[2024] KETAT 1341 (KLR)

Sainad Agencies Limited v Commissioner oOf Domestic Taxes (Tax Appeal E628 of 2023) [2024] KETAT 1341 (KLR) (20 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1341 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E628 of 2023

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

September 20, 2024

Between

Sainad Agencies Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered company under the companies Act and carries out the business of an Employment Agency Bureau in Nairobi.

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

3. The Respondent issued the Appellant with a notice of assessment dated 30th May, 2023, for the amount of Kshs. 649,184. 00. Consequently, the Respondent issued the Appellant with an additional assessment order for income tax for the period 2020 and 2021.

4. The Appellant objected manually to the additional assessment vide its notice of objection dated 29th June 2023. Upon considering the notice of objection, the Respondent issued an objection decision dated 17th August 2023 wherein it fully rejected the Appellant's objection and confirmed the amount of Kshs 860,102. 36 including principal tax, interest and penalties.

5. Aggrieved with the Respondent’s decision, the Appellant filed this Appeal vide a notice of appeal dated and filed on 11th September 2023.

The Appeal 6. The Appellant filed its Memorandum of Appeal dated 22nd September 2023 on 25th September 2023 and the same was predicated on the following grounds:i.That the Respondent erred in law and facts and issued an invalid objection decision contrary to Section 51 (9) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA” which states “The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.” Section 10[sic] further requires the Respondent to in case of an objection decision must [sic] include a statement of findings on material facts and reasons for the decision.ii.That the Respondent erred in law by assuming that a business can be in operation and incurs nil costs and expenses.iii.The Respondent erred in law and facts by demanding tax that is unreasonable and unfair as per article 210 and 201 (b) (i) of the Constitution of Kenya, 2010 (hereinafter “the Constitution”).iv.That the Respondent erred in law and facts by eliminating certainty as an integral ingredient of the rule of law as stated to be the lifeline of business and business plans.v.That the Respondent actions are contrary to legitimate expectations on the operations of the taxpayer, as per Section 15 of the Income Tax Act CAP 470 of the Laws of Kenya (hereinafter “ITA”), and Article 47(1) and (2) of the Constitution.

Appellant’s Case 7. The Appeal was premised on the Statement of Facts of the Appellant dated 22nd September 2023 and filed on 25th September 2023, and the documents attached thereto, wherein the Appellant averred that it is an employment bureau.

8. The Appellant stated that the Respondent carried out a Corporation Tax examination for the year ended 31st December 2018, 2019, 2020 and 2021 and issued assessments dated 30th May 2023. The Appellant objected to the Respondent's Income Tax assessment on 29th June 2023.

9. The Appellant stated that contrary to its legitimate expectation, the Respondent issued an objection decision to it on 17th August 2023 and also issued a Confirmation Assessment Notice confirming the assessment, without statement of facts contrary to section 51(9) and (10) of the TPA.

10. According to the Appellant, the Respondent issued a decision that was arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and not legitimate to the taxpayer's expectations.The Appellant further averred that the Respondent denied it genuine business allowable expenses which actions amounted to denial of the right to fair trial as the it was not informed why its objection was declined and on what grounds to support this appeal [sic].

11. The Appellant stated that the Respondent erred in the method and model it used in arriving at the estimated assessment contrary to Section 73 of the ITA.

Appellant’s prayers 12. The Appellant prayed for the following reliefs:i.That the Respondent’s objection decision be declared invalid, incorrect, unfair, time barred and does not meet the legitimate expectations of the taxpayer as per section [sic] 47 and Article 201 (b) of the Constitution;ii.That upon determination that the objection decision on the Respondent is invalid, wrong and unreasonable, the Appellant’s objection be withheld[sic] and the Respondent’s demand and confirmation be quashed entirely;iii.That the Respondent's demand for additional taxes and confirmation of estimated assessment be struck out entirely;iv.That the Respondent's actions are arbitrary, capricious, subjective, unfair and contrary to the fair administration of justice and to the legitimate expectations of the Appellant;v.That the Respondent and its agent be estopped from demanding or taking further action or steps to ensure recovery of the alleged principal tax, penalties and interests;vi.The Cost of appeal; andvii.Any other remedies that the Tribunal may determine.

Respondent’s Case 13. The Respondent’s case was premised on its Statement of Facts dated 24th October 2023 and filed on 27th October 2023 where in it stated as outlined hereunder:

14. That pursuant to section 3 (1) and (2) (b) of the ITA it is empowered to charged income[sic] on the Appellant's gains from business operation. It relied on Section 24(2) of the TPA to state that it is not bound by a tax return or information provided by, or on behalf of, a taxpayer and may assess a taxpayer's tax liability using any information available to it.

15. It argued that Section 24 and 31 (1) of the TPA allows it to amend a taxpayer's assessment, hence the Respondent's amended the assessment on 3rd April 2020. In support of its case, it relied on Section 17 (1) and (2) of the Value Added Tax Act CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) which provides as follows:“(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1), the person does not hold the documentation referred to in subsection (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation. Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

16. The Appellant relied on Osho Drapers Limited v Commissioner of Domestic Taxes (Income Tax Appeal E147 of 2020) [2022] KEHC 196 (KLR) (Commercial and Tax) (18 March 2022) (Judgment) where the Court held as follows:“it was not enough to have the documentation listed in section 17(1) of the VAT Act, as those documents needed to have been supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase."

17. The Respondent also stated that the Appellant failed to provide accurate and sufficient documentation in support of the disallowed input VAT, Contrary to section 43 of the VAT Act. The section provides as follows, in part:“(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 in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection () shall include—(a)Copies of all tax invoices and simplified tax invoices issued in serial number order;(c)purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier's name;(f)Copies of stock records kept periodically as the Commissioner may determine.”

18. The Respondent relied on the case of Highlands Mineral Water Limited v The Commissioner of Domestic Taxes, Tax Appeal E026 of 2020 where the Court set out the criteria for claiming input VAT under Section 17 of the VAT Act by stating the following:“34. I agree with the Appellant and I hold that the plain and unambiguous language of Section 17 of the VAT Act is clear that the only conditions provided for a Taxpayer to qualify for input VAT are:That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period,That the input tax is deducted by a registered person on taxable supplies made by him; andThat the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred."

19. The Respondent relied on Section 31(c) of the TPA which provides as follows:“…in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

20. The Respondent averred that its audit revealed that the Appellant received a total of Kshs 2,558,602. 00 as illustrated in 2021 and 2022 but for the same period, the Appellant filed nil returns for the periods under assessment. That in addition to the forgoing, the Respondent relied on, Section 56(1) of the TPA, and Section 30 of the Tax Appeals Tribunal Act, CAP 469B of the Laws of Kenya (hereinafter “TATA”) which unequivocally places the burden of proof on the Appellant.

21. The Respondent maintained that in its objection decision, the Appellant was informed on the basis on which the assessment was issued and further, the Appellant was informed why and how the Respondent arrived at its decision as outlined in the objection decision and as such the objection decision was valid and issued according to the letter of the law. Similarly, the Respondent maintained that in its invalidation decision, the Appellant was informed of the basis for the invalidation.

22. Finally, the Respondent stated that it amended its invalidation decision and the tax computations subsuming therein complied with the applicable tax law.

Parties’ Submissions 23. On 15th May, 2024 parties were directed to file their written submissions and only the Respondent complied with the directions of the Tribunal. The Respondent’s written submissions were dated and filed on 29th May, 2024 were adopted during the hearing on 17th July, 2024 and the Respondent made the following submissions:

24. The Respondent identified two issues for determination which it proceeded to analyse below:

(a) Whether the Respondent issued a valid objection decision 25. On whether the Respondent issued a valid objection decision, the Respondent submitted that the objection decision did include a statement of findings on the material facts and the reasons for the decision in compliance with section 51(10) of the TPA.

(b) Whether the Respondent’s charge of VAT tax on the Appellant was erroneous or excessive. 26. On this issue, the Respondent submitted that it relied on Section 23 and Section 24(2) of the TPA; Section 3 of the ITA; and Section 5 of the VAT Act to submit that the assessments were well founded in law. The Respondent submitted that the Appellant failed to provide documents in support of the objection therefore, the Appellant failed to discharge its burden of proof as was held in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021 eKLR where the court held as follows:“The shifting of the burden of proof in tax disputes flows from the presumption of correctness, which attaches to the Commissioner's assessments or determinations of deficiency, the commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.”

27. The Respondent also submitted that it may only admit deductions pursuant to the provisions of Section 16(1) of the ITA and the taxpayer has to tender relevant evidence in support of the expenses it wished allowed. The Respondent submitted that the Appellant failed to produce the said evidence.

28. The Respondent submitted that while the Appellant had presented a sample of the expenses incurred, the evidence did not muster the evidential standard in the present circumstances. It submitted that the Appellant had not presented any form of computation demonstrating the nature and relation of the expenses sought to its business operations as wholly and exclusive expenses. Thus, the documents failed as evidence for being irrelevant.

29. The Respondent cited the case of Digital Box Limited v Commissioner, Investigations and Enforcement (TAT 115 of 2017) in which the Tribunal noted that tax administration in Kenya and indeed that across the globe ,gives tax authorities the leeway to use any tax analysis method provided that the same is not biased, arithmetically flawed or unreasonable.

Respondent’s prayers 30. The Respondent prayed for the Tribunal to make the following findings:a.That the Respondent's objection decision dated 17th August 2023 is proper in law; andb.That this Appeal be dismissed with costs.

Issues for determination 31. The Tribunal having considered the parties pleadings documents and submissions puts forth the following two (2) issues for determination:a.Whether the Respondent’s objection decision dated 17th August 2023 was issued contrary to Sections 51 (9) and 51 (l0) of the TPA.b.Whether the Respondent was justified in fully confirming the assessment.

Analysis and Findings 32. The Tribunal will proceed to analyse the issues identified for determination as hereinunder:

a. Whether the Respondent’s objection decision dated 17th August 2023 was issued contrary to Sections 51 (9) and 51 (l0) of the TPA. 33. The Appellant argued that the Respondent erred when it issued an invalid objection decision contrary to Section 51(9) and (10) of the TPA. The Tribunal first considered the following provisions of Section 51(9) of the TPA:“(9)The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.”

34. The Respondent did not submit on this part, however, the Tribunal examined the Appellant’s allegation and observed that the Appellant did not demonstrate how the Respondent breached Section 51(9) of the TPA.

35. The Tribunal also notes the averment of the Appellant that the objection decision offended Section 51 (10) of the TPA on the grounds that the decision did not include a statement of findings on material facts and reasons for the decision. Section 51 (10) of the TPA provides as follows:“(10)an objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

36. The Tribunal examined the objection decision in view of the Appellant’s averment and established that the Appellant’s averments were baseless since the objection decision clearly included a statement of findings and reasons for the decision thereof. Accordingly, the finding of the Tribunal in this regard was that the Respondent’s objection decision dated 17th August 2023 was issued in accordance with the provisions of Sections 51 (9) and 51 (l0) of the TPA.

b. Whether the Respondent was justified in fully confirming the assessment. 37. The Appellant argued that the Respondent erred by assuming that a business can be in operation and incur nil costs and expenses thereby denying the Appellant genuine business allowable expenses. The Tribunal examined the Appellant’s notice of objection. In the objection, the Appellant’s assertion in the objection is reproduced below:‘‘The year 2020 the company started operation very well and had a total of 345 girls being trained for employment in Dubai, kartar (sic) the expenses related to this girls were telephone expenses, food, photography, transport, certificate of good conduct, passport processing, there were people who referred this (sic) girls and were paid some cash and some in kind. There is the payment of licenses which are very expensive which includes KAPEA, KNCCI, INSURANCE BOARD and NEA and city county license. The amount paid was an advance payment booking for the girls amounting to 2,466,593 which was received in 2020, this amount could not even cater for expenses incurred and we were waiting to receive the payment when covid grounded all the planes. We continued keeping the girls hoping that the covid will soon go away but we were forced to close when it was no longer sustainable to keep them.’’

38. The Tribunal notes the assertion by the Respondent on the other hand that the Appellant failed to provide documents which would have enabled it to reach a different finding. The Respondent in its written submissions submitted that while the Appellant had presented a sample of the expenses incurred, the evidence did not muster the evidential standard in the present circumstances. Further, that the Appellant did not present any form of computation demonstrating the nature and relation of the expenses sought to its business operations as wholly and exclusive expenses. Thus, the documents failed as evidence for being irrelevant.

39. The Tribunal further observes that from the Appellant’s passage above, the Appellant’s expenses related to telephone expenses, food, photography, transport, certificate of good conduct, passport processing, payment of licenses including KAPEA, KNCCI, INSURANCE BOARD and NEA and city county license.

40. The Tribunal examined the documentary evidence that the Appellant filed, the documents include invoices, supermarket receipts, cash sale receipts, receipts from fairway photo studio, receipts from Palms Timber and Hardware, cash sale receipt from Furniture Mart dated 17/1/2020; delivery notes with invoices dated 22/1/2020 and 23/1/2020, job card invoices dated 1/9/2020, single business permit bill and single business permit. The Appellant also provided some financial statements.

41. The Tribunal notes the following provisions of Section 15(1) of the ITA has the in regard to deductions for the purposes of determining total income:“(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, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

42. The Tribunal’s inference from the above is that not all expenses are allowable as the taxpayer has to demonstrate that the expenditure in issue wholly and exclusively incurred by the taxpayer in the production of that income. Further, the expenditure must meet the test under Section 16 of the ITA.

43. The Tribunal notes that in view of the nature of the Appellant’s business and in consideration of the provisions of Section 15 (1) of the ITA as read in tandem with section 16 of the ITA and considering the evidence that the Appellant adduced, the Tribunal is of the view that the Respondent ought to have allowed the following documents: All cash sale receipts addressed to or bearing the name of the Appellant indicating that the Appellant incurred expenditure;

Receipt from Furniture Mart dated 17/1/2020;

Purchase invoice dated 22/1/2020 together with delivery note dated 22/1/2020; and

Purchase invoice dated 23/01/2020 together with delivery note dated 23/1/2020;

44. The Tribunal’s finding is that whereas the Appellant provided invoices and receipts from supermarkets, the invoices may not be allowable because an invoice in itself is not conclusive evidence that a transaction was wholly and exclusively incurred by the taxpayer in the production of that income. The Tribunal also noted that the Appellant did not provide key documents such as bank statement to demonstrate various transactions occurred. Therefore, the production of financial statements as evidence without source documents is not sufficient.

45. In view of the foregoing, the Tribunal finds that the Respondent erred by totally rejecting the Appellant’s notice of objection as the Appellant provided some documentary evidence that are allowable.

46. The Tribunal notes that the Appellant has the burden of proving that the Respondent’s decision is incorrect, pursuant to Section 56(1) of the TPA. In Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKLR the court affirmed that the burden of proving a tax decision is incorrect rests on the taxpayer. The Tribunal finds that the Appellant has partially discharged its burden and accordingly, the Respondent was not justified in fully confirming the assessment.

Final Decision 47. The upshot of the foregoing is that the Tribunal finds and holds that the Appeal is partially meritorious and consequently makes the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 17th August 2023 be and is hereby set aside.c.The Respondent to consider the documentation provided by the Appellant and issue an objection decision within 60 days of the date of this Judgement.d.Each party to bear its own cost.

48. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF SEPTEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANGA - MEMBEROLOLCHIKE S. SPENCER - MEMBER