[2024] KETAT 942 (KLR)

Seroney v Commissioner of Legal Services and Board Co-ordination (Tax Appeal E183 of 2023) [2024] KETAT 942 (KLR) (12 July 2024) (Interim Judgment)

Neutral citation: [2024] KETAT 942 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E183 of 2023

RM Mutuma, Chair, EN Njeru, M Makau, B Gitari & AM Diriye, Members

July 12, 2024

Between

Lydia Chepkemboi Seroney

Appellant

and

Commissioner of Legal Services and Board Co-ordination

Respondent

Interim Judgment

Background 1. The Appellant is a citizen of the Republic of Kenya, resident in Kenya and registered as an individual taxpayer for income tax obligation.

2. The Respondent is the principal appointed under the Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out in the schedule to the said Act.

3. The dispute giving rise to the Appeal herein arose as a result of an assessment dated 8th February 2023 in the total sum of Kshs. 33,824,715. 00 inclusive of penalties and interest for the period 2016 to 2022, which assessment the Appellant contended was issued without the Respondent undertaking an audit or investigation on the tax affairs of the Appellant and outside the provided period of five years.

4. The Appellant lodged her objection notice to the assessment on 21st February 2023, and the Respondent confirmed the assessment in its decision dated 16th March 2023.

5. Aggrieved by the Respondent’s decision the Appellant lodged the Notice of Appeal dated and filed on 14th April 2023 appealing against the said decision.

The Appeal 6. The Appellant in her Memorandum of Appeal dated and filed on 28th April 2028, set out the following grounds of appeal:a.The Respondent erred in law and fact by confirming its assessment which is erroneously based on imaginary and assumed income of the Appellant instead of the actual income earned during the period under review.b.The Respondent erred in law and fact by misapplying the provisions of Section 29 and 30 of the Tax Procedures Act which provides for use of best judgement- by the Commissioner where information is not provided since the Appellant provided all material information in relation to the assessment.c.The Respondent erred in law and fact by issuing an assessment to the Appellant in relation to residential properties allegedly situated at Lessos kwa Wamama which do not belong to the Appellant.d.The Respondent erred in law and fact by holding that the Appellant earns farming income without any basis or evidence of such income and proceeding to issue and confirm an assessment based on that assumption.e.The Respondent erred in law and fact by assessing additional income from the Appellant without any basis or logic proceeding to issue and confirm an assessment based on these outrageous estimates.f.The Respondent erred in law and fact by disregarding the provisions of Section 15 and 16 of the Income Tax Act which provide that all expenses incurred in the generation of taxable income are tax deductible, and proceeded to confirm its assessment without considering any of the expenses incurred by the Appellant during the period under review.g.The Respondent erred in law and fact by disregarding the actual turnover realized and reported by the Appellant and arbitrarily increased the Appellant’s turnover for the period under review and thereafter assessing additional taxes, penalties and interest.h.The Respondent erred in law and fact by exercising its powers arbitrarily, capriciously and in bad faith by issuing unfounded and unreasonable assessment based on figures plucked from thin air.i.The Respondent erred in law and fact by requesting for documents relating to a period the statutory prescribed maximum period of five years and proceeding to issue an assessment outside the prescribed statutory period of five years.

The Appellant’s Case 7. The Appellant’s case is premised on its;a.Statement of Facts dated and filed on 28th April 2023, together with the documents attached thereto; and,b.Written submissions dated 12th January 2024 and filed on 15th January 2024.

8. The Appellant stated that the Respondent without carrying out an audit or investigation on the tax affairs of the Appellant issued an assessment dated 8th February 2023 for the period 2016 to 2022, to which the Appellant objected to on 21st February 2023, and the Respondent confirmed the entire assessment on 16th March 2023.

9. The Appellant further stated that the Respondent’s basis of assessment was that during the period under review, the Appellant had received rental income from four house blocks and did not declare the income in her tax returns. The Respondent had also contended that the Appellant also received farming income during the same period in addition to the rental income.

10. The Appellant further stated that the Respondent also alleged that since the Appellant is a director in some companies, she must have received income from such directorship which she did not declare.

11. The Appellant stated that the Respondent had also contended that the Appellant needed capital to acquire or build the residential houses where the Appellant earns rent and as such, the Respondent estimated what it deemed to be the income of the Appellant during that period and proceeded to assess tax on the estimated income.

12. On the assessment on rental income for Kshs. 1,750,190 .00, the Appellant stated that she categorically informed and affirmed to the Respondent that she did not own the two houses allegedly situated at Lessos kwa Wamama, that the Respondent purports to be hers, and put the Respondent to strict proof thereof on the ownership of such buildings in her objection notice and grounds of objection. As such the Appellant posited that she has never collected rental income from the alleged two houses at Lessos kwa Wamama and that she is a total stranger to these houses.

13. The Appellant cited the case of Kenya Revenue Authority vs. Mann Diesel & Turbo Se, Kenya Ltd (2021) eKLR, which espoused the decision of the Supreme Court of Canada in Johnson vs. Minister of National Revenue (1948) SCR 486 that;“To prove a case on its face you must provide evidence that, unless rebutted would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontroverted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.”

14. It was averred by the Appellant that she had established a prima facie case by her confirmation that she did not own the houses purported to be hers at Lessos kwa Wamama, and neither does she collect any rent therefrom, and therefore the amount of taxable income for which she had been assessed exceeded the amount of her actual rental income on account of the Respondent assessing ghost income from houses she did not own nor collect rent from. The least the Respondent could then do was to provide evidence of ownership or collection of rent from those houses by the Appellant or point as to what information they relied on to issue an assessment in relation to the disputed third-party property of which the Appellant was a stranger.

15. The Respondent therefore ought to have provided evidence of ownership of the impugned houses by the Appellant located at Lessos kwa Wamama, and collection of rent thereof which it did not, the Appellant asserted.

16. The Appellant stated however that she had confirmed to the Respondent that she only owned the houses at Naisambu, whose construction had started in 2017 and completed in 2018. She further stated that these house at Naisambu were first occupied in 2018 and it was not until 2019 when all the units were occupied by tenants. She asserted that she had been remitting rental income tax for the rent collected from tenants in these premises for the period in question and filed and provided the relevant returns and support.

17. The Appellant contended that the assessment by the Respondent in respect to the additional rental income is erroneous to the extent of inclusion of the houses allegedly situated at Lessos kwa Wamama, and also in respect of the period over which the rent was alleged to have been collected (2016 – 2022).

18. In her submissions, the Appellant submitted that contrary to the Respondent’s assertions, she duly filed her returns and paid rental income tax for the houses she owns at Naisambu since she rented them out in 2019, and reiterates that she does not own any house at Lessos kwa Wamama and the Respondent’s additional rental income tax assessments are erroneous.

19. It was also a submission of the Appellant that despite numerous attempts to explain to the Respondent about the ownership of houses at Lessos kwa Wamama and the erroneous assessment of rental income tax on houses at Naisambu, the Respondent failed or refused to listen to the Appellant’s explanations and documentation produced as proof and evidence. It was a further submission that the Respondent did not rebut the Appellant’s explanations with evidence confirming that the Appellant was the owner of the alleged houses, or collected rent thereon.

20. The Appellant reiterated the citation in the case of KRA vs. Man Diesel & Turbo Se K Ltd (supra).

21. The Appellant submitted that she had established a prima facie case that she does not own the houses as alleged at Lessos, and neither does she collect any rent therefrom. The Respondent therefore at a minimum ought to provide evidence of ownership or collection of rent from these houses by the Appellant to back its contention, or evidence it relied on in issuing an assessment in relation thereto.

22. The Appellant therefore submitted that the assessment in relation to the houses at Lessos is erroneous and ought to be set aside or nullified.

23. On other income tax assessment for Kshs. 39,773,273. 00, the Appellant stated that save for the admitted rental income, she did not have any other income over the period under review. Therefore, the reasoning by the Respondent that the capital to acquire or build the residential houses was derived from taxable income was presumed, farfetched and erroneous, she averred. The Appellant therefore averred that there are many ways of financing acquisition of assets including loans, inheritance, earnings of her spouse amongst other sources. She further contended that the assumption by the Respondent that the houses at Naisambu were constructed or acquired using earnings from farming or directorship income was mistaken, farfetched, and speculative. The Respondent further did not state the basis of presuming the construction cost, nor the applicable period.

24. The Appellant averred that the estimated income of Kshs. 10,000,000. 00 for the year of income 2015 is a figure plucked from the air with no verifiable basis, and the escalation thereof by 10 % is not founded on any legal provision, is unscientific and illogical.

25. The Appellant contended that even where best judgement is applied by the Respondent, there must a basis for the assessment, and assessments cannot be left to speculation, guesswork and arbitrary whims of the Respondent.

26. The Appellant buttressed its averments with the case of Keroche Industries Ltd vs. Kenya Revenue Authority & 5 others [2007] eKLR, where it was held;“Therefore, whereas this court is not entitled to question the merits of the decision of the taxing authority, that authority must exercise its powers fairly and there ought to be a basis for the exercise of such powers. A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion that would justify the court in intervening.”

27. The Appellant also cited the case of Republic vs. Institute of Certified Public Secretaries of Kenya ex parte Vipichandra Bhatt T/A A.J Bhatt & Co HCMA 285/2006 (Nairobi), Where it was held;“In the absence of a rational explanation, one must conclude that the decision challenged can only be termed irrational within the meaning of wednesbury unreasonableness, was in bad faith and constitutes a serious abuse of statutory power since no statute can ever allow anyone on whom it confers a power to exercise such power arbitrarily and capriciously or in bad faith.”

28. The Appellant posited that from the foregoing precedents, it is clear that tax can only be imposed on actual proven income derived or accrued, and not on assumed and speculative figures derived from the whims of the Respondent as obtains in the instant case.

29. It was also contended that the Respondent erroneously invoked the use of the best judgement by the Respondent to determine the taxes due by the Appellant, as the best judgement is only applicable where there are business activities generating income and firmed up base.

30. It was asserted that in the current assessment, the Appellant established that she does not engage in farming activities, and the Respondent did not rebut that fact. Establishment of farming activities is at the heart and a condition precedent to the assessment.

31. The Appellant averred that best judgement would only be reasonable where in the first instance, farming and other business activities of the Appellant are established, and there is no sufficient accounting and tax returns supporting documentation available. In the instant assessment, the Respondent wildly imagined and invented farming business for the Appellant and assessed tax on the imagined business, the Appellant further contended.

32. The Appellant further contended that discretion and application of best judgement by the Commissioner does not contemplate instances of whimsical and baseless assessments by the Respondent. The Appellant cited the case of Keroche industries Ltd (supra), and Digital Box Ltd vs. Commissioner of Domestic Taxes 115 of 2017 eKLR, where the reasoning in Van Boeckel vs. C & E QB 1980 STC 290 in respect of “judgement” was adopted;“the very use of the word ‘judgement’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgement on the material which is before them. Secondly, clearly there must be some material before the commissioners on which they can base their judgement. If there is no material at all it would be impossible to form a judgement as to what tax is due. What the words “best judgement” envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material, come to a decision which is one which is reasonable and amount of tax which is due.”

33. The Appellant buttressed its case further by the citation in the case of Family Signature Ltd vs. Commissioner for Investigations and Enforcement TAT 25 of 2016, where the TAT held;“When the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer, it has onerous responsibility to act reasonably by exercising best judgement- informed by pragmatic and reasonable considerations that do not in any manner result in ridiculously high-income margin.”

34. The Appellant averred that the absence of any material forming a basis for the best judgement by the Respondent as well as the arbitrariness and unreasonableness discredits and taints the correctness and validity of the assessment.

35. The Appellant submitted that she did not have any other income save for the rental houses at Naisambu during the period under review, and therefore it was unjust and unfair for the Respondent to arbitrarily adjust the Appellant’s income tax on the basis of erroneous and unsubstantiated alleged undisclosed income estimated at Kshs. 10,000,000. 00 since the year 2015 and escalated the same at 10 % every year in the assessment of income tax, which the Respondent cannot explain the methodology used to estimate the said income, hence confirming the entire assessment is flawed to the core.

36. It was also submitted by the Appellant that the Respondent contended to have invoked the principle of best judgement in assessing the taxpayer as provide for under Section 29(1) of the TPA;“(1)Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the commissioner may, based on such information as may be available and to the best of his or her judgement make an assessment.”

37. The Appellant cited the case of Saima Khalid vs. Commissioner for Her Majesty’s Revenue & Customs App. No. TC/2017/02292, where the application of the principle of best judgement was explained further.

38. It was further submitted that it was apparent the Respondent did not apply the best judgement principle as elaborated in the cited cases, as the assumption and estimation of income was not only excessive but arbitrary. The Respondent even claimed that the Appellant had farming income yet it had not been able to show the existence of the said farming activities allegedly conducted by the Appellant and having no evidence, material or basis to prove the same, it is impossible for the Respondent to form a judgement as to whether any tax is due.

39. The Appellant further submitted that the Respondent further assessed the Appellant based on other income (capital) it deems or presumed the Appellant ought to have acquired to build the residential houses, without proof that the said capital was taxable income, and subjected the said deemed capital to tax, yet it is trite law that there are multiple sources of building financing / business capital, including loans, inheritance, spousal contributions and so on. Instead the Respondent proceeded to unilaterally adjust the Appellant’s presumed revenue upwards thus assessing additional income tax on non-existent taxable revenue, which appears to have been plucked from the air to make the additional assessments against the Appellant seem possible without any justification or basis.

40. The Appellant to buttress its submissions reiterated the citations in the cases of Keroche Industries Ltd vs. KRA & 5 Others (supra), Republic vs. ICPAK ex parte Vipichandra Bhatt (supra), Digital Box Ltd vs. Commissioner of Domestic Taxes (supra) and Family Signature Ltd vs. Commissioner for Investigations & Enforcement (supra).

41. The Appellant also cited the case of Silver Chain Ltd vs. Commissioner Income Tax & 3 others (2016) eKLR, where it was stated;“The task of collecting taxes should not lead to discouraging taxpayers from carrying on with their business. If the taxpayers’ close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid, there will be no funds to run the Government operations. This calls for a balance between tax collectors and taxpayers whereby the process becomes inclusive as opposed to unilateral. There must be fairness in the process of tax assessment.”

42. On Non-deduction of expenses, the Appellant stated that without prejudice to the preceding averments, even assuming that the Appellant had other incomes, which is not the case, then in making of the estimates the Respondent ought to have deducted expenses in the presumed generation of that income, which it did not factor in.

43. It was further contended that it is impossible to run a business without incurring expenses, the Respondent did not allow any expenses in its estimated assessment raising the question of soundness and legitimacy of the assessment.

44. The Appellant submitted that even if there was additional income earned by the Appellant, she ought to have incurred expenses in generation of that income. Noteworthy that tax is charged on profits, it would have been prudent to consider estimating expenses the same way the Respondent estimated the income.

45. It was therefore submitted that the Respondent failed to acknowledge the expenses incurred thereon contrary to Section 15 (1) of the Income Tax Act, which provides that;“15(1) For the purpose of ascertaining the total income of any person for a year of income there shall , subject to section 16 of this Act , be deducted all expenditure incurred in such a year of income which is expenditure wholly and exclusively incurred by him in the production of income , and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is , for the purpose of ascertaining total income , taken to be income for any year of income , then such expenditure incurred during such period shall be treated as having been incurred during such year of income .”

46. The Appellant also cited the case of Hancock vs. General Reversionary and investment company (1919) KB 5.

47. On the Respondent’s assessment being made beyond the period of five years, the Appellant averred that the Respondent requested for documents relating to a period beyond the statutory prescribed maximum period of five years from the Appellant and proceeded to issue an assessment outside the prescribed statutory period of five years from the year 2015 to 2022.

48. The Appellant submitted that it has discharged its burden of proof and in detail and shown that the objection decision dated 16th March 2023 is erroneous.

Appellant’s Prayers 49. By reason of the foregoing the Appellant prayed that the Tribunal;a.Allows this Appeal;b.Annuls the Respondent’s confirmed assessment based on the grounds above, as well as the information contained in the Statement of Facts attached; and,c.Awards the Appellant the costs of the Appeal.

The Respondent’s Case 50. The Respondent’s case premised on its;a.Statement of Fact dated 29th May 2023 and filed on 30th May 2023 together with the documents attached thereto.

51. However, though the Respondent filed its written submissions dated 30th January 2014 on 1st February 2024, the same were ordered expunged from the record on 5th February 2024 for being filed out of time, and the same will therefore be disregarded and its case be considered only on the basis of pleadings it had filed.

52. The Respondent stated that it conducted a compliance check on the Appellant which it conducted as a review on a non-agreed basis on 8th February 2023. Its compliance check covered the period January 2015 to December 2022 for income tax individual, the Appellant being an individual who earns rental income from properties owned.

53. The Respondent posited that in assessing the Income tax monthly rental income, it considered that the Appellant is known to own a one storied building in Naisambu, Trans Nzoia and the rent thereon was disclosed and known.

54. The Respondent also posited that it had come to its knowledge that the Appellant had a four storied apartment block at Lassos kwa Wamama consisting of two and one-bedroom apartments. The rent was not known and had to be estimated, it further stated.

55. It stated that based on the above, it did a tax computation on a monthly basis comparing monthly collectable rent against the declared rent resulting in a total tax (inclusive of penalties and interest) summarized hereunder: -2018 …………….. Kshs 286,8882019……………… Kshs 308,7252020………………. Kshs 270,0202021 ………………. Kshs 189,9112022 ………………. Kshs 286,325Total ……………….Kshs 1,341,868

56. The Respondent further stated that in the assessing the Appellant for individual income tax, it made an estimation of the undisclosed income in 2015 to be Kshs. 10,000,000. 00, and escalated the said undisclosed income by 10 % every year. It also considered information that the Appellant also earned income from farming and not rent alone, and that she was a director of some company and must have earned income from this company. The Appellant did not provide any of the information or records in support this information.

57. The Respondent further stated that following the estimation of the Appellant’s undisclosed income and escalation thereon by 10%, it assessed the income tax on the same (inclusive of penalties and interest) as hereunder:2015 ……………………………. Kshs 5,716,359. 2016 ……………………………. Kshs 5,894,216 .2017 ……………………………. Kshs 5,928,312 .2018 ……………………………. Kshs 6,052,561 .2019 ……………………………. Kshs 6,154,970 .2020 ……………………………...Kshs 5,140,799 .2021……………………………….Kshs 5,149,013 .

Total ……………………………….Kshs 40,036,231. 00 58. The Respondent posited that since the iTax system does not allow the issuance of additional assessments beyond seven years from the return period, the computation was adjusted to cover the period from 2016, and not from 2015. Consequently, the total individual income tax assessed came to a total of Kshs. 34,319,872. 00 (inclusive of penalties and interest) and the monthly rental income tax of Kshs. 1,341,868. 00, bring the total tax assessed to Kshs. 35,661,740 .00.

59. The Respondent stated that the Appellant aggrieved by the Assessment filed its objection on 1st March 2023, and the Respondent confirmed the Assessment for Kshs. 9,527,459. 00 on 16th March 2023.

60. In response to the Appellant’s Memorandum of Appeal, the Respondent stated that its compliance check notice was issued to the Appellant dated 7th November 2022, and the review was concluded on a non-agreed basis on 8th February 2023.

61. The Respondent also averred that the additional assessments were issued using available information and best judgement in line with Section 31 of the TPA which empowers the Respondent to amend self-assessments using available information and best judgement.

62. The Respondent also stated that in the absence of further documents from the Appellant, it relied on information within its reach. It stated further that the commissioner has power to disallow an objection upon engaging a taxpayer which it did.

63. The Respondent also stated the Appellant’s brother visited its Eldoret office on 16th January 2023 to represent the Appellant and discuss the rental income declarations whereon he was requested to provide further records which he did not provide.

64. It was further averred by the Respondent that the five-year limit on the additional assessments issued were within the five-year time limit.

65. It was further stated that the Respondent is not bound by the Appellant’s tax returns or information provided by, or on behalf of the Appellant and the Respondent may assess the Appellant’s tax liability using any information available to him.

66. It stated that under Section 31 (1) of the TPA, it may amend the Appellant’s tax assessment by making alterations or additions based on the available information and to the best of his judgement to ensure that the Appellant is liable for the correct amount of tax payable.

67. The Respondent stated that the provisions of Section 56 (1) of the TPA, Section 30 of the TAT Act and Section 107 of the Evidence Act threshold has not be met by the Appellant to prove the Respondent’s decision incorrect or unlawful, hence the Appellant had not discharged its burden of proof by providing documentary evidence showing why the Respondent’s assessment is erroneous.

68. The Respondent cited Section 31 of the TPA which provides;“31. Amendment of assessments1. 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, the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;(b)…..(c)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.”

Respondent’s Prayers 69. By reason of the foregoing the Respondent prayed that the Tribunal: -a.Upholds the Respondent’s Decision of 16th March 2023 (confirmation of the assessment) as valid and in conformity with the provisions of the law; and,b.Find that the appeal herein is without merit and dismiss it with costs to the Respondent.

Issues For Determination 70. The Tribunal having carefully considered the filings and submissions made by the parties is of the considered view that the Appeal herein distils into two issues which commend for determination as follows:i.Whether the Respondent erred in raising the additional assessment on rental income against the Appellant for the period under review; and,ii.Whether the Respondent was justified in assessing the Appellant for additional individual income tax for the period under review.

Analysis And Determination 71. The Tribunal proceeds to analyze and determine the two issues for commending determination as hereunder;i.Whether the Respondent erred in raising the additional assessment on rental income against the Appellant for the period under review.

72. The issue subject of this dispute revolves around the additional assessment undertaken by the Respondent against the Appellant’s rental income, allegedly earned by the Appellant from the renting of certain properties located at Lessos kwa Wamama said to be owned by her hence attracting rental income tax. The Appellant however disowned ownership of the said properties or collecting rent therefrom sparking the dispute herein.

73. The Appellant averred that she categorically confirmed to the Respondent in writing in her objection notice and grounds, and further communication, that she did not own the property alleged by the Respondent at Lessos kwa Wamama, which were a block of four storied two and one bedroomed apartments. The Appellant further confirmed that she did not collect any rental income from the said alleged property.

74. She averred that she had however confirmed to the Respondent that she only owned the houses at Naisambu, whose construction had started in 2017 and completed in 2018, and the units occupied by tenants in 2019. The Appellant also averred that she had been remitting rental income tax in respect of these units for the period in question, the returns of which the Respondent amended with the alleged income from the impugned third-party houses to raise the impugned additional assessments, which the Appellant contended was inflated.

75. The Appellant further averred that the assessment by the Respondent on rental income was erroneous to the extent of inclusion of the houses allegedly owned by her situated at Lessos Kwa Wamama, which she did not own. However she asserted that she duly filed her returns and paid rental income tax for the houses she owns at Naisambu ever since they were rented out in 2019, and reiterated that she did not own any houses at Lessos kwa Wamama and therefore the Respondent’s additional rental income tax assessments were excessive, incorrect and erroneous.

76. The Appellant also averred that having confirmed to the Respondent that she was not the proprietor of the alleged houses, nor collect any rental income therefrom, the least the Respondent could have done was to provide her with any evidence why it believed the houses were owned by her, or evidence of collection of rent from those houses, or the information or reasons it relied on to base its assessment for the disputed houses, which it failed to do.

77. The Appellant submitted that despite numerous attempts to explain to the Respondent about the ownership of the disputed houses at Lessos Kwa Wamama, and the erroneous additional assessment on the houses at Naisambu, the Respondent failed or refused to give the Appellant a hearing or listen to the Appellant’s explanations or documents produced in evidence. The Respondent also failed to rebut the Appellant explanations and evidence, with its evidence confirming that the Appellant was the owner of the alleged houses, and collected rent thereon, the Appellant submitted.

78. The Appellant also submitted that it had established a prima facie case that she did not own the houses at Lessos kwa Wamama, nor collect any rent therefrom, and therefore, at a minimum the Respondent ought to provide evidence of the alleged ownership or collection of rent from these houses by the Appellant, or at least the evidence it relied on in issuing an additional assessment in relation thereto.

79. The Appellant buttressed its submissions with the citation of KRA vs. Man Diesel & Turbo Se Ltd (supra) and submitted that the Respondent’s additional assessment on rental income was erroneous as it was based on excessive rental income which did not accrue to her on account of the cited rental property not belonging to her nor known to her and therefore assessment ought to be set aside for being erroneous and excessive.

80. On the Other hand, the Respondent averred that in assessing the Appellant for additional rental income tax, it considered that the Appellant is known to own the one storied building in Naisambu, and the rental income thereon was disclosed thus known. It also averred that it got to know that the Appellant had a four storied apartment block at Lessos kwa Wamama consisting of one- and two-bedroom apartments but the rent was not known therefore could only be estimated.

81. The Respondent contended that based on the foregoing it did a tax computation based on the estimated monthly collectable rent on the properties and arrived at an additional rental income tax for the period 2018 to 2022 in the sum of Kshs. 1,341,868. 00 inclusive of penalties and interest.

82. The Respondent averred that the additional assessment was issued based on available information and best judgement.

83. In considering this instant issue on the additional assessment on rental income, it is critical to interrogate the issue of the disputed ownership of the houses at Lessos kwa Wamama, which is central to the assessment and the cog upon which it revolves.

84. The Respondent in issuing its additional assessment simply stated that it discovered that the houses at Lessos were owned by the Appellant. The Appellant vehemently denied such ownership and confirmed in her objection and other communication that she did not own the said houses as alleged. The Respondent did not disclose the basis of its allegation or the evidence of ownership if any, say, by a search conducted at the lands office which is evidence of current title to land, nor evidence of the collection of rent from the tenants in those houses by the Appellant or her agents, or bank analysis confirming payment of the alleged rent, upon the rebuttal by the Appellant that she was alien to the alleged ownership.

85. It is also noteworthy that in its decision the Respondent did not state the basis or reasons for its assessment or decision, or the rationale of using best judgement.

86. In PZ Cussons East Africa Ltd vs. KRA [2013] eKLR, the court considered the effect of failure to give reasons;“I agree with the KRA that the burden would be upon the company to show that the amounts taxed was excessive. But to that extent only. It was necessary and indeed in regard to reasonable administrative action to detail how it came to its decision contained in the letter of 29th June 2012 so as to enable the company, if it so wished to mount a challenge. The duty to give reasons is now embedded in Article 47 (2). I therefore find and hold that the failure by KRA to give information as to how it arrived on the amount was unreasonable.”

87. Flowing from the above decision, it is this Tribunal’s considered view that the Respondent ought to have provided the Appellant with further and better particulars of the alleged ownership of the houses at Lessos kwa Wamama, and how it came to its decision, the moment such alleged property ownership and rent collection was confirmed as disputed, to enable the Appellant to mount a challenge, if it so wished. In other words, the burden of proof shifted back to the Respondent.

88. The basis of the shifting of burden of proof was sufficiently elaborated in the case of HC ITA E088 of 2020 Commissioner of Domestic Taxes vs. Galaxy tools [2021] eKLR, where the court stated that;“What the Respondent had done in producing the invoices, the delivery notes and payment schedules was only prima facie evidence of purchase. On producing the said documents, the evidentiary burden of proof shifted to the appellant. The appellant in answer not only queried the said documents but informed the Tribunal that it had carried out investigations on the alleged suppliers and concluded that they never existed, that there was no supply of goods at all. That the documents produced did not contain critical details to support any reasonable commercial transaction …. On the foregoing, the evidentiary burden of proof shifted back to the respondent to show that its documentation was legitimate. This would have been by production of other transactional documentation to support the legitimacy of the alleged transactions.”

89. The Appellant having confirmed to the Respondent that she did not have a proprietary interest on the alleged property subject of the impugned assessment, nor collected any rental income therefrom, the Appellant established a prima facie rebuttal on the disputed ownership. And further it would have been illogical for the Respondent to request and expect the Appellant to produce documents on property it had already confirmed it does not own, such as copies of title, leases with tenants, rent schedules, agreement with property agent etc.

90. In the case of Kenya Revenue Authority vs. Man Diesel Se (K) Ltd (supra), the High Court held;“whereas section 23 of the TPA obliges a party to avail records, the flipside of this provision is that a party can only produce documents in his possession. It could not have been the intention of the law to compel taxpayers to produce documents in the hands of a third party or more so if the transaction were undertaken by third parties. The Respondent persuaded the TAT that it could not have produced documents it did not have, or in the hands of a third party. To expect the taxpayer to produce documents it did not have, or in the hands of third party amounts to overstretching the ambit of sections 23, and 56(1) of the TPA, and section 30 of the TAT Act.On this ground, the commissioner’s argument collapses.”

91. It was therefore incumbent upon the Respondent to; one, the pendulum of the burden of proof having shifted back to it, to give more information and particulars of the alleged ownership of the subject property and the rental income thereon, and links with the Appellant, if any, Secondly the Respondent ought to have given the Respondent reasons and grounds for the assessment. And, as per the holding in PZ Cussons EA Ltd (supra), the duty to give reasons is embedded in Article 47 (2) of the Constitution of Kenya, 2010.

92. For the foregoing reasons, the Tribunal is satisfied and comes to the inescapable conclusion that the Respondent’s assessment on rental income tax on the basis of the disputed property was excessive and not warranted, and its resultant confirmed additional assessment and decision thereon was inadequate and invalid for failure to give reasons which is a mandatory requirement rooted in the Constitution.

93. In light of the foregoing, the Tribunal is persuaded that the Appellant has established a prima facie case that the rental income upon which the Respondent based its additional rental income tax assessment in the sum of Kshs. 1,341,868. 00 was excessive as the same was founded on rental property which did not belong nor known to her, and no such rental income from the said property had accrued to her. The Tribunal is also satisfied that the Appellant has on the other hand sufficiently demonstrated that she had been making returns on the property admitted and paying the monthly rental income, the returns which were the basis of the Respondent’s amendments for the erroneous additional rental income tax.

94. In view of the foregoing the Tribunal finds and holds that the Respondent erred in raising additional rental income tax assessment in the sum of Kshs. 1,341,868. 00 on the Appellant for rental income in the period under review.ii.Whether the Respondent was justified in assessing the Appellant for additional individual income tax for the period under review.

95. The Respondent averred that in assessing the Appellant for individual income tax, it estimated her individual income in 2015 to be Kshs. 10,000,000. 00, and escalated the said income by 10 % every year. It averred that in coming up with the estimated income it considered that the Appellant apart from rental income, was undertaking some farming, and was a director of some company, from which she might have been earning some income. The Respondent therefore assessed the estimated income of Kshs. 10,000,000. 00 escalated by 10% per from 2015 to 2021 (7 years as the iTax did not allow issuance of additional assessments beyond seven years) for a total amount of Kshs. 40,036,231. 00 inclusive of penalties and interest. The Respondent stated that the review was undertaken and concluded on a non-agreed basis.

96. The Appellant objected to the assessment and the Respondent adjusted the same to Kshs. 34,319,872. 00 to cover year 2016 to 2021, Upon review of the objection the Respondent confirmed the assessment for the sum of Kshs. 9,527,459. 00 as per its decision on 16th March 2023, which is the subject of this Appeal.

97. The Respondent averred that the additional assessments were issued using the available information and best judgement in line with Section 31 of the TPA which empowers the Respondent to amend self-assessment using available information and best judgement.

98. The Respondent also averred that the Appellant’s brother visited its Eldoret office to discuss the Appellant’s rental income returns, and was requested to submit some of the requested documents, which he did not do, and therefore the Respondent considered the additional assessment on the basis of available information and best judgement.

99. It was averred that the Respondent is not bound by the Appellant’s tax returns or information provided by, or on behalf of the Appellant, and may assess the Appellant’s tax liability using any information available to him , stating that Section 31 (1) of the TPA enables the Respondent to amend tax assessments by making alterations or additions based on the available information and to the best of his judgement to ensure that the Appellant is liable for the correct amount of tax payable .

100. The Respondent also contended that the Appellant had had not met the threshold of Section 56 (1) of the TPA, Section 30 of the TAT Act, and section 107 of the Evidence Act to prove the Respondent’s decision incorrect, excessive or unlawful.

101. In objecting against the assessment on individual income tax, the Appellant canvassed the same along several limbs; that the estimated of Kshs. 10,000,000. 00 was plucked from the air and had no verifiable basis, the annual escalation by 10 % was unscientific and had no factual or legal basis, the assessment from 2015 to 2021 was made beyond the allowed period of five years and was therefore excessive and unlawful, the additional income deemed from the alien properties was excessive and illegal, and the presumption that the Appellant had income from farming and company directorship was speculative, and lacked any legal basis.

102. On the basis of the limbs highlighted hereinabove, the Appellant challenged the additional individual income tax assessment in entirety.

103. The Appellant averred that the estimated income for year 2015 of Kshs. 10,000,000. 00 was a figure plucked from the air by the Respondent and had no justifiable, verifiable basis, was speculative and the escalation thereof by 10 % was unscientific, illogical and not anchored on any statutory provision, and therefore illegal.

104. The Appellant submitted that the reasoning by the Respondent that the capital to build the properties was derived from taxable income was erroneous and farfetched, as there were other means of raising the said financing such as loans, inheritance or even earnings of her spouse. The amount assessed based on the perceived value of constructing the impugned properties, not even owned by the Appellant, was erroneous and excessive rendering the assessment incorrect and excessive.

105. The Appellant also averred that the asumption by the Respondent that the houses were constructed or acquired with income from farming or company directorship was mistaken, farfetched and speculative and had no iota of truth.

106. The Appellant submitted that even where best judgement is applied by the Commissioner, there must be a basis for the assessment, and a tax assessment cannot be founded on speculative income, guesswork or arbitrary whims of the Respondent. She cited the case of Keroche Industries Ltd vs. Kenya Revenue Authority & 5 others (2007) eKLR (supra).

107. It was also submitted that tax can only be imposed on actual income derived or accrued, and not speculative figures plucked from the air as the Respondent did.

108. It was also submitted that the Respondent erroneously invoked the use of best judgement to determine taxes due by the Appellant, as the best judgement is only applicable where there are business activities generating income, and there must be information or material before the commissioner upon which the judgement can be based. The Appellant cited the case of Digital Box Ltd vs. Commissioner of Domestic Taxes (supra).

109. The Appellant further averred that she established to the Respondent that she does not engage in farming activities, which was at the heart of this assessment, and the Respondent did not rebut this fact, but speculated a non-existent farming income and assessed tax on it on the basis of best judgement.

110. It was submitted that the absence of any material forming a basis for the best judgement by the Respondent as well as the arbitrariness, and unreasonableness discredits and taints the correctness and validity of the Respondent’s assessment.

111. The Appellant also averred that the Respondent requested for documents for a period beyond the allowed period of five years and based its assessment on the said period, outside the prescribed statutory period.

112. In considering the issues raised in this second limb of the Appeal, it is important to cite the case of George vs. Federal Commissioner of Taxation (cited with approval in KRA vs. Man Diesel & Turbo Se (k) Ltd where it was stated;“The burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income …in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable to the amount of the assessment. However, the manner in which a taxpayer can discharge the burden varies with the circumstances.”

113. Additionally, in the case of Keroche Industries Ltd vs. Kenya Revenue Authority & 5 others (supra), the court held;“It is no good answer for the taxman to proclaim that Kshs 1 Billion (approx.) is intended to swell the public treasury because due to the application of the above principles that money is not lawfully due. Applying the same reasoning, to the matter before this court, it does not matter that the respondents say and think they are owed over a billion Kenya shillings – what matters is whether the amount is lawfully due and whether the law allows its recovery. It is not a question of impression or perception of what is owed, instead it is what if anything, is owed under the relevant law and whether its assessment and recovery is permitted by the applicable law. If rightly due, the huge amount notwithstanding the court must uphold the right of recovery regardless of its consequences to the applicant, and if not due under the law, it must not hesitate to disallow it and must disallow it to among other things to uphold both the law and the integrity of the rule of law.”

114. The Tribunal notes that in the first instance the foundation of the subject assessment is rooted on the application of the Commissioner’s best judgement, not on documentary review or banking analysis.

115. The Tribunal has carefully gleaned through the pleadings filed by the parties, in particular the Respondent’s statement of facts and the annexures thereto, and found no indication of the Respondent’s averment to the extent that it reviewed and analyzed the Appellant’s banking to come up with the figures forming the basis of its assessment. Apart from the review of the returns, which were limited to the years of the rental income from the admitted properties, which the Appellant has averred were rented out from the year 2019. The Respondent further added presumed income from the disputed properties, further swelling the Appellant’s presumed income with disputed income.

116. It is also noteworthy that the Respondent included presumed income from alleged farming activities, and from directorship of a company without any verifiable basis, which income can only amount to being speculative. There were no details or particulars of the alleged farming activities and directorship earnings, which the Appellant disowned in totality.

117. The resultant effect of the foregoing leads to the logical conclusion that the sum of Kshs. 10,000,000. 00 income for the year 2015, which the Respondent came up with as undisclosed income is not credible, as it was not verified upon rebuttal by the Appellant and is therefore a speculative figure plucked from the air without a basis. The Respondent further escalated the said amount by 10 % p.a from 2015 without providing a legal basis for the said escalation.

118. In the case of Family Signature Ltd vs. Commissioner of Investigations & Enforcement TAT 25 of 2016, the Tribunal held;“When the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer, it has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high-income margin.”

119. Guided by the holding in this Appeal, the Tribunal is of the considered view that the Respondent acted erroneously and was not justified in employing the alternative method of applying best judgement in the manner it did, by estimating the Appellant’s income without a verifiable source or foundation or on the basis of disputed sources of income, thus leading to ridiculously high-income margin as stated by the Appellant.

120. In Keroche Industries Ltd vs. Kenya Revenue Authority & 5 others (supra), it was held;“A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court in intervening.”

121. The Respondent argued that the Appellant did not produce some documents, hence its decision to apply best judgement. In KRA vs. Man Diesel Turbo Se (K) Ltd (supra), the High Court held;“Whereas section 23 of the TPA obliges a party to avail records, the flipside of this provision is that a party can only produce documents in his possession. It could not have been the intention of the law to compel taxpayers to produce documents in the hands of a third party or more so if the transaction were undertaken by third parties. The Respondent persuaded TAT that it could not produce documents it did not have or in the hands of a third party. To expect the taxpayer to produce documents in the hands of a third party amounts to overstretching the ambit of sections 23, 56(1) of TPA and 30 of TAT Act. On this ground the Commissioner ‘s argument collapses”.

122. Guided by the foregoing holding, the Tribunal is persuaded that the nature of information the Respondent expected to provide is information which she could not conceivably possess as she had already disowned the subject transactions such as ownership of property, farming activity, company directorship, presumed income derived therefrom and so on.

123. The import of the foregoing is that the Respondent’s argument collapses, and the Tribunal is satisfied that there was no available information or material before the Respondent upon which the Respondent’s best judgement could be applied. Consequently, the Tribunal finds that the assessment based on best judgement was erroneous.

124. The year 2015 estimate provided the base of the amount upon which the Respondent escalated by 10 % every to arrive at its assessment. The year 2015 itself was outside the legal scope of the Respondent’s audit and assessment. The Tribunal is accordingly satisfied that the Respondent wrongly and unlawfully estimated the Appellant’s presumed income from the year 2015 as the tax base and escalated the same by 10% for a period of more than seven years, and anchored its assessment on the said unlawful estimate without lawful justification as provided for in the ITA, thereby making an erroneous and excessive assessment.

125. In the total sum of the findings the Tribunal has highlighted hereinabove, it is this Tribunal’s holding that the Respondent erred in raising the additional income tax assessment against the Appellant in the sum of Kshs. 9,527,459. 00 in the period under review.

126. The upshot of the foregoing is that the Appellant’s Appeal is found to have merit and hereby succeeds.

Final Determination 127. The Appellant’s Appeal having succeeded the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby allowed;b.The Respondent’s Objection Decision and confirmation of assessment dated 16th March 2023 be and is hereby set aside; and,c.The parties to bear their own costs.

128. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY 2024ROBERT M. MUTUMA - CHAIRPERSONELISHA N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI DIRIYE - MEMBER