[2023] KETAT 95 (KLR)

Renova Limited v Commisioner of Domestic Taxes (Tribunal Appeal 820 of 2021) [2023] KETAT 95 (KLR) (Commercial and Tax) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 95 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tribunal Appeal 820 of 2021

RM Mutuma, Chair, RO Oluoch & EN Njeru, Members

March 17, 2023

Between

Renova Limited

Appellant

and

Commisioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and whose principal business activity is the provision interior design solutions.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and Kenya Revenue Authority is an agency of the Government of Kenya for the purposes of receipt, collection, accounting of Government revenue and enforcement of all the relevant tax laws.

3. The dispute herein arose when the Respondent conducted tax investigations on the Appellant and issued a tax demand for the period 2016 to 2020 for Income tax and VAT in the sum of Kshs 400,178,403. 00.

4. The Appellant filed a notice of objection dated 28th January 2021 against the entire assessment.

5. The Respondent vide a letter dated 1st February 2021 acknowledging receipt of the objection. It later wrote a letter to the Appellant on the 17th of February 2021 requesting for documents.

6. The Appellant supplied documents leading to the issuance of an objection decision on 26th March 2021 wherein the Respondent amended the assessment downwards from Kshs 400,178,403. 00 to Kshs 148,260,193. 00.

7. The Appellant was not satisfied with the decision and it commenced an appeal process before this Tribunal vide its Notice of Appeal dated 7th December 2021.

The Appeal 8. The Appeal is premised on the grounds of appeal as set out in the Memorandum of Appeal filed on 17th December, 2021 as follows:-a.That the Respondent erred in fact and in law in its demand for additional Corporation tax and VAT for the years 2016 to 2020 as the demand has been arrived at in total ignorance of significant provisions of the Income Tax Act and the VAT Act.b.That the Respondent erred in fact and in law in its demand for additional Corporation tax and VAT for the years 2016 to 2020 because the said demand is grossly exaggerated due to non- consideration of withholding tax and VAT deducted from proceeds received by the Appellant.c.That the Respondent erred in fact and in law in its demand for additional Corporation tax and VAT for the years 2016 to 2020 as the demand is solely based on credits in the Appellant’s bank statements without taking into consideration all the expenses incurred in generating the assessed income as reported in the Appellant’s financial statements provided to the Respondent.d.That the Respondent erred in fact and in law by failing to factor in and consider invoices and import documents where input taxes were incurred, contrary to provisions of the VAT Act, No. 35 of 2013. e.That the Respondent erred in fact and in law in its demand for additional Corporation tax and VAT for the years 2016 to 2020 by only taking into consideration the purchases declared in the VAT returns and filed through the iTax system as the only expenses incurred in the generation of the assessed income. In so doing, the Respondent completely ignored the fact that the Appellant procured goods and services from vendors who are not registered for VAT and therefore was not on the purchases.f.That the Respondent erred in fact and in law in its demand for additional Corporation tax and VAT for the years 2016 to 2020 by erroneously computing VAT as a charge over –and-above the amounts received by the appellant in its bank accounts, as opposed to computing VAT as if it is already included in the amounts received by the Appellant.g.That the Respondent erred in fact and in law in its demand for additional taxes for the years 2016 to 2020 as the demand is not based on any material facts that have been provided by the Respondent.h.That the additional taxes, of KES. 148,260,193/- inclusive of interests are grossly exaggerated and were arrived at in total ignorance of significant provisions of the Income Tax Act, CAP 470 of the laws of Kenya and the VAT Act 2013. i.That the Respondent erred in fact and in law, in that, it out rightly contravened the doctrine of legitimate expectation that rests a presumption on the Commissioner to follow certain procedures in arriving at the tax liability and benefits that accrue from it.j.That the Respondent erred in fact and in law by failing to grant a fair hearing to the Appellant prior to issuance of the Objection Decision, thereby failing to take into consideration explanations and supporting documentation that the Appellant was ready and willing to avail to the Respondent.k.That the Respondent failed in its duty to act fairly as provided in the Constitution of Kenya 2010 under Article 47 (1) on fair administrative action, where every person has the right to administrative action that is expeditious, efficient, reasonable and procedurally fair.

9. The Appellant prays that the this Honourable Tribunal grants the following orders:a.That the Appeal be allowed, the demand for taxes be set aside and the assessment declared nugatory in its entirety.b.That the Respondent’s actions to demand excessive taxes despite logical and cogent explanations being given to them be declared arbitrary, capricious, unreasonable, unfair and contrary to the administration of Justice and legitimate expectation of the Appellant.c.That the Respondent, it’s employees, agents or any other persons purporting to act on behalf of the Respondent be barred and or estopped from demanding or taking any further steps towards enforcement or recovery mechanisms of the principal tax, and/or penalties and interest based on the Respondent’s demand as stipulated above;d.That the Honorable Tribunal awards costs of this Appeal.e.That the Honourable Tribunal awards any other remedies that it deems just and reasonable.

Appellant’s Case 10. The Appellant’s Appeal is premised on its Statement of Facts filed on the 17th of December 2021 and written submissions dated 25th September 2022. It urged its case under the following three broad sub-titles which it proposed as the issues for determination.a.Whether there is an ambiguity in the taxable tax laws and whether the same should be interpreted to the Appellant’s benefit.b.Whether the Respondent’s demand for Corporation Tax, VAT, Interests and penalties totaling to Kshs. 148,260,193/= was lawful and justifiable.c.Whether the Respondent use of Gross Profit Margin Formula and the Bank Analysis Formula is justifiable and lawful.

Whether there is an Ambiguity in the Taxable Tax Laws and whether the Same should be Interpreted to the Appellant’s Benefit. 11. The Appellant argued under this head that:a.It complied with the legal burden placed on it under Section 30 of the Tax Appeal’s Tribunal Act as read together with Section 56 of the Tax procedure’s Act by providing the Respondent with all the requisite documents it had requested.b.Among the documents availed to the Respondent were purchases invoices and import documents where VAT was incurred. These documents were acknowledged but they were however excluded from the decision that was contained in the impugned assessment.c.It was entitled to benefit from the excluded documents under Section 15 of the ITA and Section 16 of the VAT Act because they supported its expenses which were wholly and exclusively incurred in the production of income.d.The decision to exclude its invoices because they were lumped together was unfair and it led the Respondent to arrive at an incorrect assessment.

12. The Appellant also contended that if its right to benefit from lawful expenses under Section 16 of VAT Act conflicts with Section 17 of the VAT Act, then the Tribunal should adopt the interpretation that is in favor of the taxpayer against the tax authority. It supported this this argument with the case of Bidco vs Commissioner of Domestic Taxes ITA No. 124 of 2021, where Scott v Rusell (1948) 2 ALLEA was quoted in the following words:“If a language of a revenue Act is obscure, the taxpayer is entitled to demand his liability to a higher charge, should be made out with reasonable clearness, before he is adversely affected”

Whether the Respondent’s Demand for Corporation Tax, VAT, Interests and penalties totaling to Kshs. 148,260,193/= was lawful and justifiable. 13. The Appellant affirmed that:a.The entire assessment by the Respondent is not supported by any document and is completely different form the Appellants’ audited accounts.b.It presented all the documents that were required by the Respondent in which case the entire assessment should have bene vacated and or a plausible reason should have been provided on why the documents were not considered.c.The capriciousness of the assessment is exhibited by the fact that computation of VAT was based and computed on the basis of figures that were over and above the amounts received by the Appellant in its bank account. It was thus at a loss on the basis upon which the Respondent arrived at its VAT assessment. This therefore, showed that the Respondent did not exercise its powers fairly in this matter. It relied on the following cases to support this assertion:i.Republic v Kenya Revenue Authority ex parte Jaffer Mujtab Mohamed (2015) eKLR the Court stated as follows;-“Therefore, whereas the court is not entitled to question the merits of the decision of the taxing authority, the authority must exercise its powers fairly and there ought to be a basis for the exercise of such powers. A taxing Authority is not entitled to pluck a figure from the air and impose it upon the taxpayer without some rational basis for arising at the figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court in intervening”ii.Raghbar Mandal Harihar Mandal vs. State of Bihar AIR 1951 Pat 2351. It submitted that the upshot of the above analysis was that the assessment made by the Respondent was unfair, unjust, capricious and should thus be vacated.

Whether the Respondent use of Gross Profit Margin Formula and the Bank Analysis Formula is justifiable and lawful. 15. The Appellant cited the case of United State vs. Morse 491, F2d 19, 152 (1st Cir 1974), where the court held that the basic underlying assumption in the bank deposit analysis method of proof is that if the Appellant is involved in an income- producing activity and regularly and periodically makes deposit to the bank accounts, then those deposits after adjustments, constitute taxable income.

16. Its position was that the Respondent contradicted the dictum in this case because it used the bank balances and ignored adjustments emanating from its invoices and receipts which ought to have been considered to determine what constituted its taxable income.

17. It opined that the Respondent should have used the net profit margins to determine tax due. The utter disregard of its receipts and invoices confirmed that the Commissioner taxed its gross income.

18. Based on the above, the Appellant argued that the Respondent did not exercise best judgment in this case when it opted to use bank balance as the basis of its taxation.

19. The Appellant invoked the case of CA McCourtie LON/92/191 where the court stated the following;"In additional to the conclusion drawn by Woolf J in Van Boeckel, earlier tribunal decisions identified three further proportions of relevance in determining whether an assessment is reasonable. These are, first, the facts should be objectively gathered and intelligently interpreted; secondly, that the calculations should be arithmetically sound and finally, that any sampling technique should be representative and free from bias."

20. In view of the foregoing, it submitted that the Respondent’s assessment was done erroneously because its expenses, loans and other non-taxable incomes were unlawfully included as part of its taxable income.

Respondent’s Case 21. The Respondent opposed the Appeal vide its Statement of Facts filed on the 6th of May 2022 and written submissions filed on the 26th of September 2022.

22. The Respondent stated that its objection decision was arrived at after allowing all costs that the Appellant had supported with documents. It specifically allowed the following costs; cost of sales, administration expenses, establishment costs and finance costs.

23. The un-declared sales for Income tax purposes were computed after considering the declarations in IT2C returns, undeclared specific invoices, double counted invoices and audited accounts.

24. The Respondent blamed the Appellant for its failure to provide invoices that were not lumped together. It admitted that it did not make any adjustments on all the invoices that had been lumped together when it made its final objection decision.

25. Further, on the issue of the input VAT the Respondent stated that the purchase invoices for imports between 2016 and July 2020 were time barred as at 29th December 2020 and it could therefore, not allow them pursuant to Section 17 of the VATAct.

26. The Respondent further affirmed that:a.It considered all documents available to him at objection stage and amended the assessment downwards accordingly.b.It accorded the Appellant fair hearing contrary to its assertion that the Respondent failed in its duty to act fairly as provided for in the Constitutionof Kenya.c.It allowed for expenses that were supported by documentation.d.Section 54A of the Income Tax Act requires every person carrying on business to maintain records of all transactions for purposes of taxation.The Section states:-“(1) A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”e.It issued additional assessment based on information available to it after the Appellant declined to supply documents.f.The Appellant’s expenses were not supported by documents.

27. The Appellant was given a chance at objection stage to provide documents in support of the expenses claimed. The Appellant breached mandatory provisions of the law by failing to maintain proper record of its expense. It could therefore, not allow expenses that were not supported. It supported this position with the case of Honourable Tribunal in TAT No. 212 of 2015: mars Logistics Limited v Commissioner Domestic Taxes where it was held that it is the responsibility of the Appellant to provide documents to support and verify its expenses. It also referred to the Tumaini Distributors Company (K) Limited and Commissioner of Domestic taxes, where the High Court upheld the decision of the Tribunal, which reiterates the Appellants’ duty to keep documents.

28. The Respondent averred that it disallowed input VAT because it was claimed outside the stipulated time period provided in Section 17 of the VATAct.Section 17(2) of the VATActprovides that:“…Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

29. It supported this decision to disallow VAT with the following cases:a.TAT Appeal No. 147 of 2017 Applewood Investments Limited v Commissioner Domestic Taxes & TAT Appeal No. 54 of 2017 Laser Supplies Limited v Commissioner Domestic Taxes;b.Republic v Kenya Revenue Authority ex-parte L.A.B International Kenya Limited (2011) eKLR.1. The Appellant’s contended that legitimate expectation does not arise in the circumstances of this case as alleged by the Appellant because tax is imposed by statutes. It is thus the obligation of all Kenyan Citizens to declare and pay correct taxes to fund Government projects.2. It stated that where documentary evidence is not available, the Respondent was empowered by Section 31 of the Tax Procedures Actto use whatever information available to it and its best judgment to issue any additional assessment; in this case it used the Taxpayer’s income tax returns and followed proper procedures as provided in the law.

Respondent’s Prayers 32. The Respondent stated that its tax assessment was reasonable in the circumstances. It thus prayed that the Tribunal finds as follows:a.That the Appellant’s appeal lacks meritb.The Honourable Tribunal upholds the Respondent’s tax assessments.c.The Appellant to bear costs of the appeal.

Issues for Determination 33. The Tribunal having carefully reviewed the pleadings, the documents produced, the testimony of the witnesses and the submissions made by the parties is of the considered view that the appeal herein crystalizes into the following two issues:a.whether Respondent considered all the documents provided by the Appellant in arriving at its assessment, andb.whether the Appellant’s claim for VAT input claim was time barred.

Analysis and Findings Whether Respondent considered all the Documents Provided by the Appellant in arriving at its Assessment 34. The Appellant and the Respondent filed near similar documents. Both parties seem to agree that the Appellant acted on the Respondent’s letter dated the 17th of February 2021 requesting for documents.

35. More crucially, whereas the Respondent confirmed that it received the documents it had requested from the Appellant, it argued that it was not provided with all the documents that it required. However, it did not provide any evidence before the Tribunal to confirm that it had asked for further documents from the Appellant, or that it notified the Appellant that the documents it had provided were insufficient.

36. It is the view of the Tribunal, that fairness and proper exercise of judgment would have required the Respondent to write a an email, letter or communicate with the Appellant in any way it deemed fit to inform it that it required specific documents, or that the documents that it had asked for had not been provided or that the documents provided were insufficient, or in this case, that the invoices provided were lumped together and there was need to provide invoices that were not lumped together. This was not done.

37. The Appellant, therefore, clearly had no way of knowing that it was required to supply further documents or that there was need for it to supply invoices that were not lumped together to aid the Appellant in arriving at a fair and just tax assessment. In the premises the Respondent was thus within its right to assume and believe that it had discharged its burden of proof under Section 56(1) of the TPA and 30 of the TATAct when it supplied the documents required. The burden, therefore shifted to the Respondent to consider the documents and issue its objection decision while giving reasons for its decision as is provided for in section 51(10) of the TPA which reads thus:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

38. In this case, the Commissioner’s statement of findings and reasons for the objection decision was premised on the Appellant’s failure to provide documents and yet the same was provided. It then proceeded to issue an objection decision against the Appellant without giving it the chance, right and opportunity to supply the documents required. The outcome of this is that the Commissioner intentionally adopted a strategy of concealing relevant information from the Appellant and only coming out to reveal this relevant information at the last minute and in the objection decision fromwhere it knew that the law could not allow the Appellant to provide the documents required so as to rebut or vacate the assessment.

39. Moreover, as a holder of a public office, the Respondent is obliged to exercise its powers reasonably, rationally and within the law. The Respondent’s conduct in this matter, as has been described above, amounted to arbitrary, unreasonable and capricious exercise of power which amount to an illegality as was discussed in the cases of:-a.Republic v. Kenya Revenue Authority Jr Misc. Civ. Application 478 of 2014 where it was held: “While appreciating that the Respondent has powers to assess and demand payment of taxes due, it was submitted that statutory powers can only be exercised validly if they are exercised reasonably, rationally and properly and that no statute ever allows any public officer to statutory power arbitrary or capriciously.b.Republic vs. Kenya Revenue Authority ex parte Aberdare Freight Services Limited [2004] eKLR at page 20 where Nyamu J (as he was then) stated that “It is now an accepted principle in this field of law that statutory powers and duty must be exercised and performed reasonably”

40. The Tribunal, aligns itself with these authorities in holding that Respondent’s practice of denying the Appellant a fair chance to challenge or fairly object to its tax decision by concealing information that could have helped the Appellant to upset or cause the Respondent to amend its decision is unfair, inequitable and illegal as it contravenes the provisions of 31(1) of the TPA which requires the Commissioner to exercise best judgment when making an assessment.

41. The foregoing notwithstanding, the Tribunal has noted that the Respondent stated as follows in page 1 of its objection decision:‘The following is the commissioner’s decision:(i)…ii.…iii.on grounds (iv), since you did not demonstrate which specific invoice had been lumped together and declared, the Commissioner has made no adjustments.

42. It is clear from the above statement that the Respondent is asserting that it failed to Consider The Appellant’s invoices because they were lumped together. It however, did not inform the Appellant, prior to the objection decision that it needed it to unbundle its invoices. How then was the Appellant to know that its invoices needed to be split and that this could be a reason for their rejection. In the circumstances it would have been fair and equitable to give the Appellant the opportunity to correct this anomaly before condemning it unheard.

43. Refusal to consider the Appellant’s invoices in the pretext that they were bundled amounted to punishing the Appellant for documents that were received from its suppliers. The Appellant did not author or bundle these invoices, it is therefore, unreasonable and unfair to punish the Appellant over documents that were not authored by it and to which it did not have any control. The reasonable thing in this case would have been to request the Appellant to unbundle the invoices that it could unbundle, and to also direct it to advise its suppliers to cease the lumping of invoices in their subsequent supplies.

44. The Respondent’s refusal to take this route resulted in an assessment which included allowable expenses which formed part of the lumped invoices. This action by the Commissioner contravened section 15(1) of the Income tax Act(ITA) and section 13(5) and 16(2) of the VATAct.

45. Section 15(1) of the ITA provides as thus:“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.”

46. Section 13(5) of the VATActprovides as thus:“In calculating the value of any services for the purposes of subsection (1),there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

47. Section 16(2) of the VATAct provides as thus:“ A registered person who issues a credit note under this section shall reduce the amount of his output tax in the tax period in which the credit note was issued by an amount that bears the same proportion to the tax originally charged as the amount credited bears to the total amount originally charged and the amount of tax so credited shall be specified on the credit note.”

48. It is apparent from the foregoing provisions of the ITA and VATAct that in arriving at its tax assessment, the Respondent is legally bound to consider all the allowable expenses that may have been expended by the Appellant. This statutory right is an entitlement and cannot be taken away by a wave of the hand or the excuse that the Respondent is not able to unbundle the Appellant’s invoices.

49. In this matter the Respondent has not even explained to the Tribunal the difficulty and or the inconvenience that it faced and which made it difficult to request the Appellant to unbundle its invoices and or to explain why it could not unbundle its invoices. The absence of such an explanation adds to the more reason why its actions cannot be sustained in law,

50. The Tribunal forms the view that the Respondent’s conduct in this case would lead any reasonable man to the conclusion that the Commissioner kept quiet and concealed vital information form the Appellant intentionally so as to prejudice it. This is confirmed by the fact that it only revealed this information in its objection decision at the very last minute, when the Appellant had already been prejudiced and had no way of remedying the situation.

51. The sum total of the Respondent’s action is that it resulted in the Appellant paying more tax than what it is legally required to pay. This situation was discussed in Kenya Bankers Association v Kenya Revenue Authority [2018] eKLR, where Justice Odunga quoted the following passage with approval form the case of Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others [2007] 2 KLR 240, where court stated as follows:“It is no good answer for the taxman to proclaim that Kshs 1 billion (appx) is intended to swell the public treasury because due to the application of the above principles that money is not lawfully due… Applying the same reasoning, to the matter before this court, it does not matter that the respondents say and think they are owed over a billion Kenya shillings - what matters is whether the amount is lawfully due and whether the law allows its recovery? It is not a question of impression or perception of what is owed, instead it is what if anything, is owed under the relevant law and whether its assessment and recovery is permitted by the applicable law. If rightly due, the huge amount notwithstanding the court must uphold the right of recovery regardless of its consequence to the applicant and if not due under the law it must not hesitate to disallow it and must disallow it to among other things to uphold both the law the integrity of the rule of law.”

52. The Tribunal aligns itself with this decision in holding that the Respondent acted unlawfully when it refused to grant the Appellant the opportunity to benefit from its entitled and rightful expenses and or adjustment under section 15(1) of the ITA and sections 13(5) and 16(2) of the VATAct.

53. Based on the above analysis, guided by the decision of the superior court in Kenya Bankers Association v Kenya Revenue Authority [2018] eKLR and upon the plain reading of the meaning of Section 15(1) of the ITA and Sections 13(5) and 16(2) of the VATAct, the Tribunal holds that the Respondent acted capriciously, unreasonable, illegally and unfairly in this matter.

Whether the Appellant’s Claim for Vat Input Claim was Time Barred. 54. The determination of issue (a) above has resulted in the vacation of the Respondent’s tax assessment as contained in its objection decision dated the 26th of March 2021. This adverse decision against the Respondent in regard to issue (a) renders the second issue moot.

Final Decision 55. On the basis of the foregoing analysis the Tribunal finds the Appeal to be merited and accordingly proceeds to make the following Orders ;-a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated the 26th of March 2021 be and is hereby set aside.c.Each party to bear its own costs.

It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ROBERT M. MUTUMA - CHAIRPERSONRODNEY O. OLUOCH - MEMBERELISHA NJERU - MEMBER