[2024] KETAT 54 (KLR)

Shayonam Uniform Limited v Commissioner of Domestic Taxes (Tax Appeal 585 of 2022) [2024] KETAT 54 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 54 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 585 of 2022

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, E Komolo & T Vikiru, Members

January 26, 2024

Between

Shayonam Uniform Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose principal business activity is in making of uniforms.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued the Appellant with a pre-assessment notice on 2nd November 2021.

4. Subsequently, the Respondent issued system generated VAT additional assessments against the Appellant on 16th November 2021 for the period 2018.

5. On 17th March 2022, the Appellant objected to the assessment.

6. The Respondent confirmed the assessments vide an objection decision dated 31st March 2022.

7. Dissatisfied by the decision, the Appellant filed the Appeal herein on 6th June 2022.

The Appeal 8. The Appeal is premised on the following grounds stated in the Memorandum of Appeal filed on 6th June 2022:-a.The Commissioner erred in law in raising the system generated VAT assessment number KRA20212l311469 for Kshs. 970,369. 60 for January 2018 to December 2018. b.That the Commissioner erred in law in giving the decision and not taking into consideration the explanation given by the Appellant for the income earned during the period before the Appellant had requested the Commissioner for registration of VAT obligation.c.The system generated assessment for January 2018 and December 2018 could not be objected to on iTax as the assessment was appearing with a number that iTax did not accept and no option was available to object.d.That the Appellant was trading without VAT and once it reached the threshold of registration with VAT, it applied for the registration of VAT and upon registration with VAT tax obligation, it started charging VAT and remitting the same to Kenya Revenue Authority.e.That the Commissioner proceeded to issue assessment for inconsistence for sales during the period when the Appellant was not registered for VAT.f.That the Commissioner disregarded the facts and explanations given and proceeded to reject the objection and issued a confirmation of the assessment received.

Appellant’s Case 9. The Appellant’s case is also premised on the following documents:-a.The Appellant’s Statement of Facts filed on 6th June 2022 and the documents attached thereto.b.The Appellant’s written submissions dated 5th April 2023 and adopted by the Tribunal on 27th July 2023.

10. The Appellant averred that the Respondent issued system generated VAT additional assessment for the period January 2018 to December 2018 and issued a formal assessment covering Value Added Tax (VAT) via a letter dated 16th November 2021.

11. That the Appellant objected to the entire assessment via a letter dated 17th March 2022 and that the Respondent confirmed the assessment by an objection decision via a letter dated 31st March 2022.

12. That the issues confirmed by the Respondent and which are the subject of this Appeal are:-a.That the Appellant was trading without VAT and once they reached the threshold of registering with VAT obligation it applied for registration and upon registration, started charging VAT and remitting the same to Kenya Revenue Authority.b.That the Commissioner proceeded to issue an assessment for sale inconsistencies during the period when the Appellant was not registered for VAT.

13. That the Commissioner erred in law in giving the decision and not taking into account the explanation given by the Appellant for the income carried during the period before the Appellant requested the Commissioner for registration of VAT obligation.

14. That the Commissioner disregarded the facts and explanations given and confirmed the assessment.

15. That the Commissioner did not give any feedback even after receiving all the documents, reconciliations and all the explanation given to it as per his request.

16. That the Respondent’s actions resulted into unproportioned, unjust, unfair and excessive punishment to the Appellant even after all the above.

Appellant’s Prayers 17. The Appellant prayed that the Tribunal:-a.Allows the Appeal,b.Orders the Commissioner to accept the returns.

Respondent’s Case 18. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated 1st July 2022 and filed on the same date.b.The Respondent’s written submissions dated and filed on 30th January 2023.

19. The Respondent averred that in regard to all grounds of Appeal, it reiterated the position as stated in the notices of assessment as well as the objection decision.

20. The Respondent averred that the additional assessments were issued based on variances between sales as per VAT and income tax returns for the period 2018.

21. The Respondent averred that the VAT assessment was confirmed by virtue of Section 31(1) (c) of the Tax Procedures Act 2015 which allows the Respondent to amend the Appellant's original assessment to ascertain that the Appellant is subjected to the correct amount of tax.

22. That the said provision states that;“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 (Cap.470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;b.in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.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.”

23. That the Appellant's contention was that the said additional assessments cut across the period 2018, including the months of January and February, which the Appellant was not registered for VAT obligation yet.

24. The Respondent averred that from the business activity in the month of January 2018, it was deemed that the Appellant is registrable for VAT as of 1st January 2018 in line with the requirements of Section 34 of the VAT Act, 2013 which provides that;-“a person who in the course of a business-a.has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; orb.is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form…”

25. The Respondent averred that vide its letter dated 17th March 2022 it requested the Appellant to provide the following documents:a.Sales ledgers for the period January to December 2018. b.Reconciliation of the sales variance between VAT3 for the year 2018 and sales as per accounts.c.Detailed explanation of the variance.d.Financial statements for the period.e.Any other relevant evidence in support of the objection.

26. The Respondent averred that upon review of the provided sales ledgers by the Respondent, it was noted that the Appellant hit the statutory set requirement of Five Million Kenya Shillings on 25th January 2018, therefore becoming eligible for VAT registration as per Section 34 (1) of the VAT Act.

27. That the Appellant failed to register for VAT obligation despite meeting the requirement for the same as explained above. That instead, the Appellant did not register for the VAT obligation until March 2018.

28. That further Section 34(7) of the VAT Act states that:“The registration of a person under subsection (1) or (6) shall take effect from the beginning of the first tax period after the person is required to apply for registration, or such later period as may be specified in the person's tax registration certificate.”

29. The Respondent averred that the Appellant ought to have registered for VAT earlier than March 2018 in line with the provision stated above and file regular and accurate VAT returns.

30. The Respondent laid emphasis on the fact that the responsibility lies wholly on the Appellant to request the Respondent to register it for VAT obligation and not on the Respondent to automatically do so.

31. The Respondent averred that the Appellant went ahead to file nil returns for March 2018 which was contradictory to the provided sales ledgers that showed taxable sales for March 2018.

32. The Respondent averred that upon review of the Appellant's bank statements for January to March 2018 and comparison of the same to the provided sales ledgers, approximately Three Million Kenya Shillings worth of sales were unaccounted for.

33. That the Respondent invoked the authority given by virtue of Section 24 (2) of the Tax Procedures Act 2015 to assess the Appellant's tax liability using any available information. That the Section states:-“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."

34. The Respondent averred that the assessment and the decision were based on the information that was available for review, that is, the provided sales ledgers as well as Appellant's bank statements.

35. The Respondent submitted that the following should be the issues for determination in this matter.a.Whether the Respondent erred in law and fact by issuing VAT additional assessment amounting to Kshs. 970,369. 60 for the period 2018. b.Whether the Appellant was liable for VAT registration and remittance for the period 2018 as assessed.

36. The Respondent submitted that the VAT assessments were issued against the Appellant in the first instance due to a variance in sales declared for VAT compared to sales declared for income tax for the financial year 2018.

37. That it was after this realization in the course of reviewing the Appellant's tax records that the Respondent rightfully requested the Appellant to provide certain documents for further review by the Respondent.

38. The Respondent submitted that the requested information included; sales ledgers for the period 2018, reconciliation of the sales variance between VAT returns for the year 2018 and sales as per accounts, detailed explanation of the variance and financial statements for the period.

39. The Respondent submitted that despite requesting the Appellant to explain the variance noted in the course of review, the Appellant failed to provide a reconciliation of the stated variance and failed to provide a detailed explanation of the same.

40. The Respondent relied on the case of Tile and Carpet Centre Limited v Commissioner of Domestic Taxes (2016) eKLR where the Appellant's case was dismissed for failure to offer documentary evidence to establish that no taxes were reasonably payable as demanded in the assessment. That the Court held as follows;“The Appellant had an obligation to discharge its evidential burden of establishing to the Tribunal that no taxes were absolutely or reasonably payable as demanded in the assessment by the Respondent, but it failed and no shift of the burden of proof to the Respondent arose for the Respondent to justify the assessment of the tax liability imposed on the Appellant."

41. The Respondent submitted that additionally, in the case of Commissioner for Investigations and Enforcement v Menengai Oils Limited, the High Court held that;“In light of sections 223 of the East Africa Community Customs Management Act as read with section 30 of the Tax Appeals Tribunal Act... the finding of the Commissioner set out in the assessment constitute prima facie findings which the taxpayer is required to rebut by providing contrary evidence."

42. The Respondent submitted that the Appellant failed to discharge its evidentiary burden of explaining the existing variance through a reconciliation of the same.

43. The Respondent submitted that the Appellant's registration for VAT obligation in March 2018 opened the Appellant for review and scrutiny of its tax affairs.

44. That the Appellant's failure to voluntarily register for VAT at the time when it should have done so was mischievous and calculated not to pay taxes required of them.

45. That upon registration for VAT by the Appellant, the Respondent reviewed its sales ledgers and bank statements which led to the confirmation of the assessments as issued.

46. The Respondent submitted that from the documents that were provided by the Appellant, which included a sales ledger, it was established that the Appellant hit the statutory set requirement of Five Million Kenya Shillings on 25th January 2018 therefore became eligible for VAT registration as per the provisions of Section 34 (1) of the Value Added Tax Act 2013.

47. The Respondent submitted that the Appellant did not register for VAT until March 2018.

48. The Respondent submitted that the Appellant not only filed nil returns for March 2018 despite registering for VAT obligation in the said month but did so having made taxable sales in the stated period as derived by the Respondent from the sales ledger provided by the Appellant.

49. That a further review on the Appellant's bank statements as provided by the Appellant itself for January to March 2018, sales worth Three Million Kenya Shillings could not be supported while the ledger contained sales worth Six Million Kenya Shillings.

50. The Respondent submitted that from the bank statements provided by the Appellant, it is not clear where the Appellant was banking the sales provided; including the Three Million Kenya Shillings that was not reflected in the provided bank statements.

51. The Respondent submitted that the Appellant in this case ought to have registered for VAT obligation earlier than March 2018 and file regular and accurate VAT returns.

52. The Respondent submitted that the law allows it to issue an assessment to the Appellant as relates to VAT obligation at a later date where it ought to have been registered for the same sooner in accordance with Section 34 (7) of the Value Added Act 2013.

53. The Respondent relied on the case of Commissioner of Investigation & Enforcement vs David Ndii Mwangi (2020) eKLR where the High Court held as follows;“Section 34(7) of the VAT Act provides that registration shall take effect from the beginning of the first tax period after the person is required to apply for registration or such later date period as may be specified in the person's tax registration certificate. This means that once registered, the taxpayer is required to pay VAT from the date it would have been required to apply for registration or the date indicated in the certificate”.

54. The Respondent submitted that the assessment was rightfully issued to cover the entire financial year of 2018 since the Appellant ought to have registered for the same in January. That it was therefore immaterial that the Appellant only registered for VAT obligation in March 2018.

55. The Respondent further submitted that it was upon the Appellant, as rightfully obligated by law to register for VAT obligation as soon as the statutory set requirements were met.

56. The Respondent submitted that the responsibility to ensure registration for VAT obligation upon meeting the statutory set threshold was wholly borne by the Appellant. That the Appellant's failure to do the same is a reflection of negligence on its part and not the Respondent's.

Respondent’s Prayers 57. The Respondent prayed that the Tribunal finds that:-a.The Appeal is without merit and be dismissed.b.The Respondent’s decision of 31st March 2022 and tax demand were properly issued as provided for under the law.

Issue For Determination 58. After perusing the pleadings and documentation produced before it, the Tribunal is of the view that the issue that calls for its determination is:-Whether the Appellant has discharged its burden of proof that the Respondent erred in raising the VAT assessment for year 2018.

Analysis And Findings 59. Having identified the issue that calls for its determination, the Tribunal proceeded to analyse it as hereunder.

60. This dispute arose after the Respondent confirmed VAT additional assessments vide a letter dated 31st March 2022.

61. The Appellant appealed the decision of the Respondent on the grounds that the Respondent did not take into consideration the explanation given by the Appellant for the income earned before the Appellant was registered for VAT.

62. The Appellant submitted that it reached the threshold for VAT registration in March 2022 and that is when it requested for registration.

63. On the other hand, the Respondent submitted that it reviewed the Appellant’s bank statements after it was registered for VAT and found that the Appellant had already reached the threshold in January 2022.

64. The Respondent submitted that vide a letter dated 17th March 2022, it requested the Appellant to provide documents for review which included, sales ledgers for 2018, detailed explanation of the variance and financial statements for the period.

65. The Respondent stated that since the documents were not provided and the variances were not explained, it went ahead and issued the assessments.

66. An analysis of the material placed before the Tribunal shows that the Appellant did not provide the documents requested by the Respondent. These documents were also not made available to the Tribunal.

67. Section 23 of the TPA requires a taxpayer to maintain any document required under the law so as to enable its tax liability to be readily ascertained.

68. The Tribunal notes that while the Appellant made averments in regard to the Appeal, it did not provide documents to support the averments. The Appellant made averments and failed to support them by providing supporting documents.

69. The Tribunal notes that Section 56 (1)of the TPA provides that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

70. This Section places the burden of proof in tax cases on the taxpayer. The Section is reinforced by Section 30 of the TAT Act which states that:-“In a proceeding before the Tribunal, the appellant has the burden of proving –a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently”

71. The Tribunal is guided by the holding of the Court in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR wherein the Court stated that:“The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof.The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy.The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position.”

72. The Tribunal also relies on the holding in Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR where the Court held that:“Under section 56(1) of the TPA, the Company bears the burden of demonstrating that Commissioner’s decision in reaching the assessments complained of was incorrect”.

73. The Tribunal finds that the Appellant did not discharge its burden of proof that the Respondent erred in raising the VAT assessment for year 2018.

FINAL DECISION 74. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby dismissed.b.Each party to bear its own costs.

75. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. GRACE MUKUHA - CHAIRPERSONGLORIA A. OGAGA - MEMBERJEPHTHAH NJAGI - MEMBERDR. ERICK KOMOLO - MEMBETIMOTHY VIKIRU - MEMBER