[2024] KETAT 329 (KLR)

Sac (K) Ltd v Commissioner of Domestic Taxes (Appeal 1056 of 2022) [2024] KETAT 329 (KLR) (Civ) (23 February 2024) (Judgment)

Neutral citation: [2024] KETAT 329 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 1056 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, SS Ololchike & AM Diriye, Members

February 23, 2024

Between

Sac (K) Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is an Airline registered as a private limited company that operates air cargo charter services to Djibouti, Somalia, Somaliland, Ethiopia, South Sudan and Eritrea.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. Under Section 5 of the Act, the Respondent is mandated to collect and receipt all tax revenue on behalf of the Government of Kenya. Further, it is also mandated to administer and enforce all provisions of the written laws as set out in Part 1 &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 conducted an audit on the Appellant and vide an Assessment order dated 28th June 2022 demanded tax of Kshs 261,810,030. 62 for the period 2017-2020 being Corporation tax and PAYE.

4. The Appellant objected to this demand on 5th July, 2022. The Respondent then requested for documentation to support the Appellant’s objection through a letter dated 3rd August 2022.

5. The Respondent thereafter issued its objection decision vide a letter dated 30th August, 2022 confirming the assessment of Kshs 261,810,030,62 being Income tax and PAYE which was inclusive of principal tax, penalties and interest.

6. Aggrieved by the Respondent’s decision, the Appellant preferred this Appeal.

The Appeal 7. The Appellant filed its Memorandum of Appeal and Statement of Facts dated 22nd September 2022 on 26th September, 2022. Its Appeal was premised on the following grounds:a.Review of KRA 1st Assessment /Report via email dated 19th May 2022 from Ms. Evelyne Obiero, Compliance Team Leader for the period 2017-2019 years of income, principal income tax, Corporate, Ksh 92,936,876. 59 and PAYE principal tax Ksh 27,000,000. 00 totalling to a sum of Ksh 119,936,876. 59. b.Review of a preliminary report by former company auditors MS Njoroge Kibebe & Associates CPA (K) regarding the 1st compliance report as stated in 1 above.c.Review of manual notice of additional assessment for the period 2017-2020 years of Income dated 16'" June 2022, principal corporate tax Ksh 135,299,988. 00 & PAYE Ksh 37,200,000. 00, totalling to Ksh 172,499,988. 00, as opposed to (a) above, plus interest and penalties.d.Review of /TAX portal notice of additional assessment for the period 2017-2020 years of income dated 28th June 2022, principal corporate tax Ksh 143,429,164. 50 & PAYE Ksh37, 192,041. 00, totalling to a sum of Ksh 180;621,205. 50, as opposed to 3 above, plus interest and penalties.e.Review of 'Notice of Objection application' dated 5th July 2022 and the accompanying documents and also as duly requested by IRO.f.Review of 'objection decision' dated 30th August 2022 from IRO.g.Review of objection decision responses in this letter dated 22nd September 2022. h.Review all the relevant accompanying documents as availed in support thereof and also as duly requested by each team.i.Review of grounds (a-h), in order to ascertain, moderate, and determine as to whether any taxes are due and payable by the company.

The Appellant’s Case 8. The Appellant argued its case through its Statement of Facts dated 22nd September and filed on 26th September, 2022 and supported by the Witness Statement of one Mohamed Noor Aden dated 29th March 2023 and filed on 4th April, 2023, that was admitted in evidence under oath on the 6th September, 2023.

9. The Appellant contended that no tax was due and payable due to the inconsistencies in the manual assessment and the i-Tax portal. It argued that it had highlighted these inconsistencies in its notice of objection. However, the same was not addressed by the Respondent.

10. The Appellant argued that it provided supporting documents for the expenses incurred, however the Respondent did not take into consideration the variances arising from the expenditure which was also supported by invoices and payments it made to its suppliers. It argued further that this was against accounting matching concept where every credit must have a corresponding debit that the Respondent never considered this matching concept.

11. It was the Appellant’s averment that it availed all the accompanying documentation in support of all the expenditure which in its view was erroneously disallowed and which in some cases were added back and treated as additional sales by the Respondent.

12. On the issue of PAYE for the years 2017 to May 2021, the Appellant averred that it provided the Technical logs for its pilots who were on its employment and the payroll information of its engineers. It asserted that one of its pilots was included into the company’s payroll in 2020 while the other was included in 2019, and that both were foreign nationals who were working outside the Country and getting paid on ‘freelance’ basis. Further that crew members and costs were settled by MIDEAST Tours and Travel Ltd while the engineers were paid through the payroll which it had availed as per Respondent’s request.

Appellant’s Prayers 13. The Appellant prayed that it’s tax liability would be found to be nil in view of all the documentation it had provided.

The Respondent’s Case 14. The Respondent’s case is premised on the hereunder documents and proceedings before the Tribunal: -a.The Respondent’s Statement of Facts dated and filed on the 25th October, 2022. b.The Witness statement of Eric M. Mwangi dated 29th March, 2023 and filed on 4th April, 2023 that was admitted in evidence on oath on the 6th September, 2023.

15. It argued that the Memorandum of Appeal was very vague and the grounds of Appeal could not be determined with certainty hence it was unable to respond with precision. It therefore contended that most objected items either lacked documents or they were prohibited allowances.

16. The Respondent asserted that it is not bound by the tax returns of the Appellant, and may assess a taxpayer’s tax liability by using information available to it. Further that it is the duty of the taxpayer to provide documents whenever required by the Respondent. It argued that the expenses were disallowed for non-compliance with Sections 15 and 16 of the Income Tax Act, CAP 470 of the laws of Kenya.

17. On the issue of Income generation from services offered by the company to Air Djibouti, the Respondent averred that the Appellant never demonstrated that the income had been declared. Further that the expense had been claimed in the Appellant’s financial statements and was allowed during audit.

18. The Respondent contended that the Appellant had duplicated invoices and incoming bank transfers for which the Appellant was not able to adduce evidence to demonstrate refund of the extra claimed payment or sufficiently explain the duplication. That it therefore brought two amounts to charge because they referred to two different transactions.

19. The Respondent argued that the Appellant received funds from Global Forex Bureau which it alleged was used to purchase fuel for various flights. However, it did not avail any documents to demonstrate that the funds were not proceeds of sales hence it correctly determined that the amount was for undeclared income.

20. The Respondent contended that the documents provided by the Appellant were the same records reviewed by the Respondent during audit and were insufficient to demonstrate that the Appellant had been paying for the lease rentals. It argued that expenses can only be claimed once and only where they have been used to generate income. The Appellant in this case used the same documents to claim expenses in more than one time. Therefore, it correctly disallowed the expenses.

21. The Respondent asserted that it requested for up to date Co-Air worthiness COR and insurance documents. It also requested for asset register for the period 2015-2020 and wear and tear schedule. However, the Appellant availed documents relating to the period 2009-2010 and not the current period when the wear & tear claim was made in the financial statements.

22. The Respondent stated that it requested for a breakdown of wet leases and duty leases to help determine when the Appellant hired its own crew. Further, that an examination of one wet lease agreement indicated the monthly payment to Mid-East Tours Limited of USD 45,000. 00 and that the Appellant’s PAYE records were found to be substantially lower than the industry average relied on by the Respondent. It argued further that the alleged loan repayments to its director were not supported with any documentation to prove that indeed they were loan repayments and not salary to the director. Hence it correctly assessed for PAYE as the Appellant was unable to demonstrate they were loans as it had alleged.

23. On the issue of variances between the manual assessment and the i-Tax, the Respondent argued that this was due to the i-Tax system calculating the interest rate up to current as compared to when the manual notice of additional assessment was drawn.

Respondent’s Prayer 24. The Respondent therefore prayed:i.That the Appeal be dismissed with costs for lack of merit,ii.That the objection decision dated 30th August 2022 be upheld.

Submissions By The Parties 25. The Tribunal notes that as at 20th September, 2023 which is the date when parties were directed to have filed their respective Written submissions, only the Appellant had filed its Written submissions which the Tribunal will proceed to consider. In its Written submissions dated 14th September, 2023 and filed on 15th September, 2023, the Appellant has raised two issues for determination:

(i) Whether the Objection Decision dated 30th August 2022 should be set aside. 26. The Appellant submitted that the Respondent used erroneous figures in calculating the alleged tax liability hence the objection decision dated 30th August 2022, ought to be set aside. It submitted further that the revenue amounts computed by the Respondent includes expenses incurred by the Appellant, duplicated sales in respect to a bank transfer of USD 190,000. 00 for the year 2017, wear and tear allowances and bad debts which the ITA requires to be deducted to get accurate and correct taxable income pursuant to Section 15(1) of the ITA.

27. In discharging its burden of proof, the Appellant stated that when lodging its objection, it attached all the supporting documents which included invoices, expense schedule, bank deposit slips, legal demand letters for bad debts and other supporting documents to prove its objection. However, the Respondent disregarded all the items and went ahead to confirm erroneously, computed tax liability.

28. The Appellant relied on the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR to support its argument that it discharged its burden of proof by availing the relevant documentation which the Respondent disregarded.

29. The Appellant stated that its prayer to set aside the objection decision dated 30th August 2022, for containing erroneous figures was supported by the Respondent’s own witness one, Mr. Eric M. Mwangi who at Paragraph 16 of his Witness Statement dated 29th March, 2023 appreciated that the Respondent needed to consider the Appellant’s amended returns and restate accounts so as to arrive at the Appellant’s true tax liability and that the Appellant’s Appeal be accepted without prejudice.

30. It argued therefore that its clear the Respondent was imposing a tax liability on the Appellant where actually such obligation does not arise hence in breach of the TPA and ITA. It relied on the case of Republic vs Commissioner of Domestic Taxes Large Taxpayers Office Ex-Parte Barclays Bank of Kenya Ltd (2012) to agree with the holding that a subject is not to be taxed unless the words of a taxing statute unambiguously impose the tax upon him.

(ii) Who should bear the costs 31. In appreciating that costs follow the event the Appellant submitted that having proved the Appeal is merited and that the Respondent itself confirms and agrees with the position of the Appellant, it prayed for costs of the Appeal.

Issues For Determination 32. Having considered the parties pleadings, documentation availed, the evidence adduced and the Appellant’s submissions, the Tribunal is of the considered view that this Appeal distils into a single issue for its determination.

Whether the Respondent’s assessment and ensuing objection decision are justified. Analysis And Findings 33. The Tribunal will now proceed to analyse this single issue as hereinunder:

34. In its pleadings, the Appellant requested the Tribunal to review all of the notices of pre-assessment and assessment and the objection decision of the Respondent. The Appellant averred that in its notice of objection, it attached all the supporting documents which included invoices, expenses schedule, bank deposit slips, legal demand letters for bad debts and other supporting documents, which the Respondent disregarded and went ahead to confirm erroneously computed tax liability.

35. During cross examination of the Respondent’s witness, one Eric M. Mwangi, he admitted that the Appellant was slightly disadvantaged and should be allowed to amend its returns for reasons that the Appellant’s expenses were duly incurred wholly and exclusively in the production of business income. The Tribunal notes that the Appellant concurred with Mr. Eric Mwangi as outlined in its submissions.

36. The Tribunal will reproduce Paragraph 5 of the Respondent’s witness statement to attest to the evidence he adduced during cross examination as follows: -“The Appellant at this point explained that while preparing their financial statements, realised that there were certain costs that were left out in the years 2018, 2019, and 2020 that amounted to Kshs 42m, Kshs 42m& Kshs 55m respectively. The Appellant was of the opinion that these costs would greatly reduce their tax liability and rightly so as they were wholly and exclusively incurred in the production of business income only that they had been inadvertently omitted while preparing their financial statements.”

37. The Respondent’s witness further admitted to the erroneous demand for tax on the Appellant at Paragraphs 11, 12 and 13 of its Witness Statement. The said paragraphs are reproduced below: -“11. The Appellant’s fate now lies in the hands of the TAT. The initial additional assessment has not been varied at either objection or ADR. Review of the Appellant’s matter indicates that this is a matter of return amendment. The Appellant has consistently challenged the Respondent’s approach where Revenue may be introduced as undeclared while Costs may not be introduced as undeclared”.“12. The Appellant has sought to be allowed to submit their restated books for review by the Respondent to no avail. It is worth considering that in the interest of determining the true tax liability of the Appellant that they be allowed to prepare and submit the restated books of accounts as well as amended returns”“13. The Respondent will now have the opportunity to re-evaluate the correct revenue, as well as the correct costs and thereby arrive at the correct tax liability for the period under review”.

38. It is manifestly clear from the evidence as adduced by the Respondent’s witness that the Respondent was aware at all material times during the assessment and objection proceedings that the Appellant had inadvertently omitted in providing various expenses in its returns and was desirous of having the returns filed amended with a view of reflecting the appropriate financial status and tax liability of the Appellant.

39. It is an admitted fact by both parties that allowing the Appellant to resubmit the financial statement and upon amendment of its returns the estimated tax liability is likely to be significantly reduced or completely extinguished.

40. The Tribunal will associate itself with the holding in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commission [1920] 1KB 64 as applied in T. MBell vs Commissioner of Income Tax [1960] EALR 224 where Roland J. stated:-“….in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used… if a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the crown seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be….”

41. In view of the foregoing the Tribunal finds that the justice of the matter calls for the dispute being remitted back to the Respondent to permit the Appellant to amend its returns to provide for inadvertently omitted expenses and for the Respondent to be at liberty to undertake an appropriate audit or assessment.

Final Decision 42. The upshot of the above is that the Appeal partially succeeds and the Tribunal accordingly proceeds to make the following final Orders: -a.The Appeal be and is partially allowed.b.The Respondent’s objection decision dated 30th August, 2022 be and is hereby set aside.c.The Appellant to prepare and submit the restated books of accounts and be allowed to file amended returns within Fifteen (15) days of the date of delivery of this Judgment.d.The Respondent be at liberty to undertake an assessment within Thirty (30) days of receipt of the amended returns filed on the part of the Appellant.e.Each party to bear its own costs.

43. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI SPENCER S. OLOLCHIKEMEMBER MEMBERMOHAMED A. DIRIYEMEMBER