[2023] KETAT 933 (KLR)

Scanjet Construction Ltd v Commissioner of Domestic Taxes (Tax Appeal 957 of 2022) [2023] KETAT 933 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 933 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 957 of 2022

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

December 20, 2023

Between

Scanjet Construction Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

(Appeal against the Respondent’s objection decision dated 24th June, 2022)

Judgment

Background 1. The Appellant is a private limited liability company incorporated under the Companies Act. Its principal activity is in construction of utility projects within the Republic of Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. Under Section 5(1) of the Act, the Respondent 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), it 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 conducted tax investigations on the Appellant for the period January 2016 to December 2019.

4. The Appellant was issued with additional VAT and Income tax assessment on 26th October, 2020 through several Assessment orders for an aggregate tax liability of Kshs.48,413,730. 02

5. That Appellant vide a letter dated 28th January, 2022 wrote to request to lodge a late notice of objection which the Respondent accepted vide its letter dated 21st February, 2022.

6. The Respondent reviewed the Appellant’s objection and the documentation availed and vide a letter dated 24th June, 2022 issued its objection decision confirming the assessment for Kshs 39, 964, 232. 00 being VAT and Corporation tax for the period 2016 to 2019.

7. Being aggrieved by the Respondent’s decision, the Appellant filed a Notice of Appeal which it indicated to have been filed on 23rd July, 2022. However from the documentation availed the Appellant’s Notice of Appeal was stamped as received on 2nd September 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 31st August, 2022 and filed on 2nd September, 2022. a.That the Respondent erred in law and fact by disallowing some of the direct costs before charging income tax company at a rate of 30%. The Respondent disallowed direct costs of Kshs.7,971,574. 00, Kshs.5,398,539. 60 and Kshs. 2,940,915. 20 for the years 2016, 2017 and 2018, respectively, and charged corporation tax of Kshs. 2,376,472. 20 and Kshs. 1,619,561. 88 in the years 2016 and 2017. The Respondent’s decision to disallow some of the direct costs was not only illegal but also unsubstantiated as he did not demonstrate why he had to disallow those expenses which had been legally incurred by the Appellant in revenue generation and recognition.b.That the Respondent failed in his duty of reasonableness by disregarding inspection and examination of the Appellant’s books of accounts in determining the correct tax and financial positions. Various books of accounts covering sales, purchases, direct costs and other related expenses ought to have been examined by the Respondent in determining the correct tax position. By simply focussing on the comparison between the declarations made between IT2C and VAT3 returns alone, it is not prudent enough to arrive at the conclusion that shows a fair, just and considerate tax position. Such decision was totally unfair, unlawful and unacceptable.c.That the Respondent could not put in consideration the nature and scope of the Appellant’s business operations while coming up with the objection decision, subject to the provision of audited financial statements and other expenses. It is unfortunate that the Respondent failed to comprehend that the Appellant realized profits on a margin basis and that for every revenue realized, there is always a cost attached to it. It was, therefore, not in order for the Respondent to assume that since there were insufficient physical invoices in support of the direct costs, then the costs that were incurred by the company be dismissed without due consideration that some were locally and informally incurred during the normal course of revenue generation for the tax period in dispute. The Appellant still remains at liberty to claim such expenses save for records/explanation given to the Respondent in relation to the same. Such right of expression and opportunity to be heard/listened to before issuing the final decision by the Respondent was very essential in as far as the nature of the dispute at hand was concerned.

The Appellant’s Case 9. The Appellant stated that it held several engagements with the Respondent between 9th April, 2022 and 10th June 2022 in efforts to resolve the matter amicably. It stated further that it delivered purchase invoices to support its expenses and availed financial statements in support of the objection with a hope that the Respondent would review and reconsider the assessment. It averred that despite the documents it availed to the Respondent, none of them was put into consideration while issuing the objection decision.

Appellant’s Prayers 10. The Appellant prays that the Tribunal sets aside and annuls the assessment by the Respondent.

The Respondent’s Case 11. The Respondent addressed the Appellant’s grounds of Appeal through its Statement of Facts dated 3rd October, 2022 and filed on even date. It sought to respond to the issues by raising two issues for determination:a.Whether the Respondent’s Objection Decision dated 24th June, 2022 was proper in law.b.Whether the Appeal herein should be allowed.

12. In its response, the Respondent argued that Sections 24 and 28 of TPA allows a tax payer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information. Further that Section 77 of theITA and Section 31 of the TPA allows the Respondent to issue additional assessments where a taxpayer has been assessed of a lesser amount based on any additional available information and to its best judgement.

13. The Respondent averred that it assessed for additional VAT and Income tax based on variances between IFMIS payments and the sales declared in the VAT returns and the turnover declared in the Income tax returns for the tax period under review. It averred further that the Appellant failed to provide the reconciliation for the VAT returns.

14. It was the Respondent’s averment that input VAT claims are to be made within six months after the time of supply or importation and not when the VAT returns are filed, failure to do so would render the claims time barred and would be disallowed.

15. The Respondent asserted that it allowed the purchases invoices save for 10% which it disallowed as they were unsupported. The disallowed expenses were for various construction materials sourced from informal suppliers who did not provide receipts or invoices to the Appellant. Further that the Appellant failed to support the purchases even after being requested to do so.

16. It was the Respondent’s contention that the Appellant failed to avail documentation as required under Sections 23, 58 and 59 of the TPA to enable the Respondent ascertain its tax liability. It contended further that the Appellant contested the additional assessment at the objection stage however, it failed to reconcile the variances and also failed to avail the documentation in support of the disallowed expenses. It therefore averred that its objection decision dated 24th June, 2022 was proper based on the information that was available at the time.

17. The Respondent prayed for the Tribunal to find that-a.The Objection decision dated 24th June 2022 be upheld.b.This Appeal be dismissed with costs to the Respondent as the same is without merit.

Issue For Determination 18. The Tribunal has considered the parties pleadings and documentation availed and is of the considered view that this raises a single issue for determination, being:-

Whether the tax demand is due and payable 19. The Appellant had submitted that it availed the documentation to the Respondent and that for its nature of business, it realizes profits on a margin basis. It argued further that the Respondent erred in assuming that since there were no sufficient physical invoices in support of direct costs then these costs could not be considered.

20. The Respondent had argued that the disallowed expenses were of various construction materials and were unsupported even after the Appellant was requested to do so.

21. The Tribunal has sighted electronic mail correspondence from the Respondent to the Appellant requesting for invoices or receipts to support some of the unsupported expenses, however there is no evidence that the Appellant was able to provide the same. It’s not in doubt that the Appellant may have incurred some expenses, which it alleges was incurred informally. However. without any form of documentary evidence to support the same, it would be difficult to ascertain if indeed the cost was incurred.

22. The Appellant had also argued that the Respondent unfairly rejected the Appellant’s VAT input claims which it had rightfully acquired in the course of its business. The Respondent on its part had averred that the said claims were done more than six months after the time of supply and that these claims ought to be done within the six months and not when the VAT returns are filed.

23. Section 17(1) 2(a)(b) and 17 (3) (a) of the VAT Act guides on the documentation required and the timelines within which to claim for input VAT. It provides as follows:“(1)Subject to the provisions of this Act and the regulations, input tax on a taxable supply to or importation made by, a registered person may, at the end of a tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period , subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies(2)If, at the time a deduction for input tax would otherwise be allowable under subsection (1)-a.A person does not hold the documentation referred to in subsection (3); andb.The registered supplier has not declared the sales invoice in a return, the deduction for input shall not be allowed until the first tax period in which the person holds such documents 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(3)The documentation for the purposes of subsection (2) shall be –a.an original tax invoice issued for the supply or certified copy.”

24. Being a registered taxpayer for VAT, the Appellant ought to have known what documentation to keep and provide to prove its expenses. The Respondent therefore cannot be faulted for demanding the tax as it did.

25. The Tribunal reiterates its decision in the case of Heet Enterprises vs Commission of Investigations and Enforcement TAT No. 230 of 2018 where the Tribunal held as thus:-“The right to claim input VAT is premised on the assumption that the taxpayer paid VAT during the purchase of their supplies. section 17 (3)(a) of the Value Added Tax 2013 further provides that in order to claim input VAT, the relevant documents to be provided are the original tax invoice or a certified copy of the same”.

26. On the issue of Income tax, a variance had been established between the payments made to the Appellant through the IFMIS System and the VAT and IT2C declarations for the 2016 to 2019 years of income. The Tribunal notes that the Appellant sought to amend its returns, which request was granted by the Respondent. It was also established that the Appellant had had cash-based purchases which it could not fully support hence the Respondent used its discretion and disallowed 10% of the total purchases. It is the Tribunal’s considered view that in the absence of supporting documents, the 10% disallowed on the Appellant’s purchases seem reasonable.

27. Section 23(1) of the TPAspecifies the importance of keeping records for tax purposes. It provides as follows:“A person shall-a)maintain any documents required under a tax law, in either of the official languagesb)maintain any documents required under a tax law so as to enable the person’s tax liability to be readily ascertained; andc)Subject to subsection (3), retain the documents for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law”.

28. The Tribunal reiterates its holding in TAT No 102 OF 2018 Grace Njeri Githua vs Commissioner of Investigations and Enforcement where it stated as follows:-“In this Appeal, the Appellant has not provided the Tribunal with enough evidence to show that the net income the Respondent has based the tax assessment was not income or is subject to further cost deduction in arriving at the net profit. It is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is not from her”.

29. Pursuant to Section 56(1) of the TPA the taxpayer has the burden ofproving that a tax decision is incorrect. The Section provides as follows:“In any proceedings under his Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect”.

30. The Tribunal has noted in this instant Appeal that the Appellant failed to avail the relevant documentary evidence to support it assertions denying itself any remedy that would have favoured its case.

31. Consequently, the Tribunal finds that Respondent’s tax demand is due and payable.

Final Decision 32. Based on the foregoing analysis, the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 24th June, 2022 be and is hereby upheld.c.Each party to bear its own costs.

33. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA- MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKE - MEMBERMOHAMED A. DIRIYE - MEMBER