[2023] KEHC 23536 (KLR)

Saniken (K) Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E049 of 2021) [2023] KEHC 23536 (KLR) (Commercial and Tax) (13 October 2023) (Judgment)

Neutral citation: [2023] KEHC 23536 (KLR)

Republic of Kenya

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

Commercial and Tax

Income Tax Appeal E049 of 2021

FG Mugambi, J

October 13, 2023

Between

Saniken (K) Limited

Appellant

and

The Commissioner of Investigations and Enforcement

Respondent

Judgment

Brief Facts 1. The appeal before Court results from the decision of the Tax Appeals Tribunal delivered on 23rd April 2021. The Commissioner investigated on the affairs of the appellant and issued a tax assessment of Kshs 231,202,367. 52 comprising of VAT and corporation tax. The appellant filed a notice of objection dated 21st June 2018 and the Commissioner subsequently confirmed the assessment vide an objection decision dated 26th July 2018.

2. Dissatisfied with the findings of the respondent, the appellant lodged an appeal at the Tax Appeals Tribunal (the Tribunal) where judgment was delivered on 23rd April 2021 dismissing the appeal. Aggrieved by that decision, the appellant has lodged the present appeal vide a Memorandum of Appeal dated 24th May 2023.

3. The appellant challenged the Honourable Tribunal’s decision holding that the objection decision as issued by the respondent was valid. The appellant also took issue with the finding of the Tribunal that the appellant had not discharged the burden of proof under the tax legislation to substantiate its claim.

4. The respondent responded to the appeal vide a statement of facts dated 24th June 2021 filed by Richard Ngari. The parties canvassed the appeal by way of written submissions. The appellant filed submissions dated 9th June 2022 and supplementary submissions dated 15th September 2022 whereas the respondent filed their written submissions dated 27th June 2022.

Analysis 5. I have carefully considered the pleadings, evidence and submissions of the rival parties as well as the impugned judgment. The Court has first of all been urged to find that the objection decision issued by the Commissioner was invalid for not addressing the issues raised in the appellant’s notice of objection and not giving reasons for its findings, which undermined the appellant’s right to be heard.

6. The right of a taxpayer to be provided with reasons for a decision are provided for under section 49 and 51(10) of the TPA. The latter provision requires that an objection decision should contain a statement of findings on the material facts and the reasons for the decision. In my view, there is no obligation for the Commissioner to deal with each and every one of the grounds separately, so long as the decision presents the statement of findings, addresses the material facts and provides the reasons for the decision.

7. The standard for what constitutes adequate reasons for an assessment or decision was described in the South African decision of CSARS v Sprigg Investment 117 CC T/A Global Investment, [2010] JOL 26547 (SCA). The court quoted 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) to the extent that:“[T]he decision­maker [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. I have examined the communication from the Commissioner right from the assessment to the objection decision. I concur with the findings of the Tribunal that the Commissioner enumerated the findings from its investigations and the basis of the findings and asked for more evidence from the appellant.

9. When the evidence was not produced, the Commissioner gave reasons for the objection decision. These were that the appellant had failed to produce evidence to support its allegations in the objection, and to counter the Commissioner’s investigations of the alleged missing trader scheme. I might add that the said reasons precipitated this appeal thus demonstrating that the tax payer had sufficient notice of the reasons for the decision.

10. On the second issue the court is called upon to establish whether the Tribunal erred in finding that the appellant did not sufficiently demonstrate proof of purchase and sales and expenses incurred, on which basis the tax claims were disallowed. The appellants position was that it was only required to submit the documents listed under section 17(3) of the VAT Act and having done so, there was no basis for the objection decision by the Commissioner.

11. 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) or(e)a debit note in the case of input tax deducted under section 16(5).”

12. 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 his 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.

13. 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.

14. It is no wonder that the Court in Commissioner of Domestic Taxes v Trical 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.

15. There is legal backing for this position. Section 56 of the 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.

16. This Court also held in the case of Commissioner of Domestic Taxes v Structural 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.”

17. Back to the matter before the Court, I note that the Commissioner requested for more evidence from the appellant as empowered to do under section 59 of the TPA and section 43 of the VAT Act. This evidence was not availed meaning that the pendulum stalled on the appellant. The appellant was required to provide documents such as order forms, payment vouchers, delivery notes and stock records to prove that indeed these suppliers existed and that the commercial transactions took place as detailed by the appellant. The appellant failed to produce this evidence.

18. These are documents that are reasonably expected to be in the custody of a diligent businessman in the course of business. In any case, I am also alive to the fact that section 59 of the TPA 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.

Determination 19. In conclusion and for all the above reasons, the appeal lacks merit and is therefore dismissed. The decision of the tribunal dated 23rd April 2021 is hereby upheld. There shall be no orders to costs.

DATED, SIGNED AND DELIVERED IN NAIROBI THIS 13TH DAY OF OCTOBER 2023. F. MUGAMBIJUDGE