[2023] KETAT 543 (KLR)

Rihab Investment Limited v Commissioner of Domestic Taxes (Tax Appeal 1013 of 2022) [2023] KETAT 543 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 543 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1013 of 2022

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

October 13, 2023

Between

Rihab Investment Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

(An Appeal against the Respondent's objection decision of 29th August 2022)

Judgment

Background 1. The Appellant is a limited liability company, its principal business involves dealing in building materials and general hardware.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1), the Kenya Revenue Authority is an agency of the Government for collecting and receiving all tax revenue. Further, under section 5(2), concerning the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The issue in dispute herein arose when the Respondent conducted an audit and verification exercise on the Appellant's business and assessed it for unpaid income tax of Kshs 26,854,535. 13 for the year 2016 through an assessment notice dated 26th May 2022.

4. The Appellant objected to this assessment on the 2nd June 2022. Upon review of the objection the Respondent confirmed the assessment vide a decision issued on 29th August 2022

5. The Appellant being dissatisfied with the decision by the Respondent, filed a Notice of Appeal at the tax appeals tribunal on 15th September 2022.

The Appeal 6. The Appellant‘s Memorandum of Appeal filed on the 15tth September 2022 was based on the following grounds (sic):a.The Appellant's assessment and confirmation of the additional income including declining the Objection sought albeit the documentation proof that had been adduced, was not a reasonable decision, hence he appealed to the Tax Appeal Tribunal.b.The Respondent's continued failure to amend the apparent errors occasioned by the Respondent staff affected and continues to deny the Appellant peace of mind when one considers the kind of tax burden or enforcement measures that the Respondent could institute against the business and himself as a Director.c.The taxpayer has disputed the additional tax and has made an application to the Appeal Tribunal to have the matter arbitrated by the ADR Committee, to ensure there is equity for both parties.d.The taxpayer has attached all the necessary documentary evidence in support of the Appellant's prayer and proof that the Additional Tax confirmed is excessive, punitive and unreasonable as it has been determined, using incomplete records and assumptions. (see annexures)The Appellant will adduce and avail records that support the Appellant‘s Position including a standover of tax in dispute until the matter is consented, to avoid the accruing of interest or other penalties that may be imposed by Respondent.

Appellant's Case 7. The Appellant urged its case through a document titled ―background information of the tax dispute‖ filed on 15th September 2022 and its written submissions dated 5th April 2023.

8. The Appellant stated that the Respondent confirmed tax against it without requesting it to provide the necessary supporting documentation to justify the authenticity of the claim.

9. It was its further view that the Respondent did not carry out due diligence to ascertain the genuineness of the input VAT or other corroborating evidence like the withholding and VAT certificates.

10. The Appellant stated that it did not issue any invoices or ETR receipts because it never offered any service to Naivas supermarket.

11. The Appellant posited that it had availed the supporting documents requested by the Respondent to support its self-assessment.

12. It was of the view that the assertion that the burden of proof in this tax dispute was misplaced because the ‗Claimant‘ should have been put to strict proof as they were the beneficiaries of these claims.

13. It affirmed that it‘s a cardinal principle of law that he who alleges must prove. That in this case, it was the Respondent‘s allegation/ contention that it had made sales to Naivas amounting to an additional income. That the burden to prove such sales lay with the Respondent and would have only shifted to it after the Respondent has availed sufficient material to make out a primo facie case that the Appellant has received such income.

14. It submitted that a prima facie case has not been established in this case since no evidence or material had been availed/provided by the Respondent to support its allegations that the Appellant had made sales amounting to additional income to Naivas. It supported this assertion with the case of David Muriuki Mugambi v Jesse N.K Mugambi & 4 others (2024) eKLR.

15. That the tax in dispute in this Appeal was explained as imaginary because :a.There was no VAT withholding certificate to support the alleged VAT claims of Kshs. 234,884,523. 07. b.The sum of Kshs. 6,790,410. 00 was attributed to a time difference where a similar transaction was reported in different months by the tenant in November 2016 and by itself in December 2016. c.The sum of Kshs. 44,028,745. 22 arising from the disposal of fixed assets, when the supermarket was closed, was accounted for.d.The Respondent assumed that the sum of Kshs. 44,028,745. 22 was part of sales turnover and hence its erroneous inclusion when it considered it as additional income.e.The two months' rent deposit for November and December 2016 of Kshs. 6,790,410/- was reported and disclosed as prepaid rent but the Respondent treated it as income in the year it was received.

16. The Appellant submitted that its Constitutional or legal ‗master‘ was violated by the Respondent when it failed to adhere to the provisions of Section 51 (11) of the Tax Procedures Act and that this decision must therefore be quashed and or amended. He relied on the case of Republic v Kenya Revenue Authority Ex-parte L.A.B International Kenya Limited (2011) eKLR to support this position.

Appellant‘s Prayer 17. The Appellant‘s prayer to the Tribunal was for orders that:a.The tax in dispute should be stood over, during the process the matter is under Appeal.b.The Commissioner or his staff should not deny the Appellant Tax Compliance certificate during the process of this Appeal.c.The audited financial statement annual and monthly VAT returns filled, authenticate the value of actual purchases incurred during the period under audit. This explains why the taxpayer is not prepared to accept the additional tax liabilities that are superficial, incorrect and superfluous determined.d.The Commissioners‘ staff should not issue any enforcement notices or issues. Agency notices, during the period this matter remains unresolved.

Respondent‘s Case 18. The Respondent relied on its Statement of Facts filed 13th June, 2022 and submissions filed on 20th April 2023 to defend this appeal.

19. The Respondent stated that this dispute arose when it reviewed the Appellant‘s tax compliance status when it allegedly discovered that the Appellant had not declared its entire income for tax purposes. It was established that the Appellant who was previously a landlord of Naivas opted to sell the supermarket business to Naivas Supermarket in November 2016. That this was made evident by the payment made by Naivas Supermarket and the withholding VAT certificate it received.

20. That Naivas supermarket had declared invoices on the rent paid to the Appellant but the Appellant failed to declare the income it had received. That accordingly, on 26th May 2022, the Appellant was assessed for unpaid income tax amounting to Kshs 26,854,535. 13 for the year 2016.

21. The Respondent stated that the basis of this assessment was premised on its audit and verification of the Appellant‘s tax declaration which established that the Appellant had not accounted for income earned from the use of its commercial property by Naivas Supermarket.

22. It posited that Naivas Supermarket had confirmed use of the Appellant‘s commercial property and claimed input VAT arising from rent expense paid upon issuance of various invoices by the Appellant and that the Appellant does not dispute this position save that he has denied that it issued Naivas with the invoices that it used to claim input VAT.

23. It stated further that the assessment was also based on unexplained turnover variance it had established in the Appellant‘s financial statements.

24. The Respondent submitted that it had exercised its best judgment as is provided in Sections 29 and 31 of the TPA in arriving at the tax assessed because the Appellant did not provide it with documentation to displace the assessment. It further stated that the burden of proof in displacing this assessment lay with the Appellant and that this burden has not been discharged in this appeal.

25. The Respondent further argued that in the absence of purchase invoices and ledgers, and a credible valuation report prepared at the time of the sale of the business, it was difficult for it to ascertain the value of the assets sold. This therefore hindered the comprehension of the extent to which the sale of assets contributed to the turnover variance leaving with no option other than to use its best judgment.

26. It was explained that the documents used to confirm the assessment were in possession of the Appellant because they related to input VAT claims by Naivas Supermarket Ltd which had a business relationship with the Appellant in the form of commercial lease agreement. The VAT claims by Naivas had shown that income was earned by the Appellant arising from occupation of its commercial property and the said income was not declared by the Appellant. It cited Section 24(2) of the TPA to be the one that gives it the power to rely on third-party information in the issuance of the assessment and also relied on the case of Digital Box Limited – v- Commissioner of Investigations & Enforcement (TAT 115 of 2017).

27. The Respondent posited that the invoice it relied on in raising this assessment was issued by the Appellant as confirmed by Naivas Supermarket. It cannot therefore be allowed to run away from its documents.

28. It explained that it had discharged its burden by explaining the source of its information which confirmed that a lease agreement existed between the Appellant and Naivas Supermarket. There was therefore strong presumption that arising from this agreement, commercial rent was paid by Naivas to the Appellant and tax was not paid on that income.

29. It stated that it had reviewed all documents presented by the Appellant before confirming its assessment arising issued. These include the copies of annual report and financial statement for the year 2016, reconciliation of 2016, VAT movements for the year 2016, reconciliation of payments received from Naivas supermarket, copy of the Lease Agreement for Block 5/146, list of invoices issued to Naivas supermarket and copies of sales tax analysis.

30. The Respondent argued that if indeed the Appellant did not issue invoices claimed by Naivas, then it would have:-a.Produced evidence to affirm this position instead of making generalized averments in its pleadings. It quipped that averments are not sufficient evidence to discharge the burden of proof as was stated in National Social Security Fund Board of Trustees –v- Commissioner of Domestic Taxes, Kenya Revenue Authority (2016) eKLR.b.Sought for the cancellation of the invoices claimed by Naivas if indeed they were convinced the same did not originate from them instead of seeking for clarification from Naivas on the status of claims.c.Placed evidence in the form of correspondence between the Appellant and Naivas to corroborate its position.d.Pursued criminal or other legal remedies against Naivas and this was not done.

31. That the allegations that invoices claimed by Naivas supermarket were never issued by the Appellant therefore amounted to hearsay with no corresponding evidence to back it up.

32. The Respondent stated that the Appellant had deviated from its earlier explanation for the variance of Kshs 44,028,745. 22 by adopting a new defence that it was attributed to timing difference as a result of rent received from Naivas rather than the sale of assets to Naivas. Its view was that the Appellant‘s position was therefore inconsistent with section 56 (3) of the TPA as it introduced new grounds of appeal at the appeal stage.

33. The Respondent further stated that the Appellant did not provide it with copies of purchase invoices and ledgers as well as valuation reports prepared at the point of sale of the assassinated hence its confirmation of the assessment.

Respondent‘s Prayer 34. Based on the above grounds, the Respondent prayed that:a.The Appellant's Appeal be dismissed as it is devoid of meritb.The Respondent‘s objection decision dated 29th August 2022 be affirmed.

Issues For Determination 35. The Tribunal has gleaned through the pleadings and documents filed by the parties in this Appeal and it is of the considered view that the issue that falls for determination in this appeal is:Whether the Respondent was justified in demanding additional tax from the Appellant.

Analysis And Determination Whether the Respondent was justified in demanding additional tax from the Appellant. 36. The Appellant has not disputed the fact that it was a prior landlord of Naivas Supermarket Ltd before it sold some assets to Naivas. These facts that led to the issuance of additional tax against the Appellant are therefore commonplace and agreed upon in this appeal.

37. The divergence arises on how the income, if any, that arose from this Appeal was handled. The Appellate argued that the Respondent assumed that the sum of Kshs. 44,028,745. 22 was part of sales turnover and hence its erroneous inclusion when it considered it as additional income. It was its further argument that the two months rent deposit for November and December 2016 of Kshs. 6,790,410/- was reported and disclosed as prepaid rent but the Respondent treated it as income in the year it was received.

38. Whichever way one looks at it the resolution of this dispute required the Appellant to provide the correct invoice and or ETR receipt that was used for this transaction.

39. It is not enough to agree that a business transaction took place and thereafter proceed to affirm that the documents relied on by the Respondent were not the correct ones without providing the correct documents. This is more so because the invoices and ETR receipts which would have persuaded the Respondent and indeed this Tribunal to hold in its favour were authored by it and ought to have been in its possession and control. In which case they should have been easily supplied to the Respondent on demand.

40. Mere allegations that the invoice relied on by Naivas to claim for input VAT did not originate from it is not sufficient. The Appellant must do more such that if Naivas was involved in forgery of the said invoices then it must provide evidence that it has reported this issue to the Police. The update of this investigation should also have been shared with the Tribunal to enable a determination of the veracity of such claims. None of this was done in this case.

41. It is also settled under Section 30 of the TAT Act and 56(1) of the TPA that the burden of proof in tax cases rests with the taxpayer. Section 30 of the TAT Act provides as thus:-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; orb.in any other case, that the tax decision should not have been made or should have been made differently.

42. This burden lies on the Appellant in the first instance, and it never shifts unless the Appellant tables sufficient evidence to show that the tax assessment that had been levied against it is not justified. The Appellant has not placed sufficient evidence before the Tribunal to persuade it that the assessment done by the Respondent was not justified. It has instead engaged in providing explanations as to why it is not liable to pay the tax assessed without providing the evidence to support its assertion.

43. The settled law that the burden of proof in tax cases lies with the taxpayer was stated in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where court stated as thus:-― The party that carries the burden of proof must produce evidence to meet a threshold or ―standard in order to prove their claim. If a party fails to meet their burden of proof, their claim will fail.― Burden of Proof at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner.In other words, a Taxpayer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner‘s position. This is the basic principle.

44. The Appellant in this Appeal has failed to provide sufficient evidence to disprove the Respondent's assessment. It is for this reason that the Tribunal has arrived at the conclusion its Appeal lacks merit.

Final Decision 45. For the reasons set out above, the Tribunal finds that this Appeal lacks merit and proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent‗s objection decision dated 29th August 2022 be and is hereby upheld.c.Each party to bear its own costs.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OF OCTOBER, 2023. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA MAYAKA - MEMBEREUNICE NG‘ANG‘A - MEMBERBERNADETTE GITARI - MEMBER