[2024] KETAT 1594 (KLR)

Rural Electrification & Renewable Energy Corporation v Commissioner of Domestic Taxes (Tax Appeal E043 of 2024) [2024] KETAT 1594 (KLR) (25 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1594 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E043 of 2024

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, G Ogaga & AK Kiprotich, Members

October 25, 2024

Between

Rural Electrification & Renewable Energy Corporation

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a State Corporation, established under Section 43 of the Energy Act No. 1 of 2019 and its primary business is the implementation of the Rural Electrification Programme and management of the Rural Electrification Programme Fund.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent, vide a letter dated 29th April 2021, issued the Appellant with a preliminary report of findings. This finding was to cover the period of 2014/2015 to 2018/2019

4. In a letter dated 24th August, 2021, the Respondent issued the Appellant with a notice of assessment and demand for Withholding VAT (WHVAT), Withholding Income tax (WIT) and Corporation tax of Kshs. 5,266,722,802. 00.

5. The Appellant lodged an objection to the assessment on 30th September. 2021.

6. The Respondent issued an objection decision on 28th April, 2022 where it vacated the following taxes;a.Withholding VAT - Kshs. 2,612,882,446. 82b.Withholding Income tax - Kshs. 1,376,821,725. 00

7. Following its dissatisfaction with the Respondent’s decision, the Appellant lodged a Notice of Appeal to the Tribunal dated 11th December, 2023 and filed on 17th January, 2024.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 11th December, 2023 and filed on 17th January, 2024:-i.The Corporation tax assessed for the year 2014/2015 to 2018/2019 was on the basis of the income from the sale of electricity and interest income.ii.The Appellant objected to the assessment raised on the sale of electricity on the basis that the Respondent did not consider allowable expenses such as the operation and maintenance costs and capital allowances relating to the 50MW Garissa Solar Power Plant hence the objection to the amount of Kenya Shillings Four Hundred and Twenty Million, Thirty Four Thousand, Six Hundred and Eleven (Kshs. 420,034,611. 00) inclusive of penalties and interest.iii.The Respondent erred in law and in fact in not allowing the Appellant to claim investment deduction on the capital cost incurred from the construction of its 50MW Garissa Solar Power Plant project against its business income.iv.That if the Respondent considered and granted the allowable expenses, the Appellant made losses in the year ending June 2019 hence no tax liability on business income will accrue.v.That the costs in the construction and the operation and maintenance of the 50 MW Garissa Solar Power Plant are allowable for claim against taxable income under the Income Tax Act.vi.The Appellant has paid all taxes which were not disputed relating to interest income and sale of scrap.

Appellant’s Case 9. The Appellant’s case is premised on the following documents:i.The Appellant’s Statement of Facts dated 11th December, 2023 and filed on 17th January, 2024. ii.The Appellant’s written submissions dated 13th August, 2024 and filed on the 14th August, 2024 together with the authorities attached thereto.

10. That further to the vacated taxes, the objection decision indicated that the Corporation tax due on the sale of electricity amounted to Kshs.420,034,611. 00.

11. That the Appellant continued to engage the Respondent with a view to amicably settle the issue of Corporation tax arising out of the Appellant's 50MW Garissa Solar Power Plant.

12. That in view of amicably settling the same, the Respondent, during various engagements, sought for documentation for purposes of reviewing and establishing the veracity of the Appellant's qualification for investment deductions.

13. The Appellant averred that it later learnt that the Respondent had issued additional assessments for the period 2020/2021 without seeking clarification from the Appellant.

14. That Section 24(1)(a) of the Second Schedule of the Income Tax Act provides that a taxpayer can claim investment deduction on the construction of a building and on the purchase and installation therein or new machinery where the owner of that machinery uses the machinery in that building for the purpose of manufacture.

15. That under the same proviso aforementioned of the Income Tax Act, the amount of investment deduction shall be 150% where the investment is outside of the City of Nairobi or the Municipalities of Mombasa or Kisumu and the value of the investment is more than Kshs. 200,000,000. 00

16. That the income that was subjected to additional tax includes income from the sale of electricity.

17. That in the year ending June, 2019, the Appellant incurred a total of Kshs. 9,642,146,722. 00 in the construction of the Garissa Solar Power Plant. That additional amounts of Kshs. 237,023,214. 00 were incurred in the year 2019/2020 and a further Kshs. 8,413,200. 00 incurred in the year 2020/2021 giving a total investment of Kshs.9,887,583,136. 00.

18. That additionally, the Appellant incurs a monthly expense on operations and maintenance of the 50MW Garissa Solar Power Plant, which costs are paid to the Kenya Electricity Generating Company Limited (KenGen). The Appellant stated that it attached a copy of the Operations and Maintenance Agreement between the Appellant and KenGen to its pleadings.

19. That all the costs in the construction and the operation and maintenance of the 50MW Garissa Solar Power Plant are allowable for claim against taxable business income under the Income Tax Act.

20. The Appellant submitted that, in its view, the below are the issues for determination in this dispute:i.What is the actual principal tax in dispute before allowable investment deduction is considered?ii.Whether the Appellant qualifies for investment allowance deduction in the year 2018/2019 for construction of the Garissa Solar Power Plantiii.Whether the Appellant sufficiently proved its claim for investment allowance

i. What is the actual principal tax in dispute before allowable investment deduction is considered? 21. That the pending dispute on the Appellant's tax liability relates to Corporation tax. That as per the demand notice dated 24th August, 2021, the Corporation tax assessment was based on three line items namely:i.Sale of scrap for the year 2015/2016 with undeclared income being Kshs. 9,970,000. 00. The principal tax payable being Kshs. 2,991,000. 00. ii.Interest income for the year 2015/2016, 2016/2017, 2017/2018 and 2018/2019 with total income being Kshs 998,568,000. 00. That the principal tax being Kshs. 299,570,400. 00. iii.Sale of electricity for the year 2018/2019 with income amount being Kshs. 389,144,000. 00. The principal tax being Kshs. 116,743,200. 00.

22. That the assessment of the Corporation tax from sale of scrap and interest was annulled and reviewed to nil by the Respondent following the Appellant’s objection as communicated in the objection decision issued on 28th April, 2022.

23. That with the issue of the interest income and sale of scrap income having being dealt with, the only pending tax assessment in dispute relates to the taxes from the sale of electricity.

24. That it is not in dispute that the Appellant earned income of Kshs.389,144,000. 00 in the year 2018/2019. That the principal tax arising from the income of the sale of electricity is thus Kshs. 116,743,200. 00.

25. It was the Appellant's submission therefore that the principal tax in dispute is Kshs. 116,743,200. 00 and not Kshs. 385,350,649. 00 as communicated by the Respondent in its objection decision. That this amount is in fact correctly captured by the Respondent in its objection decision of 28th April, 2022 under the sub head C: “Corporation Tax - Sale of Electricity (Tax=Kshs. 116,743,200)”.

ii. Whether The Appellant Qualifies for Investment Allowance Deduction in The Year 2018/2019 For Construction of Garissa Solar Power Plant 26. It was the Appellant’s case that it made capital investment amounting to RMB Yuan 867,293,333. 33 (equivalent of Kshs. 13. 19 billion) in the setting up and construction of the 50MW Solar Power Plant in Garissa as evidenced in the Operation and Maintenance Agreement for the Garissa Solar Plant between the Appellant and KenGen.

27. The Appellant contended that it incurred, in the year 2018/2019, a total of Kshs.9 ,642,146,722. 00 in the construction of the Garissa solar plant. That the Appellant further incurred an additional Kshs. 237,023. 214. 00 in the year 2019/2020 and Kshs. 8,413,200. 00 in the year 2020/2021 towards the construction of the Solar Plant. That this amounts give the Appellant a total investment cost of Kshs. 9,887,583. 136. 00 in the years between 2018 and 2021.

28. The Appellant submitted that the capital investment incurred in the construction of the 5OMW Garissa Solar Power Plant is an allowable investment deduction under Paragraph IA of the Second Schedule to the Income Tax Act.

29. It was the Appellant's submission that Paragraph IA(a) of the Second Schedule, as read together with Paragraph I(1)(b)(i) and Paragraph IB of the Second Schedule to the Income Tax Act ,allows a taxpayer who has incurred capital expenditure in respect of a machinery for manufacture to claim an investment deduction of 150% in computing its gains or profits where cumulative investment value outside Nairobi and Mombasa Counties exceeds Kshs. 2 billion. That Paragraph IA(a) of the Second Schedule to the Income Tax Act provides as follows:“(IA) notwithstanding paragraph I, the investment deduction shall be one hundred per cent where:(a)the cumulative investment value in the preceding three years outside Nairobi City County and Mombasa County is at least two billion shillings:Provided that where the cumulative value of investment for the preceding three years of income was two billion shillings on or before the 25" April, 2020, and the applicable rate of investment deduction was one hundred and fifty per cent, that rate shall continue to apply for the investment made on or before the 2th April, 2020 or the investment deduction shall be one hundred and fifty per cent where the cumulative investment value for the preceding four years from the date that this provision comes into force or the cumulative investment for the succeeding three years outside Nairobi City County or Mombasa County is at least two billion shillings;(b)...(IB) Paragraph (IA) shall apply to items listed under paragraphs 1(1)(a)(i)and (ii), and (1) [b) (i).”

30. That further, the solar power plant falls within the definition of 'machinery used for manufacture' as defined under paragraph 1(I)[e](i) of the Second Schedule to the Income Tax Act which provides as follows:“(e)“Machinery used for manufacture” means machinery used directly in the process of manufacture, and includes machinery used for the following ancillary purposes-(i)Generation, transformation and distribution of electricity;(ii)...”

31. It is the Appellant's case that the cumulative capital investment incurred towards the setting up and the construction of the solar plant in the Year 2018/2019 was Kshs.9,642,146,722. 00 and that the project is situated outside Nairobi and Mombasa Counties and thus the capital investment qualifies for the criteria for investment allowance deduction under the Second Schedule of the Act.

32. The Appellant submitted that it is therefore entitled to an investment allowance deduction claim of 150% of the capital investment, which translates to Kshs. 14. 643,220,083. 00.

iii. Whether the Appellant sufficiently proved its Claim for Investment Allowance 33. It was the Appellant's submission that upon receiving the notice of assessment from the Respondent, it lodged its objection accompanied by all the documents it deemed necessary and relevant to its objection.

34. That subsequent to the lodging of the Appeal, the Respondent made an objection decision whereby it rejected the Appellant's ground of objection to the assessment for Corporation tax citing lack of supporting documents. That the Respondent, however, did not specify the reasons or the documents that were relevant to support the objection for Corporation tax as required under Section 51(4) of the Tax Procedures Act.

35. That Section 51(3) of the Tax Procedures Act states that a valid tax objection is one that is supported by all relevant documents to the objection. That Section 51(4) on the other hand gives the Respondent the powers to determine that an objection has not been validly lodged and issue a notice requesting the taxpayer to submit the information specified in the notice.

36. That in the present matter, the Appellant lodged its objection to the notice of tax assessment on 30th September, 2021 together with the documents it considered relevant to the objection. That on 28th April, 2022, the Respondent proceeded to make a tax decision whereby it allowed two objections against assessment for withholding income tax and withholding VAT while rejecting the objection against the assessment for Corporation tax citing the Appellant's failure to submit supporting documents for the investment deduction claim. That the Respondent further advised that it would review the Appellant’s tax affairs once new information was available.

37. It was the Appellant's submission that the Respondent in rejecting the Appellant's ground of objection relating to investment allowance deduction claim failed to specify the documents that the Appellant was required to submit as required under Section 51(4) of the Tax Procedures Act. The Appellant submitted that the failure by the Respondent to specify the documents that were required pursuant to Sections 51(4) and 59(1) of the Tax Procedure Act and subsequently proceeding to make an objection decision prejudiced the Appellant's right to substantiate its objection to investment deduction claim.

38. That whereas the Respondent alleged that the Appellant was not cooperative and failed to furnish the Respondent the documents and information requested, the Respondent did not furnish the Tribunal with any evidence, correspondence or notice as required under Section 59(1) of the Tax Procedures Act, requesting to be supplied with the same. That the Respondent proceeded to make an objection decision without complying with the provisions of Sections 51(4) and 59(1) of the Tax Procedures Act.

39. The Appellant submitted that upon being issued with the objection decision with advisory for review of the Appellant's tax affairs upon submission of new information, the Appellant engaged the Respondent through various meetings and correspondence on the review of Corporation tax arising from the sale of electricity for the year 2018/2019.

40. That based on the advice to review upon availability of new information, the Appellant submitted a request for reconsideration and review of the Appellant's tax liability vide letter dated 1st March 2023 enclosing documents that the Respondent requested. This was done following various meetings and correspondence between the Appellant and the Respondent where the Respondent specified the documents required for the review.

41. That subsequently, the Respondent and the Appellant made several engagements whereby the Appellant provided the Respondent with information and documentation as requested including the following:i.Copies of the Contract including drawings in respect of the construction of the 50MW Garissa Solar Power Plant;ii.Bill of quantities amounting to RMB Yuan 867,293,233. 33;iii.Supplementary Agreements No. 1, 2 and 3;iv.Invoices No. 1-12;v.Asset Register;vi.Certificate of commissioning of the power plant; andvii.WIP breakdown for each year.

42. That the Respondent, however, failed to consider the documents submitted by the Appellant and proceeded to issue an enforcement notice.

43. The Appellant submitted that the information supplied sufficiently established that the Appellant had incurred capital expenditure in the construction of the 50MW Solar Power Plant in Garissa. That in establishing this, the Appellant submitted documents including the Construction and Installation Contract, the Operation and Maintenance Contract for the Power Plant, invoices and Asset Registers.

44. That the Respondent, in fact, appreciated this fact in its objection decision of 28th April, 2022 where it made reference to the newly developed solar plant as follows:“...Records availed indicated that in the year 2019, the Corporation earned Kshs. 389,144,000. 00 from a newly developed Solar Plant in Garissa”

45. That it is curious that despite the Respondent appreciating that the income in dispute was earned from a newly developed solar power plant and having records including contracts for construction of the plant and the contract for operation and maintenance of the plant, it still went ahead and alleged that the Appellant failed to submit supporting documents.

46. The Appellant averred that it submitted all the relevant documents demonstrating its capital investment for qualification to benefit from the investment allowance deduction but the Respondent failed to consider the same. It was the Appellant's further submission that, whereas Section 56(1) places the burden of proof on an Appellant to prove that the tax decision was incorrect, the burden may shift to the Respondent depending on the evidence adduced. That this position of law was stated aptly in Elgon Tea and Coffee Limited v Commissioner of Domestic Taxes (Appeal 1264 of 2022) [2024] KE TAT 10 (KLR) (26 January 2024) (Judgment) where the Court held as follows:“It is Tribunal's view that once the taxpayer adduces evidence by providing documents, relevant facts, and agreeing to site inspections, site visits and interviews, the burden must shift to the Respondent to controvert the proof put forward by the Appellant.”

47. That similarly, in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8July 2022) (Judgment) the Court held as follows:“26. From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined 'competence' and 'relevance' because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or Irrelevant, then the burden continues to remain with the tax payer...

27. In this case, the Commissioner accused the Respondent for being part of the missing trader scheme and being involved in transactions where no supplies were actually made and that all the Respondent had were tax invoices from the flagged companies meant to reduce the Respondent's tax liability. With this assertion, the burden swung to the Respondent to prove the Commissioner wrong. In this attempt, the Respondent availed documents including copies of invoices issued for each impugned purchase, copies of delivery notes for each impugned purchase and copies of payment records and client statements. Once these documents were availed, the burden shifted to the Commissioner.”

48. That in the present case, the Appellant submitted its objection and supporting documents to the Respondent. That the Respondent neither impugned the relevance or competence of the documents and information submitted by the Appellant. It was the Appellant's submission therefore that, after submitting its supporting documents and providing the Respondent with relevant facts concerning its objection, the burden of proof shifted to the Respondent to demonstrate why the documents submitted by the Appellant were not sufficient to demonstrate that the tax decision was incorrect.

49. That in this regard, the Appellant submitted documents to justify its claim for investment allowance deduction and the Respondent rejected the same without considering or giving reasons why the claim was not substantiated.

50. The Appellant averred therefore that, had the Respondent considered the Appellant’s claim for allowable investment deduction as well as the supporting documents for the construction of the 50MW Solar Plant in Garissa, it would have established that the claim is verifiable and allowed it to claim the investment deduction.

51. The Appellant urged the Tribunal to find that it sufficiently discharged its burden of proof by submitting the documents in support of its claim for investment deduction and hold that the Appellant was entitled to investment allowance. It was the Appellant’s humble submission that the tax decision rejecting the Appellant’s claim for investment deduction be set aside.

52. That the Appellant has sufficiently demonstrated that it incurred capital expenditure in setting up and construction of the 50MW Solar Power Plant in Garissa County. That the Appellant qualifies for investment allowance deduction at the rate of 150% as the investment is outside Nairobi and Mombasa and the total investment value exceeds Kshs. 2 billion.

Appellant’s Prayers 53. The Appellant prayed as follows:i.That this Appeal be allowedii.That the Honorable Tribunal be pleased to and hereby sets aside the Objection decision dated 28th April, 2022. iii.That the Honorable Tribunal be pleased to issue any further or other reliefs as may be just and expedient in the circumstancesiv.That the costs of this Appeal be borne by the Respondent

Respondent’s Case 54. The Respondent’s case is premised on the hereunder filed documents before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 1st February, 2024 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 22nd July, 2024 together with the authorities attached thereto.

55. That the information from the iTax data base on non-filers showed that the Appellant had received income and made sales leading to an under declaration of sales turnover with some expenses attracting withholding taxes and a preliminary finding report was shared with the Appellant vide a letter dated 29th April, 2021.

56. That further to the investigations, it was established that the Appellant had in the years 2016-2021 omitted details of employees in the returns filed though salaries had been remitted in the returns.

57. That further to the review, it was established that the Appellant's VAT3 returns revealed that the Appellant filed nil returns for the period 2015-2019 and in the year 2018 claimed withholding VAT certificates of Kshs. 755,862. 05 without declaring sales.

58. That in addition, an analysis of the Appellant's VAT established that some invoices were missing hence VAT was computed from the sale ledgers taking into account the VAT certificates assigned to the Appellant on the iTax system amounting to Kshs. 286,679,100. 42.

59. That during the said review, it was discovered that the Appellant incurred expenses that attract withholding VAT which were brought to charge and credit was given for payments made on withholding VAT deducted amounting to Kshs. 2,612,842. 82.

60. That additionally, the Appellant’s amounts declared were compared to those paid as per iTax ledgers and it was established that some of the amounts expensed in the books attracted withholding Income Tax. That however, these were not subjected to withholding Income Tax hence the under declared amounts were brought to charge amounting to Kshs. 2,233,889,745. 00.

61. That a further analysis of the Appellant’s declared income in comparison to the financial statements established that the Appellant failed to declare income for the period 2015-2020 despite accruing income from the sale of electricity and interest income resulting in under-declarations as tabulated below;2015/2016 2016/17 2017/18

Income as per Audited books (chargeable) 51,530,000 111,161,00 320,376,000

Income declared as per iTax returns 26,424,985. 25 27,017,704-39 197,849,652. 17

Income Under - Declared 25,105,014. 75 84,090,295. 61 122,526,347. 83

62. That as a result, the Respondent, based on the existing inconsistencies and under declaration on income, raised additional assessments on 24th August, 2021 for Withholding VAT and Income for the period 2015-2020 totalling to Kshs. 5,266,786,802. 00 as tabulated below;Summary Principal Penalty Interest Total

WHIT 1,376,821,725 137,682,172. 50 719,385,847. 09 2,233,889,745

WHVAT 2,612,842,447 2612842447

Corporation Tax 385,350,649 33,032,344. 60 1,651,617. 23 420,034,611

Total TaxPayable 4,375,014,821 170,037,464 721,037,464 5,266,766,802

63. That the Appellant lodged an objection on 30th September, 2021 on iTax and vide a letter which was duly acknowledged by the Respondent and the Respondent noted that additional assessments on sale of scrap and interest income were not objected to.

64. That in light of the above, the Respondent issued a demand for documents, in line with the objection lodged, through email requesting for: audited financial statements, payroll schedule, contracts on contracted services, proof of expenses incurred and certified bank statements.

65. That the Appellant, however, failed to provide all the relevant supporting documents of records and bank statements for the period 2015-2020 in support of its objection. That the Appellant’s Corporation Tax, withholding VAT and Income Tax was therefore revised in light of the only documents provided and the rest estimated, as this was the only reasonable basis of assessing the withholding VAT and Income Tax and a notice invalidating the objection issued confirming the said assessments.

66. That the Appellant filed a late Notice of Appeal which was allowed by the court against the decision of the Commissioner on 11th December, 2023 against the decision of the Commissioner confirming the assessment of Kshs. 420,034,611. 00.

67. In response to grounds 1 and 2 of the Memorandum of Appeal and grounds 1-9 of the Statement of Facts, the Respondent averred that the assessments were correctly issued and conform to the Income Tax Act. That the Appellant did not provide any evidence that would have altered the assessment. That the Tax Procedure Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision. That the relevant section provides as follows:-“56(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

68. That in further response to ground 1 of the Memorandum of Appeal, the Respondent averred that examination of the Appellant's records, audited accounts and Income tax returns established that the Appellant failed to declare business income and all its incomes for the years of income 2015-2020, respectively. That the Respondent is empowered under the Income Tax Act to bring to charge income where the same is established due. That the relevant Sections provide as follows:“73. (1)Save as otherwise provided, the Commissioner shall assess every person who has income chargeable to tax as expeditiously as possible after the expiry of the time allowed to that person under this Act for the delivery of a return of income.(2)Where a person has delivered a return of income, the Commissioner may (a)if he has reasonable cause to believe that the return is not true and correct, determine, according to the best of his judgement, the amount of the income of that person and assess him accordingly.”

69. That in further response to ground 1 of the Memorandum of Appeal, the Respondent averred that the tax was reached at based on the information available and provided by the Appellant and the Commissioner is empowered by the Tax Procedure Act to make such decisions. That the assessment was based on the information provided. That the relevant Section provides as follows:-“29(1)Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a “default assessment)”

70. That in response to grounds 3 and 5 of the Memorandum of Appeal and ground 16 - 20 of the Statement of Facts, the Respondent submitted that the taxpayer, despite declaring some income knowingly, continued to under-declare income for the period under review contrary to the provisions of the Income Tax Act. The Respondent averred that according to the Income Tax Act, it is the responsibility of any person carrying on business to maintain records of all transactions. That the relevant Sections provides as follows:“54A(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”and…“55(2)person carrying on a business shall preserve every book of account, and every document which is essential to the explanation of any entry in any book of account, relating to the business for a period of not less than ten years after the year of income to which that book of account or document relates.”

71. That in further response to grounds 3 and 5 of the Memorandum of Appeal, the Respondent averred that it is empowered by Section 31 of the Tax Procedures Act 2015 to carry out amendments on assessments where adjustments are due to bring to charge the correct amounts. The relevant Section provides as follows;-“31. (1)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-…”

72. That in response to ground 4 of the Memorandum of Appeal, and grounds 12-14 of the Statement of Facts, the Respondent insisted that the Appellant filed all necessary returns and paid what they had assessed themselves to be payable. The Respondent, however, averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request for documents hence no relevant documents or records were provided to support the objection by the Appellant. That as a result, the assessments were made based on the only available information and based on the best judgment by the Respondent.

73. That the Tax Procedure Act empowers the Respondent to require production of such documents vide issuance of a notice as deemed necessary in determination of tax liability. The relevant Section provides as follows:“59. (1)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)to 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…”

74. That in further response to ground 4 of the Memorandum of Appeal, the Respondent submitted that the Appellant did not file Income tax returns for the accounting period 2015-2021 in contravention of the requirements of the Tax Procedures Act and that the estimated assessments were correct. That the relevant Section provides as follows:“94. Failure to submit tax return or other document(1)A person commits an offence if the person without reasonable cause fails to submit a tax return or other document required under a tax law by the due date

95. Failure to pay taxA person commits an offence if that person fails to pay tax by the due date.”

75. That in further response to ground 4 of the Memorandum of Appeal, the Respondent submitted that the tax assessments are correct and the same were based on the best judgement where the Appellant's audited accounts and records were analyzed and adjustments made for income declared and withheld tax deducted at source. That hence, they were brought to charge. That the Respondent assessed this income on the basis that the Appellant failed to declare income whereas records availed indicated that in the year 2019, the Corporation earned Kshs. 389,144,000. 00 from a newly developed Solar Plant in Garissa.

76. That in response to ground 6 of the Memorandum of Appeal and grounds 10 and 11 of the Statement of Facts, the Respondent averred that examination of the Appellant's records established that the Appellant earned income from supply of services in the period under audit. That however, these incomes were not declared for tax purposes for the years earned. The Respondent asserted that the Appellant carried on business in contravention of the Tax Procedure Act which requires such documents to be maintained for purposes of taxation. That the relevant Sections provide as follows:-“42. Tax invoice(1)Subject to subsection (2), a registered person who makes a taxable supply shall, at the time of the supply furnish the purchaser with the tax invoice containing the prescribed details for the supply.

43. Keeping of records(1)Every registered 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 in Kenya for a period of five years from the date of the last entry made therein.

93. Failure to maintain documents(1)A person commits an offence if the person fails to keep, retain or maintain a document that may be required to be kept, retained or maintained in accordance with a tax law without reasonable excuse during a reporting period.”

77. That in further response to ground 6 of the Memorandum of Appeal, the Respondent reiterated that the Appellant failed to provide signed financial statements and books of account to support its allegations. That the Tax Procedures Act empowers the Respondent to carry out assessments based on the information available. The Respondent averred that the assessment was issued based on information provided. That the relevant Section provides as follows:“24(1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.(2)The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner might assess a taxpayer's tax liability using any information available to the Commissioner.”

78. That in response to ground 16 of the Statement of Facts, the Respondent denied that the Appellant has paid all its tax dues and reiterated that because of its under-declaration, the Appellant is in debt of Kshs. 420,034,611. 00.

79. The Respondent stated that the Appellant was undeserving of the prayers sought due to the foretasted reasons.

Respondent’s Prayers 80. The Respondent prayed that this Tribunal considers the case and finds that:a.That the Respondent's objection decision be upheld.b.The outstanding tax arrears of Kshs. 420,034,611. 00 are due and payable by the Appellant.c.The confirmed assessments dated 28th April, 2022 were proper in law.d.That the Appeal herein be dismissed with cost to the Respondent.

Issue For Determination 81. The Tribunal has evaluated the pleadings and documentation filed by both parties and is of the view that the singular issue for its determination is: Whether the Respondent’s objection decision was justified.

Analysis And Determination 82. The Tribunal having ascertained the issue falling for its determination as set out above proceeds to deal with the same as hereunder.

83. This dispute arose from the Respondent’s action of confirming by way of an objection decision under-declared incomes that led to tax arrears amounting to Kshs. 420,034,611. 00.

84. The Appellant argued that it provided comprehensive documents to the Respondent and therefore the Respondent’s decision was not justified as the Respondent did not consider the documents submitted to it.

85. The Respondent, on its part argued, that it considered the documents provided by the Appellant and to the best of its judgment reduced the tax liability from Kshs. 5,266,766,802. 00 to Kshs. 420,034,611. 00 in its objection decision.

86. A review by the Tribunal of the pleadings and submissions by the parties reveals that the Respondent issued a “preliminary report of findings” on 29th April, 2021. In this report, it provided details of missing returns for PAYE, missing invoices and VAT computed from the sales ledgers, expenses brought to charge under Withholding tax and under-declared income resulting in Corporation tax arrears.

87. Thereafter, the Respondent issued a notice of assessment on 24th August, 2021 with arrears under the following tax heads: Withholding VAT, Withholding Income tax and Corporation tax. This notice of assessment advised the Appellant to object within 30 days if it wished to do so.

88. The Appellant filed an objection to the assessment on 30th September, 2021 wherein it objected to the entire assessment. Notably, the objection alluded to a schedule for Withholding VAT and an expenses schedule relating to accrued legal and consulting expenses that were not attached to the pleadings.

89. In its objection decision dated 29th April, 2022, the Respondent stated, inter alia, that it received the objection by the Appellant on 18th October, 2021. Further, it stated that it reviewed the supporting documentation and clarifications provided by the Appellant in its grounds of objection.

90. In relation to the reviewed documents, the Respondent undertook the following as per its objection decision:i.Fully accepted the Appellant’s objection in respect of the Withholding VAT assessment and vacated the same to nil.ii.Fully accepted the Appellant’s objection in respect of the Withholding Income tax additional assessment and vacated the same to nil.iii.Rejected the objection ground in relation to the additional assessment on Income tax on sale of electricity income and confirmed the assessment. The Respondent stated that the reason for this was that the Appellant did not sufficiently support its grounds in this respect.iv.Noted that the additional assessments in relation to sale of scrap and interest income were not objected to and that the Appellant was making payments towards settling the same.

91. The Tribunal notes that while the Appellant in its pleadings states that it provided conclusive documentation to the Respondent, it did not provide any evidence to prove that indeed it submitted information to support the items that the Respondent confirmed in its objection decision.

92. It is the Tribunal’s position that the Appellant having been served with an assessment was enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justifiable in the circumstances. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely place the burden of proof upon a taxpayer to discredit any tax assessment or decision.

93. Section 56(1) of the Tax Procedures Act reads as follow regarding burden of proof:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

94. Additionally, Section 30 of the Tax Appeals Act provides as follows:-“In any proceeding before the Tribunal the Appellant has the burden of proving-where an appeal relates to an assessment, that the assessment is excessive; orin any other case, that the tax decision should not have been made or should have been made differently.”

95. In the instant case, the Tribunal notes that the Appellant had only averred that it provided information to the Respondent but did not provide any evidence to show that it indeed submitted the said documents to any of the KRA officers to prove that the Respondent’s decision was not justified.

96. It is the Tribunal’s position that it was upon the Appellant to furnish evidence to prove its case. This was the finding in Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR where the court held that:-“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

97. Further, the Tribunal buttresses the issue of burden of proof through the case of Boleyn InternationalLimited vs. Commissioner of Investigations & Enforcement (Tax Appeals Tribunal No 55 of 2019), where the Appellant failed to provide documents, and the Tribunal held that there was no conceivable way the Respondent would have considered the objection as the same did not place itself within the parameters of Section 51(3) of the Tax Procedures Act.

98. Based on the aforementioned provisions of the statute and the case law, the Tribunal finds that the Respondent’s objection decision was justified.

Final Decision 99. In view of the foregoing analysis, the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:-i.The Appeal be and is hereby dismissed.ii.The Respondent’s objection decision dated the 28th April, 2022 be and is hereby upheld.iii.Each Party to bear its own costs.

100. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 25TH DAY OF OCTOBER, 2024ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERGLORIA A. OGAGA ABRAHAM K. KIPROTICHMEMBER MEMBER