[2024] KETAT 152 (KLR)

Suma Health Products (K) Limited v Commissioner of Investigation and Enforcement (Tax Appeal 1425 of 2022) [2024] KETAT 152 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 152 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1425 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

February 9, 2024

Between

Suma Health Products (K) Limited

Appellant

and

Commissioner Of Investigation And Enforcement

Respondent

Judgment

Background 1. The appellant is a limited liability company duly incorporated pursuant to the Companies Act, 2015 laws of Kenya; whose principal business activity is multi-level marketing of healthcare and beauty products.

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

3. The respondent issued assessments for corporation tax and VAT on June 28, 2022 amounting to Kes 57,923,710. 00 and Kes 24,245,722. 00 respectively.

4. The appellant objected on September 5, 2022.

5. The respondent issued its objection decision on October 18, 2022.

6. Following its dissatisfaction with the respondent’s decision, appellant filed a notice of appeal to the Tribunal dated 10th November, 2022 and filed on November 25, 2022.

The Appeal 7. The appeal is premised on the following grounds as stated in the appellant’s memorandum of appeal dated November 24, 2022 and filed on November 25, 2022:a.That the respondent erred in fact and law by conducting a default assessment which exceeded the timeframe provided under section 29 of the Tax Procedures Act. In its assessment, the respondent included the year 2015 despite the 5-year timeframe contemplated by section 29 of the Tax Procedures Act having lapsed.b.That the respondent erred in fact and law by failing to appreciate and understand he appellant's nature of business. Fundamentally, the respondents proceeded to impose tax liability on supposed undeclared export, despite the appellant making it abundantly clear that it is not in the export business.c.That the respondent erred in fact and law by stating that its analysis of the appellant's employees' salaries subjected to PAYE, when compared to the company expenses claimed by the appellant, showed a discrepancy of Kes 69,135,662. 00 which was disallowed for Corporation tax.d.That the respondent erred in fact and law by disallowing the aforementioned amount of Kes 69,135,662. 00 yet these were conferences, events, seminars and training costs that the appellant paid.e.That the respondent erred in fact and law by failing to consider and allow expenses paid to the appellant’s agents amounting to Kes 150,144,339. 5 yet these expenses were wholly and exclusively incurred in furtherance of the business as per section 15 of the Income Tax Act.f.That the respondent erred in fact and law by issuing an agency notice dated August 19, 2022 which predates even its objection decision dated October 18, 2022. g.That the respondent erred in law and fact by issuing an objection decision which quotes a different figure from what was demanded, that is to say, whereas the respondent's notice of assessment dated June 28, 2022 and objection decision dated October 18, 2022 quoted a tax liability of Kes 85,169,432. 00 and Kes 84,076,645. 00 respectively, the agency notice was for a demand of Kes 125,080,688. 00. h.That the respondent erred in fact and law by failing to appreciate and take into consideration the matching concept principle. The respondent indeed failed to take into consideration the appellant’s recognized revenues and their related expenses in the accounting period when determining the income tax payable.i.That the respondent erred in law and fact by breaching the appellant's right to legitimate expectation and fair administrative action in issuing the Agency notice dated August 19, 2022.

Appellant’s Case 8. The appellant’s case is premised on the following documents:a.The appellant’s statement of facts dated November 24, 2022 and filed on November 25, 2022 together with the documents attached thereto.b.The appellant’s submissions dated and filed on July 10, 2023.

9. That in arriving at the total liability payable by the appellant, the respondent conducted a bank analysis of the appellant’s accounts at Stanchart Bank and Absa wherein it noted a deposit of Kes 334,104,707 for the period 2016-2020.

10. That taking the above-captured deposit, the respondent proceeded to determine the net banking income by adjusting for non-income items, VAT and opening and closing debtors, ultimately arriving at a figure of Kes 284,350,488. 00 as the appellant’s net bankings.

11. That whereas the aforementioned items constitute some of the non-sales/non-income items, it is the appellant's assertion that those did not constitute the totality of the items that ought to have been adjusted in the determination of the net bankings.

12. That the appellant paid the sales agents and the expenses were inadvertently not claimed in the return.

13. That ideally, to get a holistic view of the appellant, the respondent ought to have considered all the appellant’s expenses as demanded by the matching concept principle.

14. That instead, using the erroneous net bankings, the respondent proceeded to determine the expected sales by comparing it with income as per iTax, and the VAT returns and taking the higher of the two, which led to an amount of Kes 318,808,315. 00 as the expected income.

15. That the respondent deducted this erroneous expected income from the appellant’s declared income and proceeded to impose VAT on the difference.

16. That in the notice of assessment, the respondent had erroneously intimated that the appellant had undeclared exports surmounting to Kshs 1,122,73 for the period 2016-2019 and further stated that these exports had not been brought to charge for corporate tax. That stating as such, the respondent proceeded to impose on this supposed undeclared income corporate tax at the rate of 30%.

17. That it cannot be overstated that the appellant's nature of business does not entail the exportation of goods. That by stating the contrary, the respondent displayed a fundamental lack of understanding and appreciation of the appellant's business. That in its objection, the appellant did indeed make it categorically clear that it does not undertake the exportation of its products and accordingly the amounts quoted by the respondent should not be associated with the appellant.

18. That the respondent further alleged that an analysis of salaries subjected to PAYE showed that the appellant had claimed employment expenses totaling to Kes 11,799,380. 00 for the period 2015-2019. That however, from its Corporation tax returns the appellant claimed a total of Kes 80,935,042. 00 as employment expense leaving a variance of Kes 69,135,662. 00.

19. That the respondent’s action of disallowing expenses totaling to Kes 69,135,662. 00 inflated the adjusted profit which was subsequently used to calculate the Corporate tax.

20. That the respondent in making this assertion failed to appreciate the appellant’s business model and structure. That crucially, the respondent failed to consider that the appellant claimed the expenses for conferences, events, seminars and training costs as the aforementioned activities were meant to assist in promoting sales and recruiting new salespersons.

21. That the respondent in conducting the default assessment, exceeded the timeframe provided under section 29 of the Tax Procedures Act. That in its assessment, the respondent included the year 2015 despite the 5-year timeframe contemplated by section 29 of the Tax Procedures Act having lapsed. That however, the respondent rejected even this ground in its objection decision dated October 18, 2022.

22. That on the issue of the self-assessment return going beyond the scope of what has been allowed by section 29(5) of the Tax Procedures Act, the respondent stated that section 29(6) does indeed provide leeway to expand the period in instances of gross or willful neglect, evasion or fraud by a taxpayer.

23. That despite alleging and mischaracterizing the appellant to the point of borderline defamation, the respondent has not provided an iota of evidence to prove or demonstrate that the appellant has undertaken acts which amount to gross/willful neglect, evasion or fraud by the appellant.

24. That egregiously, the respondent failed to appreciate that the appellant had indeed filed self-assessment returns in the years 2015 and 2016.

25. That on the issue of undeclared exports, the respondent alleged that the company undertook exportation, however; the respondent has not provided any evidence to prove that assertion. That the appellant is indeed baffled as to how it is expected to produce documents for actions it does not undertake.

26. That the respondent’s demand is indeed devoid of the appreciation that pursuant to the public notice issued on the 12th of April 2013, a certificate of export is to be issued for every exportation. That crucially, the appellant herein is not in possession of any Certificate of Exports issued by the Customs Department in favour of the appellant.

27. That that the respondent failed to allow expenses paid to the appellant’s agents amounting to Kes 150,144,339. 50 yet these expenses were wholly and exclusively incurred in furtherance of the business as per section 15 of the Income Tax Act.

28. That it should equally be appreciated that the agency notice issued by the respondent constitutes a violation of the appellant’s right to fair administrative action.

29. That the respondent’s agency notice dated August 19, 2022 has been in place despite the tax being disputed under objection process under this Tribunal in contravention of the appellant’s right to fair administrative action and legitimate expectation.

30. It is the appellant's view that the below are the main issues in contention:a.Whether the assessments for the periods 2015 and 2016 were valid.b.Whether the respondent erroneously considered exports sales in its assessment.c.Whether the appellant incurred the disallowed employment expenses and unclaimed expenses.

31. That the appellant is not oblivious that the onus of proof in regard to taxation matters falls on the taxpayer, it has indeed been stated time and again by the courts that the evidential burden of proof may shift where an assertion is being made by the Revenue Authority. That one such case is Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR.

32. That it was therefore assumed that the respondent would attempt to demonstrate that the appellant was guilty of any of the malfeasance contemplated by section 29(6) of the Tax Procedures Act. That however, the respondent merely asserted a blanket accusation without attempting to prove the same.

33. That it was similarly stated by this honorable tribunal in the case of Tata Chemicals Magadi v The Commissioner of Domestic Taxes [TAT No. 19 of 2021] that “the respondent has not discharged the burden of specifically pleading and proving the allegation made against the appellant. It is trite law that any allegation of fraud must be pleaded and strictly proved. The Tribunal thus holds that the respondent has not met that threshold.”

34. That it would be remiss not to point out that the doctrines of natural justice and our foundational Constitutional tenets demand that all parties are innocent until proven guilty in a court of law. That it was stated in the case of Republic v Abdul Majid Nagib [2022] eKLR that:“This court acknowledges the position that the Applicant is presumed innocent until proven guilty in respect to being granted reasonable bail/bond terms. Article 50(2)(a) of the Constitution of Kenya , 2010 provides that:-‘Every accused person has the right to a fair trial, which includes the right to be presumed innocent until the contrary is proved.’”

35. That in the matter at hand, the appellant has not been adjudged guilty by any court of law; the respondent is therefore acting ultra vires by unilaterally alleging that the appellant was guilty of fraud or tax evasion necessitating the inclusion of the periods 2015 and 2016 in the default assessment.

36. That the Constitution of Kenya under article 159 vests solely in the court's judicial authority. That that is to say, the Constitution envisages that the judiciary authority may be exercised by only the Courts and Tribunals established by or under this Constitution. That notably, the Kenya Revenue Authority is not listed as an authority mandated and imbued with judicial authority.

37. The Constitution of Kenya under the article 47 indeed clothes one with the right to administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair. That the Fair Administrative Actions Act thereafter reiterates and emphasizes the same principles before adding additional rights a citizen is entitled to.

38. That the importance of adhering to the doctrines, and principles and stating of fair administrative action was highlighted in the Court of Appeal case of Judicial Service Commission v Mbalu Mutava & another [2015] eKLR.

39. That to briefly consider the respondent's line of thought, the respondent, in asking the appellant to prove it does not undertake exportation business, is in essence asking the appellant to prove something that it doesn't do. That this would be akin to the courts asking a thief to prove how he/she is not a thief, especially where no evidence has been provided or lodged against him.

40. That it was stated by this honorable tribunal in the case of Menengai Oil Refineries Ltd v Commissioner of Investigations & Enforcement, TAT No. 166 of 2017, that:“From customary practice, Customs officials capture the Certificate of Export for exported goods in the Simba System to denote that the goods in question have crossed the border from the Kenyan Tax jurisdiction to another jurisdiction. To the extent that this was done in the matter under consideration, the legal obligation of the appellant is duly fulfilled. Secondly, it is not the responsibility of the exporter to capture such details but rather the customs officers. This information is thereafter available for retrieval from the respondent's Simba System from any of the terminals within the republic and not confined to the point of exit.”

41. That it was indeed stated in the case of The Supreme Court of Canada in Johnston v Minister of National Revenue that the onus is on the taxpayer to “demolish the basic fact on which the taxation rested.” Also, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada that the onus is met when a taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face." To prove a case “on its face" you must provide evidence that, unless rebutted, would prove your position. That according to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. That once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.

42. It is the appellant's unequivocal assertion that it has to the best of its abilities discharged both its legal and evidential burden of proof, yet the same cannot be said of the respondent. That the learned justices in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR quoting the case of Mbuthia Macharia v Annah Mutua Ndwiga & another Civil Appeal No. 297 of 2015 [20171 eKLR stated that: ‘The legal burden is discharged by way of evidence, with the opposing party having a corresponding duty of adducing evidence in rebuttal. This constitutes evidential burden. Therefore, while both the legal and evidential burdens initially rested upon the appellant, the evidential burden may shift in the course of trial, depending on the evidence adduced. As the weight of evidence given by either side during the trial varies, so will the evidential burden shift to the party who would fail without further evidence.

43. That the respondent's entire case in relation to the issue of employment expenses rests on the mere fact that it displayed a fundamental lack of understanding of the appellant’s business. That the appellant’s business structure is based on sales and promotion. That generally, the appellant engages and hires majorly casual laborers and invests a hefty sum into training them. That crucially, the appellant keeps very few permanent employees.

44. That the appellant incurs expenses for conferences, events, seminars and training costs as well as attendance commissions for its staff and recruiting new salesmen in support of network marketing efforts. That it was these costs that were erroneously classified as bonus expenses classified in the Corporation tax return. That the appellant has indeed provided a schedule indicating sample breakdowns of the payments made to the salespersons at the events.

Appellant’s Prayers 45. The appellant prayed that:a.This appeal be allowed.b.That the respondent's objection decision dated October 18, 2022 be set aside in its entirety.c.That the agency notice dated August 19, 2022 be revoked.

Respondent’s Case 46. The respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The respondent’s statement of facts dated and filed on December 20, 2022 together with the documents attached thereto.ii.The respondent’s written submissions dated and filed on July 6, 2023.

47. That the respondent served the appellant with a notice of tax assessments dated June 28, 2022 with total tax liability of Kes 85,169,432. 00; in the tax head of corporation tax of Kes 57,923,710. 00 and VAT of Kes 27,245,722. 00. That the appellant confirmed the same in its Statement of Facts.

48. That however, the appellant in its Statement of Facts has erroneously referred to the tax liability indicated by the respondent in the notice as being Kes 84,076,645. 00 yet the notice states the total tax liability as Kes 85,169,432. 00 which consists of corporation tax of Kes 57,923,710. 00 and VAT of Kes 27,245,722. 00 and not corporation tax of Kes 56,984,005. 00 and VAT of Kes27,092,640. 00 as claimed by the appellant in its Statement of Facts.

49. That the respondent started investigations after receiving intelligence to the effect that the appellant was under declaring its income for tax purposes.

50. That the objectives of the investigations were to:-a.Verify whether the company had over claimed inputs;b.Verify the accuracy of the employment expenses claimed in the Income tax returns IT2C; andc.Ascertain whether the appellant had under declared income for the period under investigation and as such demand outstanding taxes.

51. That the investigations covered Income tax and Value Added Tax for the period between 2015 and 2020. That the respondent carried out the investigations by:a.Analysing the appellant's internal systems such as iTax;b.Comparing the sales provided by the appellant's customers and the purchases claimed by the appellant;c.Analyzing third party information and the appellant's company bank and financial statements.

52. That after analyzing the bank statements from the appellant's banks, the respondent adjusted the opening and closing debtors, VAT and non-income items to realise the net banking income.

53. That the net banking income was compared to the income filed as per the appellant's returns and the same indicated the presence of a variance to which the respondent subjected to tax liability

54. That the respondent also proceeded to analyse the appellant's IT2C account which indicated that the appellant had claimed a total of Kes 80,935,04. 002 as employment expense, yet the appellant had filed Kes 11,799,380. 00 as per its PAYE return. That the respondent treated the variance as over claimed employment expense and the same was disallowed for Corporate tax.

55. That the respondent analysed customs data from its systems and it showed that the appellant had undeclared exports for the years 2016, 2018 and 2019. That the same was brought to charge at the corporate tax rate of 30%.

56. That overall the respondent subjected the undeclared income to corporate tax and VAT and the disallowed costs to corporate tax.

57. That the respondent informed the appellant of the findings of the investigations above in a notice of tax assessments dated June 28, 2022 and duly informed the appellant of its right to object to the tax assessment if it wishes to do so within 30 days of service of the assessment notice as required in section 51(2) of the Tax Procedures Act.

58. That the respondent proceeded to issue agency notices dated August 19, 2022 under section 42 of the Tax Procedures Act.

59. That as per section 42, the respondent was and still is empowered to issue agency notices where:“a taxpayer is, or will become liable to pay a tax and-(a)the tax is unpaid tax; or(b)the Commissioner has reasonable grounds to believe that the taxpayer will not pay the tax by the due date for the payment of the tax.”

60. That in this case, the agency notice was dated August 19, 2022, that is two months after the notice of tax assessment was issued on June 28, 2022. That as at the date that the agency notice was issued, the appellant had not lodged any objection nor had it paid the assessed tax and therefore the respondent had reasonable ground to believe that the appellant will not pay the tax as and when required.

61. That the appellant wrote a letter dated August 29, 2022 to the respondent requesting for additional time to lodge an objection as provided for in section 51(6) and (7) of the Tax Procedures Act.

62. That the reason given by the appellant for the delay in filing its notice of objection was because its key management officials had travelled to China due to Kenya's general elections but at the time of writing the letter the officials were in Kenya and the Company offices were now open.

63. That the appellant lodged a notice of objection dated September 5, 2022 and one of the issues raised by the appellant was that the respondent was out of time to demand the self-assessment return for 2015 and 2016. That the appellant relied on section 29 (1) and (5) of the Tax Procedures Act. That however, section 29(6) of the Tax Procedures Act empowers the respondent to make an assessment under section 29 (1) beyond the five-year limit where there is a case of gross or wilful neglect, evasion or fraud by a taxpayer.

64. That the respondent requested for more documentation on 21st September, 2022 and the appellant responded on 22nd September, 2022 providing more information.

65. That the respondent after reviewing the documentation provided by the appellant proceeded to issue an objection decision via a letter dated 18th October, 2022 and took into consideration the appellant's grounds of opposition and addressed each of them.

66. That the respondent addressed the issue of ‘assessment period 2015-2016’ and informed the appellant about section 29 (6) of the Tax Procedures Act which allows the respondent to extend the statutory timeframe when conducting a default assessment in cases of gross or wilful neglect, evasion or fraud by a taxpayer. That the appellant had failed to file self-assessment returns for the tax years 2015 and 2016 despite having taxable income and hence met the threshold for section 29 (6) of the Act.

67. That the respondent addressed the issue of ‘income tax’ and informed the appellant that upon review of the appellant's schedules, in support of various expenses against the respondent's initial workings, it was noted that the assessing team had allowed all the expenses to the extent they were claimed in the appellant's financial statements and as such no additional expenses were allowed at the objection review stage.

68. That the respondent also informed the appellant that the bank charges had not been adjusted in the respondent’s computation and as such the respondent made adjustments for bank charges for the years 2015-2020 as the same do not constitute the appellant's income. That this is what led to the reduction in tax liability from Kes85,169,432. 00 as indicated in the notice of tax assessment to Kes 84,076,645. 00 as indicated in the objection decision.

69. That the respondent dealt with the issue of VAT. That the appellant claimed that input VAT was not claimed during the filing of VAT and requested the respondent to allow the appellant claim it at objection stage. That the respondent informed the appellant about section 17 (2)of the Value Added Tax Act, 2013 which states that input VAT can only be claimed within six (6) months after the end of the tax period in which the supply or importation occurred.

70. That the respondent dealt with the issue of undeclared exports in its objection decision and stated that the appellant simply alleged that the exports did not belong to the company but did not support the assertion with any documents and therefore no adjustments were made.

71. That the respondent dealt with the issue of employment income in its objection decision. That the respondent took note of the appellant's assertion that the respondent's finding on PAYE was not correct since the company's labour costs are mainly comprised of casuals and few permanent employees. That it was the respondent's view that the appellant failed to support the assertion with evidence and as such the employment expenses were brought to charge accordingly.

72. That the appellant also simply stated that there was a classification error under employment expense whereby expenses for conferences, events, seminars and training costs on staff were classified as bonus expenses. That the respondent was also of the view that the appellant failed to support the assertion with evidence.

73. That the appellant claims that the respondent erred in failing to appreciate and take into consideration the matching concept principle. The respondent averred that the appellant contended that in furtherance of its business it incurred costs and attached schedules to support its various expenses. That the appellant however failed to provide any supporting documentation to accompany the schedules and as such, the matching concept could not be accepted.

74. The respondent relied on the following cases:a.Highlands Mineral Water Ltd v Commissioner of Domestic Taxes [2021] eKLR.b.Nairobi TAT No. 25 of 2016 Family signature Limited v The Commissioner of Investigations and Enforcementc.TAT No. 28 of 2018 – Joycott General Contractors Limited v Kenya Revenue Authority.

respondent’s Prayers 75. The respondent prayed that the Tribunal:a.Finds that this Appeal lacks merit;b.Upholds the respondent's review decision; andc.Dismisses the Appeal with costs to the respondent.

Issue For Determination 76. The Tribunal has evaluated the pleadings and documentation filed by both parties and is of the respectful view that the issues falling for its determination are:a.Whether the respondent erred in law and in fact by issuing assessments for the period outside the statutory timelines provided by the law.b.Whether the respondent’s assessments were justified.

Analysis And Determination 77. The Tribunal having ascertained the issues for determination as set out above proceeds to deal with the same as hereunder.

a. Whether the respondent erred in law and in fact by issuing assessments for the period outside the statutory timelines provided by the law. 78. The appellant submitted that the respondent erred in law by going beyond five years which exceeded the timeframe provided for under section 29 of the TPA.

79. The respondent on the other hand submitted that section 29(6) of the TPA provides empowers it to make an assessment under section 29(1) beyond the five-year limit where there is a case of gross or wilful neglect, evasion or fraud by a taxpayer.

80. The respondent submitted that the commissioner established that there was wilful neglect on the appellant's part since it failed to declare any income (as the Company actually filed nil returns) in part of the period under review.

81. The Tribunal notes that section 29 of the Tax Procedures Act 2015, provides as follows regarding default assessments:“Default assessment(1)Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgement, make an assessment (referred to as a "default assessment") of—(a)the amount of the deficit in the case of a deficit carried forward under the Income Tax Act (cap. 470) for the period;(b)the amount of the excess in the case of an excess of input tax carried forward under the Value Added Tax Act, 2013 (No. 35 of 2013), for the period; or(c)the tax (including a nil amount) payable by the taxpayer for the period in any other case.(2)The Commissioner shall notify in writing a taxpayer assessed under subsection (1) of the assessment and the Commissioner shall specify—(a)the amount assessed as tax or the amount of a deficit or excess of input tax carried forward, as the case may be;(b)the amount assessed as late submission penalty and any late payment penalty payable in respect of the tax, deficit or excess input(c)the amount of any late payment interest payable in respect of the tax assessed;(d)the reporting period to which the assessment relates;(e)the due date for payment of the tax, penalty, and interest being a date that is not less than 30 days from the date of service of the notice; and(f)the manner of objecting to the assessment.(3)A written notification by the Commissioner of an assessment under this section shall not alter the due date (referred to as the "original due date") for payment of the tax payable under the assessment as determined under the tax law imposing the tax, and any late payment penalty or late payment interest shall remain payable based on the original due date.(4)This section shall not apply for the purposes of a tax that is not collected by assessment.(5)Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.(6)Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

82. The respondent submitted that “there was wilful neglect on the appellant's part since they failed to declare any income (as the company actually filed nil returns), in the 2015-2016. ”

83. The Tribunal finds that it was the duty and responsibility of the respondent to enforce the law. The respondent should therefore have prosecuted the appellant if it had the evidence. The fact this was not done creates doubt as to whether there was any fraud, evasion or wilful neglect.

84. The Tribunal has pronounced itself on the issue of fraud and in TAT No 88 of 2021 Glenrose Ltd v Commissioner of Investigations & Enforcement stated as thus:-“the Tribunal finds that the burden of proof, which essentially in law rests upon the appellant, shifted to the respondent at the point where issues of fraud were raised. In this regard, the Tribunal relies on the Halsbury’s Laws of England, 4th Edition, Volume 17, Paragraphs 13 and 14, which provide as follows: -“(13)The legal burden is the burden of proof which, remains constant throughout a trial, it is a burden on establishing the facts and contentions which will support a party’s case. If at the conclusion of the trial he has failed to establish that to the appropriate standard he will lose.(14)The legal burden of proof normally rests with the party desiring the court to take action: thus, a claimant must satisfy the court or tribunal that the conditions which entitle him to an award have been satisfied. In respect of a particular allegation, the burden lies upon the party for whom substantiation of that particular allegation is an essential element of this case. There may therefore be separate burdens in a case with separate issues.”

85. The Tribunal is also guided by the ruling in Evans Kidero v Speaker of Nairobi City County Assembly &another [2018] eKLR where the court stated as follows:-“30. Its trite law that he who alleges fraud must prove it. Allegations of fraud must strictly be proved. Great care needs to be taken in pleading allegations of fraud or dishonesty. In particular the pleader needs to be sure that there is sufficient evidence to justify the pleading. This was considered in some detail by Lewison J in Mullarkey V Broad. [17] In Central Bank of Kenya Ltd v Trust Bank Ltd & 4 Others [18] the Court of Appeal in considering the standard of proof required where fraud is alleged had this to say-‘The appellant has made vague and very general allegations of fraud against the respondent. Fraud and conspiracy to defraud are very serious allegations. The onus of prima facie proof was much heavier on the appellant in this case than in an ordinary Civil Case’.31. The burden of proof lies on the applicant in establishing the fraud/dishonesty that he alleges. The parties opted to adopt their pleadings as opposed to oral evidence. In my view, whereas it is proper to proceed by way of written submissions and pleadings, where allegations of fraud or dishonesty are alleged, the higher standard of prove required under the law may not be realized. This is because such a high standard of prove may require oral evidence and cross-examination for both parties test the veracity of the allegations.”

86. The Tribunal finds that since no evidence was tendered by the respondent in relation to wilful, neglect, evasion or fraud by the appellant, the allegations of fraud or wilful neglect have not been proved. The respondent therefore erred in law and in fact by issuing assessments for the period outside the statutory timelines.

87. The Tribunal finds that the respondent should only have computed VAT tax liabilities for the period not earlier than 29th June, 2017 and income tax liabilities for the years starting 2017 to 2021 when income tax returns should have been filed. This would ensure that the respondent remains within the statutory timelines of five years.

b. Whether the respondent’s assessments justified. 88. This dispute arose out of principal Corporation tax and Value Added Tax additional assessments amounting to Kes 85,169,432. 00 issued to the appellant on 28th June, 2022.

89. The appellant averred that the respondent did not consider the totality of the items that ought to have been adjusted in the determination of the net bankings.

90. The appellant further averred that it paid sales agents and the expenses were inadvertently not claimed in the return. That ideally, to get a holistic view of the appellant, the respondent ought to have considered all the appellant’s expenses as demanded by the matching concept principle.

91. That instead, using the erroneous net bankings, the respondent proceeded to determine the expected sales by comparing it with income as per iTax, and the VAT returns and taking the higher of the two, which led to an amount of Kes 318,808,315. 00 as the expected income. That the respondent deducted this erroneous expected income from the appellant’s declared income and proceeded to impose VAT on the difference.

92. The appellant submitted that the respondent erroneously intimated that the appellant had undeclared exports surmounting to Kshs 1,122,73. 00 for the period 2016-2019 and further stated that these exports had not been brought to charge for Corporate tax. That it cannot be overstated that the appellant's nature of business does not entail the exportation of goods. That by stating the contrary, the respondent displayed a fundamental lack of understanding and appreciation of the appellant's business. That in its objection, the appellant did indeed make it categorically clear that it does not undertake the exportation of its products and accordingly the amounts quoted by the respondent should not be associated with the appellant.

93. On its part, the respondent submitted that it undertook an investigation into the appellant’s affairs where the net banking income was compared to the income filed as per the appellant's returns and the same indicated the presence of a variance to which the respondent subjected to tax liability

94. The respondent further submitted that it proceeded to analyse the appellant's IT2C account which indicated that the appellant had claimed a total of Kes 80,935,042. 00 as employment expense, yet the appellant had filed Kes 11,799,380. 00 as per its PAYE return. That the respondent treated the variance as over claimed employment expense and the same was disallowed for Corporate tax

95. The respondent averred that it analysed Customs data from its systems and it showed that the appellant had undeclared exports for the years 2016, 2018 and 2019. That the same was brought to charge at the Corporate tax rate of 30%. That overall the respondent subjected the undeclared income to Corporate tax and VAT and the disallowed costs to Corporate tax.

96. The respondent argued that the appellant provided various explanations and schedules to support its grounds but did not adduce documentary evidence to support the same.

97. The Tribunal has gleaned through the parties’ pleadings and noted that the Income tax and VAT assessments by the respondent were based on the appellant’s bankings analysis as well as its IT2C Income tax returns and exports that the respondent claims were made by the appellant.

98. The Tribunal having reviewed the parties’ pleadings further established that other than the computational schedules provided by the appellant, no further documentary attachments were provided with the appellant’s pleadings to support these computations.

99. The Tribunal observes that provision of documents as evidence is well stated under section 30 of the Tax Appeals Tribunal Act which provides as thus:-“In a proceeding before the Tribunal, the appellant has the burden of proving –a.Where an appeal relates to an assessment, that the assessment is excessive; orb.In any other case, that the tax decision should not have been made or should have been made differently.”

100. The Tribunal is further guided by section 56(1) of the Tax Procedures Act which states as follows in relation to general provisions relating to objections and appeals:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

101. Section 30 of the Tax Appeals Tribunal Act (TATA) places the burden of proof on the taxpayer to submit all the necessary documentation to support its case. This position was held by the court in Alfred Kioko Muteti v Timothy Miheso &another [2015] eKLR where it was held that a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough. The court stated that:“Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence, and it is not enough to plead particulars of negligence and make no attempt in one’s testimony in court to demonstrate by way of evidence how the accident occurred and how the 1st defendant was to blame for the said accident. It is trite law that he who alleges must prove and that burden does not shift to the adverse party even if the case proceeds by way of formal proof and or undefended.”

102. Further, in Metcash Trading Limited v Commissioner for the South African Revenue Service andanother Case CCT 3/2000, Justice Kriegler held that:“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.”

103. Additionally, the Tribunal found it appropriate to rely on the provisions of Section 107 of the Evidence Act which provides that:“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.”

104. It is trite law that the burden to prove that a tax assessment is erroneous lies on the appellant and that the appellant therefore should have adduced documentary evidence to support its averments in the instant case.

105. Section 15(1) of the Income Tax Act provides as follows regarding deductible/ allowable expenditure for business:“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…”

106. Further, section 17(3) of the VAT Act, 2013 provides as follows regarding documentation that should be produced to support a claim for input tax:“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;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under section 16(2); or(e)a debit note in the case of input tax deducted .”under section 16(5)

107. The appellant, in the instant case, provided various schedules for expenses incurred for business purposes but did not attach any documentation to support the same for Corporation tax purposes.

108. Further, the appellant did not provide any support documents as per section 17 of the VAT Act to support its input tax claim for expenditure incurred in its business.

Final Decision 109. In view of the foregoing, the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby partially allowed.b.The objection decision dated October 18, 2022 be and is hereby varied in the following terms;i.The assessment relating to VAT for any period prior to June 29, 2017 be and is hereby set aside.ii.The assessment relating to Corporation tax for any period prior to January 2017 be and is hereby set aside.iii.The respondent to re-compute VAT and Corporation tax taking in account the above variations within ninety (90) days of the date of delivery of this judgement.c.Each party to bear its own costs.

110. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBEREUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER