[2024] KETAT 653 (KLR)

Style Industries Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E128 of 2023) [2024] KETAT 653 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 653 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E128 of 2023

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

April 26, 2024

Between

Style Industries Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a company duly incorporated in Kenya and a registered taxpayer whose principal business activity is manufacture and distribution of hair products.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Respondent conducted an audit of the Appellant’s tax affairs for the period 2017 – 2020.

4. On 23rd November 2022, the Respondent issued the Appellant with additional assessments for PAYE amounting to Kshs. 35,367,752. 00.

5. The Appellant objected to the assessment vide a notice of objection dated 23rd December 2022.

6. On 20th February 2023, the Respondent issued its objection decision where it confirmed P.A.Y.E assessments totaling to Kshs 32,448,467. 00.

7. The Appellant, being dissatisfied with the Respondent’s objection decision, lodged this Appeal at the Tribunal on 22nd March 2023.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 5th April 2023. i.That the Respondent erred in law and in fact by erroneously concluding that the staff welfare fuel benefits included in the Appellant's general ledgers vary from the amounts declared in the Appellant's PAYE computation, when in fact these amounts accurately match the Appellant’s payroll and were declared in the relevant PAYE returns and tax duly paid.ii.That the Respondent erred in law and in fact by disallowing expenses relating to fuel as a business expense incurred by the Appellant in the furtherance of its operations.iii.That the Respondent erred in law and in fact by disallowing expenses incurred by the Appellant’s in relation to its expatriate employees.iv.That the Respondent erred in law and in fact by disregarding the supporting documentation provided by the Appellant in support of its motor vehicle fuel expenses legitimately incurred in furtherance of its business and as contemplated under Section 15 of the Income Tax Act.

Appellant’s Case 9. The Appellant’s case is premised on its Statement of Facts dated and filed on 5th April 2023.

10. The Appellant submitted that the Respondent erred in law and in fact by erroneously concluding that the staff welfare fuel benefits included in the Appellant's general ledgers vary from the amounts declared in the Appellant's PAYE computation, when in fact, these amounts accurately match the Appellant’s payroll and were declared in the relevant PAYE returns and tax duly paid.

11. The Appellant averred that it caters for fuel expenses incurred by the sales and marketing team as a taxable benefit on the employees thereby taxing the amounts in the payroll and remitting the same monthly to the Respondent

12. The Appellant submitted that Section 5 (2) (a) of the Income Tax Act provides that:“For the purposes of section 3(2)(a)(ii) "gains or profits" includes;any wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity, or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered, and any amount so received in respect of employment or services rendered in a year of income other than the year of income in which it is received shall be deemed to be income in respect of that other year of income.”

13. The Appellant averred that the Respondent failed to provide the workings on how it arrived at the variance of Kshs 3,367,754. 00.

14. The Appellant averred that the law is clear when stating that it is the mandate of the Respondent to confirm its assessment in a form and manner that gives clear reasons for its decisions with supporting material facts. That the above requirement is in line with the provisions of Section 51(10) of the Tax Procedures Act (TPA) which provides as follows:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

15. The Appellant submitted that the Respondent failed to understand the documentation provided as the general ledgers adduced correctly match that which has been declared under the Appellant’s payroll.

16. The Appellant averred that subjecting the Kshs 3,367,754. 00 raised by the Respondent to further tax would amount to double taxation.

17. The Appellant averred that it engages in the business of manufacturing and distributing hair products, thus engaging a marketing team whose role entails having to move around. That the Appellant covers the expenses by affording its marketing employees a fuel benefit which is taxed under the payroll as described above.

18. Further, the Appellant submitted that the fuel expenses incurred are in relation to deliveries made by its drivers using registered company vehicles that it books under its ‘motor vehicle fuel’ ledger and ‘staff welfare fuel do not use’ ledger in the books of accounts, provided for as allowable expenses under Section 15(1) of the Income Tax Act which states;“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 year of income which is expenditure wholly and exclusively incurred by him in the production of that 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 for any year of 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.”

19. The Appellant averred that the Respondent erred in law and in fact by disallowing expenses incurred in relation to permits and visa documents for its expatriate employees as well as passes for their dependents.

20. The Appellant opined that the expenses of Kshs 27,142,461. 00 for the years 2017-2020 are business related expenses paid on behalf of expatriates as provided for in Section 5(4) read together with Section 15 of the Income Tax Act.

21. The Appellant averred that the Respondent’s objection decision failed to consider the detailed documentation provided by the Appellant in an attempt to provide the much needed clarification and explanations to the transactions in question.

22. The Appellant averred that the Respondent’s assertion in its objection decision that the assessment should stand on account of lack of documentation when the required documentation have been provided is therefore not only surprising but also quite disruptive as the taxpayer has been left grappling in the dark in trying to respond to an objection that is marred with such inconsistencies.

Appellant’s Prayers 23. The Appellant prayed that the Tribunal finds that:-i.The objection decision dated 20th February 2023 setting out the assessment of Kshs. 32,448,467 be set aside in its entirety;ii.The Appeal be allowed with costs to the Appellant; andiii.Any other remedies that the Tribunal deems just and reasonable.

Respondent’s Case 24. The Respondent’s case is premised on the following documents before the Tribunal:a.Its Statement of Facts dated 3rd May 2023 and filed on 4th May 2023b.Its Written Submissions dated 14th November 2023 and filed on 15th November 2023.

25. The Respondent averred that the Appellant failed to provide certain documents upon request through email correspondence by the Respondent during the audit and assessment and objection review stages.

26. The Respondent submitted that the documents provided by the Appellant under the appendices 11, 12, 13, 14, 15 and 16 of the Appellant’s Record of Appeal are fresh and newly adduced documents at the Appeal Stage and without leave of the Tribunal.

27. The Respondent submitted that the Tribunal’s jurisdiction flows from the Respondent’s Objection Decision. The Respondent averred that Section 3 of the Tax Appeals Tribunal Act, 2013 strictly mandates the Tribunal:“… to hear appeals filed against any tax decision made by the Commissioner.”

28. The Respondent submitted that the Tribunal does not have jurisdiction to consider the documents adduced by the Appellant because they do not inform the objection decision. The Respondent averred that the Tribunal should not consider them to the extent that they do not form part of the Respondent’s Objection Decision.

29. The Respondent averred that the introduction of new grounds and filing of fresh documents at the Tribunal is governed by Section 56(3) of the Tax Procedures Act, 2015, which provides:“... (3) In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.”

30. The Respondent averred that Section 3 and Section 13(6) of the Tax Appeals Tribunal Act, 2013, should be read and construed both holistically and purposively with Sections 51 and 56(3) of the Tax Procedures Act, 2015.

31. The Respondent relied on the case of Mars Logistics Limited v Commissioner of Domestic Taxes [2021] eKLR, the Court on construction of statutes held as follows:“52. A holistic reading of the Act requires that we bring into view the various provisions of the statute dealing with a particular subject and construe them together so as to bring out the purposes of the statute and the real intention of the legislature. The long title and the general scope of the Act constitute the background and the general scope of the context in which it must be examined. The whole or any part of the Act may be referred to and relied upon in seeking to construe any particular part of it, and the construction of any particular phrase requires that it is to be viewed in connection with the whole Act and not that it should be viewed detached from it. The words of the Act, and in particular the general words, cannot be read in isolation and their content is to be derived from their context. Therefore, words and phrases which at first sight might appear to be wide and general may be cut down in their construction when examined against the objects of the Act which are to be derived from a study of the Act as a whole including the long title. Until each part of the Act is examined in relation to the whole it would not be possible to say that any particular part of the Act was either clear or unambiguous.”

32. The Respondent further submitted that the Tribunal does not have jurisdiction to consider the fresh document adduced at the appeal stage, which were not availed to and were not considered by the Respondent. It submitted that the new and fresh documents adduced at the appeal stage are prejudicial to the Respondent because it has not been in a position to verify their authenticity thus, condemned unheard.

33. The Respondent further relied on the ruling in Rahima Traders Limited v Commissioner of Investigations and Enforcement (Income Tax Appeal E042 of 2021) [2021] KEHC 440, where the High Court held that:“That being the case, it would be prejudicial to the respondent to allow the applicant to use this opportunity to patch up and/or fill up the gaps in its case at this second appeal stage. When a party chooses a professional who represents him/it in a negligent manner, sometimes it is fair to let the loss lie where it falls as in this case. The client should seek recourse there other than vex the other litigant and/or the court unnecessarily.”

34. The Respondent submitted that the Appellant did not understand the nature of transactions, the subject of PAYE, in this dispute. That the Appellant was required to demonstrate that these fuel expenses were business expenses and not expenses for the benefit of its staff. That the Appellant failed to provide tangible evidence to demonstrate that the fuel expenses in question were business expenses and not allowances for the benefit of employees.

35. The Respondent averred that the Appellant failed to link any of the figures shown as staff welfare figures to the amounts charged to PAYE on Payroll. The Respondent submitted that the amounts shown as payroll amounts in the tax returns have no relationship with what the Appellant has provided in the bundle of documents.

36. The Respondent submitted that the amounts picked are payroll figures that shows the emoluments taxed and they do not in any way contain the transactions in question.

37. The Respondent relied on the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the High Court at paragraph 26 of its Judgment observed as follows:“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the taxpayer.”

38. The Respondent further relied on the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR. While considering the issue of burden of proof in tax matters, the High Court held as follows in paragraphs 32 and 38 of the Judgment:-32. 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. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer…38. 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 Tax payer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner’s position. This is the basic principle”

39. The Respondent averred that the documents that were new and freshly adduced as evidence at the Appeal stage do not satisfy requirement of the competency and relevance. That therefore, the Appellant did not discharge the burden of proof.

40. The Respondent submitted that it reviewed some of the documents that the Appellant freshly adduced at the appeal stage, and noted as follows:-a.That the amount showed, as payroll amounts in the tax returns have no relationship with what the Appellant has provided in the said bundle of documents. That the Appellant failed to link any of the figures shown as staff welfare figures to the amounts charged to PAYE on Payroll;b.That the figures in the general ledgers at Appendix 8 in the Appellant’s Statement of Facts were not part of the figures in the Payroll as alleged by the Appellant. That the Respondent picked the payroll amounts that show the emoluments taxed and that such amounts do not in any way contain the transactions in question;c.On whether the fuel expenses were business expenses or allowance to the Appellant’s employees, the Respondent noted the documents annexed were insufficient. That the Appellant was required to provide proof that these costs were wholly and exclusively incurred for the purposes of production of the income.d.As the Respondent observed at the Objection decision, page 30 of the Respondent’s Index of Documents when the Appellant was requested to provide proof of business expense, the Appellant availed logbooks, delivery book excerpts, and fuel remittance. These documents provided only proved that the Appellant owned commercial vehicles but not the business expense;e.The Respondent pointed out that the Appellant was required to provide invoices and the proof of payments, that none was provided at the objection review stage but unprocedurally at the appeal stage and thus no one can ascertain their veracity as they were never subjected to an audit or scrutiny;f.On the issue of staff welfare, the Respondent noted that save for list of the alleged expatriate employees and the proof of payments for visa documents, the Appellant failed to link the payment advices to the specific listed expatriates;g.That being aware of the inadequacies of its case, the Appellant has sneaked in fresh documents at the Appeal stage. That even with these unverified documents, the Respondent has noted that alleged contracts do not indicate the residency of the alleged Appellant’s expatriate employees for the Tribunal to make a finding of whether or not they are expatriates; and thath.Similarly, the Appellant did not provide passports to prove the citizenship of the said employees. The Respondent therefore submitted that other than the said new documents being inadmissible, they are inadequate (even if they were to be produced at the objection review) to prove that the alleged expenses on staff welfare were business expenses. The Appellant, therefore, has not satisfied the burden of proof.

41. The Respondent averred that the Appellant did not discharge the burden of proof as the entire appeal is based on inadmissible evidence/new documents/fresh evidence adduced at the Appeal stage. The Respondent submitted that the burden of proof was and has never been discharged.

42. The Respondent relied on the case of Afya Xray Centre Limited vs Commissioner of Domestic Taxes TAT Appeal No. 70 of 2017; wherein it was observed that:-“From then foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent’s finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent’s assessment after all the Appellant by law bears the burden of proof… ”

Respondent’s Prayers 43. The Respondent prayed to this Tribunal that:a.The Appellant’s Memorandum of Appeal dated and filed on 5th April 2023 be dismissed with costs, andb.The Respondent’s Objection decision dated 20th February 2023 be upheld.

Issue For Determination 44. The Tribunal has carefully considered the pleadings and documentation of both parties and is of the considered view that the single issue that calls for its determination is Whether the Respondent was justified in its decision to confirm the assessed P.A.Y.E taxes on the Appellant.

Analysis And Findings 45. Having identified the issue for determination, the Tribunal proceeded to analyse the same as here under:-a.Staff Welfare Fuel

46. The Appellant contended that the Respondent erred by concluding that the staff welfare fuel benefits included in the Appellant's general ledgers vary from the amounts declared in the Appellant's PAYE computation. That the said amounts accurately match the Appellant’s payroll and were declared in the relevant PAYE returns and tax duly paid.

47. It was the Appellant’s contention that the Respondent had failed to provide workings on how it arrived at the variance of Kshs. 3,367,754. 00 in the Appellant’s Pay As You Earn (PAYE) computations.

48. The Tribunal observed that the Respondent in its objection decision explained the basis of the variance and stated that the summary of the breakdown provided by the Appellant was for an unrelated period hence could not support the contention.

49. The Tribunal finds that the Appellant failed to dislodge the burden of proof to show that there was no variance in the fuel benefit declared in its computation and the amounts in the fuel general ledger.b.Staff Welfare Expatriate Employees

50. The Appellant averred that the Respondent erred in law and in fact by disallowing expenses incurred in relation to permits and visa documents for its expatriate employees as well as passes for their dependents whereas the said payment on business related expenses on behalf of expatriate is provided for in Section 5(4) read together with Section 15 of the Income Tax Act.

51. The Respondent on its part argued that save for the list of the alleged expatriate employees and the proof of payments for visa documents, the Appellant failed to link the payment advices to the specific listed expatriates hence failing to justify the expenses as being allowable.

52. The Tribunal noted that the Appellant failed to provide engagement letters, passports, evidence of residence status to prove that the payments were made for the said individuals as a business expense.

53. The Tribunal noted that the Appellant having failed to provide the documents at the objection stage despite several reminders attempted to bring new documents at the Appeal stage to fill in the gaps identified by the Respondent in its objection decision.

54. The Tribunal finds that by hoarding documents it had in its possession, the Appellant failed to utilize the opportunity it had at the objection stage to discharge its burden of proof.c.Motor Vehicle Fuel expenses

55. Citing Section 5 (2) (a) of the Income Tax Act, the Appellant averred that it caters for fuel expenses incurred by the sales and marketing team as a taxable benefit on the employees thereby taxing the amounts in the payroll and remitting the same monthly to the Respondent.

56. The Appellant submitted that the fuel expenses incurred in relation to deliveries made by its drivers using registered company vehicles that it books under its ‘motor vehicle fuel’ ledger and ‘staff welfare fuel do not use’ ledger in the books of accounts, were provided for as allowable expenses under Section 15(1) of the Income Tax Act;

57. The Respondent observed that when the Appellant was requested to provide proof that the said fuel expense was a business expense, the Appellant availed logbooks, delivery book excerpts, and fuel remittance. The Respondent noted these documents were insufficient as they only proved that the Appellant owned commercial vehicles but not the business expense.

58. That the Appellant failed to produce invoices or proof of payment to support the motor vehicle fuel expense costs that were wholly and exclusively incurred for the purposes of production of the income.

59. The Tribunal’s appraisal of the Appellant’s responses to the Respondent at the objection stage show that indeed the Appellant failed to produce sufficient evidence to sustain its claim that the motor fuel expense was an allowable expense in the meaning of Section 15(1) of the Income Tax Act.

60. The Tribunal therefore finds that the Appellant failed to discharge its burden of proof in this instance.

61. Section 56 of the Tax Procedures Act states as follows with regard to burden of proof:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

62. In addition to Section 56 stated above, Section 30 of the TAT Act provides that: -“In a proceeding before the Tribunal, the appellant has the burden of proving where an appeal relates to an assessment, that the assessment is excessive; or in any other case, that the tax decision should not have been made or should have been made differently”

63. The Tribunal has pronounced itself on burden of proof in numerous cases. In TAT Appeal No.55 of 2018 Boleyn International Ltd -vs- Commissioner Domestic Taxes, the Tribunal held that:“We find that the Appellant at all times bore the burden of proving that the Respondent’s decisions and investigations were wrong. The Tribunal is guided by the provisions of Section 56 (1) of the Tax Procedures Act, 2015 which states;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”d.New documents produced at the Appeal stage.

64. The Tribunal observed that on all items in the Respondent’s objection decision, the Appellant produced additional documents in evidence at the Appeal stage without seeking leave of the Tribunal.

65. Section 13(6) of the Tax Appeals Tribunal Act provides as follows with regard to production of new documents at the Appeal stage:(6)The appellant shall, unless the Tribunal orders otherwise, be limited to the grounds stated in the appeal or documents to which the decision relates.”

66. It is the Tribunal’s position that it would be prejudicial to the Respondent to allow the Appellant to use this opportunity to patch up and/or fill up the gaps in its case at this Appeal stage. The Appellant’s failure to provide the documents it attempts to adduce at the Appeal stage during the objection stage is improper as the said documents did not inform the objection decision under Appeal.

67. If indeed the Appellant had a justifiable reason why it failed to produce the documents at the objection stage then it ought to have applied for leave of the Tribunal in accordance with Section 13(6) of the TAT Act.

68. With regard to introduction of new documents or evidence at the Appeal stage, the Tribunal is guided by the decision in Wanjie & Others v Saikwa & Others [1984] KLR 275, where Chesoni JA observed on admitting additional evidence on appeal as thus:“This rule is not intended to enable a party who has discovered fresh evidence to import it nor is it intended for a litigant who has been unsuccessful at the trial to patch up the weak points in his case and fill up omissions in the Court of Appeal. The Rule does not authorize the admission of additional evidence for the purpose of removing lacunae and filing in gaps in evidence. The appellate court must find it needful. Additional evidence should not be admitted to enable a plaintiff to make out a fresh case in appeal. There would be no end to litigation if the rule were used for the purpose of allowing the parties to make out a fresh case or to improve their case by calling further evidence. It follows that the power given should be exercised very sparingly and great caution should be exercised in admitting fresh evidence”

69. In light of the above analysis, the Tribunal finds that the Appellant failed to dislodge its burden of proof. Its attempt to adduce new evidence at the Appeal stage without leave of the Tribunal offends well laid out procedure and therefore must fail.

Final Decision 70. The upshot of the foregoing is that the Appeal fails and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 20th February 2023 be and is hereby upheld.c.Each party to bear its own costs.

71. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH -MEMBERTIMOTHY B. VIKIRU - MEMBER