[2024] KETAT 1082 (KLR)

Superserve Limited v Commissioner, Investigation and Enforcement (Tax Appeal E931 of 2023) [2024] KETAT 1082 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1082 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E931 of 2023

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

July 12, 2024

Between

Superserve Limited

Appellant

and

Commissioner, Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose principal business is in the construction industry.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is an agency of the Government of Kenya for the purposes of receipt, collection, accounting of Government revenue, and enforcement of all the relevant tax laws.

3. The dispute herein arose when the Respondent conducted tax investigations on the Appellant and issued a tax assessment on 23rd March 2023 for the period 2018 to 2021 for Corporation tax, withholding tax (WHT) and PAYE in the sum of Kshs 440,381,166. 00.

4. The Respondent carried out investigations into the Appelant’s tax affairs for the years 2014-2019 which culminated in the Respondent issuing the Appellant with an assessment dated 26th March 2021 demanding a total of Kshs 163,799,371. 00 being VAT and Corporate income tax, inclusive of interest and penalties.

5. The Appellant objected to the assessment vide a letter dated 15th July 2020, and the Respondent issued its objection decision vide a letter dated 30th June 2021, wherein it revised its assessment from Kshs 163,799,371. 00 to Kshs 48,870,137. 00.

6. The Appellant being dissatisfied with the Respondent’s objection decision lodged at the Tribunal a Notice of Appeal dated and filed on25th April, 2023.

The Appeal 7. The Appellant has premised its Appeal on its Memorandum of Appeal dated and filed on 15th December 2023. Its grounds of Appeal were as follows:a.That the Respondent erred in law and fact by failing to differentiate the appellant’s income and non-income items in the bank statements and thereby subjecting non-income items such as loans and shareholder’s capital injection as taxable income thereby imposing tax on an incorrect income.b.That the Respondent erred in law and fact by computing income based on gross receipts/income in the bank statements contrary to the provisions of Section 3 of the Income Tax Act which provides that tax shall only be charged on gains or profits.c.That the Respondent erred in law and fact in its application of the banking test by restricting itself to the receipts (sales) being the output VAT in its determination of the VAT payable contrary to Section 17 of the Value Added Tax, 2023 (VAT) Act which requires that VAT be computed by deducting the input VAT (purchase) from the output VAT.d.That the Respondent erred in law and fact by failing to take into consideration the turnover as per the VAT 3 returns for July 2019 and December 2019 being the sum of Kshs 12,678,317 thereby arriving at a fundamentally flawed decision.e.That the Respondent erred in law and fact by disregarding the Appellant’s purchases as declared in its VAT 3 return contrary to Section 31 (1) of the Tax Procedure Act, 2015 (TPA) which enjoins the Respondent to use “the available information and his best judgment” when issuing the amended assessment.f.That the Respondent erred in law and fact by failing to take into account and crediting the VAT withholding tax paid by the Appellant’s customers contrary to section 42A of the TPA.g.That the Respondent erred in law and fact by charging VAT on exempt supplies made to the Kenya Defence Forces (KDF) as well as other exempt supplies such as the supply of livestock and agricultural produce contrary to Paragraph 57 Part 1 of the First Schedule of the VAT Act.h.That the Respondent erred in law and fact in its assessment of taxes, by disregarding the timing difference between a sale and its subsequent payment thereby treating the date of deposit as the date accrual of income.i.That the Respondent erred in law and fact by disregarding the provision of Section 17 of the VAT Act which permits a taxpayer to claim input VAT within 6 months thereof. Accordingly, it was wrong for the Respondent not to factor in the tax point and the timing difference of input VAT related to November 2018 but declared in the VAT 3 returns of February 2019 which was well within the 6-month window.j.That the Respondent erred in law and fact by failing to take into account the VAT balance brought forward from the previous month’s VAT 3 returns thereby arriving at an erroneous decision.k.That the Respondent erred in law and fact by assessing the Appellant VAT of Kshs. 526,819. 00 for the year 2014 of income which fell outside the statutory timelines of 5 years contrary to Section 31 (4) (b) of the TPA.

Appellant’s Case 8. The Appellant premised its Appeal on its Statement of Facts dated and filed on 15th December 2023 and the written submissions dated 21st March, 2024 and filed on the 25th March, 2024. It itemised its issues of appeal under various heads as follows:

i. Time-Barred VAT and Income Tax Demand for The Year 2014 9. The Appellant contended that the Respondent was misguided when it raised assessments for the year of income 2014, which was beyond the statutory period of five years contrary to Section 31 (4)(b) of the Tax Procedures Act, 2015 (TPA) which prohibits such assessments that are time-barred from being raised.

10. That the Respondent failed to establish the legal threshold of wilful or gross negligence, evasion or fraud to justify reliance on Section 31(4) of the Tax Procedures Act to re-open investigations beyond the statutory period and proceeded to issue additional assessments for the year 2014.

11. The Appellant stated that since there was no wilful or gross neglect on its side, the Respondent acted ultra vires thereby rendering the assessments for 2014 null and void.

ii. Value Added Tax 12. The Appellant stated that the Respondent relied solely on the banking test to compute its VAT liability of Kshs 37,246,533. 00. That this reliance on the banking test was wholly misguided as bank statements do not only contain revenue nature transactions but also include non-revenue items such as loans and shareholder capital injection and bank reversals.

13. That the analysis by the Respondent when it took the bank deposits, deducted the loan adjustments and arrived at a taxable value was fundamentally flawed as it failed to take into account the inherent defects of relying solely on the banking test to compute VAT liabilities.

14. That the said analysis was also erroneous because it:a.Took into account both income and non-income items in computing the Appellant’s VAT liability;b.Did not take into consideration the timing differences between the booking of revenue (invoicing) and the banking of deposit/receipt of funds from the customer;c.Charged VAT on exempt supplies;d.The analysis for the 2019 year of income disregarded the Appellant’s turnover as per the VAT 3 returns for July 2019 and December 2019 being the sum of Kshs 12. 678,317. 00;e.Omitted the Appellant’s purchases as declared in its VAT 3 Returns;f.Did not just adjust for the input VAT relating to November 2018 which was declared in the VAT 3 returns in February 2019, which was well within the 6 months window;g.Failed to factor in the Appellant’s withholding VAT credit (on i-Tax); andh.Failed to adjust the VAT balance brought forward from previous months' VAT 3 returns.

15. That as a result of the defects in the banking analysis it was forced to reconcile its income for the period under review to cure the flaws occasioned by the reliance on the banking test analysis.

16. The Appellant contended that the Respondent erred in law and fact by failing to differentiate its income and non-income items in the bank statements. That the Respondent treated the shareholder’s capital injection as vatable income and consequently imposed VAT on it and also failed to adjust the Appellant’s loan liabilities in full.

17. The Appellant averred that the inclusion of non-income items in computing its vatable liability was erroneous and ran counter to the provision of the VAT Act, 2013 which does not contemplate imposing VAT on loans and capital injections. That in effect, the Respondent by relying on these non-income items in computing the VAT liability has ignored the provision of VAT Act thereby introducing back-door amendment into the VAT Act.

18. The Appellant held the view that the Respondent erred in law and fact by failing to consider the tax point for Kshs 15,342,742. 00. It was its view that this sum was reflected in the bank statement in 2018 but it belonged to the sale made in 2017. That this tax point is consistent with Section 12 of the VAT Act which provides that the tax point should be the date on which the invoice for the supply is issued or the date on which payment for the supply is received, in whole or in part.

19. The Appellant stated that it is for this reason that it reclassified the amount of Kshs 15,342,742. 00 by removing it from the period of income 2018 and reclassifying it in the period of income 2017.

20. The Appellant posited that the Respondent erred in law by charging VAT on exempt supplies made to the Kenya Defense Forces (KDF) as well as other exempt supplies such as the supply of livestock (goats) and agricultural produce (beans) contrary to the First Schedule of the VAT Act.

21. The Appellant stated that the Respondent erred by failing to take into consideration the turnovers as per the VAT 3 returns for July 2019 of Kshs 1,898,100. 00 and December 2019 of Kshs Kshs 10,780,217. 00 bringing the total sum to Kshs. 12,678,317. 00. That the Respondent consequently arrived at a fundamentally flawed decision.

22. That sole reliance and failure to factor the Appellant’s purchases has denied it the right to claim input VAT thereby increasing the VAT payable.

23. That the Respondent had sufficient information in the VAT 3 returns to arrive at a decision and it was thus not right for the Respondent to invoke Section 31 of the TPA and thereby rely on its best judgment.

24. The Appellant postulated that the Respondent erred in law and fact by disregarding the provisions of Section 17 VAT Act which permits a taxpayer to claim input VAT within 6 months thereof. That accordingly, it was wrong for the Respondent not to factor in the timing of input VAT related to November 2018 but declared in the returns in February 2019 which was in any event within the 6-month window.

25. That the Respondent also erred in law and fact by failing to take into account the VAT withholding tax paid by the Appellant’s customers contrary to Section 42A of the TPA.

26. That in arriving at the VAT payable amount, the Respondent failed to take into account the VAT balance brought forward from the previous month’s VAT 3 returns arising out of excess input VAT and thereby arriving at an erroneous decision contrary to Section 17 (5) of the VAT Act.

iii. Income Tax 27. The Appellant took the view that the Respondent’s reliance on banking analysis to demand income tax of Kshs 11,623,604. 00 was misguided because the said bank statements contained revenue and non-revenue transactions such as loans and shareholder capital injection.

28. The Appellant averred that the inclusion of non-income items in its taxable income is erroneous and runs counter to the provision of the income of the Income Tax Act (ITA).

29. The Appellant contended that the Respondent erred in law and fact by failing to consider the tax point for Kshs 15,342,742. 00 despite the amount being deposited in the bank statement in 2018, the said bank deposit belonged to the sale made in 2017 and should have been charged in the year 2017.

30. That the Respondent erred when it failed to take into account the Income tax withholding of Kshs 998,461. 00 paid by the Appellant’s customers.

31. That in any event it was entitled to a refund of tax of Kshs 2,201. 05 in respect of VAT and Kshs 5,235,669. 00 in respect of Income tax shown below:Year 2014 2015 2016 2017 2018 2019 TOTAL

VAT 183,241 443,386 1,208,894 (177,446) 310,560 (4,170,041) 2,201,405)

Income Tax (998,622) (1,574,609) (3,133,751) (910,886) (914,325) 2,276,524 (5,235,669)

TOTAL (815,381) (1,131,223) (1,904,857) (1,088,332) (603,765) (1,893,517) (7,437,074)

32. The Appellant identified the following as the main issues for determination:a.Whether the Respondent erred in law by assessing and demanding taxes for the 2014 year of income contrary to the provisions of Section 31(4) of the Tax Procedure Act, 2015;b.Whether the Respondent erred in law and fact in its exclusive reliance on the banking test determining the Appellant’s value-added tax (VAT) liability.c.Whether the Respondent erred in law by assessing and demanding taxes for the 2014 year of income contrary to the provisions of Section 31 (4) of the TPA.

33. The Appellant stated that no sufficient evidence of gross or wilful neglect or fraud was placed before the Tribunal to justify the assessment that was done beyond 5 years, and more so for 2014.

34. That it was not sufficient to merely allege wilful neglect as the Respondent has the responsibility to go beyond mere allegations and substantiate and particularize its assertion in line with the edicts of Sections 107 and 108 of the Evidence Act, Cap 80 of the laws of Kenya.

35. That the assessment beyond 5 years contravened the provisions of Section 31(4)(a) of the TPA.

36. It supported its argument with the following cases:a.Commissioner of Domestic Taxes vs Airtel Networks Kenya Limited (Income tax Appeal E062 o 2022) [2023] KEHC 25059 (KLR) (Commercial and Tax) (10 November 2023) (Judgement) (the Airtel case).b.National Social Security Fund Board of Trustees vs Commissioner of Domestic Taxes, Kenya Revenue Authority [2016] eKLR (National Social Security Fund Case).c.Katsran Ltd vs TheCommissioner of Domestic Taxes (tax appeal Number 182 of 2021) [2022] eKLR (Katsran Ltd Case.d.Whether the Respondent erred in law and fact in its exclusive reliance on the banking test in determining the Appellant’s Value Added Tax (VAT) liability.

37. That the banking test failed to take into account the fact that the bank statements encompass not only revenue transactions but also non-revenue items such as loans and shareholder capital injections, which are not in themselves taxable supplies.

38. The Appellant relied on the following cases to support its position:a.Digital Box Limited v Commissioner of Investigation & Enforcement, Tax Appeal No. 115 of 2017. b.Van Boeckel v C & E QB Dec 1980, [1981] STC 290

Appellant’s Prayer 39. The Appellant prayed to the Tribunal for orders that:a.The Respondent’s objection decision dated 30th June 2021 be set aside.b.The Appeal be allowed with costsc.Any other orders the Tribunal deems just and reasonable.

Respondent’s Case 40. The Respondent relied on its Statement of Facts dated 15th January 2024 and written submissions dated 21st March 2024 and filed on the same date to defend this Appeal.

41. The Respondent identified the following as the issue for determination in this Appeal:i.Whether the Appellant’s case has merit.ii.Whether the Objection decision was valid

i. Whether the Appellant’s case has merit. 42. It averred that the Appellant’s appeal was not merited because the Appellant did not provide sufficient evidence and documents to support its Appeal and objection.

43. That it was thus justified to apply its best judgment and the banking analysis in determining the tax due in this Appeal.

44. It supported its decision with the cases of Digital Box Ltd vs Commissioner of Investigation and Enforcement (TAT 115 of 2017}

ii. Whether the Objection decision was valid 45. The Respondent stated that its decision was consistent with Section 17 of the VAT Act and was thus valid.

46. That the Appellant had failed to discharge its burden of proof and therefore its assessment stood affirmed.

47. That its assessment was over 5 years limit period because it had determined that the Appellant was engaged in fraud.

48. That it was not provided with relevant documents and hence its decision to issue its assessment while relying on available documents.

49. It relied on the following cases to support its postion:a.Gatirau Peter Munya v Dickson Mwendwa and 2 others, Supreme /Court Petition No. 26 of 2014 eKLR, Commissioner of Domestic Services v Galaxy Tools Limited (2021) eKLRb.Digital Box Ltd Commissioner of investigation and Enforcement (TAT No 115 of 2017).

50. It responded to the issues raised by the Appellant in its Appeal as follows:a.That it is empowered to use its best judgment in arriving at a tax assessment as explained in the case of Mulherin vs Commissioner of Taxation (2013) FCAFC 115b.That it complied with all the relevant laws in its application of the banking analysis and that the Appellant was given adequate opportunity to defend its position but failed to do so.c.That the Appellant failed to provide supporting documents and or to prove its case as is required under Section 56 of the TPA. That it was thus in order to issue its objection.d.That it used all the information available to it in arriving at its final decision.e.That it was empowered to issue assessments beyond 5 years if fraud is proved as it was done in this case.f.That documents provided by the Appellant did not meet the threshold of Section 17(1) of the VAT Act.

Respondent’s Prayer 51. The Respondent's prayers to the Tribunal were for orders that: -i.The Appeal be dismissed with costsii.The Respondent’s objection decision be upheld.

Issues For Determination 52. The Tribunal upon due consideration of the pleadings, documents and written submissions separately filed by the parties is of the view that the following issues precipitate for its determination: -a.Whether the Respondent’s assessments were in contravention of the provisions of Section 29(5) of the TPA.b.Whether the Respondent was justified in confirming the assessments.

Analysis And Determination 53. The Tribunal having ascertained the issues that crystallizes for its determination shall proceed to analyse the identified issues separately as hereunder:-

a) Whether the Respondent’s assessments were in contravention of the provisions of Section 29(5) of the TPA. 54. The parties in this appeal are in agreement that the Respondent’s assessment was issued beyond the 5 year statutory limit period. The Respondent has justified this decision under Section 31(4)(b) of the TPA on the premise that the Appellant’s action in omitting the 2014 assessment was fraudulent, deliberate and had wilfully been involved in fraud and hence its reason for the extended assessment.

55. Section 31(4) (b) of the TPA provides as follows regarding cases where the Respondent may issue assessments beyond 5 years;“The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment” (Emphasis added)

56. Section 29(5) of the Tax Procedures Act provides as follows regarding the timelines for assessments:-“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.”

57. The assessment in this Appeal was issued on 26th March 2021 for the period 2014 to 2019. The assessment for 2019 was thus due as at the date of the said assessment. On the face of it, the assessments for 2014 fell outside the 5 year limit period and was thus prima facie illegal unless it could be salvaged by the provision of Section 31(4) (b) of the TPA.

58. The Tribunal was not provided with any tangible evidence of fraud that the Appellant had allegedly engaged in, in the course of its transaction under review.

59. Section 97 of the TPA provides as follows regarding fraud concerning tax matters:“Fraud in relation to taxAny person who, in relation to a tax period, knowingly—(a)omits from his or her return any amount which should have been included; or(b)claims any relief or refund to which he or she is not entitled; or(c)makes any incorrect statement which affects his or her liability to tax; or(d)prepares false books of account or other records relating to that other person or falsifies any such books of account or other records; or(e)deliberately defaults on any obligation imposed under a tax law,”

60. Given that the allegations of fraud were not particularised and or exhibited with certainty and given further that there was no evidence that any criminal proceedings had been commenced against the Appellant for any fraudulent activity or omission. In the circumstances, whereas the burden of proof is always on the Appellant to prove that the assessment was wrong, in cases of allegation of fraud the Respondent should at the very least provide bare evidence to exhibit the basis of its averments or the finer reasons why it is alleging that the Appellant was involved in fraud. It is not enough to merely allege or state that the Appellant was involved. The provision of such bare evidence, information and particulars of the said allegation of fraud would thereafter allow the Appellant the opportunity to discharge its burden of proof to show that it was not involved in fraud.

61. Moreover, the Respondent has powers under Section 96 of the TPA to recommend and or commence criminal prosecution against a taxpayer who has been involved in fraud. There was no evidence of any prosecution carried out in relation to any offence committed on the part of the Appellant in this case.

62. In the circumstances, the Tribunal finds and holds that the allegation of fraud were just that. Mere allgations. Accordingly, the Tribunal finds that the confirmed assessments relating to income tax for the year 2014 was in contravention of the law.

b) Whether the Respondent was justified in confirming the assessments. 63. The Appellant averred that it provided documents that should have been relied on by the Respondent when issuing its assessment. That its turnover as per VAT 3 returns also contained sufficient information that could be relied on to determine its due tax. It was hence its view that the Respondent erred when it relied on banking analysis to determine its tax liability.

64. The Respondent on the other hand, held the position that it was not supplied with the relevant documents and hence its reason for resorting to its best judgment of applying the banking analysis was justified.

65. The Tribunal has noted that the Respondent did not raise the issue that it was not provided with documents that it required in the assessment process, it stated as follows in its objection decision dated 30th June 2021:“To affirm your position, you provided us with supporting documents on 27th May 2021 which we have reviewed with regards to the issues raised and thereby advise as follows:

66. The subsequent paragraphs did not raise the issue of insufficiency and or refusal on the part of the Appellant to provide relevant documents. It is thus not clear to the Tribunal the reasons or the cause that pushed the Respondent to ignore the documents provided by resorting to its best judgment.

67. The Tribunal has previously offered guidance on how the best judgement of the Respondent can be applied in the – TAT No. E016 Of 2023 – Agrochemicals and Food Company Limited –Vs- Commissioner of Domestic Taxes where the Tribunal cited and relied on Saima Khalid vs The Commissioner for Her Majesty’s Revenue & Customs Appeal No. TC/2017/02292, where the Court observed that: -“29. The requirements for a decision to be to the best of HMRC’s judgement was set out in the High Court case of Van Boeckel v C & E Commissioners where Woolf J, as he then was, said:“…The very use of the word ‘judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them … What the words ‘best of their judgment’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is reasonable and not arbitrary as to the amount of tax which is due...”

68. It is clear from this decision that even in cases where the Respondent has exercised its best judgment, it shall still be required to consider the evidence placed before it by the taxpayer. It cannot ignore the evidence placed before it and proceed to consider external factors under the guise of ‘best judgment’ doctrine.

69. Moreover, the Appellant ought to apply its best judgment only in cases where the Appellant has failed to supply it with the relevant documents or in cases where the material placed before it is insufficient. In case of the latter, it shall be required to identify and call for the missing documents. It is only when such documents have not been supplied that it can resort to its best judgment.

70. The Respondent is however not at liberty to invoke and apply its best judgment option willy-nilly and in a manner that suits it.

71. The Tribunal has noted that the Respondent opted to apply its best judgment option in this case and yet it had been supplied with the documents it required to enable it make a meritorious decision on the fair and accurate tax liabilities of the Appellant. That decision from which its assessment was premised was thus not justified.

Final Decision 72. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent's objection decision dated 30th June 2021 be and is hereby set aside.c.Each party is to bear its own costs

73. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA- MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH- MEMBER