that the Commissioner’s assessment was wrong and or erroneous. The Appellant has not provided evidence that it furnished the Respondent with the documents it supposes to have provided at the objection state.

80. The Tribunal notes that the Appellant filed its submissions well out of time on 10th December 2024 without leave of the Tribunal. Parties were directed to file submissions by 17th October 2024, the Respondent complied but the Appellant failed to do so, it was afforded an extension of 7days but still failed to comply. The said submissions were therefore not adopted by the Tribunal.

81. Further, the Appellant filed a supplementary list of documents on 8th November 2024 without leave of the Tribunal in contravention of Section 13 (4) & (6) of the TPA which enjoins parties to obtain leave from the Tribunal before filing additional documents. Having been filed without leave of the Tribunal the Appellant’s supplementary documents do not form part of the record of Appeal.

82. Without supporting documents, the Appellant’s contentions remained mere averments, the Tribunal finds guidance in the case of Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR where it was held that;“A party can only discharge its burden upon adducing evidence. ...........Merely making pleadings is not enough.”

83. The fact that the burden of proof that the Respondent’s decision was wrong always rests on the Appellant has been affirmed by this Tribunal in Tumaini Distributors [K] Ltd vs. Commissioner of Domestic Taxes [2020] eKLR, where the court held that the taxpayer has the burden to prove that the tax decision is wrong. Similarly, in the case of Otieno Odongo & Partners vs. Commissioner of Domestic Taxes TAT NO. 290 of 2019, again it was held that it is upon the Appellant to prove the that the Respondent’s decision is wrong.

84. Guided by the foregoing analysis, authorities, Section 56 (1) of the TPA and Section 30 of the TAT Act, the Tribunal thus finds and determines that Appellant failed in discharging its burden of proof that the Respondent’s assessments were not justified.

Final Decision 85. The upshot of the foregoing 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 issued on the January 23, 2024 be and is upheld; and,c.Each party to bear its own costs;

86. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 21ST DAY OF FEBRUARY 2025. ROBERT MUTUMA MUGAMBI - CHAIRMANDR. TIMOTHY B. VIKIRU - MEMBERJEPHTHAH NJAGI - MEMBERMUTISO MAKAU - MEMBERDELILAH K. NGALA - MEMBER