[2024] KETAT 1274 (KLR)

Takbir General Trading Company Limited v Commissioner of Domestic Taxes (Tax Appeal 372 of 2023) [2024] KETAT 1274 (KLR) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1274 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 372 of 2023

E.N Wafula, Chair, E Ng'ang'a, EN Njeru & G Ogaga, Members

August 23, 2024

Between

Takbir General Trading Company Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability Company duly incorporated in Kenya under the Companies Act. Its main business is actively tendering for contracts.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya. The Kenya Revenue Authority (“KRA”) is an agency of the Government of Kenya for assessing, collecting, and accounting for all revenue.

3. The Respondent conducted a review on the Appellant’s returns and found that the Appellant had under-declared income in both its VAT and income tax for the period of 2017 to 2021.

4. On 4th January 2023, the Respondent issued the Appellant with a demand notice totaling Kshs 7,148,352. 00 including penalties and interest for Income tax, PAYE, and Withholding tax.

5. The Appellant lodged an objection application vide a letter dated 6th March 2023 and provided documents to support the objection.

6. The Respondent rendered its Objection decision on 25th April 2023 fully rejecting the Appellant’s Objection and confirming the assessment for VAT and Income tax of Kshs. 6,918,538. 09.

7. Dissatisfied with the Objection decision, the Appellant filed a Notice of Appeal on 23rd May 2023.

The Appeal 8. The Appeal is premised on the following grounds listed in the Memorandum of Appeal dated 31st May 2023 and filed on 5th June 2023:-a.That the Commissioner erred in fact and in law by overstating the Respondent’s revenue for the years 2017 to 2021 based on erroneous summation of the total bank credits.b.That the Commissioner erred in fact and in law by charging Corporation tax and VAT on bank credits relating to non-revenue bankings.c.That the Commissioner acted in bad faith by disregarding other non -revenue banking such as contra entries (inter-bank transactions), reversals, director’s injections and loans from friends.

Appellant’s Case 9. The Appellant’s case was premised on its Statement of Facts dated 31st May 2023 and filed on 5th June 2023.

10. The Appellant averred that the Respondent analyzed all the bank statements availed by the Appellant and asserted that all the credits from the bank statements were business revenues.

11. That the Respondent then compared the total bank credits vis a vis the total sales declared by the Appellant for the periods under review and claimed that the variances were sales that were not declared in the Corporation returns and subjected the variance to Corporation tax.

12. The Appellant averred that the Respondent, in his assessment erroneously compared the total credited amounts in the bank statements vis-a-vis the total sales declared, without adjusting for the non-revenue banking's which included interbank transfers, reversals and loans from friends.

13. The Appellant averred that it was grossly inaccurate for the Respondent to conclude that all the money in on the bank statements were business income. The Appellant provided the Respondent with a gross banking analysis and the bank statements to support the non-revenue deposits from the bank statements.

14. The Appellant averred that the accurate amount to be considered as sales derived from the bank statements is as below:Period 2017 2018 2019 2020 2021

Derived sales 16,536,272 44,846,690 46,638,873. 49 170,268,921. 34 80,486,497

Sales declared in corporate tax 18,649,695. 00 44,921,982 49,853,636. 00 170,326,116. 67 80,500,930

Variance 13,322. 65 75,292. 49 14,762. 52 57,195. 33 14,432. 56

15. The Appellant contended that similarly to income tax, the Respondent computed VAT in the assumption that all the money in from the bank statements were business income and treated the variance as undeclared sales.

16. The Appellant contented that the Respondent subjected the variance obtained from the comparison of the purported sales derived from the bank statements and sales declared in the VAT returns for the period 2017 to 2021 as undeclared sales and subjected them to VAT.

17. The Appellant averred that it availed the gross banking analysis to the Respondent distinguishing the revenue income from the non-revenue income from the bank statements.

18. The Appellant stated that it explained to the Respondent that the variance between the VAT sales and the Corporate tax sales was as a result of exempt sales that were erroneously not included in the VAT returns and that were to be amended to reflect the correct position.

19. The Appellant contended that the Respondent, vide its Objection decision claimed that the Appellant did not provide the supporting documents to ascertain the variance was as a result of the exempt sales that were not declared in the VAT returns.

20. The Appellant averred that it furnished the Respondent with all the local purchase orders that indicated that the supplies made to Mandera County were exempt sales and which were erroneously not declared in the VAT returns.

21. The Appellant submitted that it did not have any undeclared revenue and therefore no outstanding taxes on account of income tax and VAT obligations. That the assessments amounting to Kshs. 6,918,538. 09 for both VAT and Income tax should be amended to Nil as that is the correct position of the Appellant.

Appellant’s prayers. 22. The Appellant prayed for orders that:a.This Appeal be allowed and the Respondent's Objection decision dated 25th April 2023 be set aside;b.The assessment of Kshs. 6,918,538. 09 be expunged in totality.

Respondent’s Case 23. The Respondent’s case is premised on its Statement of Facts dated and filed on 26th June 2023.

24. The Respondent stated that it requested for documents from the Appellant to support its objection on diverse dates between 13th March 2023 and 23rd March 2023, upon production of which, the Respondent issued an Objection decision on 25th April 2023.

25. The Respondent contended that following Section 31(1) of the Tax Procedures Act, the Respondent issued an assessment and tax demand for VAT and Corporation income tax resulting from under-declaration of income for both VAT and Income tax, over claimed purchases and missing PAYE tax obligation.

26. The Respondent submitted that it is allowed to amend an assessment pursuant to Section 31(1) of the Tax procedures Act 2015, using information available to it, and to the best of its judgment. Section 31(1) provides:“31. Amendment of assessments(a)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."

27. The Respondent averred that it raised additional assessment for VAT and Corporation income tax on13th February 2023 as follows;Period Obligation Assessment number Assessed Amount

2017-2021 Income TaxCompany//VAT KRA202301942369 6,918,538. 09

28. The Respondent contended that the taxpayer objected to the additional assessment on the KRA portal on 6th March 2023 as follows;Period Obligation AssessmentNumber AssessedAmount

2018 Income Tax KRA202301942374 210,743. 72

2019 Income Tax KRA202301942373 1,189,630. 80

2020 Income Tax KRA202301942371 1,478,838. 33

2021 Income Tax KRA202301942370 716,001. 00

2017 VAT KRA202301942379 2,506,032. 00

2018 VAT KRA202301942378 115,761. 76

2019 VAT KRA202301942377 370,101. 76

2020 VAT KRA202301942375 331,428. 72

29. The Respondent averred that the Appellant in its objection dated 6th March 2023 only objected to the income tax, VAT and PAYE assessment amounts, but did not object to the WHT assessment of Kshs. 175,793 which was raised in the assessment dated 4th January 2023. The Appellant only objected to the VAT and income tax assessment.

30. The Respondent averred that the Appellant objected to the assessments on the following grounds;a.The Respondent based its assessments on the total bankings without due regard to interbank transfers, loans from friends and reversals.b.The Respondent charged the variance between the Appellant's declaration and the banking analysis as per the Respondent's letter of review of returns assessment and tax demands. The Appellant stated that it noted that it was the income from the interbank transfers loans and loan from friends that was not declared and the costs associated with it not claimed in the returns.c.The variances between the bankings and VAT is as a result of the exempt project. These were not included in the VAT returns as would have been the case.d.The director did not earn a salary from the company thus it cannot be estimated and charged for PAYE.

31. The Respondent contended that it is empowered under Sections 58 and 59 of the Tax Procedures Act to require the production of documents and information to enable it ascertain tax liability of a person.

32. That pursuant to Section 59(1) of the Tax Procedures Act 2015, the Respondent requested for documentation from the Appellant to support its objection. Section 59(1) provides;“59 Production of records(1)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(2)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."

33. The Respondent averred that it requested the Appellant on diverse dates between 13th March 2023 and 23rd March 2023, to provide requisite documents supporting its grounds of objection.

34. The Respondent submitted that it relied on Section 51(3) of the Tax procedures Act 2015 on production of documents, which stipulates that a validly lodged objection should be accompanied by supporting documentation. Section 51(3) states:“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and(c)all the relevant documents relating to the objection have been submitted."

35. That upon review of the document's produced by the Appellant, and its tax returns for the year January 2017 to December 2021, the Respondent established that on income tax the Respondent noted that the income declared for the years 2017 to 2020 was underdeclared. That this led to the Respondent confirming its additional assessment for underdeclared income.

36. That Section 15 of the Income Tax Act provides for allowable expenses against any income earned. Section 15(1) of the Income Tax Act provides;“15. Deductions allowed(1)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.”

37. The Respondent averred that it also noted that the Appellant claimed for entertainment expenses amounting to Kshs. 3,548,005. 00. The Appellant did not provide any documents to prove that such expenses were incurred.

38. The Respondent posited that the burden of proving that expenses were incurred lies with the person claiming the expenses. The Appellant failed to discharge its burden of proof hence the Respondent disallowed the entertainment expenses claimed by the Appellant.

39. That Respondent submitted that the findings on VAT was that the sales, as declared by the Appellant in its VAT returns, were grossly understated, leading to the additional assessment for a VAT tax liability of Kshs. 5,489,169. 00 inclusive of interest and penalties, for the years 2017 to 2021.

40. The Respondent averred that the documents produced by the Appellant were unsatisfactory in supporting its objection against the additional VAT assessment, once again failing to discharge its burden of proving that the Respondent’s assessment was erroneous.

41. That on findings on P.A.Y.E the Respondent, through banking analysis and a review of the documents provided by the Appellant, established that the director of the Appellant company received an income from which arose a P.A.Y.E obligation which the Appellant did not declare. The Respondent, based on the information available to it and its best judgment, estimated the director’s salary at Kshs. 50,000. 00 per month for the years 2019 to 2021 and raised an assessment for P.A.Y.E obligation at Kshs. 826,200. 00, inclusive of interest and penalties.

42. The Respondent submitted that the Appellant ought to have produced its accounting records as evidence to show that the director did not receive any renumeration that would be considered a monthly salary or income from the company. The Appellant did not discharge its burden of proof in relation to this ground of assessment, which the Respondent confirmed in its objection decision.

43. On WHT findings, the Respondent also established that the company procured Legal services in the years 2019 to 2021, for which WHT relating to the services was not accounted for in the Appellant’s returns. That although this tax assessment was raised in the assessment dated 4th January 2023, the Appellant did not object to the same.

44. The Respondent averred that it proceeded to use the documents produced by the Appellant, and its banking analysis to review the Appellant’s objection.

45. The Respondent submitted that it rejected the Appellant's objection based on the evidence that was available to it, due to the Appellant's failure to provide satisfactory evidence, and to the best of the Commissioners knowledge.

46. The Respondent stated that the Appellant bears the burden of proof as provided under Section 109 of the Evidence Act which provides thus:“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.”

47. The Respondent relied on Section 56(1) of the Tax Procedures Act, 2015 which provides that the burden of proving that the tax assessment is wrong lies with the Appellant. Section 56(1) of the Tax Procedures Act states;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

48. The Respondent averred that it reasonably believed that it accorded the Appellant herein a chance to prove that its assessment was erroneous, by requesting for documentation from the Appellant. The Appellant produced evidence which was unsatisfactory in supporting its objection.

49. The Respondent posited that the Appellant failed to satisfactorily support its objection, and in turn failed to discharge its burden of proof in demonstrating that the Respondent’s assessments were erroneous.

50. The Respondent averred that its objection decision dated 25th April 2023, wherein it confirmed its assessments for income tax and VAT as proper in law.

Respondent’s prayers. 51. The Respondent prayed for the Tribunal to:a.Uphold the Respondent’s Objection decision dated 25th April 2023 requiring payment for VAT and Income tax of Kshs. 6,918,538. 09. b.Dismiss this Appeal with costs to the Respondent as the same is without merit.

Issue For Determination 52. The Tribunal having evaluated the pleadings and submissions of the parties is of the view that there is one issue that calls for its determination;Whether the Respondent’s Objection decision dated 25th April 2023 was proper in law.

Analysis And Findings 53. The Tribunal having determined the issues falling for its determination proceeds to analyse the same as hereunder.

54. The Respondent posited that it issued an assessment and tax demand for VAT, and Corporation tax to the Appellant resulting from under-declaration of income for both VAT and Income tax from claimed purchases and missing PAYE obligations after an audit of the returns filed by the Appellant.

55. It was the Respondent’s case that the Appellant objected to the additional assessments of Income tax, VAT, and PAYE on its KRA portal but did not object to the Withholding tax assessment which was raised in the assessment dated 4th January 2023 of Kshs. 175,793. 00 wherein it established that the company procured legal services in the years 2019 to 2021 in which Withholding tax was not accounted for in the Appellant’s returns.

56. The Respondent reiterated that the Appellant failed to produce its accounting records as evidence that the director did not receive any remuneration in the form of a monthly salary or income from the company and the same was confirmed in the Objection decision.

57. The Respondent maintained that the Applicant failed to satisfactorily prove the grounds of its Objection hence the confirmation of its assessments, fully rejecting the Appellant’s Objection stating that upon a review of the documents produced by the Appellant and its tax returns for the period January 2017 to December 2021, it established that the income declared for the years 2017 to 2020 was under declared and thus it confirmed its additional assessment for the under declared income.

58. On the other hand, the Appellant averred that the Respondent erroneously compared the total credit amounts in the bank assessments vis a vis the total sales and declared without adjusting for non-revenue deposits from the bank statements and also computed VAT in the assumption that all the ‘money in’ from the bank statements were business income treating the variance obtained from the comparison of the purported sales derived from the bank statements and sales declared in the VAT returns for the period 2017 to 2021 as undeclared sales and subject to VAT.

59. It is the Appellant’s case that the Respondent failed to distinguish the revenue income from the non-revenue income from the bank statements and explained to the Respondent that the variance between the VAT sales and the Corporate tax sales was a result of exempt sales that were erroneously not included in the VAT returns and that this was to be amended to reflect the correct position.

60. The Tribunal observes that Section 31 of the Tax Procedures Act provides as follows:-“(1)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 judgment, 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.”

61. The Tribunal has held before that exercise of best judgment includes use of bank deposit analysis in TAT Appeal No. 115 of TAT Appeal No. 115 of 2017 Digital Box Limited 2017 Vs Commissioner of Investigation & Enforcement where the Tribunal stated as follows: -“Further the courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment. This was held to be so in the case of Bachmann v. The Queen, 2015 TCC 51 where the court stated that:-"This court has recognized that in an appropriate case a bank deposit appropriate case a bank deposit analysis is an acceptable method to compute income." Once it is established that the method is allowed, the question is whether the method was applied in arriving at a reasonable assessment in the case at hand. The Tribunal is guided by the test set out in CA McCourtie LON/92/191 where it was stated: - "In addition to the conclusions drawn by Woolf Jin Van Boeckel earlier tribunal decisions identified three further propositions of relevance in determining whether an assessment is reasonable. These are, first that the facts should be objectively gathered and intelligently interpreted; secondly. that any calculations should be arithmetically sound; and finally, that any sampling technique should be representative and free from bias.”

62. The Tribunal finds that the Appellant has not proven that the use of bank deposit analysis is against the law and that when the Respondent used it, that the Respondent arrived at an unreasonable assessment which lacked objectivity or was arithmetically wrong or biased.

63. The Appellant maintained that it furnished the Respondent with all the local purchase orders indicating that the supplies made to Mandera County were exempt sales and were erroneously not declared in the VAT returns.

64. Section 30 of the Tax Appeals Tribunal Act provides as follows with regard to burden of proof:-“the appellant has the burden of proving –(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

65. Section 56 of the Tax Procedures Act further provides as thus:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

66. Section 62 of the VAT Act clearly states that the onus of proving that any goods or services are exempt from VAT lies with the taxpayer. The provision states that: -“In any civil proceedings under this Act, the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax.”

67. The Tribunal observes that the Appellant, while it alleged to have made VAT exempt supplies to the County Government of Mandera, failed to discharge its burden of proving that the supply it made was exempt from VAT under the VAT Act, and/or failed to prove that a VAT exemption for the supplies to the County Government had been approved by the Cabinet Secretary for the National Treasury in accordance with the Guidelines/Framework for Requesting, Processing And Granting Of Tax Exemption/Waiver/Variation/ Remission on a National Tax, A Fee Or A Charge, Treasury Circular No. 9/ 2018.

68. Based on the foregoing, the Appellant, failed to persuade the Tribunal with competent evidence that the Respondent erred in assessing VAT on the Appellant’s supplies to the County Government of Mandera, and thus did not discharge its burden of proof under Section 62 of the VAT Act, Section 56(1) of the Tax Procedures Act, and Section 30 of the Tax Appeals Tribunal Act.

69. The Tribunal is of the considered view that the Appellant has not adduced satisfactory evidence before this Tribunal to show that the Respondent’s Objection decision was incorrect and further, the Appellant has not addressed the Respondent’s assessment on the undeclared entertainment expenses, PAYE from its director’s salary and withholding tax from the legal services it procures.

70. The Tribunal, therefore, finds that the objection decision dated 25th April 2023 was proper in law.

Final Decision 71. The upshot to the foregoing analysis is that the Appeal lacks merit and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 25th April 2023 be and is hereby upheld.c.Each part to bear its own costs.

72. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF AUGUST, 2024ERIC NYONGESA WAFULA - CHAIRMANEUNICE N. NGA’NG’A - MEMBERJEPHTHAH NJAGI - MEMBERGLORIA A. OGAGA - MEMBER