[2024] KETAT 1248 (KLR)

Sketchers Design Promoters Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal E501 of 2023) [2024] KETAT 1248 (KLR) (9 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1248 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E501 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

August 9, 2024

Between

Sketchers Design Promoters Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in the Republic of Kenya and engaged in the business of outdoor advertising, corporate branding, design, printing and advertising.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Authority 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 additional assessment for VAT and Income tax to the Appellant on 18th and 26th April, 2023 with a total principal tax liability of Kshs. 92,103,214. 10

4. The Appellant objected to the assessments on 12th May, 2023 on iTax.

5. The Respondent issued an objection decision on 10th July, 2023 confirming the said assessments of all the principal tax, interest and penalties payable.

6. The Appellant being dissatisfied with the Respondent’s decision lodged a Notice of Appeal dated and filed on 8th August, 2023.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 22nd August, 2023 and filed on 24th August, 2023:a.That the VAT assessment for years 2017, 2018, 2019 and 2021 was based on the variances between the Income tax and VAT returns for the period 2017 to 2021. However, the variances were relating to zero rated and exempt sales that should not be subjected to VAT. Hence the Commissioner erred by charging additional VAT taxes on the basis of the turnover variances that were exempt and zero-rated supplies.b.That the Commissioner did not consider all the documents provided by the Taxpayer to support the exempt supplies and zero-rated supplies due to the goods exported outside the Country.c.That further analysis of the data provided by KRA showed some computational errors that were included in the basis of tax computation as illustrated below:i.In regard to Year 2019, the Commissioner used a figure of Kshs. 140,975,330. 00 as the Sales as per the VAT Returns instead of the correct figure of Kshs. 151,252,455. 00 resulting in a wrong computational variance figure of Kshs. 54,075,481. .00 instead of Kshs. 43,798,356. 00 that accounted for Kshs. 10,277,125. 00 error being subjected to additional tax assessment.ii.In regard to Year 2021, the Taxpayer had filed an original return on 29/06/2022 with an error which was corrected the same day vide an amended return to capture the correct turnover value as per the audited financial statements. That the Commissioner however, used the wrong sales turnover figure of Kshs. 177,534,533. 00 that was captured in the original return instead of the corrected figure in the amended returns of Kshs. 157,534,533. 00 hence resulting in a computational error of Kshs. 20,000,000. 00 being subjected to tax.d.That the Commissioner charged additional VAT on the presumption that the taxpayer disposed some motor vehicles and did not bring them to charge of VAT. However, the taxpayer explained that the motor vehicles had not been disposed of as claimed; but had been written off the books of accounts due to their conditions of disrepair; and the documents from NTSA confirmed that no such disposal or transfer of ownership had taken place. Hence the additional VAT tax was charged in error.e.That the Commissioner erred in fact by insisting that the motor vehicles were disposed-off, hence subjected to VAT on disposal when in fact the motor vehicles still exist at the taxpayer's premises and are still registered in the taxpayer's name.f.That the Commissioner relied on the system variance between the Income Tax returns and VAT returns for the year 2020 to come up with a grossed-up sales from VAT3 returns without taking into account the expenditure incurred in realizing that income.g.That the Commissioner erred in charging Corporation tax without taking into account the expenditure exclusively incurred in generating the taxable income as provided for under Section 15(1) of the Income Tax Act (Cap 470).h.That the taxpayer provided the audited financial statements for year 2020 as requested by KRA and was not given any opportunity to substantiate any particulars that KRA was not satisfied with, hence it was prejudicial on the part of the Commissioner to presume that the expenses could not be supported by the taxpayer.i.That the Corporation tax variances charged in respect of year 2020 was due to the system input error which the taxpayer reported and applied to amend the returns, hence the variance should not be subject to tax.j.That the Commissioner raised additional taxes based on the variances between the employment costs as captured in the Income tax returns and PAYE returns for the period 2017 to 2021. k.That the variances were explained as being due to the casual wages that were not within the monthly PAYE returns but were expenses incurred wholly and exclusively to generate the taxable income hence the Commissioner erred by charging the same to additional corporation tax.l.That the Commissioner presumed that all the cash withdrawals were directors’ personal drawings and charged the same to PAYE; whereas the payments were made to company's petty cash system that was used to pay for the business expenses including the casual wages, the artisans, suppliers and other direct petty cash expenses.m.That the Commissioner was provided with all the required data and information how the cash withdrawn from the bank by the director was applied into the petty cash.n.That the Commissioner did not explain why he disregarded the explanation offered by the taxpayer in regard to the cash drawings from the bank into the petty cash.o.That the taxpayer objected to the assessment regarding WH-VAT since they did not receive any notice of the appointment as a withholding agent hence, they could not withhold the VAT on purchases.p.That notwithstanding the fact that the Taxpayer was not formally appointed as a withholding Agent, the withholding VAT is based on the actual payments made and not the arbitrary gross figure of purchases including creditors’ balances as was computed by the Commissioner.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated 22nd August, 2023 and filed on 24th August, 2023 together with the documents attached thereto.b.The Appellant’s written submissions dated and filed on 20th February, 2024.

9. That the variances between the sales declared and inputs claimed in the VAT3 returns was due to the aggregated sales made in regard to the customers who had not presented their PINs to be captured by the taxpayer at the time of making the sales, hence the same was aggregated together as sales to non-registered customers.

10. That however, the customers used the Sketchers Design Promoters Limited KRA PIN and claimed the inputs, hence the noted variances. That this has been reconciled and the Appellant attached the reconciliation to its pleadings.

11. That to justify the reasons why the said amounts should not be subject to VAT, the Appellant had provided the following reasons for KRA to consider:a.Year 2018 - Kshs. 1,320,000. 00 - The amount relates to the book value of motor vehicle, pickup Registration Number KCD 314T that was not disposed but instead written off due to mechanical breakdown and the wreckage is still at company premises as per the photos attached to the Appellant’s pleadings.b.Year 2020 - Kshs. 60,214. 00 - The amount relates to the book value of motor cycle, pickup Registration Number KMEV 166E that was not disposed but instead written off due to mechanical breakdown and the wreckage is still at company premises as per the photos attached to the Appellant’s pleadings.c.Year 2021 – Kshs. 500,000. 00 - The amount relates to the book value of motor vehicle van, Registration Number KBU 533K that was not disposed but instead written off due to mechanical breakdown and the wreckage is still at company premises as per the photos attached to the Appellant’s pleadings.

12. The Appellant concluded that there is therefore no VAT on disposal as charged by the Commissioner of Domestic Taxes and the amount of additional VAT charged should be vacated.

13. That in regard to Corporation tax, there was a system error at the time of filing the returns and the taxpayer has applied for technical support and assistance from KRA to enable it file the amended returns to reflect the correct position as per the audited financial statements. That the issue has been reported to the KRA support team for technical assistance.

14. That the audited Financial Statements for year 2020 were attached for review to confirm that the Income Tax Turnover for Year 2020 was not nil, hence there was no additional tax.

15. That in regard to disallowed telephone expenses for the years 2017 - 2019, the following computational errors were observed from the tabulation by the Commissioner in arriving at the additional assessment:-a.In regard to Year 2017, the Commissioner wrongly computed the total amount for the principal tax, penalty and interest as Kshs. 995,112. 00 instead of Ksh.418,906. 00 resulting in a variance of Kshs. 576,206. 00 based on arithmetical errors.b.In regard to Year 2018, the Commissioner wrongly computed the total amount for the principal tax, penalty and interest as Kshs. 872,097. 00 instead of Kshs. 367,121. 00 resulting on a variance of Kshs. 504,976. 00 based on arithmetical errors.c.In regard to Year 2019 the Commissioner wrongly computed the total amount for the principal tax, penalty and interest as Kshs. 608,875. 00 instead of Kshs. 256,314. 00 resulting in a variance of Kshs. 352,561. 00 based on arithmetical errors.d.The interest charged was also not correctly computed in respect of the various years.

16. That notwithstanding the issue of computational errors in the additional tax assessment based on the telephone expenses, the Appellant demonstrated that the expenses were incurred wholly and exclusively for business purposes based on the reconciliation it attached to its pleadings.

17. That the expenses related to airtime purchased for use in the office and for the sales team, including telephone accessories and internet maintenance service, hence the expenses should not be disallowed.

18. That in relation to withholding VAT, the Appellant objected to the assessment since it did not receive any notice of the appointment as a withholding agent. That therefore, it could not withhold the VAT on purchases. That the Appellant was only notified of the appointment vide the email of 16th March, 2023.

19. That the variances for PAYE were explained as being due to the casual wages that were not within Monthly PAYE payment bracket and were reconciled by the Appellant and the same was attached to its pleadings.

20. That the casuals and artists were paid outside the payroll because of the temporary nature of the work and were only engaged on need basis by the company.

21. That in regard to PAYE on bank drawings, the Commissioner assumed that all the cash withdrawals were directors' drawings and charged the same to tax; whereas the payments were made to company's petty cash system that was used to pay for the casual wages, the artisans, suppliers and other direct petty cash expenses.

22. That the directors being the authorized signatories for the bank accounts are the ones who withdraw cash from the bank for petty cash usage. That hence the company expenses amounting to Kshs. 76,592,865. 00 were charged in error as drawings on the directors. That a tabulation of the petty cash expenses was provided for review.

23. That the taxpayer provided the requested documents through various volumes of files to support its objection to the tax decision made by KRA. That however, KRA did not review all the provided information to arrive at the correct tax decision based on the facts and the existing tax laws.

24. That the Respondent claimed in the objection decision that the Appellant's objection application was rejected in full. That however, the Respondent went ahead and confirmed the principal tax liability amounts of less than the amounts in the tax assessment decision and objection notice.

25. That the Tax Procedures Act Section 51 (8) states as follows:“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision”

26. That the Tax Procedures Act Section 51 (10) states:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision”

27. That however, the Respondent did not give statement of reasons for the tax heads omitted in the objection decision; that is the WHVAT and PAYE tax heads. That hence the only logical conclusion is that the same has been allowed in the objection decision. That this therefore means that the objection in regard to WHVAT principal taxes amounting to Kshs. 2,023,156. 00 and PAYE principal taxes of Kshs. 22,977,860. 00 in the initial assessment should be considered allowed.

28. That the Respondent charged additional VAT taxes based on the turnover variances between the Income tax and VAT returns filed by the Applicant. That the VAT assessment for years 2017, 2018, 2019 and 2021 was based on the variances between the Income tax and VAT returns for the period 2017 to 2021. That however, the variances were relating to zero rated and exempt sales that should not be subjected to VAT. That hence the Commissioner erred by charging additional VAT taxes on the basis of the turnover variances that were exempt and zero-rated supplies.

29. That the Commissioner did not consider all the documents provided by the taxpayer to support the exempt supplies and zero-rated supplies due to the goods exported outside the country.

30. That in regard to Year 2021, the taxpayer had filed an original return on 29th June, 2022 with an error which was corrected on the same day vide an amended return to capture the correct turnover value as per the audited financial statements.

31. That the Respondent however, used the wrong sales turnover figure of Kshs. 177,534,533. 00 that was captured in the original return instead of the corrected figure in the amended returns of Kshs. 157,534,533. 00 hence resulting in a computational input error of Ksh,20,000,000. 00 being subjected to tax.

32. That the Respondent did not give a statement of reasons why he refused the application as required by Section 49 of the Tax Procedures Act.

33. That to restate the obvious, there must be an actual objective factual basis upon which an assessment of tax is based or as the Courts have put it in previous judgements, the tax authorities cannot just pluck figures out of the air and charge to tax. The Court of Appeal in Fleur Investments Limited v Commissioner of Domestic Taxes & another [2018]eKLR pronounced itself on this.

34. That in Republic vs. Institute of Certified Public Accountants of Kenya ex parte Vipichandra Bhatt T/A J V Bhatt & Company Nairobi HCMA No. 285 of 2006, it was held that in the absence of a rational explanation, one must conclude that the decision challenged can only be termed irrational within the meaning of the 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.

35. That the Appellant also relied on Republic vs Kenya Revenue Authority Ex parte Jaffer Mujtab Mohammed (2015) eKLR which held a similar view.

36. That the Respondent had claimed in the objection decision that the Appellant did not provide all the requested documents, in particular the export entry sheets. That the Appellant and the Respondent had various meetings to discuss the issues raised in the submitted objection and the Respondent wrote various emails to the Appellant requesting for specific information and the Appellant provided the same. That on the issue of the export entries, it was mutually agreed that the customs data at the disposal of the Respondent be used to determine the correct amount of taxes due on the Appellant.

37. That the requested information as per the email correspondences was provided as exhibited in the bundle of supporting documents provided with this Appeal.

38. The Appellant submitted that despite being provided with documents and/or information, the Respondent did not provide it with the reasons for rejecting the evidence, whose validity was not and has never been questioned. That the Appellant draws the attention of the Tribunal to Section 49 of the Tax Procedures Act, which provides that:“Where the Commissioner has refused an application under a tax law, the notice of refusal shall include a statement of reasons.”

39. The Appellant submitted that the right to be given reasons is part of the rights under the rules of natural justice, particularly that of fundamental fairness since it is a well-accepted principle that any decision made in violation of the principles of natural justice is a nullity and should be quashed on the application of the person affected.

40. That the principle of fair administrative action is also enshrined under Article 47 of the Constitution of Kenya, 2010 and as expressly enshrined in Section 4(3)(d) of the Fair Administrative Action Act, 2015 ("the FAA"), that states that it is the duty of public officers to give reasons for their actions as part of the due process of administrative rights guaranteed by law.

41. The Appellant further submitted that without such reasons it is impossible to establish where the Respondent might have gone wrong and formulate one's grounds for challenge.

42. The Appellant stated that although the current tax laws provide that the onus to prove that the assessment is wrong lies on the taxpayer, it cannot have been the intention of the legislature to put the taxpayer in a position where he would be required to produce any document that the taxman may require.

43. That in demanding the production of documents which are not prescribed by legislation, the tax authority should be guided by reasonableness, the nature and circumstances of the trader otherwise it would, as it occasionally does, demand information which the trader cannot produce because he does not have and is under no obligation to have.

44. The Appellant stated that this Honorable Tribunal, should in this case, apply the Cohan Rule birthed in the case of Cohan v. Commissioner of Internal Revenue,39 F.2d 540, 2U.S. Tax Cas. (CCH) P 489, 8 A.F.T.R. (P-HI) P 10552 (C.C.A.2d Cir.1930) and accept reasonable explanations given by the taxpayer and evidence furnished by the Appellant

45. That this position was held in Supreme Court of Canada's decision in Hickman Motors Ltd. v. Canada, 1997 Canlll 357(SCC),[1997]2 S.C.R. 336 at paragraphs 92 to 94.

46. That Section 107 of the Evidence Act, Cap 80 of the laws of Kenya provides thus;“(1)Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

47. That the Respondent herein did not discharge the above requirement of the Evidence Act to prove that there existed facts to show that the assets were disposed or sold.

48. The Appellant concluded that having discharged its burden of proving its sales, purchases, exports and banking records, it is the Respondent's duty to demonstrate that the evidence so adduced was insufficient; and to prove the contrary and has failed to do so.

49. That the Appellant relied on the matter of Shreeji Enterprises Limited-vs- Commissioner of 'Investigations and Enforcement, TAT Appeal No. 58 and 186 of 2019 in which the Tribunal observed as hereunder:“Although the current tax law provides that the onus of proof lies with the Appellant to prove that tax was paid or that the Respondent's assessment was wrong... In demanding the production of documents which are not prescribed by legislation, the tax authority should be guided by reasonableness, the nature and circumstances of the trader otherwise it would, as it occasionally does, demand information which the trader cannot produce because he does not have...”

Appellant’s Prayers 50. The Appellant prayed for orders that:a.The Tribunal be pleased to allow the Appeal in its entirety and set aside part of the objection decision by the Commissioner dated 10th July 2023 being assessment for principal Corporation taxes, VAT, PAYE, WHT including penalties and interests of Kshs. 186,300,636. 00. b.The Tribunal be pleased to order the Respondent to pay the costs of this Appeal, andc.The Tribunal be pleased to issue any other orders favorable to the Appellant as it may find just and expedient to issue.

Respondent’s Case 51. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 18th September, 2023 and filed on 21st September, 2023 together with the documents attached thereto.b.The Respondent’s written submissions dated 6th March, 2024 and filed on 11th March, 2024.

52. That in order to ascertain the grounds of objection by the Appellant, the Respondent requested for the following documents: Current NTSA search results on all the three motor vehicles in contention, Customs entry sheets from the Appellant: bank statements clearly depicting receipt of payments for the invoices shared in the box file and Customs data.

53. That the Respondent reviewed the above documents together with records held in iTax and observed the following;a.The Appellant provided audited accounts for the period under review in support of its incomes and expenditure. The audited accounts were examined and reviewed for correctness and seem to reflect the taxpayer's position.b.The Appellant did not provide a Customs entry sheet despite the Respondent’s request to demonstrate how the exported goods left the Country. The Customs data obtained did not match with the invoices provided by the Appellant.c.The disposable assets in contention were within the company premises and are scrapped off from books to avoid claiming wear and tear on them since they were not in usable condition.

54. That subject to the above, the Respondent proceeded to confirm the additional assessments of principal tax of Kshs. 92,103,214. 10 and further went on to issue an objection decision on 10th July, 2023 confirming the said assessments of all the principal tax, interest and penalties payable.

55. That Section 24(2) of the Tax Procedure Act provides that;“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.”

56. That Section 31(1)(c) of TPA 2015 provides for amendment of assessments as follows:“(1)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--(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.”

57. That in response to grounds 1-3 of the Memorandum of Appeal, the Respondent averred that the Appellant did not provide Customs entry sheets despite being requested which would have demonstrated how the exported goods left the country. The Respondent averred that it noted that the invoices provided by the Appellant did not match the Customs data.

58. That in response to grounds 4 and 5, the Appellant alleged that the assets in contention were not in usable condition and had been scrapped off the books to avoid claiming wear and tear; however they did not substantiate the same. The Respondent averred that the Appellant did not provide evidence that the said motor vehicles were no longer in use and therefore could not come to a different assessment.

59. That Section 51(3)(c) of the Tax Procedure Act provides that an objection shall be deemed as validly lodged by a taxpayer if it is supported by all relevant documents.

60. That Section 56(1) of the Tax Procedure Act provides that;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

61. The Respondent averred that although the Appellant provided audited accounts for the periods under review, it did not provide ledgers, trial balances and primary documents to substantiate the expenses and proceeded to confirm the assessments.

62. That the Appellant failed to provide relevant documents in support of its objection to the assessment and application for reprieve of the additional assessment. That therefore the Appellant failed to discharge its burden of proof.

Respondent’s Prayers 63. The Respondent prayed that this Tribunal:a.Dismiss the Appeal.b.Uphold the Respondent's objection decision dated 10th July. 2023. c.Award the Respondent the costs of the Appeal.

Issues For Determination 64. The Tribunal has considered the pleadings and documentation filed by both parties and is of the view that the singular issue for its determination is: Whether the Respondent’s assessments were justified.

Analysis And Findings 65. The Tribunal having established the issue falling for its determination, proceeds to analyse it as hereunder.

66. The Appellant averred that the Respondent demanded documents that it had no obligation to keep under the law and that the Respondent did not consider the documents it provided, or the reasonable explanations, it gave consequently issuing an erroneous decision.

67. The Respondent on its part argued that the Appellant did not discharge its burden of proof.

68. The Tribunal has reviewed the parties’ documents and established that the Respondent issued a number of assessments on 17th April, 2023; 18th April 2023; 24th April 2023 and 26th April 2023 amounting to Kshs. 92,103,214. 10

69. The Tribunal notes that the assessments were issued on iTax and therefore the Respondent did not ask for any specific documents at the assessment stage. Further, the Tribunal notes, from the objection decision, that the Respondent stated that the Appellant did not provide NTSA searches to verify its claims on non-disposal of motor vehicles and that the Appellant provided audited accounts but did not provide ledgers, trial balances and primary documents to support its expenses. That therefore the Respondent was unable to verify the correctness of the audited accounts.

70. The Tribunal further established that there were email correspondences between the parties on 17th May, 2023, 18th May, 2023, 19th May, 2023, 29th May, 2023 and 6th June, 2023. These email correspondences related to documentation shared by the Appellant with the Respondent.

71. The Tribunal thereafter notes that the Appellant’s objection claimed that it provided the following information and documents:a.In regard to the VAT assessment, a reconciliation of Income tax vs. returns turnover variances, a listing of computational errors occasioned by KRA in its calculation of additional VAT and Income tax as well as a listing of exempt and zero rated sales. It also provided support schedules to demonstrate the same.b.Further, to support its claims relating to the VAT assessment, a reconciliation of sales declared versus purchases claimed showing sales aggregated due to customers that had not presented their PINs to be captured by the Appellant.c.In relation to the assessment on disposal of motor vehicles, a breakdown of the motor vehicles written off by the company which in the Appellant’s explanation were written off due to mechanical wreckage and breakdown. The Appellant further attached photos to confirm that the vehicles were within its premises as well as logbooks showing that the motor vehicles in question were in the company’s name. The Appellant also attached a letter to NTSA requesting the Authority to confirm the information provided in the NTSA portal and certify ownership status of its motor vehicles.d.In regard to Income tax, it provided audited financial statements and explained that it had reported a KRA system error to the Respondent which estopped the Appellant from completing the process of amending its Income tax return. It stated that if the error was rectified, it would be able to file its amended return that would reflect the correct position. That the Respondent relied on the incorrect position in its computation of additional tax. The Appellant further provided a letter to KRA confirming that indeed it informed the Respondent of the system error as well as the amended return as lodged on iTax.e.A listing of computational errors made by the Commissioner in disallowing telephone expenses that the Appellant claimed were exclusively incurred for business purposes. That the telephone expenses were used in the office, for the sales team and internet maintenance. The Appellant provided a schedule showing the breakdown of the disallowed expenses apportioning them into the different expense lines.f.On withholding VAT, the Appellant stated that it had never been appointed as a Withholding tax agent. That it was only notified of an appointment on 16th March, 2023 and it attached email correspondence with the Respondent on the same.g.On Income tax employment costs vs PAYE returns, the Appellant provided the casual employee contracts to support its claims. The Appellant also provided the detailed artisans’ and casuals’ payment schedules.h.On PAYE on bank drawings, the Appellant explained that the directors’ accounts were used to withdraw cash for petty cash usage and the tabulation of usage of the petty cash was attached by the Appellant.

72. The Tribunal thereafter analysed the itemised assessment as follows:

a. Value Added Tax based on Income Tax vs. VAT returns turnover variances 73. The Tribunal confirmed that the Appellant provided a reconciliation of Income tax vs. returns turnover variances, a listing of computational errors occasioned by KRA in its calculation of additional VAT and Income tax, a listing of exempt and zero rated sales, LPOs and invoices to support the exempt sales, exempt sales bank statements and schedules which fully supported its claims in relation to this item as well as exported services invoices to support its zero rated sales.

74. In regard to VAT, therefore, the Appellant fully supported its claims on exempted services and provided exported services invoices to support its zero rated sales. It however did not provide export entries to show that the branded goods it supplied exited the Country.

75. Section 17(3) of the VAT Act provides as follows regarding documentation to support input tax claims:“The documentation for the purposes of subsection (2) shall be—(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;….”

b. Value Added Tax based on sales declared versus purchases claimed 76. The Tribunal confirmed that the Appellant provided a schedule of VAT declared to KRA during the period under dispute. A perusal of the schedule provided however showed that it did not highlight/ break down the lumped up sales and did not reconcile the amounts queried by the Respondent in its assessment.

77. In this regard, the Tribunal notes that the Appellant did not discharge its obligation to fully support its claims for this item.

c. VAT on disposal of assets 78. The Tribunal confirmed that the Appellant supported its claims by providing a breakdown of the motor vehicles written off by the company which were written off due to mechanical wreckage and breakdown, photos to confirm that the vehicles were within its premises, logbooks confirming that the motor vehicles in question were still in the Appellant’s possession and a letter to NTSA requesting the authority to confirm the information provided in the NTSA portal and certify ownership status of its motor vehicles.

79. In this regard, the Tribunal finds that the Appellant supported its claims in relation to VAT on disposal of assets.

d. Income Tax 80. The Tribunal has confirmed that the Appellant provided audited financial statements and the amended return that it lodged on the iTax website as well as the iTax acknowledgment receipt. It also provided a letter it submitted to the Respondent detailing the nature of the error in its initial return and the correction made in the amended return.

81. However, while the Appellant provided its audited financial statements, it did not provide ledgers, trial balances and primary documents to support the same. In this regard, the Tribunal is of the position that the Appellant did not fully support its claims under Income tax.

e. Disallowed telephone expenses 82. The Tribunal notes that the Appellant provided a schedule showing the various amounts incurred in airtime, accessories and maintenance. It however, did not adduce any further documents to support this schedule.

83. In this regard, the Tribunal can not confirm the accuracy of the expenses supposedly incurred by the Appellant and to whom the various payments were made. Therefore, the Appellant did not fulfil its obligation to discharge its burden of proof as far as this expenditure is concerned.

f. Withholding VAT 84. The Tribunal notes that while the Appellant claimed to have had correspondences with the Respondent in relation to this item, the Appellant stated that it was not informed of its appointment as a withholding VAT agent. It was only notified on 16th March, 2023. The Respondent did not disprove this assertion by the Appellant.

85. Section 42A of the Tax Procedures Act provides as follows regarding appointment of Value Added Tax withholding agents:“1)The Commissioner may appoint a person to withhold two per cent of the taxable value on purchasing taxable supplies at the time of paying for the supplies and remit the same directly to the Commissioner.Provided that the withholding tax shall not apply to the taxable value of zero-rated supplies and registered manufacturers whose value of investment in the preceding three years from the commencement of this Act is at least three billion.”

86. It is the Tribunal’s position that while the Respondent stated that it appointed the Appellant as a withholding VAT agent, the Appellant can only be aware of its agency once it is informed. To the extent that the Appellant stated that it was only made aware on 16th March, 2023, the Tribunal can only conclude that the effective date of this appointment was the date of notification.

87. As a result of the foregoing, the Tribunal concludes that the withholding VAT assessment was not justified.

g. Taxes relating to PAYE 88. The Tribunal confirms that the Appellant adduced casual employment contracts as well as a schedule of bulk payments to support its claims that it paid casual workers who did not qualify for PAYE. Notably, the said contracts do not show the actual payments that were supposed to be made to the casual employees. The contracts simply stated that the compensation would be agreed at onset of the work or that the payments would be made every two weeks.

89. In this regard, the Appellant did not dispel the Respondent’s assessment as the information it provided did not explain the amounts in variance as per the assessment. Notably, there was no evidence that the contracts were performed as payments made to casuals, artisans and towards other expenses were not provided as requested by the Respondent.

90. In regard to payments of petty cash through directors’ accounts, the Appellant stated that it provided the tabulation of petty cash expenses for review. However, it did not attach any evidence to prove that it had provided the same to the Respondent nor provide the same for the Tribunal’s reference.

91. The Tribunal, in view of the foregoing, finds that the Appellant partially discharged its burden of proof. The Tribunal finds that it supported its averments in relation to VAT on exempt sales, exported services and disposal of assets. It additionally supported its claims in relation to income tax relating to the error in its amended return of 29th June 2022 that was corrected.

92. On the other assessments raised by the Respondent, specifically in relation to exported goods, lumped up sales, disallowed telephone expenses and PAYE, the Appellant did not prove its case.

93. Section 30 of the TAT Act provides as follows regarding burden of proof:“In a proceeding before the Tribunal, the appellant has the burden of proving—(a)where an appeal relates to an assessment, that the assessment isexcessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

94. Section 56 of the TPA also states as follows regarding burden of proof in tax appeals:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

95. The fact that failure by the Appellant to discharge its burden of proof would result in the confirmation of the tax assessed against it was stated in the Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where it was stated as follows:“The party that carries the burden of proof must produce evidence to meet a threshold or “standard” in order to prove their claim. If a party fails to meet their burden of proof, their claim will fail. “Burden of Proof” at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a Taxpayer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner’s position. This is the basic principle.”

96. The Appellant in the instant Appeal failed to discharge its burden of proof to show that the Respondent erred in its assessments. It is for this reason that the Tribunal has arrived at the inevitable conclusion that the Appellant’s Appeal is partially supported.

Final Decision 97. The upshot of the foregoing analysis is that the Appeal is partially merited. Consequently, the Tribunal proceeds to make the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 8th June, 2023 be and is hereby varied in the following terms:i.The assessment on VAT on exempt sales be and is hereby set aside.ii.The assessment on VAT on exported services be and is hereby set aside.iii.The assessment on VAT on disposal of assets be and is hereby set asideiv.The Withholding VAT assessment be and is hereby set aside.v.The income tax assessment relating to the error in returns be and is hereby set aside.vi.The VAT assessment on exported goods be and is hereby upheld.vii.The VAT assessment on lumped up sales be and is hereby upheldviii.The income tax assessment relating to disallowed telephone expenses be and is hereby upheldix.The assessment relating to PAYE be and is hereby upheld.x.The Respondent is hereby directed to recompute the tax assessment based on the Tribunal’s findings under Order (i) to (ix) above within Thirty (30) days of the date of delivery of this Judgment.c.Each Party to bear its own costs.

98. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF AUGUST, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY OLUOCH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH- MEMBER