[2024] KETAT 38 (KLR)

Santram Traders Limited v Commissioner of Domestic Taxes (Appeal 1205 of 2022) [2024] KETAT 38 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 38 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1205 of 2022

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

January 26, 2024

Between

Santram Traders Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company incorporated in Kenya under the Companies Act whose main operation is trading in hardware materials in Eldoret, Kenya.

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 & 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 sent an email on 15th October 2021 informing the Appellant of its intention to conduct an audit from 1st January 2019 to 31st August 2021 review period and requiring the Appellant to avail various records as listed in the notice.

4. On 7th December, 2021, the Respondent conducted an interview with the Appellant and subsequently shared preliminary audit findings with the Appellant’s directors on 17th May 2022 and the Appellant was asked to provide reconciliation/ pending records. The revised findings were later shared on 9th June 2022.

5. On 14th July, 2022, the Respondent issued assessment orders for 2019 and 2020 years of income in relation to Corporation tax, PAYE and VAT all totaling to Ksh 139,117,342. 45 comprising principal tax, penalties and interest.

6. The Appellant objected to the assessment via the iTax platform as well as through its letter dated 3rd August, 2022.

7. On 9th September 2022, the Respondent informed the Appellant that its objection was not validly lodged and requested the Appellant to avail documents to validate their objection within seven days.

8. On 12th September 2022, the Appellant provided some of the requested documents via email.

9. On 30th September 2022, the Respondent issued its objection decision confirming the assessment.

10. Aggrieved by the Respondent’s objection decision, the Appellant lodged its Notice of Appeal at the Tribunal on 17th October 2022.

The Appeal 11. The Appeal was premised on the following grounds as set-out in the Memorandum of Appeal dated 14th October 2022 and filed on 17th October 2022;i.That the Respondent’s use of direct method was misplaced because the Appellant maintained proper books and ledgers as required by tax laws.ii.That while using the ideal banking test analysis, the Respondent failed to adjust all transactions correctly in arriving at the estimated or expected incomes in the bank statements.iii.That the Respondent’s use of stock estimation was biased as the Appellant maintained proper stock records and valuation. Additionally, the method used in arriving at sales for the period was misplaced.iv.That the Respondent erred in law and in fact by demanding unreasonable and unfair taxes contrary to Article 210 and 201 (b)(i) of the Constitution of Kenya, 2010 (hereinafter ‘the Constitution’).v.That the Respondent erred in law and fact by failing to invite the Appellant to clarify all transactional evidence in the computations contrary to Section 51(1)(c) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’).vi.That the Respondent’s actions were contrary to Appellant’s legitimate expectation pursuant to Section 15 of the Income Tax Act Cap 470 of Kenya’s laws (hereinafter ‘ITA’) and Article 47(1)(2) of the Constitution.

Appellant’s Case 12. The Appeal as laid out in the Appellant’s Statement of Facts dated 14th October 2022 and filed on 17th October 2022.

13. The Appellant stated that it was a taxpayer mainly dealing with hardware materials and was assessed for 2019 and 2020 review period for corporation tax, Income tax-PAYE and VAT by the Respondent on 14th July 2022. That the Appellant objected on 3rd August 2022 and the Respondent acknowledged the objection on the same date.

14. The Appellant averred that contrary to legitimate expectation and even before lapse of the legal period for raising an objection decision, the Respondent issued its objection decision on 30th September 2022 without giving reasons for rejecting the Appellant’s objection as required by Section 51(9) and (10) of the TPA.

15. The Appellant stated that it maintained and furnished the Respondent proper books and documentation as requested, but the Respondent failed to inform the Appellant why it adopted the banking analysis method and stock analysis method that culminated in the impugned objection decision contrary to Section 73 of the ITA.

16. It was the Appellant’s assertion that the Respondent failed to notify the Appellant on the inadequacy of the submitted financial documents contrary to Section 59(1)(c) of the TPA. Furthermore, the Respondent failed to invite or create a platform to allow the Appellant an opportunity to clarify information contained in the documentation provided during the review process. To buffer its position, the Appellant cited the ruling in CA McCourtie LON/92/191 as follows;“In addition to the conclusions drawn by Woolf J in Van Boeckel earlier tribunal decisions identified three further propositions of relevance in determining whether an assessment is reasonable. These are, first that the facts should be objectively gathered and intelligently interpreted; secondly, that the calculations should be arithmetically sound; and, finally, that any sampling technique should be representative and free from bias.”

17. The Appellant claimed that the Respondent erred in law and in fact by excluding other debtors, not adding back closing debtors and excluding cash at hand and bank in the adjustments. Additionally, the Respondent erred in fact and in law by not considering actual VAT adjustments for banking analysis method.

18. The Appellant avowed that the Respondent erred in law and in fact by not undertaking actual stock count, using estimated stock count and price estimates while alluding that all purchases and sales were done in one (1) financial year.

19. It was the Appellant’s assertion that the Respondent issued a decision that was arbitrary, capricious, unreasonable, unfair and contrary to administrative justice; and contrary its legitimate expectation. Further, the Appellant claimed that the Respondent’s actions amounted to denial of the right to fair trial as the Respondent appeared not to understand the Appellant’s industry and its working models and contractual obligations.

20. The Appellant averred that even after issuing its objection decision, the Respondent issued another letter on 3rd October 2022.

Appellant’s Prayers 21. The Appellant’s prayers to the Tribunal were:i.That the Respondent’s objection decision be set asideii.That the Respondent and its agents be estopped from demanding or taking further action or steps to ensure recovery of the alleged principal tax, penalties and interest.iii.That the Tribunal awards the Appellant costs of the Appeal

The Respondent’s Case 22. The Respondent replied to the Appeal through its Statement of Facts dated 28th November 2022 and filed on even date.

23. The Respondent reiterated its position as earlier communicated to the Appellant.

24. The Respondent’s witness averred that the purpose of the audit was to verify proper declaration of sales, purchases and their correctness, PAYE on salaries and wages, vehicle running expenses, loan interest expense, audit expense and establishing whether income tax was deducted.

25. Further, that the requested records for the exercise which were availed by the Appellant were; bank statements, loan agreements, audited accounts, VAT 3 returns, purchase invoices and payroll all of which were examined to ascertain whether they supported averments made in audited financial statements regarding tax.

26. The Respondent’s witness further stated that at the meeting convened to understand the business process of the Appellant, findings were shared and Directors requested for one week to consult their accountant and reconcile the findings. Later on, the Respondent shared revised preliminary findings but it was the Respondent’s assertion that the Appellant, despite reminders, did not respond to the revised preliminary findings.

27. The Respondent averred that it issued its notice of assessment on 14th September 2022 confirming its preliminary findings because the Appellant failed to respond to the findings. Further, the Respondent averred that the Appellant failed to properly lodge its notice of objection pursuant to Section 51(3) of the TPA.

28. The Respondent stated that the Appellant was notified regarding the objection invalidity via electronic mail of 9th September 2022 and was informed of the need to validate the objection as stipulated in Section 51(3) of the TPA by providing specific records; the Appellant provided the documents on 12th September 2022. The Respondent found that the documents as provided were insufficient to dislodge the assessment as issued and the same was communicated to the Appellant vide a letter sent the same day on 12th September 2022.

29. It was the Respondent’s assertion that Section 73(2)(b) of the ITA grants powers (using various methods) to assess tax to the best of judgement where there is reasonable cause to believe that a return is not true and correct. Thus, the Respondent was well within the law when it applied the banking test and stock analysis methods and that the Respondent relied on actual figures supplied by the Appellant not estimates.

30. The Respondent averred that the objection decision was rendered within the stipulated timelines of sixty (60) days and that it acted within the confines of the law as stipulated in Sections 31, 51 and 59 of the TPA. Further, the Respondent stated that the TPA provisions allow it to assess tax based on available information where a taxpayer fails to provide documents necessary for the determination of tax liability due.

31. The Respondent asserted that it granted the Appellant fair administrative action that was reasonable and procedurally fair as the Appellant was accorded time to furnish required documents and findings were communicated in good time. Thus, the Respondent acted fairly and within the confines of the law.

Respondent’s Prayers 32. The Respondent prayers to the Tribunal were;i.That the Tribunal finds there is no dispute before it for determination.ii.That the Tribunal upholds the Respondent’s decision as proper and in conformity with the provisions of the law.iii.That the Tribunal dismiss the Appeal with costs as the same is devoid of any merit.

33. The parties were directed by the Tribunal on 27th September 2023 to file and serve upon each other with respective written submissions by 23rd October 2023. The Appellant’s submissions were dated 27th October 2023 while the Respondent’s submissions were dated 31st October 2023.

34. Both written submissions have been struck out by the Tribunal in view of the fact that they were lodged outside the set timelines as directed by the Tribunal on 27th September 2023 and none of the parties sought leave of the Tribunal to file the submissions outside the timeline as specifically directed by the Tribunal. The same have accordingly not been considered in the determination hereinafter.

Issues for Determination 35. The Tribunal having carefully considered the parties’ pleadings and, documentation notes that a single issues calls for its determination which is:Whether the objection decision dated 30th September 2022 was valid.

Analysis and Determination 36. The Tribunal proceeds to analyze the facts of the Appeal as follows;Whether the objection decision dated 30th September 2022 was valid

37. The Tribunal notes that the Respondent communicated its intention to conduct an audit against the Appellant who was required to avail information and records to enable the Respondent ascertain compliance with tax obligations. Afterwards, the Respondent issued preliminary audit findings and consequently an assessment that was confirmed through the contested objection decision.

38. The Tribunal notes that the Appellant was required to avail information or records that could have dispelled the Respondent’s preliminary audit findings. The Appellant did not dispute this assertion by the Respondent. The Tribunal notes that both Section 30 of Tax Appeals Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’) and Section 56 (1) of the TPA place the burden of proof in tax disputes upon the taxpayer who has to demonstrate why a tax assessment is excessive or incorrect.

39. Furthermore, the Tribunal observes that Section 24 (2) of the TPA states as follows;“(2).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.”

40. The Tribunal notes that the Appellant in a bid to oust the Respondent’s notice of assessment provided reconciliations and records but did not fully discharge the assessment. The Respondent contradicted the Appellant’s allegations that it was not informed as to why the notice of objection was rejected by listing the documents required from the Appellant to dispel audit findings as confirmed in the assessment and consequent objection decision. The Tribunal is guided by the holding in the case of Far East Connection Limited v Commissioner of Domestic Taxes 233 of 2021 where it was held that;“The Respondent is only enjoined in law to consider and issue an objection in respect of a valid objection lodged…”

41. The Tribunal notes that the Appellant was accorded an opportunity to respond to the audit findings with a reminder sent by the Respondent. The Tribunal has sighted in the pleadings, correspondences exchanged between the parties. The Appellant has not indicated why the Respondent’s assessment was not warranted. The Tribunal observes that Section 31 (1) of the TPA grants the Respondent powers to amend an assessment by making alterations or additions from available information and to the best judgement.

42. The Tribunal spotted the Respondent’s averments to the effect that the Appellant was a fairly compliant taxpayer as shown by the audit findings apart from output VAT claims, trade debtors and cash balances. The Appellant ought to have demonstrated why the stated specific items were not correct in law and in fact but mere pleadings are not enough reason to disapprove tax liability.

43. The Tribunal observes that the Appellant states that it had legitimate expectation that the Respondent would adhere to principles of fair administration action as espoused in Articles 41, 201 and 210 of the Constitution. While acknowledging the import of this important piece of legislation, the Tribunal is of the view that the Respondent acted fairly by informing the Appellant from the onset what its audit intentions were, the documentation/records required, the invalidity of its notice of objection and what was required to validate and communicating its findings in time as stipulated in Section 51 (11) of the TPA. The Tribunal relies on the findings in the case of Republic vs Kenya Revenue Authority ex parte Krones LCS Centre East Africa Limited [2012] eKLR where it was held as follows;“Legitimate expectation can only operate inside and not outside the law; one can only rely on legitimate expectations when the law has been complied with. Where taxes have not been paid then the Appellant cannot rely on the principle of legitimate expectations to avoid paying taxes.’’

44. From the foregoing, the Tribunal observers that the Respondent’s objection decision dated 30th September 2022 was valid.

Final Decision 45. The upshot of the foregoing 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 30th September 2022 be and is hereby upheld.c.Each party to bear its own costs.

46. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF JANUARY, 2024ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A. MUGAMEMBERGEORGE KASHINDIMEMBERMOHAMED A. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER