[2025] KETAT 63 (KLR)

Rma Motors (Kenya) Limited v Commissioner of Investigations & Enforcement (Tax Appeal E289 of 2024) [2025] KETAT 63 (KLR) (31 January 2025) (Judgment)

Neutral citation: [2025] KETAT 63 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E289 of 2024

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

January 31, 2025

Between

Rma Motors (Kenya) Limited

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

1. The Appellant is a private limited liability company registered under the Companies Act of the Laws of Kenya. The company’s principal activity is dealing in wholesale and retail sale of motor vehicles and motorcycles and also involved in repair of motor vehicles/cycles and sales of spare parts.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5 (2) of the Act with respect to 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 Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent commenced investigations against the Appellant covered the period between the year January 2014 to December 2018 for Corporation Income Tax and VAT. The Respondent thereafter issued a tax assessment vide a letter dated 7th November 2023 (though the letter is dated 17th November 2023) wherein the Respondent demanded a total of Kshs. 64,787,162. 00.

4. Aggrieved with the assessment, the Appellant objected to the same on 15th December 2023 through iTax attaching its letter dated 14th December 2023 which was outside the statutory period of thirty (30) days. On 29th December 2023, the Appellant filed an application seeking leave to have their late objection processed. On 5th January 2024, the Respondent approved the Appellant that late application.

5. The Respondent reviewed the Appellant’s objection then issued an Objection Decision dated 12th February 2024 wherein the Respondent enhanced the assessments to Kshs. 104,113,129. 00.

6. Being dissatisfied with the Respondent’s Objection Decision, the Appellant lodged the instant Appeal vide Notice of Appeal dated 11th 8th March 2024 and filed on 11th March 2024.

The Appeal 7. The Appellant lodged the Memorandum of Appeal dated and filed on dated and filed on 22nd March 2024 highlighting the following grounds of appeal;a.That the Respondent erred in law and fact in changing the closing debtors for the year 2017 to Kshs. 93,378,496. 00 which was exclusive of other line items that are used in coming up with the total figures for debtors;b.That the Respondent use of an incorrect figure for the closing debtors for the year 2017 resulted in issuing a flawed Objection Decision where the opening debtors for the year 2018 resulted in a higher taxable position;c.That in issuing the Objection Decision the Respondent failed and/ or neglected to take into account the fact that the Appellant had provided all the documents in support of its objection;d.That the Respondent failed to take into account the methodology and book keeping practices used by the Appellant in doing its returns;e.That the Respondent erred in law and fact in issuing unreasonable assessments by using the banking analysis method incorrectly contrary to the position set out by the Tribunal in TAT 115 of 2017;f.That the Respondent use of the banking analysis was not consistent and ignored instances where the Appellant had over declared income and only concentrated on years that the Appellant had tax to pay.g.That the Respondent did not take into account the fact that the Appellant had losses as per its books when re-computing the tax due per year in its Objection Decision;h.That the Respondent’s Objection Decision showed a changed in the non-sale items for the year 2018 with no basis as determined by the assessing team and thereby refused to accommodate the Appellant’s explanations on the correct non-sales;i.That the Respondent Objection Decision increased the tax assessed as compared to the original assessment to which the Appellant had objected to; and,j.That the Respondent denied the Appellant an opportunity to address key issues as they were introduced in the Objection Decision and did not form part of its original assessment and the only form of redress was to address them in the Appeal herein contrary to the principles of fair administration and Article 47 of the constitution.

The Appellant’s Case 8. In support of the Appeal, the Appellant lodged its;a.Statement of Facts dated and filed on 22nd March 2024 together with the documents attached thereto; and,b.Written submissions dated and filed on 24th October 2024.

9. The Appellant stated that the Respondent issued a notice of assessment dated 17th November 2023 titled, ‘notice of tax assessment for years of income 2016 to 2021. ’ The Appellant in a letter dated 15th December 2023 objected to the Respondent’s demand of Kshs. 64,787,162. 00 that comprised of Value Added Tax (VAT), Corporation Tax and Withholding Tax (WHT) on deemed interest.

10. The Appellant further objected to the demand on the basis that there was inconsistency in the audit period, the lapse of the statute of limitation and the use of inaccurate workings. Subsequently, the Respondent issued Objection Decision demanding increase sum of Kshs. 104,113,129. 00 hence this Appeal.

11. The Appellant narrated its case as follows:

Corporation Tax 12. The Appellant noted that this matter is a reconciliation issue and invited the Tribunal to look at it from a numerical/accounting perspective and choice of formula used by accountants of different schools of thoughts in arriving at taxable income of an entity. In line with the self-assessment system regime practiced in Kenya while determining taxes due.

13. The Appellant noted that Section 28 (1) of the Tax Procedures Act 2015 (TPA) allows a taxpayer to submit a self-assessment return for tax payable. The Appellant also noted that the Respondent among the many tools that it has at its disposal in determining income and calculating taxes due is through a banking analysis. It argued that where the Respondent reviews the bank statements of a taxpayer for a particular period it can calculate tax due.

14. It stated that the banking analysis however is an indirect income measurement method that has its inherent weaknesses that ought to be considered and certain adjustments need to be made by the Respondent to prevent the issuance of unrealistic assessments, such as the one issued to the Appellant herein. It contended that the use of indirect income measurement methods such as banking analysis are not explicitly articulated in legislation giving tax authorities implied discretion to do as they please.

15. According to the Appellant, courts world over have stepped in to provide general guaride rails and limit the authorities as put succinctly by Edmund Biber who in the article, ‘‘Revenue Administration: Taxpayer Audit Use of indirect method,’’ at Page 9 which states that:In general it can be said that courts have ruled that administrations;(1)May use any method to reconstruct income that is reasonable under the circumstances;(2)May not be arbitrary in the use of this authority;(3)..(4)Must investigate all reasonable evidence presented by the taxpayer refuting the computation of income.’’

16. According to the Appellant, the inherent weakness of banking analysis is further illustrated where it is well known by all accountants that not all deposits in the bank statements are income and that they relate to sale activities. It argued that some of the deposits may include bank reversals, loans, interbank transfers, sale of foreign currency i.e. from a USD bank account to Kenya shillings account all generally referred to as non-sales.

17. It further asserted that the deposits in the bank statements can be affected by how an entity does its accounting that is the cash or accrual accounting mechanism. It stated that in undertaking the banking analysis method the Respondent usually compares the sales declared as a self-assessment and it is through this the that Respondent establishes whether the income is over-declared or undeclared.

18. The Appellant contended that in using the banking analysis method however, the Respondent always has to make adjustments to take into account the issues of output VAT since businesses/taxpayers and the Appellant herein get paid inclusive of Value Added Tax (VAT) but declare the sales exclusive of VAT. It added that in revenue recognition the Appellant and the Respondent are guided by Generally Accepted Accounting Principle (GAAP) where business income is declared when earned but payment may come years later and the Appellant results to adjusting of its opening and closing debtors to recognize this fact.

19. According to the Appellant, although such adjustments were made, the method resulted in huge over declarations which the Respondent does not want to take into account. It noted that it significantly reduced non-sales in 2018 with no basis yet the number is completely differed from that of the assessing team during our objection. Therefore, the Appellant asserted that the Respondent in its decision did not take into account correct opening and closing debtors in 2017 and 2018.

20. The Appellant alleged that being acutely aware of the deficiencies of the banking method analysis strived to inform the Respondent on this and provided a schedule outlining its various non-sale items in its bank statement for the period 2018. The schedule was derived from various non-sale items that the Respondent had not considered which were from the bank statements from its various banks that is NIC Bank, CFC Stanbic Bank and Standard Chartered bank that showed the reversals loans, transfers, insurance, claims credit interests, contra entries and refunds.

21. It contended that upon analyzing of the schedule the Respondent as per paragraph 3. 4.1. 2 of the Objection Decision was able to trace Kshs. 1,097,108,002. 00 and not Kshs. 110,849,119. 73 as per the Appellant’s schedule and consequently the difference brought about was Kshs. 13,741,117. 73 which the Respondent deemed it could not trace on its part contrary to the Appellant’s position. The Appellant noted that the Respondent at the very minimum should have expressly stated what it disallowed in the various bank statements it analysed and further which banks accounts they were.

22. The Appellant stated that the Respondent did not take into consideration the Appellant’s computations and the necessary adjustments made in consideration of revenue recognition in line with the GAAP principles. It also alleged that the Respondent did not consider documentation that the Appellant used in coming up with its position such as the financial statements and ledgers.

23. The Appellant noted that the Respondent unilaterally changed the closing debtors for the year 2017 from Kshs. 164,142,440. 00 as per initial assessment and agreed debtors between the Appellant and the assessing team to Kshs. 93,378,496. 00 without any reason and the effect of this is that this action affected the 2018 opening debtors and 2017 closing debtors.

24. It noted that the amount of Kshs. 164,142,440. 00 as closing debtors for the year 2017 was derived from the Appellant’s own financial statements for the year 2017 and this was the amount indicated as per the returns for the year 2017. It argued that there was therefore no basis for the Respondent to change the closing debtors for the year 2017 without good reason. The Appellant averred that the assessing team was in agreement with the figures of the closing debtors for 2017 and the effect of the change in closing debtors was the ripple effect on the financial position in 2018.

25. According to the Appellant, the opening debtors for 2018 was greatly reduced that when tax was computed for 2018 it resulted in the Appellant looking like it had made a lot of income of Kshs. 101,163,573. 00 which translated to higher Corporation Tax of Kshs. 30,349,072,00.

26. It also stated that had the right closing debtors as per the financial statements of 2017 of Kshs. 164,142,440. 00 been used the opening debtors for the year 2018 would have been Kshs. 164,142,440. 00 which would have resulted in an income of Kshs. 133,121,524. 00.

27. The Appellant also argued that there is no basis for change of the closing debtors by the Respondent and that the change in closing debtors is what resulted in an unreasonable assessment being issued and ultimately the dispute herein. It further noted that reasonability is what should have guided the Respondent in coming up with its assessment where it had based its assessment on the banking analysis test.

28. The Appellant cited the Tribunal’s finding in Digital box vs. Commissioner of Investigation and Enforcement [TAT 115 of 2017] wherein the Tribunal stated;“One it is established that the method is allowed, the question is whether the method was applied in arriving at a reasonable assessment in the case at hand. The Tribunals guided by the test set out in CA Mc Courtie LON/92/191 where it was stated: "In addition to the conclusions drawn by Woof] in Van Boeckel earlier tribunal decision identified three further propositions of relevance in determining whether an assessment is reasonable. These are, first that 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.’’

29. The Appellant averred that it was evident that the Respondent might have come to the conclusion that it might not receive as much taxes due and decided to pursue an entirely unjustifiable means to claim tax by intentionally reducing the closing debtors of the year 2017 to reduce the opening debtors for 2018 and increase the tax liabilities for the year 2018. It also noted that had the right closing debtors for 2017 been used coupled with the difference identified after reconciliation of non-sale items and the setoff of over declared taxes together with the losses already incurred the Appellant would have no Corporate Tax payable.

30. It added that the amounts used by the Respondent in respect of the closing debtors for 2017 did not include all the closing debtors as the full list of debtors amounted to Kshs. 164,142,440. 00 which was inclusive of all receivables and line items, making a mockery of the key tenet of the use of the banking method that is reasonability.

31. According to the Appellant, the facts were not objectively gathered and intelligently interpreted. To this end, the Appellant averred that it provided documentation that proved its financial position and that would assist the Respondent in coming to a reasonable conclusion as to the taxes due if any.

32. The Appellant asserted that the sampling technique was not representative and was biased. To that end, the Appellant asserted that the Respondent ought to be guided by the Article 47 of the Constitution which provides that, ‘‘every person has the right to administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair.”

33. The Appellant therefore argued that the Respondent did not assess fairly the 2017 and 2018 taxes.

Value Added Tax (VAT) 34. The Appellant noted that the Respondent in coming up with its VAT position, considered the figures that resulted from its banking workings and compared the amount to the VAT declared in the Appellant's own VAT returns.

35. The Appellant reiterated that the amounts the Respondent came up with are derived from a banking analysis and are subject to change upon reconciliation being done and ultimately would result in different figures between both parties.

36. It argued that the Respondent based its VAT computation as per the established income in its Objection Decision dated 12th February 2024. The Appellant averred that the Respondent ought to have made some necessary considerations in its workings where it should have adjusted incomes such as in instances where in one year of income was over declared since it had been under declared in the previous year.

37. The Appellant noted that had the adjustments been made it would have resulted in the Respondent acknowledging that the Appellant had in fact declared correct sales in both years. It added that the Respondent ought to have made an adjustment by adding sales to where they were under-declared and reduce to where they were over declared for 2016 and 2017. The Appellant also stated that the Respondent ought to have made adjustments in its working in respect to zero rated sales.

38. Whereas the Appellant is in agreement with the Respondent statement in respect of zero-rated sales amounting to Kshs. 31,104,098. 00, it argued that the Respondent ought to have made an adjustment taking into the interdepartmental sales for which there were corresponding costs resulting in no tax loss in respect of VAT and also Corporation Tax.

39. The Appellant the highlighted adjustments ought to have been considered for VAT purposes by the Respondent since corresponding payments were received in the bank. The Appellant averred that having explained the necessary adjustments that the Respondent ought to have made adjustments.

40. Finally, the Appellant asserted that the dispute emanates from the Respondent erroneous use of expected income arising from the banking analysis where it had used the wrong closing debtors from the year 2017 affecting the 2018 opening debtors and failed to take into account the correct non-sales for the year 2018.

Withholding Tax On Deemed Interest on Foreign Loan and VATat on Disallowed and Overstated Inputs 41. On this issue, the Appellant stated that the issue of Withholding and VAT on disallowed and overstated inputs as summarized in the Objection Decision is not in dispute as the Appellant has already settled this before the initiation of this suit.

42. In addition to Statement of Facts, the Appellant relied on its written submissions wherein it submitted that Respondent erred in law and fact by incorrectly applying the banking analysis in coming up with the Appellant’s sales and consequently demanding Corporation Tax. It also submitted that the Respondent’s assessment is invalid because the Respondent disregarded the documents that it availed.

43. The Appellant submitted the use of bank statement should be done carefully. It relied on the case of Afya XRay Centre Limited vs. the Commissioner of Domestic Taxes (TAT Appeal No. 70 of 2017) where it was held that;The Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner. The Respondent in this case could have used industrial margins to determine the Appellant's profits and subject that figure to the 30% and 16% taxes, rather than a topline of 30% and 16% on the bank deposits...".

44. The Appellant also cited the case of Moses Kiarie Kuria vs. the Commissioner of Domestic Taxes [2021] eKLR, where it held that:Where the Respondent has relied on Banking Analysis Method, it is obliged to exercise best judgment to ensure that the taxpayer is liable for the correct amount of tax. The question before this Tribunal is whether the Respondent’s assessment was a product of best judgment.”

45. The Appellant also cited other case laws including Cussens vs. Revenue and Customs Commissioners [2019]; Digital Box Limited vs. Commissioner of Investigations and Enforcement (TAT 115 of 2017); Alfred Kioko Muteti vs. Timothy Miheso and Another [2015] KLR; and Hole vs. The Queen, 2016 TCC 55.

46. Finally, the Appellant submitted that the assessments are beyond five years therefore, unlawful.

Appellant’s Prayers 47. The Appellant urged this Tribunal for the following reliefs;a.The Respondent’s Objection Decision dated 12th February 2024 be set aside;b.The Appeal be allowed with costs to the Appellant; and,c.Any other orders that the Honourable Tribunal may deem fit.

The Respondent’s Case 48. In response to the Appeal, the Respondent lodged itsit’s;a.Statement of facts dated and filed on 23rd April 2024 together with the documents attached thereto; and,b.Written submissions dated and filed on 23rd October 2024

49. The Respondent stated that it commenced investigations against the Appellant in the year 2022 and accordingly informed the Appellant of the same upon receiving intelligence that the Appellant was mis declaring imports on iTax and under-declaring sales.

50. The investigations covered the period between the year January 2014 to December 2018 for Corporation Income Tax and VAT. The investigations carried out sought to establish the following: -i.To determine the Appellant’s taxable income;ii.To establish the correct tax obligations and taxes payable by the Appellant;iii.To determine if there exists a tax evasion scheme based on the revenue risk: and,iv.To assess and collect unpaid taxes (if any) and recommend remedial measures for future compliance.

51. The investigation canteredcentred on the review and analysis of financial records and related data for the Appellant. The records reviewed include, data from internal databases, including iTax, third party data including from the Appellant’s bankers among others.

52. The investigations employed the banking analysis method where the Respondent analyzedanalysed the banking credits in accounts held at NCBA Bank, Standard Chartered Banks in establishing the taxable income.

53. The Respondent then proceeded to make adjustments for non-sales banking such as loan disbursements, inter-bank transfers, reversals and insurance claims in order to come up with the net banking.

54. The Respondent compared the expected sales with the sales declared in income tax returns and VAT returns and used the established variance to compute Income Tax and VAT amounting to Kshs. 882,519,069. 00 and Kshs. 453,186,991. 00 respectively.

55. The Respondent additionally established that the company had claimed input VAT on imports for entries which were either non-existing or entries which were in the names of other taxpayers. In addition, some of the input VAT on imports claimed had been overstated.

56. The Respondent established that the total claims on non-existing exports amounted to Kshs. 160,535,671. 00 with corresponding VAT of Kshs. 25,685,707. 00. Additionally, the investigating team established that the Appellant had overstated certain imports by Kshs. 25,482,087. 00 with a corresponding VAT of Kshs. 4,077,134. 00. From this, a total VAT on disallowed inputs of Kshs. 29,762,841. 00 was established.

57. The Respondent served the Appellant with a Notice of Tax Findings on 25th November 2020 detailing the tax liability and inviting the Appellant to give the requisite explanations to the Respondent. The Appellant responded to the letter of tax findings on through a letter dated 24th February 2022. The Respondent stated the Appellant supplied Bank reconciliations and ledgers covering the period 2014 to 2018, Loan agreements for Clipper Holdings, Invoices for import entries and Financial Audited Accounts for the period 2014 to 2018 to support its case.

58. The Respondent alleged that it reviewed the Appellant’s grounds together with the supporting documents provided and established that the non-sales deposits comprising of; Loan disbursements, Inter-bank transfers, Reversals and Insurance claims were fully supported with the relevant documents including loan agreements and copies of bank statements highlighting bank deposits and the corresponding interbank transfers. In light of the aforementioned, the Respondent made adjustments for all the non-sales deposits and other receivables resulting to total principal taxes of Kshs. 64,787,162. 00.

59. The Respondent thereafter proceeded to issue a tax assessment vide a letter dated 7th November 2023 (though the letter is dated 17th November 2023) which comprised Corporation Tax, VAT and Withholding tax for the period 2014 - 2018. The Appellant then filed a late objection vide a letter dated 15th December 2023.

60. The Respondent alleged that vide a letter dated 21st December 2023 informed the Appellant that the objection was invalid for failure to meet Section 51 (3) (b) & (c) of the TPA wherein the Appellant was directed to validate it within seven (7) days. On 29th December 2023, the Appellant filed an application seeking leave to have their late objection processed. On 5th January 2024 the Respondent informed the Appellant that the late objection had been admitted.

61. Consequently, the Respondent issued its Objection Decision reviewing the Appellant’s objection and recomputed Income Tax resulting into an increase from Kshs. 29,562,511. 00 to Kshs. 30,349,072. 00 due to adjustments made on opening and closing debtors in the years 2017 and 2018. Similarly. VAT was recomputed resulting into an increase from Kshs. 33,701,706. 00 to Kshs. 72,241,112. 00. The Respondent maintained that this was due to the negative variances in the years 2014, 2015 and 2017 totaling to Kshs. 210,200,073. 00 that had earlier offset the positive variances in the years 2016 and 2018. Aggrieved, the Appellant filed this Appeal.

62. In response to the Appeal, the Respondent stated that whereas the Appellant averred that it paid the undisputed taxes, a perusal of pages 255 - 261 of the Appellant’s Bundle shows that the Appellant paid withholding tax on deemed interest, VAT on non – existent entries but no payment has been paid with respect to VAT on overstated imports which was equally not contested. The Respondent averred that this liability directly impacts the validity of the Appeal by virtue of Section 52 (2) of the Tax Procedures Act. The Respondent therefore prays that the appeal be dismissed for being fatally defective.

63. In response to grounds A1 and B2 of the Memorandum of Appeal, the Respondent averred that at the review stage, it analyzed the Appellant’s audited financial statements for the years 2017 and 2018 and established that closing debtors and opening debtors for the year 2017 were Kshs. 93,378,496. 00 and Kshs. 400,437,444. 00 respectively.

64. The Respondent further observed that in 2018, closing debtors had been indicated as Kshs. 10,806. 037. 00. However, there were provisions for bad debts amounting to Kshs. 5,355,219. 00 that affected the closing debtors thereby reducing the closing debtors to Kshs. 5. 450,818. 00.

65. Based on the foregoing, the Respondent undertook to adjust the final reconciliation to reflect this variance. As such, the Respondent averreds that the alteration was justified and not arbitrary as suggested by the Appellant.

66. In Response to grounds E5, F6 and G7 of the Memorandum of Appeal, the Respondent averred that the use of banking analysis/deposit method in determining the taxes due is a method that is recognized in most jurisdictions and the Tax Appeals Tribunal has also restated this position. In that regard, it is not in issue whether the banking analysis method is an acceptable method that the Respondent can use in determining the taxes payable. The Respondent relied on the case of Digital Box Limited vs. Commissioner of Investigations and Enforcement TAT Appeal No.115 of 2017.

67. It contended that from the above case, there are two known methods by which the Appellant can challenge the use of the Banking Analysis method i.e. by providing all the documents and to the satisfaction of the Respondent that are required to be kept under Section 23 of the Tax Procedures Act, 2015 and the second option is to challenge the specific application i.e. by pointing out and supporting non-revenue banking. The Respondent averred that in the instant case, it made adjustments at the assessment stage for loan disbursements, inter-bank transfers, reversals and insurance claims that were supported.

68. Whereas the Appellant contended that in using banking method, the Respondent was only limited to the information available in the bank statements analyzedanalysed with no knowledge of existence of other bank accounts where other sales may have been banked or even data on cash sales not banked, the Respondent stated that at the time of objection, the Appellant failed to provide sufficient documentation in support of the adjustments claimed not to have been made.

69. It asserted that burden of proof lies on the taxpayer since Kenya is based on a self-assessment regime where the taxpayer is required by the provisions of Section 56 (1) of the TPA to discharge the burden of proof. To that end therefore, The Respondent asserted that the allegation by the Appellant is baseless since it did not provide the other bank statements relied upon to enable the Respondent make a meritorious decision in the circumstances.

70. In responseresponse to ground H8 of the Memorandum of AppeaAppeall, the Respondent averred that the Appellant provided a schedule of all non-sale items from NIC Bank, CFC Stanbic Bank and Standard Chartered Bank which included reversals, loans, transfers, insurance claims, credit interests, contra entries and refunds. It alleged that it analyzed the schedule, traced the entries by date in the bank statements and was only able to trace entries amounting to Kshs. 1,097,108,002. 00 and not Kshs. 1,110,849,119. 73 as claimed by the Appellant. The Respondent therefore asserted that the Appellant did not offer any explanations with respect to the variance as required under Section 56 of the TPA.

71. In Response to Ground I9 and J10 of the Memorandum of Appeal, the Respondent averred that at all material times, the Appellant was requested to provide supporting documentation at the objection stage to address the issues raised in the assessment and at objection stage. It also stated that the Appellant was granted sufficient opportunity to challenge the assessments by production of the necessary documents and that the Respondent issued the Objection Decision to the extent supported by the Appellant.

72. The Respondent maintained that to Section 51 (8) of the TPA grants the Respondent powers to partially allow/reject or totally reject a Notice of Objection. Therefore, the Objection Decision issued by the Respondent was in accordance with the law.

73. WThe whereas the Appellant stated that it issued assessments beyond the five years' statutory limit on the basis of Section 31 (4) of the TPA, the Respondent asserted that during the investigations, the Respondent identified offences committed by the Appellant since it had contravened Section 97 (a) of the TPA by making an incorrect statement which affects tax liability.

74. With respect to the VAT liability, the Respondent alleged that the Appellant only provided invoices but failed to avail the export entries as requested as by the Respondent to fully discharge their burden of proof.

75. The Respondent in its written submissions, placed reliance on Section 52 (2) of the TPA to submit that the Appeal is invalid because the Appellant has paid withholding tax on deemed interest amounting to Kshs. 1,522,945. 00 but no payment has been paid with respect to VAT on overstated inputs, which had been already admitted by the Appellant.

76. The Respondent also submitted that it was justified in altering the closing debtors for the year 2017 to cure the variances that it had identified. The Respondent submitted that the Appellant did not satisfy the criteria outlined under Section 15 (2) (a) of ITA read together with Legal Notice No. 37 of 2011 which provides the conditions under which a debt can be written off.

77. The Respondent cited the case of Commissioner of Domestic Taxes vs. Kenya Maltings Limited [2013] eKLR wherein in paragraph 25, the Court stated;The import of the Legal Notice No 37 of 2011 is that the Commissioner of Income Tax must be satisfied that that all efforts have been made to collect a debt. He must be convinced that the same has become uncollectable for him to declare it a bad debt. In addition to that, a bad debt becomes a deductible expense only if it is wholly and exclusively incurred in the normal course of business.’’

78. The Respondent relied on the case of Digital Box Limited vs. Commissioner of Investigations and Enforcement TAT Appeal No. 115 of 2017 to submit that it correctly relied on the banking method in assessing the Appellant’s tax liability.

79. Consequently, the Respondent submitted that the Appellant failed to discharge its burden of proof.

Respondent’s prayers 80. The Respondent prayed to the Tribunal tohat;a.Dthis Appeal be dismissed this Appeal with costs to the Respondentb.Upholdwhile the Respondent’s Objection Decision dated 12th February, 2024 be upheldas being in conformity with the law.

Issues for Determination 81. Having examined the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, the Tribunal is of the view that the following are the issues for determination:i.Whether the Appeal is invalid by virtue of Section 52 of the Tax Procedures Act;ii.Whether the assessments are statute time barred under Section 31 (4) of the TPA; and,iii.Whether the Respondent erred in confirming the assessments.

Analysis and Findings 82. The Tribunal having identified the issues for determination, it shall analyze the same as herein under;

i. Whether the Appeal is invalid by virtue of Section 52 of the Tax Procedures Act; 83. Whereas the Appellant stated that the issue of Withholding and VAT on disallowed and overstated inputs as summarized in the Objection Decision is not disputed and that the Appellant settled this before the initiation of this Appeal, the Respondent submitted that the Appeal is invalid on basis that the Appellant did not pay VAT on overstated imports which was not contested.

84. Section 52 (2) of the TPA provides as follows;A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.’’

85. The Tribunal examined the summary of payable taxes under the Objection Decision and noted that it has three items. Under table 12 of the Objection Decision, the Appellant disputed the first two items being Corporation Tax of Kshs. 30,349,072. 00 and VAT of Kshs. 72,241,112. 00. The third item contained therein is Withholding Tax on deemed interest on foreign loan amounting to Kshs. 1,522,945. 00. The evidence of payment adduced by the Appellant indicates that the Appellant made payments in relation to the third item as listed in the Objection Decision.

86. Whereas the Respondent asserted that the Appellant did not pay VAT on overstated imports which was not contested, the Tribunal noted that the Appellant admitted “Withholding and VAT on disallowed and overstated inputs as summarized in the Objection Decision.” The Tribunal is of the view that the Appellant was specific at to what was uncontested while the Respondent was not specific as to the exact amount that was allegedly uncontested. This is so because VAT on overstated imports in the assessment was Kshs. 2,539,245 which is not a standalone item under table 12 in summary of taxes payable under the Objection Decision.

87. Flowing from the above, the Tribunal finds that the Appellant’s Appeal is validly lodged before the Tribunal as is envisaged under Section 52 (2) of the Tax Procedures Act.

ii. Whether the assessments are statute time barred under Section 31 (4) of the TPA; and, 88. The Respondent issued assessments dated 7th November 2023 (it turned out that the assessment was erroneously dated 17th November 2023) seeking to recover taxes from 2014 to 2018. Whereas the Appellant submitted that the assessments are statute time barred, the Respondent submitted that during the investigations, it identified offences committed by the Appellant since it had contravened Section 97 (a) of the TPA by making an incorrect statement which affects tax liability.

89. Filing tax returns, assessment of taxes, objecting to the assessment and issuance of Objection Decision, lodging an Appeal against the Respondent’s decision(s) are governed by law and that must be done within stipulated timelines under the applicable law.

90. There are a number of provisions that deal with timelines under tax laws. Section 23 of the TPA provides for timelines for keeping records. Section 23 (1) (c) of the TPA requires documents to be kept for five years or lesser period. This means that if the Respondent requests for documents that beyond five years, then that would be irregular. The said section provides as follows:(1)A person shall—(a)Maintain any document required under a tax law, in either of the official languages;(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

91. In relation to Self-assessment Section 28 (1) of the TPA provides as follows:28. Self-assessment(1)A taxpayer who has submitted a self-assessment return in the prescribed form for a reporting period shall be treated as having made an assessment of the amount of tax payable (including a nil amount) for the reporting period to which the return relates being the amount set out in the return.’’

92. Default tax assessment are supposed to be issued within five years. In this respect, Section 29 (5) of the TPA Provides that,Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.’’

93. Similarly, amendment of assessment ought to be issued within five years from the date of self-assessment. In this regard, Section 31 (4) (b) of the TPA. It provides that as follows:The Commissioner may amend an assessment——(b)In any other case, within five years of—(i)For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)For any other assessment, the date the Commissioner notified the taxpayer of the assessment.’’

94. Part from the timeframe under Section 27 of the Income Tax Act (ITA), time starts running in relation to income tax from 1st July of the year upon submitting a return on or before 30th day of June of the year.

95. Similarly, Section 52 B of the ITA deals with time frames and final return with self-assessment. It Provides as follows:52B.Final return with self-assessment(1)Notwithstanding any other provision of this Act—(a)every individual chargeable to tax under this Act shall for any year of income commencing with the year of income 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income.’’

96. Whereas assessments ought to be issued within five years of the date the taxpayer submitted the self-assessment return, the Tribunal notes that the Respondent can only issue assessments beyond five years if the elements under Section 29 (6) or Section 31 (4) (a) of the TPA are pleaded and proven. The said elements are gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer.

97. In the case of Commissioner of Domestic Taxes vs. Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) the High Court stated as follows regarding the issue on timeframe:In this regard, under section 31(4) of the Tax Procedures Act, an amendment outside the 5-year period can only be permitted if there is evidence of willful neglect, evasion, or fraud by or on behalf of the tax payer…The legal position is that, all assessments ought to be made within 5 years except when there is evidence of gross or willful neglect, evasion or fraud on the part of the taxpayer. This also goes hand in hand with the provisions of section 23 of the Tax Procedures Act, which requires a taxpayer to retain documents for the same period. The implication is that, after 5 years, since no assessment can be made, the taxpayer is absolved of his burden of maintaining such records.’’

98. The burden is on the Respondent to justify why it is demanding taxes beyond five years. This Tribunal in Gitere Kahura Investments Ltd vs. TheCommissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019 observed as follows:The Respondent has the burden of proof pursuant to sections 107 and 108 of the Evidence Act to prove that the Appellant breached section 29(6) of the Act…’’

99. Similarly, this Tribunal in Centurion Engineers & Builders Ltd vs. Commissioner of Domestic Taxes (Tax Appeal 963 of 2022) [2024] KETAT 356 (KLR) opined as follows:33. in n this Appeal, the Respondent has not provided evidence be it under Section 29 (6) or Section 31 (4) (a) of the Tax Procedures Act to justify assessment of 2016 taxes beyond the five-year rule.’’

100. The Respondent’s justification for assessing taxes beyond five years was that during the investigations, it identified offences committed by the Appellant since it had contravened Section 97 (a) of the TPA by making an incorrect statement which affects tax liability.

101. Section 97 A of the TPA that the Respondent relied on, provides as follows;97A.Offence of impersonating an authorized officer(1)A person who is not an authorised officer commits an offence if that person assumes the name or designation of an authorised officer and performs or procures the performance of any act which that person is not entitled to do.(2)A person convicted of an offence under subsection (1) shall be liable to imprisonment for a term not exceeding three years.’’

102. The Respondent did not provide any evidence or specific particulars to in support of the fact that that the Appellant herein was charged and/or convicted under Section 97A of the TPA. The Tribunal cannot act on mere averments/allegations that an offence was committed. Therefore, the Respondent cannot seek solace under Section 97 A of the TPA. Consequently, the Tribunal finds that the Respondent did not have a justification to assess taxes beyond five years.

103. Consequently, Pursuant to the provisions of Section 31 (4) (b) of the TPA as read with Section 52 B of the ITA, the Respondents assessments seeking to recover taxes from 2014 to 2018 and issued in November 2023 vide assessments dated 7th November 2023 (erroneously dated 17th November 2023) are statute time barred, null and void.

iii. Whether the Respondent erred in confirming the assessments. 104. Having established that the assessments are unlawful, the Tribunal noted that there were not assessment made by the Respondent prior to the year of income 2018, thus the same having been issuedentire assessment was issue beyond the statutory period, evaluating the remaining issues is rendered an academic exercise as all the assessments were covered within that period.

Determination 105. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and makes the following orders;a.The Appeal be and is hereby allowed;b.The assessments dated 7th November 2023 (erroneously dated 17th November 2023) and the resultant objection decision dated 12th February 2024 be and are hereby set aside; andc.Each party to bear its own cost.

106. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 31ST DAY OF JANUARY 2025. ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERDELILAH K. NGALA - MEMBER