[2025] KETAT 237 (KLR)

Rockcon Construction Company Limited v Commissioner of Investigation and Enforcement (Tax Appeal E752 of 2024) [2025] KETAT 237 (KLR) (9 May 2025) (Judgment)

Neutral citation: [2025] KETAT 237 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E752 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

May 9, 2025

Between

Rockcon Construction Company Limited

Appellant

and

Commissioner of Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a Company incorporated in Kenya under the Companies Act (Cap 486, Laws of Kenya) and its principal business activity is that of sales and supply of treated wooden poles.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 carried out investigations into the tax affairs of the Appellant for purposes of obtaining full information in respect of a person or class of persons chargeable to tax for the years of income 2019, 2020, 2021 to 2022. The Respondent discovered that the Appellant had under-declared income and VAT in the annual tax returns. The Respondent then issued the income tax and VAT additional assessments dated 17th January 2024.

4. The Appellant lodged the Notice of Objection dated 20th March 2024 which the Respondent acknowledged receipt vide objection application acknowledgement receipt dated 25th April 2024.

5. Consequently, the Respondent issued objection decision dated 16th May 2024, wherein the Respondent fully rejected the objection and demanded payment of tax amounting to Kshs 38,957,945. 00 based on tax costs and inaccurate income established from the withholding certificates.

6. The Appellant aggrieved with the objection decision, filed notice of appeal dated 11th June 2024 and filed on the even date.

The Appeal 7. The Appellant lodged the Memorandum of Appeal dated 11th June 2024 and filed on 9th July 2024 raising the following grounds:i.That the additional assessment is estimated;ii.That the additional estimated assessment is excessive by reason of some error or mistake of fact in the stated income;iii.That the estimated additional assessment is punitive, erroneous and not as per the income;iv.That the Respondent while raising additional estimated assessment for income tax and VAT made a substantial error or defect in the procedure provided by Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) and Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) Section 17 and Rules Made there under which may possibly have produced error or defect in the decision of the case upon merit.v.That the assertion that made the Respondent to allow back costs incurred purely in the course of doing business which ought to be allowed is baseless, untrue, punitive, unlawful, dishonest, unprocedural and unreasonable hence imposition of uncollectable and uncertainty as to any question of law or fact.vi.That the assertion [that there] were under-declared income tax and VAT in annual returns and lack of supporting documents for declaration of taxable income are erroneous and dishonest.vii.That by the Respondent disregarding or neglecting costs incurred purely in the course of doing business which ought to be allowed is a decision contrary to the law.viii.That the Respondent having ignored or neglected to grant costs incurred purely in the course of doing business which ought to be allowed, is the decision having failed to determine some material issue of law or usage having the force of law, disregarded "Fair Administrative Action as provided under Section 47 of the Constitution of Kenya 2010 (hereinafter “the Constitution”).ix.That no fair hearing was granted by the Respondent. The Respondent erred in law and fact by not according the Appellant a fair hearing more specifically to hear the Appellant on grounds and consider the substance of the matter and further untrue assessments and dishonest reason for raising assessments. No hearing was accorded to the Appellant before the decision was made. The Respondent overlooked Section 50 of the Constitution.x.That the Respondent denied the Appellant access to information. As the Respondent has power to access any taxpayer's documents and without seeking clarification from the taxpayer or the owner of the documents, he raised punitive and defective estimates which have no basis against Section 35 of Constitution.xi.That the Respondent's action to demand additional assessment of Kshs. 38,957,945. 00 is arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant, despite fulfilling Section 30 of Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) as read together with Section 62 of VAT Act.

Appellant’s Case 8. In support of the appeal, the Appellant lodged its Statement of Facts dated 11th June 2024 and filed on 9th July, 2024.

9. The Appellant stated that it commenced its business in April 2012. The business has been under financial constraints, financial hardship and financial uncertainty. The directors borrowed huge loans from NCBA bank and invested in its treatment plant of wooden poles in its site in Naivasha.

10. It stated that the Respondent carried out the tax compliance on the company for the purpose of obtaining full information in respect of a person or class of persons chargeable to tax for the years of income 2019,2020,2021 to 2022 where the Respondent stated under-declared income and VAT in the annual tax returns. On the 16th May 2024, the Respondent issued the same estimated additional assessment of Kshs. 38,957,975. 00 based on tax costs and inaccurate income established from the withholding certificate.

11. Following the assertion by the Respondent in the additional assessment, the notice of objection of assessments was served on the 25th March 2024 and the Respondent extended time after reasonable reasons were explained and Appellant presented himself to the tax investigators/officials. On 16th May 2024, the Respondent issued its decision rejecting the notice of objection.

12. The Appellant averred that the Respondent while disallowing or adding back the stated taxable services, he made a substantial error or defect in the procedure provided under Section 15 of the ITA and the rules made thereunder which may possibly have produced error or defect in the decision. It argued that the Respondent by adding back the expenses contrary to supporting documents means that the decision was contrary to law. The Appellant also stated that the decision having failed to determine the material issue of law, the decision went against "Fair Administration Action " under Section 47 of the Constitution.

13. The Appellant averred that the Respondent erred in law and fact by bringing to charge or allow back the expenses which were incurred purely in the course of doing business. It stated that the Respondent erred in law and fact by failing to appreciate and understand the general nature of the Appellant’s business even though its directors provided all facts related to the operations.

14. The Appellant added that the Respondent erred in law and fact by computing income from the withholding VAT certificates without considering the cost incurred and the supporting documents. The Appellant stated that the Respondent erroneously stated that the Appellant did not provide necessary records to support the objection when the Appellant fully explained to the Respondent about the treated wooden poles business operations. The Appellant maintained that the Respondent disregarded allowable costs incurred purely in the course of doing business was contrary to the law.

15. According to the Appellant, the Respondent having ignored the allowable costs incurred purely in the course of doing business means that the decision failed to determine some material issue of law therefore, disregarded "Fair Administrative Action as provided under Section 47 of the Constitution.

16. It asserted that no fair hearing was granted by the Respondent. It asserted that the Respondent failed to hear the Appellant’s grounds and consider the substance of the matter. The Appellant argued that the Respondent denied the taxpayer access to Information. It stated that the Respondent has power to access any taxpayer's documents and without seeking clarification from the taxpayer or the owner of the documents, the Respondent raised punitive and defective estimates which have no basis. According to the Appellant, this was against Section 35 of the Constitution.

17. Finally, the Appellant stated that the Respondent's action to demand additional assessment of Kshs 38,957,9452. 00 was arbitrary, capricious, unreasonable, unfair and contrary to the provisions of administration of justice and legitimate expectation of the Appellant, despite fulfilling the provisions of Section 30 of Tax Appeal Tribunal Act, CAP 469A of the Laws of Kenya(hereinafter “TATA”) as read together with Section 62 of VAT Act.

18. Consequently, the Appellant urged the Tribunal to stay of execution of the decision of the Respondent pending the hearing and determination of the Appeal; and the decision of the Respondent to be set aside.

Respondent’s Case 19. In response to the appeal, the Respondent filed its Statement of Facts dated 18th November 2024 and filed on 19th November 2024 the same having been deemed by the Tribunal on 28th November 2024 as having been duly filed and served. The Respondent also relied on its written submissions dated and filed on 4th March 2025.

20. In response to grounds (i), (ii).(iii),(iv) and (v) of the Appeal, the Respondent stated that it is empowered to use best judgement in arriving at a tax assessment. The Respondent relied on the pronunciation of the court in the case of Mulherin v Commissioner of Taxation [2013] FCAFC 115 where the Federal Court of Australia held that in tax disputes, the tax payer must satisfy the burden of proof to successfully challenge income tax assessments. The Respondent added that the onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.

21. The Respondent averred that it issued the additional assessments as provided for in Section 31 of the TPA as the assessment was based on available documents and best judgment of the Respondent. The Respondent further stated that Section 56 of the TPA stipulates that the burden shall be on the taxpayer to prove that a tax decision is incorrect. It stated that it requested the Appellant to provide supporting documentation when the Appellant rejected the assessments. The Respondent averred that it reviewed the documents provided and noted that the evidence was deemed to be insufficient to make any changes. The Respondent stated that it further advised the Appellant to provide a notice of objection which would enable the Respondent to review the objection.

22. The Respondent relied on the pronunciation of the court in the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR where it was held as follows:“...the tax laws reverse the well-known principle of evidence of ‘he who alleges must prove’. In this regard, the tax authorities would assess what it considers to be the tax due from a taxpayer and the tax laws would burden the tax payer to disprove that the assessment or tax demanded is wrong or incorrect.”

23. It maintained that the Appellant failed to demonstrate through provision of expense supporting documents that they indeed and actually incurred the expenses so represented in the financial statement, to generate the taxable income. To further support the foregoing, the Respondent relied on Section 17(1) of the VAT Act which provides as follows:‘‘17(1)Subject to the provisions of this section, and the regulations, an input tax on taxable supply to, or importation made, by a registered person, may at the end of a tax period in which the supply or importation occurred, be deducted from the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies made by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.’’

24. In Response to grounds (vi),(vii),(viii) and (ix) of the appeal, the Respondent relied on Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR where the it was held that the taxpayer has to discharge the burden of proof. The Respondent also stated that the Appellant did not adduce documents under Section 17(1), (2) and (3) of the VAT Act that would have made the Respondent arrive at a different finding.

25. It cited Section 107 of the Evidence Act CAP 80 of the Laws of Kenya (hereinafter “the Evidence Act”) to state that the Appellant ought to have provided documents to support its notice of objection but the Appellant failed. The Respondent maintained that no evidence whatsoever was provided by the Appellant in terms of IFMIS records or withholding certificates to support this fact in his objection hence in absence of such proof the Respondent was limited to information that was available to him vide I-Tax system

26. In Response to grounds (x) and (xi) of the Appeal, the Respondent cited Digital Box Ltd V Commissioner Investigations and Enforcement (TAT Act 115 of 2017) to state that it employed the best judgment in determining the taxes due as provided by Section 29 of the TPA. It asserted that it was carefully guided by all relevant laws and followed due procedure and that the Appellant was given adequate opportunity to defend its position but failed to do so.

27. The Respondent stated that it requested for documents under Section 59 (1) (a) of the TPA but the Appellant did not provide them. The Respondent noted that the Appellant has a responsibility to maintain records and documents that pertain to the business and avail the same for tax purposes when required to as provided for under Section 23 (1) of the TPA and Section 54A (1) of the ITA but the Appellant failed to produce the documents when it was required to do so.

28. According to the Respondent, the Appellant having not met the requirements of the above provisions of the laws, the Appellant failed to prove that the assessments were incorrect thereby leading the Respondent to confirm the assessments issued.

29. The Respondent in its written submissions submitted that the objection decision was proper in law on the basis that the Respondent followed the laid down procedure in issuing assessments to issuance of the objection decision. The Respondent also submitted that the Appellant herein failed to discharge burden of proof in challenging additional assessments as it failed to adduce documents to support its VAT claims under Section 17 of the VAT Act.

30. The Respondent cited the case of Mulherin v Commissioner of Taxation [2013] FCAFC 115 and Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR to support the position that the taxpayer has to provide evidence to discharge burden of proof but the Appellant herein failed to do so.

31. It further submitted that whereas Section 23(1) of the TPA, section 59(1) of the TPA and Section 54A (1) of the ITA mandates the taxpayer to keep documents to facilitate determination of tax liability, the Appellant failed to adduce the documents to support the notice of objection. The Respondent therefore, submitted that the Appellant failed to discharge the burden of proof contrary to section 56(1) of the TPA.

32. Based on the above grounds, the Respondent sought the following reliefs:i.That the Respondents objection decision dated 16th May 2024 be upheld; andii.That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues For Determination 33. The Tribunal having considered the pleadings, documents and submissions puts forth the following issue for determination:Whether Appellant discharged its burden of proving that the objection decision dated 16th May 2024 was incorrect.

Analysis And Findings Whether the Appellant discharged its burden of proving that the objection decision dated 16th May 2024 was incorrect. 34. Whereas the Appellant asserted that the Respondent ignored or neglected costs incurred purely in the course of doing business which ought to be allowed, the Respondent argued that the Appellant failed to provide documents to support the objection contrary to Section 51(3) of the TPA therefore, it had no option but to confirm the assessments fully. Section 56(1) of TPA places the burden of proof upon the taxpayer. It provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

35. It should also be recalled that tax law in Kenya establishes a presumption that the decision of the Commissioner is correct. In this regard, section 50(1) (a) of the TPA provides as follows:‘‘50. Conclusiveness of tax decisions(1)Except in proceedings under this Part—(a)the production of a notice of an assessment or a document under the hand of the Commissioner shall be conclusive evidence of the making of the assessment and that the amount and particulars of the assessment are correct.’’

36. In Commissioner of Domestic Taxes v Altech Stream (Ea) Limited [2021] KEHC 5755 (KLR), the Court held as follows:‘‘It is for the tax payer in any proceeding to prove that the tax decision is incorrect or assessment is excessive.’’

37. To discharge the burden of proof, a taxpayer must adduce documents to support its notice of objection. Consequently, Section 23 (1)(b) and (c) of the TPA provides as hereunder:‘‘A person shall—(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.’’(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.’’

38. The assessment in this Appeal touched on corporation tax and VAT. Section 54A (1) of the ITA provides as follows in relation to keeping records:‘‘54A.Keeping of records of receipts, expenses, etc.(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.’’

39. On matters VAT, Section 43 (1) of VAT Act provides as follows in relation to keeping records:‘‘43. Keeping of records(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept for a period of five years from the date of the last entry made therein.’’

40. The running thread under Section 23 of TPA, Section 54A (1) of the ITA and Section 43 (1) of VATA is that the taxpayer has to keep records to facilitate determination of tax liability. The Appellant stated that it incurred expenses that were deductible under Section 15 of the ITA. Section 15(1) of the ITA provides as follows:‘‘15. Deductions allowed(1)For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income…’’

41. Pursuant to the provisions of Section 15(1) of the ITA, a taxpayer must demonstrate that expenses were incurred wholly and exclusively in generation of the taxable income. This can only be done when evidence is provided. The Tribunal examined the Appellant’s pleadings and evidence in support of the appeal and noted that the Appellant filed the following documents; The objection decision dated 16th May 2024

Four Objection Application Acknowledgement Receipts all dated 25th April 2024.

Four Confirmation Assessment Notices all dated 30th May 2024.

Four notices of objection letters all dated 11th June 2024. All in response to the four confirmation notices dated 30th May 2024.

A letter from NCBA Bank dated 11th April 2024 being a notice to the Appellant to settle outstanding facilities advanced to it.

Letters from NCBA Bank dated 8th April 2024, 26th April 2024 and 8th May 2024 being notices of sale of the Appellant’s bell logger and skeleton elite (motor vehicles).

42. The Tribunal notes that these documents do not prove that the Appellant incurred deductible expenses under Section 15 of ITA. The Appellant did not file any documentary evidence as described under Section 54A (1) of the ITA and Section 43 of VAT Act to support its case.

43. Taxpayers should recall and keep in mind that the mandate of adducing documentary evidence does not terminate at the objection stage. When a taxpayer files an appeal, the expectation is that a taxpayer must discharge its burden of proof before this Tribunal. Indeed, Section 30 of the TATA places the burden of proof upon the taxpayer. It provides as follows:‘‘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; or(b)In any other case, that the tax decision should not have been made or should have been made differently.’’

44. To discharge the burden of proof before this Tribunal, a taxpayer must adduce evidence to support its appeal and thereby enable the Tribunal to make a decision on the Appeal. To this end, Section 13(2) (d)of the TATA provides as follows:‘‘The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)…(d)Such other documents as may be necessary to enable the Tribunal to make a decision on the appeal.’’ (emphasis is ours).

45. Kenya applies a self-assessment tax system and a taxpayer must produce documents to demonstrate that the Respondent’s assessment is erroneous. InCommissioner of Domestic Taxes v Block International Limited (Income Tax Appeal E103 of 2023) [2024] KEHC 8889 (KLR) (11 July 2024) (Judgment), the High Court stated as follows at paragraph 21:‘‘The burden of proof in tax matters is not stationary but is like a pendulum swinging between the Taxpayer and Taxman at different points. The Kenyan tax system places the evidential burden of proof on the Taxpayer. In that regard, in Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment), the Court stated thus-“The most significant justification for placing the burden of proof on the tax payer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability. It is simply fair to place the burden of persuasion on the taxpayer, given that he knows the facts relating to his liability, because the commissioner must rely on circumstantial evidence, most of it coming from the taxpayer and the taxpayer's records. The taxpayer must present a minimum amount of information necessary to support his position. This safety valve seems to place the burden of production on the taxpayer without relieving the Commissioner of the overall burden of proof. The tax payers’ evidence must meet this minimum threshold. A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.”’

46. In the instant appeal, the Appellant did not swing the pendulum. Not even once. The Appellant did not adduce evidence to make pendulum swing towards the Respondent. The presumption that the Respondent’s decision was correct remained intact.

47. Based on the foregoing analysis, the Tribunal finds and holds that the Appellant failed to discharge its burden of proving that the objection decision dated 16th May 2024 was incorrect as couched under Section 56(1) of the TPA and Section 30 of the TATA.

Final Decision 48. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal lacks merit and makes the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 16th May 2024 be and is hereby upheld.c.Each party to bear its own cost.

49. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 9TH DAY OF MAY, 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER