[2024] KETAT 1045 (KLR)

Salim Merchandise Company Limited v Commissioner, Intelligence, Strategic Operations and Investigations & Enforcement (Tax Appeal E174 of 2023) [2024] KETAT 1045 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 1045 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E174 of 2023

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & T Vikiru, Members

June 28, 2024

Between

Salim Merchandise Company Limited

Appellant

and

Commissioner, Intelligence, Strategic Operations andInvestigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability Company duly incorporated in Kenya and a registered taxpayer whose principal business activity is import of sugar.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. On 11th October 2022, the Respondent informed the Appellant that it intended to carry out investigations pursuant to Sections 58 and 59 of the Tax Procedures Act.

4. The investigations covered the period between January 2017 and December 2021 for Corporation income tax and VAT.

5. On 21st November 2022, the Respondent communicated its findings of the investigations to the Appellant.

6. The Respondent vide a letter dated 15th December 2022 issued a notice of additional tax assessment of Kshs 155,534,569. 00 for Corporate income tax and VAT.

7. The Appellant, vide a letter dated 30th December 2022, lodged an objection to the assessment.

8. The Respondent, vide a letter dated 6th January 2023, issued a notice of invalidation indicating that the Appellant’s objection as lodged failed to meet the provisions of Section 51(3) of the Tax Procedures Act.

9. The Respondent issued an objection decision dated 28th March 2023 confirming the assessments of Kshs. 155,543,569. 00.

10. The Appellant, aggrieved by the Respondent’s objection decision, lodged this Appeal at the Tribunal on 19th April 2023.

The Appeal 11. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 19th April 2023 and the Amended Memorandum of Appeal filed on 18th October 2023:i.That the Respondent erred in fact and in law by purporting to issue an objection decision on 28th March 2023 way outside the 60 days period provided for by the Tax Procedures Act.ii.That the Respondent erred in fact and law in its decision dated 28th March 2023 by demanding unpaid taxes assessed at Kshs. 155,534,569. 00 from the Appellant.iii.That the Respondent erred in law and in fact as the premise of demanding taxes was that the amount of monies deposited in the Appellant's bank accounts to import sugar on behalf of other entities was income and hence subject to income tax. The assessment was thus excessive, erroneous and not based on any material facts.iv.That the Respondent erred in law and in fact in its decision by outrightly contravening the doctrine of legitimate expectation that rests on the presumption on the Commissioner to follow certain procedures at arriving at the tax liability and the benefits that accrue from it.

Appellant’s Case 12. The Appellant’s case is premised on the following documents before theTribunal: -a.Its Statement of Facts dated 24th April 2023 and filed on 27th April 2023b.Its Amended Statement of Facts dated and filed on 18th October 2023. c.Its Written Submissions dated 17th February 2024 and filed on 20th February 2024.

13. The Appellant averred that Section 51 (11) of the Tax Procedures Act provides that;“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed."

14. The Appellant submitted that the objection decision was issued on 28th March 2023, which is 88 days after it had lodged a notice of objection on 30th December 2022, thereby offending the provision of Section 51 (11) of the Tax Procedures Act.

15. The Appellant relied on the case of Vivo Energy Kenya Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority &another [2020] while affirming the above-stated position, the Court held that: -“The provisions of the TPA are clear that where the Commissioner fails to make a decision on an objection within sixty days, the objection shall be allowed. This means that the objection dated 8th November 2016 in which the Applicant sought for the revision of the Commissioner's decision to demand the excise duty amounting to Kshs 127,183,364/= was allowed by operation of the law by dint of Section 51(11) of the TPA. Therefore, the 1st Respondent should not have continued to demand the payment of the excise duty through the letters dated 23rd November 2016, 3rd February 2017, 3rd October 2019, 24th October 2019, and 7th November 2019. ”

16. The Appellant further relied on the case of Eastleigh Mall Limited v Commissioner of Investigations & Enforcement (Income Tax Appeal E068 of 2020) [2023] KEHC 20000 (KLR) (Commercial and Tax) (17 July 2023) (Judgment), on the sanctity of making the objection decision within the 60 days period, the Court asserted that:-“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 n 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.”

17. The Appellant submitted that failure by the Respondent to issue an objection decision within the 60-day period was fatal, and as such, its objection was allowed by operation of the law.

18. The Appellant submitted that it had provided the Respondent with comprehensive bank statements that show that other entities deposited monies in its bank accounts for purchase of and/ or tea leaves on behalf of those entities. That the Appellant retained a certain percentage of the monies as commission.

19. The Appellant submitted that the Black's Law Dictionary, 6th edition defines an Agent to mean a person authorized by another (principal) to act for or in place of him; one instructed with another's business. That agency can be implied where there is no express agreement.

20. The Appellant relied on the case of Heifer Project International v Forest CityExport Services Limited & another [2017] eKLR where the Court citing Halsbury's Law of England 4th Edition Volume 1(2) para 19 and 20 stated as follows:-“….. a principal agency relationship is created by the express or impliedagreement of principal and agent or by ratification by the principal of the agent's acts done on his behalf. Express agency is created where the principal or some person authorized by him, expressly appoints the agent whether by deed, by writing under hand or orally. Implied agency arises from the conduct or situation of parties.”

21. The Appellant submitted that it was merely an agent of other entities. That while there is no service and/or agency agreement, the parties' conduct, where other entities send money to the Appellant, the Appellant buys sugar on their behalf, and they retain a certain amount as commission, clearly illustrates that the Appellant were merely agents.

Appellant’s Prayers 22. The Appellant prayed to the Tribunal for orders that: -a.Allows its Appeal and finds it merited.b.The Tribunal be pleased to set aside the Respondent's Objection decision dated 28th March 2023 and consequential orders thereto.c.The Costs of the Appeal be borne by the Respondent.d.Any other reliefs as the Tribunal may deem fit and just to grant in the circumstances of this Appeal.

Respondent’s Case 23. The Respondent’s case is premised on the hereunder filed documents: -a.The Respondent’s Statement of Facts dated and filed on 26th May 2023. b.The Respondent’s Supplementary Statement of Facts dated 6th December 2023 and filed on 7th December 2023. c.The Respondent’s Written Submissions dated 19th February 2024 and filed on 21st February 2024.

24. The Respondent averred that it is allowed to asses a taxpayer's tax liability using any information available to it as provided for under Section 24(2) of the Tax Procedures Act, 2015 which provides that:-“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

25. The Respondent submitted that Section 31 of the Tax Procedures Act empowers it to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner's best judgment.

26. The Respondent averred that Section 31(1) of the Tax Procedures Act 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—a.in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;b.in the case of an excess amount of input tax under the Value Added Tax Act (Cap. 476), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.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.”

27. The Respondent relied on the case of Commissioner of Domestic Taxes v Altech Stream (Ea) Limited [2021] eKLR where it was stated that:“Section 31(1) of the Tax Procedures Act allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.”

28. The Respondent submitted that it applied the banking analysis method to determine the Appellant's taxable income. The Respondent averred that this method is universally acceptable, and that the Respondent should not be faulted for applying it.

29. The Respondent submitted that the Appellant did not avail any documentary evidence to support all the contentions to substantiate its objection.

30. The Respondent averred that despite requesting the Appellant to provide documentation to support its objection, the Appellant failed to do so.

31. The Respondent further submitted that it allowed the Appellant's request for time to avail more documents, which were availed on 26th January 2023 and 13th February 2023 thereby resulting into a valid objection.

32. The Respondent relied on the case of Osho Drapers Limited versus Commissioner of Domestic Taxes [2022] eKLR, which held that;“Section 59 of the Tax Procedures Act empowers the Commissioner to request more information to satisfy himself on the taxable income declared.”

33. The Respondent posited that the burden of proof that an assessment is excessive and/ or erroneous lies with the Appellant and is provided for under Section 56 (1) of the Tax Procedures Act which provides as follows;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

34. The Respondent submitted that Section 30 of the Tax Appeals Tribunal Act provides that when appealing to the Tribunal, the Appellant has the burden of proving that where an Appeal relates to an assessment, that the assessment is excessive or, in any other case, the tax decision should not have been made or should have been made differently.

35. The Respondent averred that the Appellant has not discharged its burden of proof under Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

36. The Respondent submitted that where an Appellant makes an objection to the assessments issued by the Commissioner, the Appellant is obligated to provide all the relevant documentation it relies on in making the objection as provided for under Section 51 (3) of the Tax Procedures Act.

37. The Respondent submitted that Section 51 (3) of the Tax Procedures Act provides that:-“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;b.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 or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

38. The Respondent relied on the case of Boleyn International Limited versus Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No 55 of 2019) it was held that:-“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."

39. The Respondent averred that upon the Commissioner issuing an invalidation to the Appellant, there was no objection on the record at all. That this would mean that any subsequent attempt to object is treated as a new objection.

40. The Respondent submitted that the Appellant formally lodged a proper objection supported by documentation on 13th February 2023. That therefore, the computation of the time to issue an objection decision started on the aforementioned date. Respondent’s Prayers

41. The Respondent prayed that:a.The Appellant's Appeal be dismissed with costs andb.The Objection decision of 28th March 2023 be upheld.

Issues For Determination 42. The Tribunal frames the following as the issues for its determination:a.Whether the Respondent’s Objection decision was made out of time.b.Whether the Respondent was justified in confirming the VAT and Income tax assessments on the Appellant.

Analysis And Findings 43. The Tribunal has carefully considered the pleadings filed by the parties, the Respondent’s submissions and the numerous authorities and provisions of law which they have sought to rely on. The Tribunal’s findings and holding on the issues for determination are set out below:-

a. Whether the Respondent’s Objection Decision was made out of time 44. The Appellant anchored its Appeal on the premise that the Respondent’s objection decision was out of time and that its objection had been deemed allowed by operation of the law.

45. The Appellant submitted that the objection decision was issued on 28th March 2023, which is 88 days after it had issued a notice of objection on 30th December 2022, thereby offending the provision of Section 51 (11) of the Tax Procedures Act.

46. The Respondent countered that the Appellant lodged an invalid objection not having all the relevant documents as required by Section 51(3) of the TPA and that the Appellant only validated the objection on 13th February 2023 upon provision of additional documents.

47. The Respondent posited that according to Section 51(11) of the TPA the sixty days started counting when the Appellant validated its notice of objection on 13th February 2023 hence its objection decision of 28th March 2023 was rendered within the sixty-day statutory timeline.

47. In order to determine the issue in dispute, the Tribunal took into consideration the chronology of events and important dates in this dispute, which are as follows;i.Date of assessment was 15th December 2023ii.The date of objection was 30th December 2023iii.The date of invalidation and request for additional information by the Respondent was 6th January 2023iv.Dates of subsequent objections and provision of information were; 21st January 2023, 26th January 2023 and 13th February 2023. v.The objection decision was issued on 28th March 2023.

47. Section 51(11) of the TPA provides as follows regarding the timeline for issuance of an objection decision:“The Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

50. Further Section 51(3) of the TPA provides as follows regarding validity of an objection:-“(3)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;b.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 or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.” (Emphasis added)

51. The evidence laid before the Tribunal indicates that there was correspondence between the parties beginning with the invalidation of objection and request for information on 6th January 2023 by the Respondent followed by the Appellant’s supply of additional documents on 21st January, 27th January and 13th February all of 2023.

52. Section 51(11) above provides that an objection decision shall be made within 60 days of receipt of a valid notice of objection while Section 51(3) above elucidates what constitutes a valid notice of objection.

52. Further Section 51(4) provides as follows with regard to an invalidly lodged notice of objection:“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

54. The Tribunal notes that the Respondent notified the Appellant of the invalidity of its notice of objection on 6th January 2023 which was within 14 days of receipt of the notice of objection in accordance with the provisions of Section 51(4) of the TPA. What followed was correspondence between the parties with the last correspondence being on 13th February, 2023 upon receipt of which the Respondent acknowledged that the Appellant’s notice of objection had thus been validated.

55. The Appellant’s notice of objection having been validated on 13th February 2023, it follows that the sixty days in the instant case began to count from the 13th February 2023 hence the sixtieth day would have been on 13th April, 2023.

56. In light of the above, the Tribunal finds that the Respondent’s objection decision rendered on 28th March, 2023 was within the statutory timelines.

b. Whether the Respondent was justified in confirming the VAT and Income tax assessments on the Appellant. 57. The Tribunal having determined that the Respondent’s decision was rendered within statutory timelines now shifts its focus to the veracity of the additional tax assessments.

58. The Appellant averred that the Respondent erroneously arrived at an income tax assessment of Kshs. 109,279,783. 00 on the presumption that any money in the company’s account constituted an income.

59. The Appellant averred that it was merely an agent of other entities whereupon it received deposits in its bank accounts for onward purchase of sugar or tea on their behalf and that it retained a certain amount as commission. That while there was no service and/or agency agreement, the parties' conduct clearly illustrated that the Appellant was merely an agent.

60. The Appellant further averred that the Respondent erroneously arrived at a VAT assessment of Kshs. 45,254,786. 00 by either increasing or decreasing the Appellant’s purchases. That it was improper, unfair and unprocedural for the Respondent to arbitrarily demand taxes without any legal basis.

61. The Respondent submitted that its investigations pointed to under-declaration in the VAT and income tax returns, overclaimed purchases and overclaimed input tax. The Respondent stated that this formed the basis of the assessments.

62. The Respondent stated that it is not bound by the Appellant’s tax return and that it is empowered by Section 24(2) of the TPA to assess the Appellant based on any information available to it and by Section 31 of the TPA to make alteration to original assessments.

63. The Respondent submitted that it resorted to the banking method to determine the taxable income of the Appellant since the Appellant failed to provide documentary evidence to support all the contentions to substantiate the objection.

64. Once the Respondent raises an assessment, the burden of proof falls on the Appellant to show that the assessment is excessive or incorrect.

65. Section 56(1) of the TPA provides as follows with regard to burden of proof in tax cases: -“In any proceedings under this part, the burden of shall be on the taxpayer to prove that a tax decision is incorrect.”

66. Further, Section 23(1) (b) of the TPA provides as follows regarding maintenance of records for tax assessment purposes: -“A person shall;-maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained”

67. The Tribunal followed through the correspondences between the parties running from 6th January 2023 to 13th February 2023 which demonstrate that the Respondent made several attempts to obtain documents to enable it resolve the variances identified between the Appellant’s income tax sales and VAT sales.

68. The Tribunal pored through the documents provided by the Appellant at the Appeal stage and noted that the Appellant only provided bank statements, bank reconciliations and import entry documents. The Appellant neither attached agreements nor any other documents to substantiate its averment that it acted as an agent on behalf of principals on whose behalf it purchased sugar and tealeaves.

69. The reconciliations provided by the Appellant were scanty in detail failing to provide clarity as to whether the inflows were income or not. Further, no documentation was attached to support the alleged refunds to the said principals. Although the Appellant tabulated the inflows and refunds in the reconciliations, failure to attach documents in support of the remarks on the reconciliations rendered them mere averments which couldn’t be relied upon as proof of the alleged transactions.

70. The Tribunal arrives at the conclusion that Appellant did not provide primary documents at the objection stage which were critical in resolving the tax dispute. The Appellant equally failed to provide the said documents at the Appeal as required by Section 30 of the TAT Act which provides that:“In any proceeding before the Tribunal the Appellant has the burden of proving –a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

71. The Tribunal’s does not wish to depart from its holding in TAT 7 of 2015 Ushindi Exporters Limited V Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No. 7 of 2015) where the Tribunal held that: -“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the Tax Appeals Tribunal Act……. ……….By purporting to shift the burden of proving that the tax assessment against it was incorrect or should have been made different the Appellant failed in discharging the burden, placed upon it by law”

72. By failing to provide the primary documents, the Appellant failed to discharge its burden of proof. The Tribunal is further guided by the holding of the High Court in the case of Commissioner of Domestic Taxes -vs- Structural International Kenya Ltd ITA E089 of 2020 (2021) KEHC 152 (KLR): where it was held that-“For the avoidance of doubt, the Tribunal is reminded that in matters where the supply of goods, be it for VAT purposes or Corporation Tax, the burden is always on the trader / taxpayer to show that, the documentation set out in the statute and in which he relies on arose out of a commercial transaction. Period. If additional documents, which would reasonably be expected to be in his possession is requested for to verify the alleged transactions, he should produce the same to the Commissioner. That is what is expected of a keen and diligent trader.”

73. In view of the foregoing, the Respondent cannot be faulted for having applied its best judgment on the basis of available information in arriving at the

Appellant’s tax liability. 74. The Tribunal therefore finds that the Respondent did not err in confirming the VAT and Corporate income tax additional assessments on the Appellant.

Final Decision 75. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 28th March 2023 is hereby upheld.c.Each party to bear its own costs.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERTIMOTHY B. VIKIRU - MEMBER