[2025] KETAT 76 (KLR)

Royflex Contractors Limited v Commissioner of Domestic Taxes (Tax Appeal E225 of 2024) [2025] KETAT 76 (KLR) (31 January 2025) (Judgment)

Neutral citation: [2025] KETAT 76 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E225 of 2024

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

January 31, 2025

Between

Royflex Contractors Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated under the Companies Act, Cap 486 of the Laws of Kenya and whose principal activity is civil engineering works and contractual services.

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 Acts”). 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. Upon conducting an audit on the business of the Appellant for the 2019 to 2022 review period, the Respondent on 22nd December 2022 issued principal corporation tax assessment of Ksh 1,098,062. 03 in relation to January 2019. Similarly, the Respondent issued principal Value Added Tax (VAT) assessment of Ksh 6,371,201. 69 in relation to January, June, July and September 2021 and January, February, April, May and June 2022.

4. On 29th November 2023, the Appellant objected to the all the assessments vide its i-Tax platform.

5. Through an objection decision dated 19th December 2023, the Respondent fully rejected the Appellant’s objection and fully confirmed the Corporation tax and VAT assessments as previously issued.

6. Aggrieved by the Respondent’s objection decision dated 19th December 2023, the Appellant filed its notice of appeal dated 30th January 2024 on even date at the Tribunal.

The Appeal 7. The Appellant’s case was predicated upon a Memorandum of Appeal dated 30th January 2024 and filed on even date wherein the Appellant stated the following as its grounds of appeal:i.The Respondent erred in fact and in law in assessing the tax payable.ii.The Respondent erred in fact and in law in failing to consider the Appellant’s nature of business.iii.The Respondent erred in fact and in law by failing to consider the expenses and direct costs incurred to generate Appellant’s income.iv.The Respondent erred in fact and in law by failing to accord the Appellant a fair hearing despite lodging an objection.

Appellant’s Case 8. The Appellant’s Statement of Facts dated 30th January 2024 were filed on even date.

9. It was the Appellant’s case that the Respondent’s assessment introduced a turnover of Ksh 3,660,206. 78 and increased the total principal corporation tax payable by Ksh 1,098,062. 03 while VAT increased by Ksh 6,371,201. 69 which the Appellant rejected noting that the Respondent failed to understand the Appellant’s industry, its working models as well as its contractual obligations. The Appellant asserted that the additional assessment amount should be deducted and in the interest of fairness and justice, the Appeal be allowed.

Appellant’s Prayers 10. The Appellant made the following prayers:a.The Tribunal allows the Appeal with costs.b.The Respondent’s decision regarding tax payable be discharged and set aside with costs to the Appellant.c.The Tribunal finds the additional assessments issued by the Respondent for the periods under review, together with penalties and interest unlawful, improperly assessed and be set aside.d.The Tribunal be pleased to assess the tax payable by the Appellant commensurate with the actual transactions and the evidence tendered.e.The Tribunal vacates the additional assessment so that the going concern of the company is not affected.f.That the Tribunal quashes in its entirety and declares the objection decision null and void.g.The Tribunal grants any other relief it deems fit.

Respondent’s Case 11. The Respondent replied to the Appeal through its Statement of Facts 2nd April 2024 and filed on even date.

12. The Respondent stated that it carried out an audit for the 2019 to 2022 review period with the view of confirming Appellant’s tax compliance with income tax obligations. Specifically, to confirm income declared under Section 3(2) and part IV of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”), to ascertain if VAT had been declared and to ascertain if the Appellant was involved in tax evasion. That in the exercise, the Respondent, examined cost of sales by analyzing purchase ledgers, import documentations, purchase invoices and custom data which was compared with what was claimed. That to specifically verify the accuracy of claimed cost of sales and expenses, the Respondent conducted the following tests:i.Purchases/invoices of major items in the purchase ledgers were sampled and checked to confirm that they were incurred wholly and exclusively for the business.ii.Inventory/stock movement register called and verified to establish that all purchases were accounted for during the period under review.iii.Purchase invoices in VAT input tax schedules were verified and claimable input tax compared with amounts claimed in the VAT3 returns.

13. It was the Respondent’s case that information from i-Tax database on non-filers showed that the Appellant failed to declare business income for 2019 to 2022 period and had overstated and unsupported expenses while their income was under declared. That as a result, the Respondent declared a banking reconciliation by reviewing and analyzing deposited credits which were compared with sales declaration and any unreconciled variance was brought to charge which yielded a principal tax of Ksh 1,098,062. 03.

14. That the audit further established that the Appellant had under declared VAT sales against gross bankings and net IFMIS payments for the 2021 to 2022 review period wherein the variance was brought to charge yielding a principal VAT amount of Ksh 6,371,201. 69.

15. The Respondent asserted that the Appellant was informed of the inconsistency in the VAT3 returns yet it failed to resolve the same within the stipulated timeframe upon which the Respondent brought the same to charge and the subsequent issuance of the additional assessments for corporation tax and VAT.

16. It was the Respondent’s assertion that it duly considered the Appellant’s objection and that hence requested the following documents: Audited Financial statements and trial balances for years 2019-2022.

Certified Bank statements for years 2019-2022.

General ledgers, cost of sales and expense ledgers for disallowable expense years 2019-2022, invoices, contracts and proof of payment among others.

Tax computations for taxes due and supporting documents.

17. It was the Respondent’s case that in consideration of the objection noted that the estimated daily income indicated in the income schedules and financial statements was not explained and was highly understated considering the business had constant flow of income streams from the review of returns filed by the Appellant who failed to provide proof of payment in relation to these expenses and VAT variances thus failed to satisfactorily support their grounds of objection.

18. The Respondent asserted that the assessments were correctly issued and conformed to the ITA that it was the Appellant who failed to provide any evidence that would have altered the assessment noting that Section 56(1) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) places the onus of proof in tax objections upon the taxpayer. That as a result of Appellant’s failure to adduce relevant documents in support of their objection, and as empowered by Section 73(1) and (2) of the ITA, the Respondent brought to charge income established to be due having established that the Appellant failed to declare all their income for the 2019 to 2022 years of income.

19. It was the Respondent’s assertion that Section 29(1) of the TPA empower it to assess tax payable based on available information noting that it was the Appellant who failed to properly lodge their objection as provided for by Section 51(3) of the TPA which provides as follows:“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb.In relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.”

20. The Respondent averred that despite the Appellant declaring some income, it knowingly continued to under declare income for the period under review contrary to the provisions of ITA. Additionally, that the Appellant failed to maintain business records as couched under Section 54 A(1) and 55(2) of the TPA. That as a result, the Respondent amended the assessments as provided for under Section 31(1) of the TPA which provides as follows:“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer for a reporting period to ensure that-……”

21. The Respondent averred that the Appellant failed to provide signed financial statements and books of accounts to support their allegations thus, pursuant to Section 24(1) and (2) of the TPA the Respondent assessed the Appellant based on available information. Similarly, that the Appellant failed to provide requested documents in support of their objection hence VAT was disallowed pursuant to Section 17(1) and (2) of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).

22. The Respondent asserted that the Appellant filed all necessary returns and paid what they assessed themselves payable and that the Appellant was uncooperative in provision of relevant records yet Section 59 (1) of the TPA provides as follows:“For the purpose of obtaining full information in respect of the income of a person or class of persons, the Commissioner may, by notice in writing, require, in the case of the income of a person, that person or any other person, and in the case of a class of persons, any person-a.produce for examination by the Commissioner at the time and place specified in the notice, any accounts, books of account, and other documents which the Commissioner may consider necessary; and the Commissioner may inspect such accounts, books of accounts or other documents and may take copies of any entries therein.”

23. The Respondent while citing Section 94 and 95 of the TPA held that the Appellant failed to file income tax for the 2019 to 2022 period thus the estimated assessments were correct. Further, that despite earning income from supply of service, the Appellant failed to declare the same for tax purposes thus contravening the provisions of Section 42(1), 43(1) and 93(1) of the TPA. Moreover, that the Appellant failed to pay all tax due as it was in debt of principal assessed taxes amounting to 7,469,263. 72 plus resultant interest and penalties thus was undeserving of prayers sought.

Respondent’s Prayer 24. The Respondent made the following prayers:i.That the Tribunal upholds the objection decision dated 19th December 2023. ii.The Tribunal finds the outstanding tax arrears due and payable by the Appellantiii.That the Tribunal finds the confirmed assessments of 19th December 2023 as proper in law.iv.That the Appeal herein be dismissed with costs to the Respondent

Parties’ Written Submissions 25. The Tribunal on 13th November the Tribunal adopted the Respondent’s written submissions dated 1st October 2024. The Appellant’s written submissions were not on record . The Respondent submitted on three issues as hereinunder;i.Whether Respondent took into consideration all additional information availed before making the decision.ii.Whether the Respondent erred by raising an assessment for the period of income and VAT for years 2019, 2021 and 2022. iii.Whether the assessments issued were excessive.

26. The Respondent submitted that the assessments were correctly issued and conformed to the ITA and TPA that instead it was the Appellant who failed to avail contrary evidence or lodge a proper objection as provided by Section 56(1) of the TPA as read together with Section 51(3) of the TPA. Furthermore, that the Appellant filed under declared income earned and did not disclose all income earned and neither maintained nor availed necessary documentation that would have aided the Respondent establish tax liability as couched under Section 59(1) of the TPA. That this was why the Respondent assessed tax based on available information as empowered by Section 31(1) of the TPA since the Appellant failed to maintain records of transactions as sanctioned by Section 54 A(1) and 55(2) of the TPA as read together with Section 73(1) and (2) of the ITA.

27. In firming up this position, the Respondent relied on the case of Joyce Mwende Titusvs Commissioner of Domestic Taxes[TAT E072 of 2023] and Commissioner of Investigations and Enforcement vs Kidero (Income Tax Appeal SE 028 of 2020 eKLR in asserting as follows:“…the duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self-assessment. This system relies on the taxpayer making full and good faith disclosures in their tax declarations and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer...”

28. The Respondent asserted that records indicated that the Appellant earned income from rent, partnership business which was not declared for tax purposes as required by Section 42(1), 43(1) of the VAT Act as read with Section 93(1) of the TPA which left the Respondent no option other than assess the Appellant based on available information as provided for by Section 24(1) and (2) of the TPA as the Appellant failed in its obligation to maintain any documentation required under a tax law to enable the determination of tax liability as couched under Section 23(1)(b) of the TPA. The Respondent relied on the case of Julie Magwi Njue vs Commissioner of Domestic Taxes [TAT No. 1400 of 2022] that;“It was upon the Appellant to keep proper record and produce them as required by law in order for her actual tax liability to be ascertained at any time. In the instant case the Tribunal noted that the Appellant did not provide any evidence in support of its assertion that the Respondent’s assessments were unreasonable…the provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act…”

29. It was the Respondent’s assertion that the Tribunal should be guided by the following considerations;i.Were any documents provided to justify the Appellant’s objection?ii.Were the annual taxation returns of income as done by the Appellant from time to time correct and complete?iii.Were any transactions omitted from or incorrectly recorded in the Appellant’s books of account/bankings?

30. The Respondent held that the Appellant’s objection was devoid of substance and did not include any supporting records to validate claims as required by Section 51 of TPA thus the Respondent confirmed the assessment pursuant to Section 51(9) of the TPA. The Respondent relied on the following authorities among others in buttressing its position; Monaco Engineering Limited v Commissioner of Domestic Taxes [TAT No. 67 of 2017]

OSHO Drappers Limited vs Commissioner of Domestic Taxes [TAT No. 159 of 2018]

Miao Yiv Commissioner of Investigations & Enforcement [TAT No. 441 of 2019]

Ritz Enterprises Limited vs Commissioner of Investigations & Enforcement [TAT No. 227 of 2018]

Kenya Revenue Authority v Man Diesel & Turbo SE, Kenya[2021]eKLR

Janet Kephiphe Ouma and Another v Marie Stopes International (Kenya), HCC No. 68 of 2007

Dyer &Dyer Limited v Commissioner of Domestic Taxes [TAT No. 139 of 2020]

Commissioner of Domestic Taxes v Metoxide [2021]

31. The Respondent asserted it did not err in invalidating the Appellant’s objection and issuing a decision as it was the Appellant who did not controvert, through evidence, the incorrectness of the Respondent’s tax assessments since all availed documentation was analyzed and the outcome clearly communicated under each tax head. The objection decision was made based on documentation availed. The Respondent placed reliance of the case of Commissioner of Domestic Services v Galaxy Tools Limited (2021)eKLR and further firmed this position citing the case of Ken Iron and Steel Limited v Commissioner Investigations and Enforcement (2021) where the High court held as follows:“it is trite that section 30 of the Tax Appeals Tribunal Act and Section 56 of the Tax Procedures Act places the burden of proof on the tax payer.”

32. The Respondent asserted that the Appellant failed to discharge its burden of proof by availing documentary evidence to prove the assessments as excessive or how they could have been made differently.

Issues for Determination 33. The Tribunal having carefully considered the parties’ pleadings, submissions and documentation adduced before it notes that two distill determination as follows:i.Whether the Appeal is properly before the Tribunal.ii.Whether the objection decision dated 19th December 2023 was justified.

Analysis and Determination 34. The Tribunal having established two issues for determination will proceed to analyze them as follows;

i. Whether the Appel is properly before the Tribunal. 35. The instant dispute arose from the Respondent’s audit against the Appellant for the 2019 to 2022 review period resulting in principal tax of Ksh 7,469,263. 72 comprising income tax and VAT and the subsequent confirmation of the same vide the objection decision dated 19th December 2023. Th Appellant filed its notice of Appeal together with its pleading on 30th January 2024.

36. The Tribunal notes that upon being served with an objection decision, the Appellant has thirty days within which it may lodge an Appeal with the Tribunal. Section 51(12) of the TPA provides as follows:“A person who is dissatisfied with the decision of the Commissioner under subsection (11) may appeal to the Tribunal within thirty days after being notified of the decision”

37. The Tribunal notes that Tax Appeals Tribunal (Procedure) Rules Section 10 affords the Appellant the opportunity to apply to the Tribunal seeking grant of extension of time to submit documents. Similarly, whenever the Appellant is derailed by reasonable cause and is unable to file the Appeal on time, Section 13 (3) and (4) of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) provides the Appellant the opportunity to indulge the Tribunal with valid reasons for consideration in grant of extension of time to file an Appeal out of time. The cited Section provides as follows:“(3)The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).(4)An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

38. The Court when faced with similar matter held as follows in the case of Eastleigh Mall Limited v Commissioner of Investigations & Enforcement Income Tax Appeal No E068 of 2020:‘‘It is clear from the forgoing that the provisions of section 51(11) of the Tax Procedures Act are mandatory. They are not cosmetic. Parliament in its wisdom knew that in matters tax, time is very crucial as those in commerce need to make informed decisions. If the Commissioner is allowed to exercise his discretion and stay ad-infinitum before issuing an objection decision, the tax payer would be unable to make crucial decisions and plan his/her business properly. The timelines set are mandatory and not a procedural technicality.

39. The Tribunal also cites the case of Andrew Mukite Musangi V Commissioner of Domestic Taxes E163 (2021), where the court held that statutory timelines which give rise to substantive rights cannot be extended suo moto.

40. Accordingly, the Tribunal finds and holds that the Appeal herein was not properly before it.

ii. Whether the objection decision dated 19th December 2023 was justified. 41. Having so found the Appeal to be improperly before it the Tribunal will not delve into the second issue for determination as it has been rendered moot.

Final Decision 42. The upshot of the foregoing is that the Appeal herein lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

43. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 31ST DAY OF JANUARY 2025. ………………………………CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER