[2023] KEHC 24209 (KLR)

Sambimba Distributors Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E052 of 2021) [2023] KEHC 24209 (KLR) (Commercial and Tax) (27 October 2023) (Judgment)

Neutral citation: [2023] KEHC 24209 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E052 of 2021

FG Mugambi, J

October 27, 2023

Between

Sambimba Distributors Limited

Appellant

and

The Commissioner of Investigations and Enforcement

Respondent

Judgment

1. The appellant has challenged the decision of the Tax Appeals Tribunal (the Tribunal) dated April 30, 2021. This decision confirmed the Commissioner’s objection decision and upheld a tax demand of Kshs.84,642,080/= from the appellant. Dissatisfied with the decision the appellant appealed to this court vide a Memorandum of Appeal dated May 24, 2021. The appellant also filed written submissions dated June 10, 2022 and supplementary submissions dated September 15, 2022.

2. The respondent, who is the Commissioner of Investigations and Enforcement (the Commissioner), opposed the appeal and relied on its statement of facts dated June 24, 2021 together with written submissions dated June 27, 2022 and supplementary submissions dated April 1, 2023.

3. The facts leading up to this appeal are that the respondent investigated the affairs of the appellant and issued a tax assessment of Kshs.84,642,080/= which comprised of both VAT and Corporation Tax. The appellant objected to the assessment vide a letter dated 21st June 2018 and the respondent confirmed the assessment via an objection decision dated July 26, 2018. Aggrieved by the Commissioner’s decision, the appellant lodged an appeal at the Tribunal and judgement was delivered confirming the Commissioner’s objection decision.

4. Being dissatisfied by the decision of the Tribunal, the appellant filed this appeal, which in my view is premised on two issues; first, the validity of the assessment and objection decision and secondly whether the appellant discharged the burden and standard of proof of purchase for VAT and expenses for corporation tax.

Analysis 5. I have carefully considered the pleadings, evidence and rival submissions filed by the parties. The appellant takes issue with the tax assessment and the objection decision and particularly that the Commissioner did not provide reasons for the assessment and there was no evidence to back the objection decision. This was in contravention to sections 49, 51(9) and (10) of the Tax Procedures Act (TPA), article 47 of the Constitution and section 47 of the Fair Administration Act.

6. The starting point is that like any administrative action, the Commissioner is required to give adequate reasons in writing for its actions. What is sufficient information for the purposes before the court is guided by sections 49, 51(9) and (10) of the (TPA) as pointed out by the appellant. The law requires that an objection decision should contain a statement of findings on the material facts and the reasons for the decision.

7. I would refer yet again to the South African decision of CSARSvSprigg Investment 117 CC T/A Global Investment, [2010] JOL 26547 (SCA). In that case the court cited with approval from the dictum of the Supreme Court of Appeal in Minister of Environmental Affairs & Tourism &others v Phambili Fisheries (Pty) Ltd &another, [2003] 2 All SA 616 (SCA) regarding what constitutes adequate reasons for purposes of a tax assessment or decision.The court found as follows:“[T]he decision­ maker [must] explain his decision in a way which will enable a person aggrieved to say, in effect:Even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging.”

8. The court went on to state that the decision by the [Commissioner] ought to communicate several things which it set out as follows:“…Set out his understanding of the relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in dispute), and the reasoning processes which led him to those conclusions. He should do so in clear and unambiguous language, not in vague generalities or the formal language of legislation. The appropriate length of the statement covering such matters will depend upon considerations such as the nature and importance of the decision, its complexity and the time available to formulate the statement. Often those factors may suggest a brief statement of one or two pages only.”

9. The critical question therefore is whether the appellant was furnished with sufficient reasons by the Commissioner, to enable it to formulate its objection. I am of the view that to answer this would require that the notice of assessment be read in conjunction with the objection decision and other correspondence relating to the matter in question, from the Commissioner.

10. I have looked at the letter of findings dated April 19, 2018 and the Notice of Assessment of Tax dated May 24, 2018 both addressed to the respondent. I have no doubt that the two documents set out in succinct terms that the appellant was being assessed for VAT and corporation tax and they provided the relevant tax period in question.

11. The correspondence presented the findings by the Commissioner that the suppliers which the appellant alleges to have dealt with were fictitious and finally the Commissioner requested further documentation to disprove this finding. The objection decision explained the reasons for the imposition of the tax being that no evidence had been produced as requested by the Commissioner.

12. The appellant cannot therefore not say that it was not informed of the reasons for the assessment. Accordingly, I find that the Commissioner’s reasons for the assessment are adequate for the purpose for which they were sought.

13. The second issue relates to whether the appellants had discharged the burden of proof required to reverse the Commissioner’s findings, to which the Tribunal’s held in the negative. The appellant’s case was that according to section 17 of the VAT Actread with regulation 7 of the VAT regulations, the production of tax invoices and corresponding ETRs was sufficient proof of supplies. This evidence had been furnished to the Commissioner and the appellant took issue with the Tribunal for overlooking this fact.

14. The appellant further argues that by providing this information, it had made out a prima facie case and it was on the Commissioner to rebut the evidence produced by the appellant. In default of this, the appellant as a taxpayer would then succeed. The appellant takes issue with any request by the appellant to produce documents from third parties, that it would not be privy to.

15. The appellant further asserts that it was entitled to deduction of costs of purchases incurred under section 15(1) of the Income Tax Act (ITA) and that these expenses had been proved to the required standards.

16. The Commissioner opposed the appeal. It was submitted that the suppliers whom the appellant claimed to have been trading with were fictitious suppliers and that they existed only on paper. The respondent stated that the appellant was given an opportunity to present further evidence to support its objection and failed to do so, hence the objection decision.

17. Section 17 of theVAT Act provides the statutory basis for claiming and deducting VAT. Section 17(3) of the VAT Act provides for the following documentation that is required for a claim of input tax:a.an original tax invoice issued for the supply or a certified copy;b.a customs entry duly certified by the proper officer and a receipt for the payment of tax;c.a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;d.a credit note in the case of input tax deducted under section 16(2) ore.a debit note in the case of input tax deducted under section 16(5).

18. This court has been very consistent in its decisions that the documents enumerated under section 17(3) of the VAT Act when provided by the taxpayer are sufficient to build a prima facie case in their favour. In this case the Commissioner’s assessment of the appellant’s tax affairs was based on the fact that the appellant was trading with fictitious companies and suspected that the appellant was involved in the missing trader tax scheme.

19. By furnishing copies of invoices and ETR receipts as provided for under section 17(3) of the Act, the appellant sought to disprove the Commissioner’s allegation. The Commissioner however questioned the veracity of the documents produced by the appellant, and the burden again shifted to the appellant to demonstrate how the goods were ordered for, purchased and supplied and to furnish the records of the sales.

20. It is no wonder that the court in Commissioner of Domestic TaxesvTrical and Hard Limited, (Tax Appeal E146 of 2020), [2022] KEHC 9927 (KLR) described the burden of proof in tax matters as a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.

21. There is legal backing for this position. Section 56 of the Tax Procedure Act (TPA) and section 30 of the Tax Appeals Tribunal Act (TATA) both impose the burden of proof on the tax payer to prove that an assessment is excessive or a tax decision is incorrect. In order to do so, where the documents supplied under section 17(3) are insufficient to disprove the Commissioner’s case, the Commissioner is within its rights to request for more documentation from the tax payer. The law recognizes that evidence required in support of transactions for tax purposes is ordinarily in the possession of the taxpayer and that the Commissioner cannot sustain the burden.

22. This court also held in the case ofCommissioner of Domestic TaxesvStructural International Kenya Ltd(Income Tax Appeal E089 of 2020), [2021] that:“. If additional documents, which would be reasonably 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.”

23. The Commissioner requested for more evidence from the appellant as empowered to do under section 59 of the TPAand section 43 of the VAT Act. This evidence was not availed meaning that the pendulum stalled on the appellant. The appellant would have dispelled the allegations of the Commissioner by presenting order forms, payment vouchers, delivery notes and stock records to prove that indeed the suppliers existed and that the commercial transactions took place as detailed by the appellant. The appellant failed to produce this evidence or at the very least, invite some of the suppliers to testify or write confirming their dealings with the appellant.

24. The appellant raises concerns about being asked to present documents that are supposed to be in the custody of third parties. In my view, not all the documents that the appellant was requested to provide fall under this category. The documents that would be required to prove how goods were ordered, stocked and sold are documents that are reasonably expected to be in the custody of a diligent businessman in the course of business.

25. In any case, I am also alive to the fact that section 59 of theTPA and section 43 of the VAT Act impose an obligation for tax payers to keep their records for a period of up to five (5) years and produce them when required by the tax authorities. I do not find anything unreasonable about the request for further evidence under the circumstances, which the appellant was at pains to produce hence the objection decision which the Tribunal confirmed.

Determination 26. For all the foregoing reasons, this appeal is therefore devoid of merit and the same is dismissed. The decision of the Tribunal dated April 30, 2021 confirming the objection decision of July 26, 2018 issued by the respondent, is upheld. There shall be no orders to costs.

DATED, SIGNED AND DELIVERED IN NAIROBITHIS 27TH DAY OF OCTOBER2023. F. MUGAMBIJUDGE