[2024] KETAT 740 (KLR)

Stratogen Limited v Commissioner of Domestic Taxes (Appeal 229 of 2023) [2024] KETAT 740 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 740 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 229 of 2023

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

May 9, 2024

Between

Stratogen Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company registered under the Companies Act of the laws of Kenya and registered as a taxpayer by the Kenya Revenue Authority

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and is responsible for the administration and enforcement of various revenue laws among them the Income Tax and the Tax Procedures Act

3. The Appellant was identified by the Respondent for review and in the process of review the Respondent noted variances between expected turnover from bankings and turnover declared in VAT and IT2C returns for the years January 2017 to December 2021.

4. Vide a letter dated 7th September 2022 the Respondent communicated the findings of the audit to the Appellant and also issued a demand notice of Kshs. 54,050,415. 97. 00, being Corporation tax and VAT.

5. The Appellant lodged a notice of objection on 29th September, 2022 and validated the same by providing documents on 12th October, 2022.

6. The Respondent issued the Objection decision on 8th December, 2022 confirming the assessment.

7. Aggrieved by the Respondent Objection decision the Appellant lodged a Notice of Appeal dated and filed on 24th January 2023.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 25th January 2023 and filed on 16th March 2023;a.That the Respondent erred in fact and in law in its demand for additional Corporation tax and VAT for the years 2017 to 2021 as the demand has been arrived at in total ignorance of significant provisions of the Income Tax Act and the VAT Act.b.That the Respondent erred in fact and in law in its demand for additional Corporation tax and VAT for the years 2017 to 2021 because the said demand is grossly exaggerated due to non-consideration of withholding tax and VAT deducted from proceeds received by the Appellant.c.That the Respondent erred in fact and in law in its demand for additional Corporate income tax and VAT for the years 2017 to 2021 as the demand is solely based on credits in the Appellant's bank statements without taking into consideration all the expenses incurred in generating the assessed income as reported in the Appellant's financial statements provided to the Respondent.d.That the Respondent erred in fact and in law by failing to factor in and consider invoices and import documents where input taxes were incurred, contrary to provisions of the VAT Act, no. 35 of 2013. d.That the Respondent erred in fact and in law in its demand for additional Corporate income tax and VAT for the years 2017 to 2021 by only taking into consideration the purchases declared in the VAT returns and filed though the iTax system as the only expenses incurred in the generation of the assessed income. In so doing, the Respondent completely ignored the fact that the Appellant procured goods and services from vendors who are not registered for VAT and therefore was not in a position to claim input VAT on such purchases since it had not been charged VAT on the purchases.d.That the Respondent erred in fact and in law in its demand for additional VAT for the years 2017 to 2021 by erroneously computing VAT as a charge over-and-above the amounts received by the Appellant in its bank accounts, as opposed to computing VAT as if it is already included in the amounts received by the Appellant;d.That the Respondent erred in fact and in law in its demand for additional taxes for the years 2017 to 2021 as the demand is not based on any material facts that had been provided by the Respondent.d.That the additional taxes, of Kshs 53,142,342. 62. 00 inclusive of interests are grossly exaggerated and were arrived at in total ignorance of significant provisions of the Income Tax Act, CAP 470 of the laws of Kenya and the VAT Act 2013. d.That the Respondent erred in fact and in law, in that, it outrightly contravened the doctrine of legitimate expectation that rests a presumption on the Commissioner to follow certain procedures in arriving at the tax liability and benefits that accrue from it.j.That the Respondent erred in fact and in law by failing to grant a fair hearing to the Appellant prior to issuance of the Objection decision, thereby failing to take into consideration explanations and supporting documentation that the Appellant was ready and willing to avail to the Respondent.j.That the Respondent failed in its duty to act fairly as provided in the Constitution of Kenya 2010 under Article 47 (1) on fair administrative action, where every person has the right to administrative action that is expeditious, efficient, reasonable and procedurally fair.

Appellant’s Case 9. The Appellant’s case is premised on the following documents: -i.Statement of Facts dated 24th January 2023 and filed on 16th March 2023 together with the documents attached thereto.

10. The Appellant stated that it believed that the following issues stand out for determination by this Honourable Tribunal:i.Whether a taxpayer can be called upon to pay tax on income that has been arrived at before deduction of expenditure incurred to earn or generate that income;ii.Whether a taxpayer in claiming expenditure incurred in the generation of taxable income, should only claim expenses and purchases that have been declared in the VAT returns;iii.Whether in computing due VAT based on income received, the tax should or should not be considered as included in the income received.iv.Whether a taxpayer can be called upon to pay tax on income, which has been arrived at before deduction of expenditure incurred to earn or generat that income

11. The Appellant stated that the entitlement to deduct expenses in arriving at taxable income is set out in Section 15(1) of the Income Tax Act, Cap 470, which provides that:“For the purpose of ascertaining the total income of a person for a year of income there shall, subject, to section 16, be deducted, all expenditure incurred in that year of income which is expenditure wholly and exclusively incurred by him in the production of that income.”

12. The Appellant averred that pursuant to Section 15 (1) of the Income Tax Act, Cap 470, the Appellant has every right, in the computation of its taxable income, to claim a deduction for any expenditure wholly and exclusively incurred in the generation of income provided that it is not restricted under Section 16 of the Income Tax Act.

13. The Appellant stated that in arriving at the confirmed assessment, the Respondent completely disregarded the expenses claimed by the Appellant in its financial statements and this amounts to gross injustice and a complete ignorance of the provisions of the Income Tax Act for the Respondent to call upon the Appellant to pay tax on income that has been arrived at before deduction of expenditure that is wholly and exclusively incurred in the production of that income.

14. The Appellant posited that some of the credit inflows into the Appellant's bank statements were treated by the Respondent as income earned, subject to 30% income tax. However, the transfers were made to enable ease of payment of expenses. The expenses settled from the accounts, including wages and purchase of fuel, are adequately supported by documentary evidence and should indeed have been treated as deductible expenses instead of being treated as income subject to 30% Personal Income Tax.

15. The Appellant averred that by restricting the Appellant's deductible expenditure to only those that were declared in the VAT returns, the Respondent completely went against the spirit of Section 15 (1) of the Income Tax Act, Cap 470, which has no interplay at all with the provisions of law that relate to declaration of expenses or purchases in a VAT return.

16. The Appellant averred that for a taxpayer to claim input VAT in his VAT return, the input VAT should relate to the taxable supplies made by the taxpayer and also meet the criteria set out in Section 17 of the VAT Act, 2013, including the taxpayer being in possession of an original tax invoice and claiming the input VAT deduction within six months, but such criteria has no bearing in identifying expenditure that is deductible from a Corporate Income Tax perspective.

17. The Appellant averred that by restricting the deductible expenditure for the Appellant to the purchases and expenses claimed in its VAT return, the Respondent limited the deductible expenditure to the expenses for which the Appellant had an original tax invoice and that were claimed within a period of six months, and thereby ignored other purchases and expenses for which a tax invoice was not obtained or whose input VAT was not claimed within the six-month window period.

18. The Appellant stated that only traders who are registered for VAT are in a position to issue an original tax invoice that would permit a purchaser to claim input VAT. The Appellant in the ordinary course of business is not limited to procuring goods and services from VAT- registered vendors and has the freedom to acquire supplies from business enterprises that are not VAT-registered - and whereas such supplies would not be eligible for input VAT claims in the Appellant's VAT returns, they would nevertheless amount to expenditure incurred for production of income and would therefore be eligible to be treated as deductible expenditure under Section 15(1) of the Income Tax Act.

19. The Appellant averred that despite acknowledging that the Appellant incurred capital costs that should enjoy wear and tear allowances under the provisions of the Income Tax Act, the Respondent nevertheless did not deduct wear and tear allowances in arriving at taxable income for the Appellant.

20. The Appellant stated that by limiting its deductible expenditure to only the expenses or purchases claimed in the VAT returns, the Respondent arrived at overly inflated taxable income amounts, which led to overly exaggerated Corporate income tax amounts.

21. The Appellant averred that with regard to its Corporate income tax and VAT liabilities, the Respondent completely ignored the fact that the Appellant receives proceeds from most of its clients after deduction of withholding tax (3%) and withholding VAT (6% from a possible 16%), and these deductions ought to have been deducted in arriving at deemed liabilities due from the Appellant. By failing to take these withholding amounts into consideration, the demanded liabilities are overly exaggerated.

22. The Appellant posited that with regard to the VAT liabilities, the Respondent failed to take into consideration the fact that the Appellant carried out some projects for organisations that enjoy VAT exempt status. By treating the entire variance that it encountered as Vatable income, the Respondent ended up treating income from VAT-exempt clients as well as income from sale of VAT-exempt fuel as if it was income subject to VAT, and thus over-stated the demanded VAT liability.

23. The Appellant stated that based on all the grounds quoted herein, which led to exaggerated income and VAT amounts, all penalties and interest computed by the Respondent are excessively inflated.

Appellant’s Prayers 24. The Appellant prayed that based on the grounds and evidence adduced above this Honourable Tribunal holds:a.That the Appeal be allowed, the assessment quashed, the demand set aside, and the Respondent be ordered to arrive at correct assessments for the Appellant.b.That the Respondent's actions to demand additional taxes be declared arbitrary, unreasonable, unfair, and contrary to the fair administration of justice and legitimate expectation of a taxpayer.c.That the Respondent, its employees, agents or any other persons purporting to act on behalf of the Appellant be barred and estopped from demanding or taking any further steps towards enforcement or recovery mechanisms of the principal tax, penalties and interest on the Respondents demand as stipulated above.d.That the Honourable Tribunal awards the costs of this Appeal and any other remedies that it deems just and reasonable to the Appellant.

Respondent’s Case 25. The Respondent’s case is premised on the documents set out hereunder; -i.Statement of Facts dated 13th April 2023 and filed on the same date and documents attached thereto;ii.Written submissions dated 16th October 2023 and filed on 17th October 2023.

26. The Respondent stated that the assessment was raised under Section 31 of the TPA and were based on variances between expected turnover per bankings and turnover declared in VAT. Further the Appellant failed to provide banking analysis as per bank statements, reconciliations between turnover from bankings and turnover declared in VAT and Income Tax returns, audited financial statements, sales ledgers, sales invoices, purchases ledgers, expenses ledgers and supporting documents requested for review. Therefore, the Appellant failed to prove that the Commissioner's assessments were correct.

27. The Respondent averred that the Appellant failed to provide reconciliations requested for to prove that the assessments were incorrect. Further, WHIT and WHVAT had already been utilized by the Appellant in self-assessment returns in prior periods.

28. The Respondent stated that the assessments were raised in accordance with provisions of the law that is Section 31 of the TPA. The Appellant failed to provide requested documents to dislodge the Commissioner's assessments. A list of documents requested for review was sent to the Appellant via email on 2nd December, 2022 and the Appellant was requested to avail documents by 5th December 2022 however, the Appellant failed to provide the requested documents for review.

29. The Respondent posited that the Appellant was given an opportunity to provide documents for review. However, it failed to provide the same. Section 56(1) of the Tax Procedure Act, states that: "(1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect". The Appellant is invited to disapprove the Respondent's decision with evidence.

30. The Respondent, in its submissions, identified one issue for determination which is, whether the Respondent erred in confirming the assessment as issued.

31. The Respondent submitted that Section 24 (2) of the TPA provides as follows;“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 information available to the Commissioner .”

32. The Respondent posited that upon receipt of the additional assessment, the burden of proof shifts to the Appellant to disapprove the Respondent's position. Ideally, the Appellant is meant to demonstrate that the Respondent erred in coming to the tax position. Section 56 (1) of the Tax Procedures Act provides as follows;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

33. Further on the issue of burden of proof, the Respondent cited the case of Grace Njeri Githua vs. Commissioner of Investigations & Enforcement (Tat No. 102 Of 2018), ·where the Tribunal emphasized the fact that the burden is on the Appellant to prove the assessment was wrong, by stating as follows“in this Appeal, the Appellant has not provided the Tribunal with enough evidence to show that the net income the Respondent has based the tax assess1nent was not income or is subject to further cost deduction in arriving at a net profit. It is trite law that the burden of proof is on the taxpayer to show that the tax so assessed is not due from her"

34. The Respondent submitted that in order to shift the burden of proof from Appellant to the Respondent, the Appellant was meant to raise an objection against the assessment as provided for under Section 51 of the Tax Procedures Act. This objection is subject to legal requirements to ensure validity as provided for under Section 51(3) of the Tax Procedures Act which provides as follows;“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for a extension of time to pay the tax not in dispute under section 33 (1); andb.all the relevant documents relating to the objection have been submitted.

35. The Respondent submitted that there was communication between itself and the Appellant where the Appellant was guided on documents to provide but the Appellant failed to provide the required documents as requested by the Respondent.

36. The Respondent referred to the case of TAT No. 55 of 2018 Boleyn International Limited vs. Commissioner of Domestic Taxes, where it was held that:-“... on 8th March 2018, the Appellant lodged an objection with the Respondent. However, the said objection did not reiterate the grounds of objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide the relevant documents in support of its alleged objection. Therefore, there was no conceivable way the Respondent would have considered the Appellant's objection as the same did not place itself within the parameters of Section .51 (.l) of the Tax Procedures Act”

37. Further the Respondent submitted that Section 51 (8) of the Tax Procedures allowed to make provision for the kind of conclusion the Respondent can make on an objection. The provision states;“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”

38. The Respondent submitted that the Appellant's Objection and the documents provided were fully considered before the objection decision was issued and the Respondent's various correspondences with the Appellant demonstrates the willingness of the Respondent to come to a fair and just conclusion of the review of the objection.

39. The Respondent argued that after considering what was available, the Respondent was guided by Section 51 (8) of the Tax Procedures Act that allows the Respondent to, in reference to a valid objection, to allow in whole or in part or disallow it.

40. The Respondent submitted that its decision clearly stated the documents that were not provided for the review of objection.

41. The Respondent posited that Section 43 of the VAT Act 2013, Section 54A of the ITA and Section 23 (1) (b) of the TPA provides for the requirement that a taxpayer is to maintain records. The Respondent therefore submitted that the Appellant failed to support input VAT claims.

42. The High Court in allowing the Commissioner's Appeal in the Commissioner Investigations And Enforcement vs. Sangyug Enterprises(K) Limited (Income Tax Appeal Eo56 of 2020) [2022] KEHC 59 (KLR) stated as follows“The Objection Decision contained in the letter dated 28th September 2018 could not have been clearer. The Commissioner stated, "After reviewing the records provided by the taxpayer, we have observed that the taxpayer failed to provide evidence confirming direct purchases between the company and the traders whose invoices were disallowed" and that, "The purchases totaling Kshs. 249,901,583 are still disallowed considering that you are not able to support them fully as required by section 17and 42 of the VAT Act, 2013. " The Respondent was unable to surmount the conclusion reached by the Commissioner by furnishing the documentation”.

43. The Respondent submitted that this position of who bears the burden of proof was also considered by the court in Commissioner of Domestic Services vs. Galaxy Tools Limited ML HC ITA No. E088 OF 2020 [2021] eKLR where the court cited with approval the decision in the case Metcash Trading Limited v Commissioner for South Africa Revenue Service and Another CCT/2000 where the South Africa Constitutional Court stated as follows:“But the burden of proving the Commissioner wrong then rests on the vendor under section 37. because VAT is inherently a system of self-assessment based on a vendor 's own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner and by like token such a finding would usually have entailed a rejection of the truth of the vendor's records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment unless the Commissioner's precipitating credibility finding can be shown to be wrong, the consequential assessment must stand”.

44. The Respondent submitted that it is empowered under Sections 58 and 59 of the Tax Procedures Act to require the production of documents and information to enable the Commissioner ascertain tax liability of a person. It is the Respondent submission that in its decision all documents availed were considered and in the absence of supporting documents, the assessments were confirmed due and payable immediately.

45. The Respondent submitted that the onus is on the Appellant to show which information and documents the Respondent omitted in making its decision.Further the Appellant even before this Tribunal did not make any attempt to refute the additional assessments by evidence.

Respondent Prayers 46. The Respondent prayed that this Honourable Tribunal finds:a.The additional assessments be upheld.b.This Appeal be dismissed with costs.

Issues for Determination 47. The Tribunal upon due consideration of the pleadings and submissions of the parties is of the considered view that the issue for determination is:a.Whether the Appeal has been validly lodged before the Tribunalb.Whether the Objection Decision dated 8th December 2022 is justified

Analysis and Findings 48. The Appellant is challenging the objection decision of the Respondent which was issued dated 8th December 2022.

49. The procedure of filing appeals before the Tribunal is under the Tax Appeals Tribunal Act Cap 40 of the laws of Kenya. Section 13 of TAT Act states as follows:-“1. A notice of appeal to the Tribunal shall—a.be in writing or through electronic means;b.be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.2. The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—a.a memorandum of appeal;b.statements of facts;c.the appealable decision; andd.such other documents as may be necessary to enable the Tribunal to make a decision on the appeal.”

50. The same Section 13 of the TAT Act also allows the Tribunal to extend the time for filing an appeal and it states as follows:-“3. The Tribunal may, upon application in writing or through electronic means, extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).4. An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

51. The Tribunal has perused the documents submitted by the Appellant in relation to this Appeal and notes as followsa)The Objection decision was issued by the Respondent on 8th December 2022. b)The Notice of Appeal is dated and filed on 24th January 2023 that is 37 days after the issuance of the objection decisionc)The Memorandum of Appeal and Statement of Facts though dated 24th January 2023 were received by the Tribunal on 16th March 2023 that is 40 days from the date of filing the Notice of Appeal.

52. The Tribunal notes that the principle regarding procedures is well articulated by the Court of Appeal in Speaker of National Assembly vs. Njenga Karume [2008] 1 KLR 425, where it held that;“In our view there is considerable merit.....that where there is clear procedure for the redress of any particular grievance prescribed by the Constitution or an Act of Parliament, that procedure should be strictly followed.”

53. The Tribunal is also guided by the cases of Cape Brandy Syndicate vs. Inland Revenue Commissioners [1921] K.B 64 where it was observed that;“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used…... if a person sought to be taxed comes within the letter of the law, he must be taxed. However great the hardship may appear to the judicial mind may be. On the other hand, if the crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

54. The Tribunal notes that the Appellant did not make any efforts to either a apply for extension of time to file the Notice of Appeal nor to submit the Memorandum of Appeal and Statement of Facts outside the stipulated statutory timelines. The Appeal should have been filed by 8th January 2023 and the Memorandum of Appeal and Statement of Facts by 22rd January 2023 therefore the Tribunal finds that the Appeal is incompetent.

55. In view of the above findings the Tribunal shall not delve on the other issue of determination, Whether the Objection Decision dated 8th December 2022 is justified, as the same has been rendered moot

Final Decision 56. The Tribunal on the basis of the foregoing analysis finds that the Appeal is incompetent and accordingly makes the following Orders:a.The Appeal be and is hereby struck outb.Each Party to bear its own costs.

57. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024. ROBERT M. MUTUMA - CHAIRPERSONBERNADETTE M. GITARI - MEMBERMUTISO MAKAU - MEMBERMOHAMED A. DIRIYE - MEMBERELISHAH N. NJERU - MEMBER