[2023] KETAT 913 (KLR)

Taimon Company Limited v Commissioner of Domestic Taxes (Tribunal Appeal 1145 of 2022) [2023] KETAT 913 (KLR) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 913 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 1145 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

November 24, 2023

Between

Taimon Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act. Its principal activity is construction.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under Subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act for the purposes of assessing, collecting, and accounting for all revenues in accordance with those laws.

3. The Respondent assessed Corporation income tax and Value Added Tax (VAT) on undeclared income of the Appellant following a compliance verification exercise conducted by the Respondent covering the tax periods from January 2017 to December 2018.

4. The Respondent issued the Appellant with a notice of assessment in a letter dated 25th August 2020. The notice of assessment indicated that there were variances between the bank deposits and sales expected in the income tax and VAT returns, and variances between the incomes deduced from the withholding VAT certificate and sales expected in the income tax and VAT returns for the tax periods in the years 2017 and 2018.

5. On 11th September 2020, the Respondent issued the Appellant with income tax assessment orders for the years of income of 2017 and 2018 and VAT assessment orders for the periods of December 2017 and December 2018.

6. The Appellant objected to the additional assessments on iTax on 8th October 2020 which the Respondent acknowledged receipt of on the same date.

7. In an email sent by the Respondent to the Appellant on 4th December 2020, the Respondent requested the Appellant to provide documentary evidence in support of its objection ground, and in a letter dated 7th December 2020, the Respondent issued an objection decision confirming the assessments.

8. The Appellant, dissatisfied with the objection decision, filed its Notice of Appeal on 7th October 2022.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 5th October 2022 and filed on 7th October 2022 which raised the following grounds: -a.That the Respondent erred in law and in fact by assessing additional Corporation income tax on the Appellant based on arbitrary and unreasonable estimates while disregarding the actual income and expenses incurred by the Appellant as contained in the financial statements and the income tax returns filed.b.That the Respondent erred in law and in fact by making a ridiculous and mistaken upward adjustment on the Appellant’s turnover with Kshs. 41, 277,315. 00 in 2017 and Kshs. 34,557,038. 00 in 2018 and disregarding the actual turnover of the Appellant thereby assessing additional income taxes.c.That the Respondent erred in law and in fact by disregarding the documentation and information provided by the Appellant and assessing income tax from unfounded and grossly erroneous estimates which have no basis either in law or the accounting practice.d.That the Respondent erred in law and in fact by disregarding and failing to deduct any of the expenses incurred by the Appellant in generation of income contrary to Sections 15 and 16 of the Income Tax Act.e.That the Respondent erred in law and in fact by increasing the sales figure in the Appellant’s VAT returns and erroneously assessing additional VAT.f.That the Respondent erred in law and in fact by disregarding all the explanations and documentation provided by the Appellant and proceeding to confirm the VAT assessment.g.That the Respondent erred in law and in fact by assessing additional VAT on the Appellant based on arbitrary and unreasonable estimates while disregarding the actual sales and purchases incurred by the Appellant contained in the VAT returns filed by the Appellant.

Appellant’s Case 10. The Appellant’s case is premised on the following documents: -a.Its Statement of Facts dated 5th October 2022 and filed on 7th October 2022 and the documents attached thereto; andb.Its Written Submissions dated 5th September 2023.

11. The Appellant stated that the Respondent issued it with additional assessments with reference numbers KRA202017591378, KRA202017591460, KRA202017592779 and KRA202017592676 of Corporation income tax and Value Added Tax (VAT) for the tax periods in 2017 and 2018.

12. The Appellant objected to the income tax and VAT assessments on 8th October 2020.

13. The Appellant stated that the Respondent allegedly made its objection decision on 7th December 2020 therein confirming the entire assessment amounting to Kshs. 37,459,920. 00. The Appellant claimed that the Respondent failed to serve it with the objection decision and that it only learnt about the objection decision when the Respondent issued agency notices on its bank accounts.

14. The Appellant pointed out that the Respondent asserted that the Appellant had underdeclared its turnover in the tax periods in 2017 and 2018 and consequently assessed the under-declaration under income tax and VAT.

15. The Appellant stated that during the period under assessment, it only had one client, the Kenya National Highways Authority (KENHA) and that the only income received during the period was from KENHA.

16. The Appellant contended that it declared all the income it received in the tax periods in 2017 and 2018 as per its financial statements and income tax returns.

17. The Appellant outlined its issues for determination by the Tribunal as below: -a.Whether the Respondent erred in the computation of the Income tax assessments of the Appellant for the period under review by arbitrarily adjusting the turnover of the Appellant and disallowing expenses incurred by the Appellant in the generation of the taxable income.b.Whether the Respondent erred in its assessment of the Value Added Tax of the Appellant for the period under review.c.Whether the Respondent erred in disregarding the Appellant's information and documentation provided.

a.On whether the Respondent erred in the computation of the Income Tax assessments of the Appellant for the period under review by arbitrarily adjusting the turnover of the Appellant and disallowing expenses incurred by the Appellant in the generation of the taxable income. 18. The Appellant submitted that it declared all the income it received in the years of income 2017 and 2018 as per its financial statements and income tax returns as highlighted in paragraph 12 of the Appellant’s Statement of Facts.

19. The Appellant explained that its principal activity is construction and that in the construction industry, the income earned in any year of income is determined by the certificates issued by the engineer certifying the value of work done.

20. The Appellant averred that by virtue of having only one client, that the level of income earned for the period was the sum total of the work certificates issued by the engineer for payments.

21. The Appellant stated that the sum of income earned can also be determined by working back from the withholding tax credits accumulated in the year of income, noting the withholding tax rate of 3% applicable to contractual engagements. The Appellant stated that in the year of income 2017, the total withholding tax credits were Kshs. 587,714. 00, and in the year 2018, the total withholding tax credits were Kshs. 5,678,257. 00 both representing 3% of revenue earned.

22. The Appellant submitted that inspite of it presenting all the relevant information including the financial statements and source documents, that the Respondent went ahead to disregard the actual figures of revenue earned and erroneously adjusted the revenue earned.

23. The Appellant asserted that without prejudice to the foregoing arguments, that the Respondent did not make any adjustments for expenses in its additional assessments.

24. The Appellant submitted that it declared all the income it received in the years of income 2017 and 2018 as per its financial statements and income tax returns

25. The Appellant clarified to the Tribunal that withholding income tax is tax withheld at source. That a person making certain payments deducts tax, at the applicable rate, and remits the tax to the Commissioner on behalf of the recipient. That the Appellant's client KENHA diligently remitted the same, as evidenced by the withholding tax certificates provided by the Appellant to prove its claim.

26. The Appellant submitted that it discharged its burden of proof as stipulated in Section 56 of the Tax Procedures Act (TPA) and the evidentiary burden of proof shifted to the Respondent to prove its allegations of the adjusted revenue, which according to the Appellant the Respondent did not.

27. The Appellant argued that it is trite law that it is impossible to file any income tax return on iTax without declaring all the withholding tax certificates for the period and that this confirmed that those were the only withholding tax certificates issued to the Appellant by the same client.

28. The Appellant submitted that it was unfortunate that despite its efforts to explain and come to a consensus with the Respondent on the actual taxable income, that its efforts were futile as the Respondent failed to consider material facts and evidence of the withholding tax certificates issued, disregarded the actual figures of the revenue earned and erroneously adjusted the revenue earned with no justification, and making the additional assessment.

29. The Appellant placed reliance on the High Court case of Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] eKLR where the learned justice held that the only logical conclusion was that the Commissioner of Income Tax omitted to consider material facts which he was bound to consider under the law and the failure to which prejudiced the company.

30. That not only was it unjust but also unfair for the Respondent to arbitrarily adjust the Appellant's revenue earned without any justification and contrary to the documents provided by the Appellant, which the Appellant claimed were neither reviewed nor considered in the sudden adjustments. That the failure by the Respondent to consider material facts produced by the Appellant had greatly prejudiced the Appellant with the excessive and erroneous tax assessment.

31. The Appellant claimed that in fact, the Respondent disregarded proper financial statements prepared by the Appellant and withholding tax certificates for the period and went ahead to use unsubstantiated and unjustified data which appeared to have been plucked from thin air to make the assessments herein.

32. The Appellant further relied on Silver Chain Ltd -vs- Commissioner Income Tax & 3 Others (2016[ eKLR where the court stated: -“The task of collecting taxes should not lead to discouraging taxpayers from carrying on with their businesses. If the taxpayers close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid there will be no funds to run government operations. Th is calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as opposed to being unilateral. There must be fairness in the process of tax assessment.”

33. The Appellant urged the Tribunal to find the decision by the Respondent to use imaginations to arbitrarily adjust the Appellant's revenue as erroneous and incorrect.

34. It was the Appellant’s submission that the Respondent failed to acknowledge the expenses incurred in the running of the Appellant's business contrary to the provisions of the Income Tax Act (ITA) which provides that all expenses incurred in the generation of income are tax allowable. That obviously, it is impossible to run a business without incurring expenses, yet the Respondent did not allow any expenses claimed by the Appellant in their statement of income.

35. That Section 15 (1) of the ITA provides: -“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.”

36. The Appellant argued that it incurred expenses given the nature of its principal activity as a construction company. The Appellant stated that it incurred salaries and wages expenses among other expenses incurred and that the Respondent has erroneously ignored or failed to consider and make the necessary adjustments in issuing the additional assessments.

37. The Appellant relied on the case of Hancock v General Reversionary and Investment Company [1919] KB 5, 37. where Lush J., explained that“The proper test to apply in tax computation is: was the expenditure incurred in order to meet a continuing business demand, in which case it should be treated as an ordinary business expense and an admissible deduction or was it an expenditure incurred once and for all in which case it should be treated as capital outlay…”and implored the Tribunal to see through the arbitrary decision of the Respondent of disallowing expenses incurred in the ordinary running of the business.

38. The Appellant submitted that the Respondent was adamant to allege that the Appellant did not produce evidence of the said expenses yet the Appellant showed that it had kept proper records of the book of accounts, financial statements, withholding tax certificates as highlighted in paragraphs 12 and 13 of the Appellant's Statement of Facts.

39. It therefore, beseeched the Tribunal to allow this appeal and let the Respondent's claim of taxes fail.

b.On whether the Respondent erred in its assessment of the Value Added Tax of the Appellant for the period under review. 40. The Appellant cited Section 12 of the VAT Act which provides: -“(1)Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of—(a)the date on which the goods are delivered or services performed;(b)the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;(c)the date on which the invoice for the supply is issued; or(d)the date on which payment for the supply is received, in whole or in part.”

41. The Appellant averred that its VAT returns were filed in accordance with the legal provisions on the time of supply as cited above and that its turnover as per VAT returns was properly reconciled with the turnover as per financial statements.

42. The Appellant averred that it filed all its VAT returns and paid the VAT due for the period under assessment, and that the value of its self-assessed VAT was based on the certificates issued for work completed.

43. That the Respondent disregarded all the facts in the documents presented by the Appellant in the financial statements and source documents, and overstated the sales in the period, and consequently erroneously made additional assessments.

44. The Appellant affirmed that all invoices (with ETR receipts) supporting the sales and expenses incurred by the Appellant were all furnished to the Respondent.

45. The Appellant submitted that in the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) {2022} KEHC 9927 (KLR) (Commercial and Tax) Justice Majanja held: -“The burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer. The uniqueness of our tax system in placing the evidential burden of proof on the tax payer is neither a mistake nor is it unconstitutional. 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.”

46. The Appellant submitted it produced competent and relevant evidence supporting the sales and expenses incurred by the Appellant including all invoices and ETR receipts, and that it discharged its burden of proof by providing the various financial statements of the period under audit. Further, that it produced unchallenged and uncontradicted evidence to proof its case. That the burden of proof ought to shift to the Respondent to prove its allegations.

47. The Appellant submitted that it concurred with Justice Mativo's judgment in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021} eKLR where the learned judge held: -“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. [10] 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. [11] 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.The Supreme Court of Canada in Johnston v Minister of National Revenue [18] decided 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 1191 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. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. 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.”

48. The Appellant buttressed its submission by placing reliance on the case of George v Federal Commissioner of Taxation. {1952} HCA 21 citing that: -“the burden lies upon the taxpayer of establishing affirmatively that the amount of taxable income for which he has been assessed exceeds the actual taxable income which he has derived during the year of income" and that " ... in order to carry that burden he must necessarily exclude by his proof all sources of income except those which he admits. His case must be that he did not derive from any source taxable income to the amount of the assessment.

49. The Appellant continued by submitting that the amount assessed as derived income by the Respondent is erroneous given the factual and substantive proof and arguments by the Appellant that illustrate that the taxable income assessed exceeds the actual taxable income derived during the period under review.

50. The Appellant decried that it was unfortunate that its efforts bore no fruits with the Respondent to solve the dispute amicably. It implored the Tribunal to consider its submissions and all the supporting documents herein to prevent the execution of erroneous taxes as claimed by the Respondent.

51. The Appellant further relied on the case of Kilburn v Bedford (H.M. Inspector of Taxes) 1955 Chancery Division, 36, p.262 where the court held that: -“... As regards the extra tax imposed upon those figures it was for the appellant to show that there was some reason why on the agreed figures tax should not be paid ...”

52. The Appellant submitted that it is clear that the Respondent who is aptly equipped and mandated to collect and assess taxes was committing an illegality by imposing unfair, excessive and unjust taxes to a committed and diligent taxpayer who has been at the forefront in submitting tax returns.

b.On whether the Respondent was wrong in disregarding the Appellant's information and documentation provided. 53. The Appellant argued that it filed all its tax returns (Income, VAT and Corporation tax) due for the period under assessment, and that the Respondent without any basis or justification adjusted the turnover of the Appellant upwards for the period under review and thereafter erroneously assessed additional taxes.

54. The Appellant reiterated that in accordance to Sections 108 and 109 of the Evidence Act cited below, it has discharged its burden of proof on the erroneous assessment of VAT on the Appellant. That Section 108 read together with Section 109 of the Evidence Act provide that: -“The burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on either side.”And that;“The burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence, unless it is provided by any law that the proof of that fact shall lie on any particular person”

55. The Appellant submitted that in adherence to the Section 43 of the VAT Act, the Appellant ensured to keep all records in the course of his business and produced the requisite documents during the audit carried out by the Respondent. The Appellant also cited Section 23 of the TPA to buttress the requirement to keep records.

56. The Appellant submitted that it provided the documents requested and that the Respondent failed to reconcile the accounts and still demanded the erroneous tax assessment.

57. The Appellant relied on the case of Republic v Commissioner of Domestic Taxes Large Tax Payer’s Office Ex Parte Barclays Bank of Kenya Ltd (2012) eKLR where the court held that for the proposition that the decision to tax must have a legal basis and that Section 56(1) does not empower the Appellant to make speculative assessments (citing Johnson v Scott (Inspector of Taxes) nor was it the intention of the legislature to put the taxpayer in a position where he would be required to produce any documents that the taxman requires. (Citing Peter Bonde Nielson v Commissioner of Domestic Tax (2016) eKLR).

58. To further buttress its submission on this issue, the Appellant referred to the court decision in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya (2021] eKLR which held in its analysis of the appeal from the Tribunal that: -“the TAT was persuaded by the Respondent's evidence. It was persuaded that the Respondent discharged the burden of proof but more important, in auditing a taxpayer the Commissioner is required to properly consider the documentation provided and to understand the information. It is not sufficient for the Commissioner to merely request information and then disregard it and to issue on assessment as it sees fit. Where the Commissioner issues an assessment based on the taxpayer's accounts and records but has misconstrued those records then it will be sufficient for the taxpayer to explain the nature of the Commissioner's misconception, point out the flaws in the analysis and to explain how those records and accounts should be properly understood." In this regard, the Respondent misconstrued the Appellant's documents and has not provided any justifiable basis as to why it disregarded the Appellant’s documentation and explanation in its attempt to reconcile the various variances alleged.

59. The Appellant contended that the Respondent's argument that it failed to produce all the required documents sounded attractive, but the Appellant invited the Tribunal to objectively analyse the documents it attached in this Appeal and establish that the Appellant dutifully produced all the records as required, that the Respondent should have accordingly done a reconciliation of accounts and that the Respondent should not have proceeded to erroneously assess it even with the glaring evidence it provided.

60. The Appellant claimed that the Respondent amended the Appellant’s VAT assessments for the period under review without conducting an audit or review of the Appellant's books.

61. The Appellant implored the Tribunal to acknowledge and act on the glaring errors made by the Respondent who it claimed to have not only disregarded the Appellant's supporting documentation but also made an excessive assessment and that the tax decision should have been made differently.

62. The Appellant cited the case of Keroche Industries Limited V Kenya Revenue Authority & Others (2007] eKLR where the court held that:-“It is no good answer for the taxman to proclaim that Kshs 1 billion (appx) is intended to swell the public treasury because due to the application of the above principles that money is not lawfully due ...Applying the same reasoning, to the matter before this court, it does not matter that the respondents say and think they are owed over a billion Kenya shillings - what matters is whether the amount is lawfully due and whether the law allows its recovery? It is not a question of impression or perception of what is owed. instead it is what if anything. is owed under the relevant law and whether its assessment and recovery is (sic) permitted by the applicable law. If rightly due. the huge amount notwithstanding the court must uphold the right of recovery regardless of its consequence to the applicant and if not due under the law it must not hesitate to disallow It and must disallow it to among other things to uphold both the law the integrity of the rule of law.”

63. The Appellant concurred with the Keroche Case and beseeched this Tribunal not to hesitate to disallow the Respondent from recovering the unfair, unlawful, excessive and unjust tax assessments from the Appellant, but among other things to uphold the law and the integrity of the rule of law.

Appellant’s prayers 64. The Appellant prays that the Tribunal: -a.Allows the Appeal.b.Annuls the Respondent’s confirmed assessments based on the grounds above, as well as the information contained in the Statement of Facts attached.c.Awards the costs of this Appeal to the Appellant.

Respondent’s Case 65. The Respondent’s case is premised on the following documents:a.Its Statement of Facts dated and filed on 16th November 2022 and the documents attached thereto; andb.Its Written Submissions dated and filed on 2nd March 2023.

66. The Respondent stated that it assessed income tax and Value Added Tax (VAT) on undeclared income of the Appellant following a compliance verification exercise conducted by the Respondent.

67. The Respondent averred that during the verification exercise, it reviewed the bank statements and reconciliations provided by the Appellant and noted that some years had unreconciled variances.

68. The Respondent further averred that it issued the Appellant with a notice of assessment in a letter dated 25th August 2020. That the notice of assessment indicated that there were variances between the bank deposits and sales expected in the income tax and VAT returns, and variances between the incomes deduced from the withholding VAT certificates and sales expected in the income tax and VAT returns for the tax periods in the years 2017 and 2018.

69. The Respondent stated that based on the unexplained sales variances, on 11th September 2020 it issued the Appellant with income tax assessment orders for the years of income of 2017 and 2018 and VAT assessment orders for the periods of December 2017 and December 2018.

70. The Respondent confirmed that the Appellant objected to the additional assessments on iTax on 8th October 2020 which it acknowledged receipt of on the same date.

71. The Respondent stated that on 4th December 2020, it requested the Appellant to provide documentary evidence in support of its reasons for the objection, which request the Respondent averred that the Appellant ignored and/or failed to respond to.

72. That the Respondent issued an objection decision dated 7th December 2020 confirming the assessments raised as the taxpayer did not provide sufficient documentary evidence in support of its ground of objection.

73. That the Appellant appealed against the objection decision to the Tribunal.

74. The Respondent summarised it issues for determination by the Tribunal as: -a.Whether the additional assessment was justified in law.b.Whether the Appellant discharged the burden of proof.

a.On whether the additional assessment was justified in law. 75. The Respondent averred that the decision to arrive at the assessment was justified and had basis in law as required under the Tax Procedures Act.

76. The Appellant stated that the additional VAT assessment in question was raised after a verification exercise where the bank statements and reconciliations from the Appellant were reviewed and it was noted that some years had variances that were not reconciled.

77. The Respondent averred that despite it according the Appellant several opportunities to provide documents to review the variances, that the Appellant failed and/or ignored to do so.

78. The Respondent contended that it is not bound by the Appellant’s returns or self-assessment and that it is empowered to vary the assessments using any available information in the Respondent’s possession, citing Section 24 of the TPA which states that: -“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

79. The Respondent stated that Section 31 of the TPA empowers it to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner’s best judgement. That the Section of the law provides: -“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that—(a)in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;(b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

80. It was the Respondent’s submission that it was clear that it relied on its best judgement based on information available to it in compliance with Section 31 of the TPA while raising the additional VAT assessment. That the court in Commissioner of Domestic Taxes v Altech Stream (Ea) Limited [2021] eKLR stated that Section 31(1) of the Tax Procedures Act allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.

81. The Respondent further relied on Section 59 of the TPA that empowers it to seek any information relating to the ascertaining of the correct tax liability of a taxpayer. That the court in Osho Drapers Limited versus Commissioner of Domestic Taxes [2022] eKLR, held that Section 59 of the TPA empowers the Commissioner to request for more and additional information to satisfy himself on the taxable income declared.

82. The Respondent submitted that the Appellant has a duty to keep records for a period of five years in accordance with the provisions of Section 23 of the TPA. That Section 23 of the TPA provides that: -“A person shall(a)Maintain any document required under a tax law, in either of the official languages;(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained and;(c)subject to subsection (3) retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

83. The Respondent submitted that a reading of Sections 23 and 59 of the TPA depicts that the Appellant had an obligation to keep records and produce them when called upon to do so.

84. The Respondent submitted that where an Appellant makes an objection to the assessments issued by the Commissioner, the Appellant is obligated to provide all the relevant documentation it relied on in making the objection. That Section 51 (3) of the TPA provides that: -“A notice of objection shall be treated as validly lodged by an Appellant under subsection (2) if(a)...(b)...(c)all the relevant documents relating to the objection have been submitted.”

85. The Respondent relied on the following decisions of the Tribunal on the issue of Section 51(3)(c) of the TPA: -a.Boleyn International Limited versus Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No 55 of 2019) where the Appellant failed to provide documents and the Tribunal held that there was no conceivable way the Respondent would have considered the objection as the same did not place itself within the parameters of Section 51(3) of the TPA.b.Rongai Tiles and Sanitary Ware Limited versus Commissioner of Domestic Taxes (Tax Appeals Tribunal No. 163 of 2017) where The Tribunal found that the wording of Section 51 (3) of the TPA is clear that a notice of objection was valid if the conditions given are met.

86. The Respondent submitted that the Appellant did not lodge a valid objection as it did not adduce any documentation to support its objection. Further, vide an email dated 4th December 2020, it informed the Appellant that it had lodged an invalid objection and requested it to provide audited accounts/ statement of income and expenditure, certified bank statements, ETR Z-reports for the period under assessment, the purchases schedule and the expenses schedule to support its objection.

87. The Respondent submitted that despite requesting the Appellant to provide documentation to support its objection, that the Appellant failed to do so.

88. The Respondent submitted that the Appellant had not discharged its burden of proving that the tax decision was incorrect or excessive or that the tax decision should not have been made or should have been made differently as required under Section 56 (1) of the TPA and Section 30 of the Tax Appeals Tribunal (TAT) Act.

89. The Respondent relied on the case of Prima Rosa Flowers Limited versus Commissioner of Domestic Taxes [2019] eKLR where the High Court relied on Mulherin versus Commissioner of Taxation [ 2013] FCAFA 115 in which the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. That the onus is on the taxpayer in proving that the assessment was excessive by adducing positive evidence, which demonstrates the taxable income on which ought to have been levied.

90. That in Ushindi Exporters Limited versus Commissioner of Investigation and Enforcement (Tax Appeals Tribunal No. 7 of 2015) the Tribunal held that: -“The burden of proving that the tax assessment is excessive or should have been made differently never shifts to the Respondent and is placed squarely on the Appellant as Section 30 (a) and (b) of the TAT Act states,a)Where an appeal related 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 differentlyBy purporting to shift the burden of proving that the tax assessment against it was incorrect or should have been different the Appellant failed in discharging the burden, placed upon it by law.”

91. That in Tumaini Distributors Company (K) Limited and Commissioner of Domestic Taxes [2020) eKLR, the High Court in determining the issue as to whether the Commissioner followed the correct procedure or correctly assessed a company's tax liability found out that the Appellant had failed to provide the relevant documents despite several requests by the Commissioner. The High Court upheld the decision of the Tribunal, holding that since the Appellant had not provided all the documents, the Commissioner was right in reaching the assessment on the material available.

92. The Respondent averred that the assessments were justified since the Appellant failed to rebut the same with evidentiary proof.

b.On whether the Appellant discharged the burden of proof. 93. The Respondent averred that Section 56 (1) of the TPA places on the Appellant the burden of proving that a tax decision is incorrect.

94. The Respondent stated that the Appellant did not discharge its burden of proving that the income tax and VAT additional assessments were incorrect since it did not adduce any evidence to support its objection.

95. The Respondent relied on Section 59 of the TPA which empowers it to seek any information relating to ascertaining of the correct tax liability of a taxpayer as cited hereunder: -“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to—(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

96. The Respondent submitted that where an Appellant makes an objection to assessments issued by the Commissioner, the Appellant is obligated to provide all the relevant documentation it relies on in making the objection.

Respondent’s prayers 97. The Respondent prays that the Tribunal:a.Upholds the Respondent’s additional assessments and confirms the objection decision dated 7th December 2020. b.Dismisses the Appeal with costs to the Respondent.

Issue For Determination 98. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:Whether the objection decision dated 7th December 2020 is proper in law.

Analysis And Findings 99. Having determined the issue that calls for its determination, the Tribunal continues to analyze it as hereunder.

100. The Respondent assessed Corporation income tax and Value Added Tax (VAT) on undeclared income of the Appellant following a compliance verification exercise conducted by the Respondent covering the tax periods from January 2017 to December 2018.

101. The Respondent issued the Appellant with a notice of assessment in a letter dated 25th August 2020. The notice of assessment indicated that there were variances between the bank deposits and sales expected in the income tax and VAT returns, and variances between the incomes deduced from the withholding VAT certificates and sales expected in the income tax and VAT returns for the tax periods in the years 2017 and 2018.

102. On 11th September 2020, the Respondent issued the Appellant with income tax assessment orders for the years of income of 2017 and 2018 and VAT assessment orders for the periods of December 2017 and December 2018.

103. The Appellant objected to the additional assessments on iTax on 8th October 2020 which the Respondent acknowledged receipt of on the same date.

104. In an email sent by the Respondent to the Appellant on 4th December 2020, the Respondent requested the Appellant to provide documentary evidence in support of its objection ground, and in a letter dated 7th December 2020, the Respondent issued an objection decision confirming the assessments.

105. The Appellant stated that its principal activity is construction and that in the construction industry, the income earned in any year of income is determined by the certificates issued by the engineer certifying the value of work done. It averred that by virtue of having only one client, that the level of income earned for the period was the sum total of the work certificates issued by the engineer for payments.

106. The Appellant also averred that the sum of income earned can also be determined by working back from the withholding tax credits accumulated in the year of income, noting the withholding tax rate of 3% applicable to contractual engagements. The Appellant stated that in the year of income 2017, the total withholding tax credits were Kshs. 587,714, and in the year 2018, the total withholding tax credits were Kshs. 5,678,257 both representing 3% of revenue earned.

107. The Appellant submitted that inspite of presenting all the relevant information including the financial statements and source documents, that the Respondent proceeded to disregard the actual figures of revenue earned and erroneously adjusted the revenue earned.

108. The Tribunal reviewed all the information and documents adduced by the Appellant and determined that alongside the Statement of Facts and submissions outlined above, the Appellant provided only the following documents in relation to the appealed objection decision:a.The Corporation income tax assessment orders for 2017 and 2018 and VAT assessment orders for December 2017 and December 2018. b.The original tax assessment return, being the self-assessments of Corporation income tax that it made for the years of income 2017 and 2018. c.The additional assessment return, being the assessments of Corporation income tax that the Respondent made for the years of income 2017 and 2018. d.Its notices of objection to the 2017 and 2018 Corporation income tax and December 2017 and December 2018 VAT additional assessments.e.Confirmation of award of a tender for a contract for the maintenance of the JN B77 Iten – B 16 Kabarnet Road dated 14th August 2017. f.Taking-over certificate issued by Engineer being the Director (RA& CM) Kenya National Highways Authority dated 7th May 2019 for substantial instructed works completed on 9th January 2019. g.Unsigned annual reports and financial statements for the years ended 31st December 2017 and 31st December 2018. h.The Respondent’s objection decision dated 7th December 2020.

109. Having identified the issue that calls for its determination, the Tribunal proceeda to analyse it in three parts as hereunder:a.Corporation income tax additional assessments for 2017 and 2018. b.VAT additional assessment for December 2017. c.VAT additional assessment for December 2018.

Corporation income tax additional assessments for 2017 and 2018. 110. The Respondent stated in its notice of assessment that it based its additional income tax assessments for 2017 and 2018 on unexplained variances between credits in the Appellant’s bank accounts and the turnover declarations in the income tax returns for the years of income of 2017 and 2018.

111. For the year of income 2017, the Respondent cited that the bank credits exceeded the sales declared in the Appellant’s income tax return for the year by Kshs. 41,755,315. 00. The Tribunal noted that the sales declared in the Appellant’s 2017 financial statements exceeded the sales declared in the Appellant’s income tax return for the year by Kshs. 9,510,364. 00.

112. For the year of income 2018, the Respondent cited that the bank credits exceeded the sales declared in the Appellant’s income tax return for the year by Kshs. 34,557,038. 00.

113. The Tribunal took note of the Appellant’s pleadings regarding its revenue recognition methodology. According to the Appellant, it recognised its revenue for income tax purposes by relying on withholding tax credits received from its client. The Tribunal observes that this may not be a reliable and accurate approach.

114. Further, the Tribunal’s review of the evidence presented by the Appellant showed that the Appellant failed to produce sales invoices, bank statements and bank reconciliations for all the bank accounts owned, matching bank credits with sales income that it recognised in its tax returns and financial statements in 2017 and 2018.

115. It was the Tribunal’s observation that the Appellant did not adduce any other source documents to support its claim that the sales variance determined by the Respondent’s review was incorrect or excessive. Further, the Appellant failed to provide a logical manner in which it recognises the income it accrues from its construction activities.

116. The Appellant further stated that in the year of income 2017, the total withholding tax credits were Kshs. 587,714. 00, and in the year 2018, the total withholding tax credits were Kshs. 5,678,257. 00 and that these represented 3% of revenue earned in the respective years.

117. The Tribunal is guided by the court’s holding in the case TAT 345 of 2022 Baha Safety Company Limited vs Commissioner of Domestic Taxes that data derived from withholding tax data may not reflect completeness of revenue due to its reliance on third-party compliance or lack thereof. The court in this case found that: -“The obligation to withhold a portion of an eligible payment and remit the withholding tax to the Commissioner is on the persons required to withhold tax or persons specifically appointed to withhold tax. As a result, the nature of the nature of withholding tax is that it is third-party reporting to the Commissioner of payments made by users of goods or services.The reliability of withholding tax certificates as a primary source of revenue data is disputable because:a)Withholding tax certificates are a result of third-party reporting, which may have errors.b)Only a section of persons liable to withhold tax may fully comply with the requirement.(c)In cases where the Commissioner’s appointment of a withholding tax agent is required to initiate the withholding of tax, only the appointed suppliers to a business would deduct tax.d)A taxpayer can earn income from persons not liable to withhold tax and remit the tax to the Commissioner, for instance, where a payment to a taxpayer is not eligible for deduction of withholding tax or where taxpayer earns income outside Kenya.Clearly apparent, withholding tax certificates on their own are incapable of being a reliable source of primary income data of a taxpayer as they cannot validate the completeness and accuracy of income data of the taxpayer…”

118. For these reasons, the Tribunal finds that the Appellant’s claim that the sales it declared in its returns for purposes of income tax for the years 2017 and 2018 were complete on the basis that the amounts allegedly reflected income data derived from withholding tax data, is devoid of merit.

119. Further, the Tribunal notes that the Appellant introduced additional cost of works and operating expenses in the financial statements, which expenditure was not previously claimed in the original tax assessments. Specifically, the Appellant introduced additional costs of works and operating expenses of Kshs. 14,301,289. 60 in the year of income 2017, and additional costs of works and operating expenses of Kshs. 10,571,313. 33 in the year of income 2018.

120. The Appellant did not prove to the Tribunal that it wholly and exclusively incurred the expenditure it introduced in its 2017 and 2018 financial statements in the production of its business income as required under Section 15, subject to Section 16 of the ITA, and did not adduce any other source documents to support its claim of additional expenses to reduce its taxable income for the years 2017 and 2018.

121. Section 54A (1) of the ITA which provides as follows: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. While the Appellant claimed that it kept these records and documents, and claimed that the Respondent disregarded these records and documents, the Appellant did not produce the records and documents for the Tribunal’s discovery.

122. The Appellant failed to explain to the Tribunal what these conspicuous income variances in 2017 and 2018 related to, and failed to explain the variances with evidence. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s additional assessment of income tax for the years of income 2017 and 2018 were incorrect or excessive as required under Section 56 (1) of the TPA and Section 30 (a) of the TAT Act.

123. Based on the foregoing, the Tribunal finds that the Respondent was justified in issuing the additional assessments for 2017 and 2018.

VAT additional assessment for December 2017. 124. The Respondent averred in its notice of assessment that it based its additional VAT assessments for December 2017 on unexplained variances between credits in the Appellant’s bank accounts and the turnover declarations in the 2017 VAT returns.

125. The Tribunal’s review of the evidence presented by the Appellant showed that the Appellant failed to produce sales invoices, bank statements and bank reconciliations for all the bank accounts owned, matching bank credits with sales income that it recognised in its tax returns in December 2017 and December 2018.

126. It was also the Tribunal’s observation that the Appellant did not adduce any other source documents to support its claim that the sales variance determined by the Respondent’s review was incorrect or excessive.

127. Section 43 of the VAT Act, 2013 which provides that: -“(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial copies number order;(b)of all credit and debit notes issued, in chronological order;(c)…;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.envisions that a person carrying on a business must keep certain records and documents which should be provided to the Commissioner for inspection. While the Appellant claimed that it kept these records and documents, and claimed that the Respondent disregarded these records and documents, the Appellant did not produce the records and documents for the Tribunal’s discovery.

128. The Tribunal has previously held in TAT No. 469 of 2022 Five Forty Aviation Limited vs Commissioner of Domestic Taxes that: -“It is settled law on record keeping and provision of the same when requested by the Respondent where Section 43 of the VAT Act 2013 requires a taxpayer to keep transactional records for a period of five years…”

129. To determine how VAT should be accounted for and paid by a registered person, the Tribunal relies on Section 5 (3) of the VAT Act, 2013 which states that: -“Tax on a taxable supply shall be a liability of the registered person making the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.”

130. Time of supply is defined in Section 12 of the VAT Act, 2013, which provides as thus: -“Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of—(a)the date on which the goods are delivered or services performed;(b)the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;(c)the date on which the invoice for the supply is issued; orSUBPARA (d)the date on which payment for the supply is received, in whole or in part.”

131. The Appellant failed to demonstrate that the time of supply in December 2017 was different from the time of supply as determined by the Respondent in accordance with Section 12 of the VAT Act, 2013. In addition, the Appellant also failed to explain to the Tribunal what the conspicuous income inconsistency in December 2017 related to, and failed to explain the inconsistency with evidence. Accordingly, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s additional assessment of VAT for the period of December 2017 was incorrect or excessive as required under Section 56 (1) of the TPA and Section 30 (a) of the TAT Act.

132. As per the foregoing analysis, the Tribunal finds that the Respondent was justified in issuing the objection decision confirming the VAT assessment for December 2017.

VAT additional assessment for December 2018 133. According to the Respondent’s notice of assessment, the Respondent charged VAT on 2018 sales of Kshs. 50,283,573. 00 paid for in 2019. The VAT on this amount comprised the entire additional assessment charged for December 2018.

134. The Appellant averred in its Statement of Facts that its VAT returns were filed in accordance with the legal provisions on the time of supply as cited above and that its turnover as per its VAT returns was properly reconciled with the turnover as per its financial statements.

135. The Tribunal relies on Section 5 (3) of the VAT Act, 2013 to determine when VAT should be accounted for and paid by a registered person and on Section 12 of the VAT Act, 2013 for the meaning of time of supply.

136. The Tribunal observes that the identifiable and measurable tax points which it can determine from the evidence before it are:a.The date of substantial completion of instructed works.b.The date the taking over certificate was issued.c.The date the Appellant received payment for the supply of services.

137. According to the tender award letter for the construction contract, the total contract sum was Kshs. 352,574,692. 00 and the contract period was 36 months starting from 1st November 2017 to 31st October 2020. The Appellant provided a taking over certificate with following details:Date of substantial completion of instructed works Dates on which taking over certificate was issued Date on which payment for the supply of services was received Amount of revenue to be recognised in Kenyan Shillings (Kshs.)

9th January 2019 7th May 2019 Sometime in 2019 284,496,486. 00

138. While the Appellant provided the taking over certificate issued on 7th May 2019 which showed that 9th January 2019 was the date when instructed works under the contract were substantially completed, it failed to demonstrate the value of services under the taking over certificate that were performed in 2018 vis-à-vis in 2019. In addition, it did not provide a copy of a dated invoice to provide an alternative time of supply.

139. The Appellant having failed to demonstrate with evidence that the time of supply for the taxable value of Kshs. 50,283,573. 00 was different from the time of supply as determined by the Respondent in accordance with Section 12 of the VAT Act, 2013, and merely leaving the Tribunal to speculate about an alternative time of supply, the Tribunal finds that the Appellant did not discharge its burden of proof to demonstrate that the Respondent’s additional assessment of VAT for the period December 2018 was incorrect or excessive as required under Section 56 (1) of the TPA and Section 30 (a) of the TAT Act.

140. Based on the above analysis, the Tribunal finds that the Respondent was justified in issuing the objection decision confirming the VAT assessment for December 2018.

Final Decision 141. Based on the foregoing analysis, the Tribunal finds that the Appeal is devoid of merit, 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 7th December 2020 be and is hereby upheld.c.Each party to bear its own costs.

142. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023. GRACE MUKUHACHAIRPERSONDR ERICK KOMOLOMEMBERJEPHTHAH NJAGIMEMBERTIMOTHY VIKIRU OGAGAMEMBERGLORIA A.MEMBER