[2024] KETAT 844 (KLR)

Tanad Transporters Ltd v Commissioner of Legal Services & Board Coordination (Tax Appeal E242 of 2023) [2024] KETAT 844 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 844 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E242 of 2023

RM Mutuma, Chair, B Gitari, EN Njeru, M Makau & AM Diriye, Members

June 28, 2024

Between

Tanad Transporters Ltd

Appellant

and

Commissioner of legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, Chapter 486 of the Laws of Kenya. The Appellant’s principal activity is civil and infrastructure works.

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

3. The Respondent conducted a return review analysis on the Appellant’s returns. The Respondent established that there was a variance between its sales and its VAT and income tax returns. The Respondent therefore issued the Appellant with a pre-assessment notice on 6th October 2021.

4. The Appellant responded to the pre-assessments vide a letter dated 14th October 2021. The Respondent then issued the Appellant with a return review report dated 30th November 2022 which analysis gave rise to a tax liability of Kshs. 38,315,664. 00.

5. Consequently, the Respondent issued the Appellant with an iTax based assessment dated 29th November 2022 for income tax for the year 2017 for Kshs. 22,853,271. 60.

6. The Appellant lodged an Objection to the assessment on 29th December 2022. upon consideration of the Appellant’s documents, the Respondent issued its Objection Decision dated 25th February 2023 confirming the assessment.

7. The Appellant being aggrieved by the above objection decision lodged its Appeal vide the Notice of Appeal dated 17th May 2023 with leave of the Tribunal granted 2nd June 2023.

The Appeal 8. The Appellant vide its Memorandum of Appeal dated 22nd May 2023 and filed on 23rd May 2023 raised the following grounds of appeal:a.That the Respondent placed an arbitrary standard of proof for the Appellant to discharge by citing the lack of “a tangible attempt” to substantiate its grounds of objection.b.That the Appellant’s right to a fair hearing as enshrined in the Fair Administrative Actions Act and the Constitution of Kenya was curtailed.c.That the Appellant’s right to a fair hearing as enshrined in the Fair Administrative Actions Act and the Constitution of Kenya was curtailed by the Respondent’s complacency.d.That the Appellant effectively discharged its onus of proof as imposed on it by Section 56 (1) of the Tax Procedures Act.

The Appellant’s Case 9. The Appellant’s case is premised on its;a.Statement of Facts dated 22nd May 2023 and filed 23rd May 2023; and,b.Written submissions dated 28th February 2024 and filed on 5th March 2024.

10. The Appellant stated that the Respondent placed an arbitrary standard of proof for the Appellant to discharge and in that decision, the Respondent citied “lack of tangible attempt” to substantiate grounds of appeal. The Appellant posited that it is trite law that the standard of proof to be discharge by a taxpayer in a tax dispute is the prima facie standard.

11. The Appellant relied on the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR where the court stated that the evidentiary test is whether a prima facie case has been established. Consequently, the Appellant maintained that the Respondent misconducted itself when rendering the decision.

12. The Appellant also argued that its right to a fair hearing as enshrined in the Fair Administrative Actions Act and the Constitution of Kenya was curtailed. The Appellant averred that the Respondent infringed the Appellant’s rights to a Fair Administrative Action as provided for under Section 4 (3) (b) and 4 (4) (b) of the Fair Administrative Actions Act and Article 47 of the Constitution of Kenya when it imposed on the Appellant impractical timelines to produce further supporting documents. The Appellant also argued that the Respondent ignored ill health of the Appellant’s director.

13. The Appellant maintained that its right to a fair hearing as enshrined in the Fair Administrative Actions Act and the Constitution of Kenya was curtailed by the Respondent’s complacency.

14. The Appellant stated that the Respondent infringed on the Appellant’s rights when it did not afford itself ample time for conclusion of its own internal process that would avail for the utility of the Appellant’s income tax credits dully accruing to it to the uncontested taxes.

15. Finally, the Appellant stated that it effectively discharged its onus of proof as imposed on it by Section 56 (1) of the Tax Procedures Act and stated that it facilitated production of relevant evidence to prove its claim. Further, it accused the Respondent of not specifying any document that the Appellant was supposed to produce.

16. The Appellant submitted that the Incremental Tax Liability emanated from sales variances of 2017 amounting to Kshs. 78,355,142. 00 but upon further reconciliation the Appellant noticed several errors in their VAT returns of 2017 as follows: -i.In the VAT return for January 2017, Invoices totaling Kshs. 6,487,691. 00 that had been declared in the VAT return of December 2016 were also erroneously declared in January 2017 thus raising the sales in the January 2017 VAT Return.ii.In the VAT return for March 2017 some invoices amounting to Kshs. 9,588,785. 00 were declared twice.iii.In May 2017 VAT return, several invoices totaling to Kshs. 14,418,846. 00 were double batched and declared twice in the same month return.iv.In the VAT return for the month of July 2017 several grouped invoices amounting to Kshs. 30,261,713. 26. 00 were also accounted twice for July 2017 VAT Return.v.In August 2017 invoices that had been prepared in July 2017 amounting to Kshs. 7,211,550. 00 were submitted to a customer in August 2017. The same invoices were declared in both July 2017 and also August 2017. vi.In the month of October 2017 two similar batches of invoices amounting to Kshs. 10,386,557. 88 were double accounted for twice in the same month.

17. The Appellant further submitted that the highlighted double declaration in the VAT Returns of the mentioned months brought up the sales variance of Kshs. 78,355,142. 00 between sales declared in the VAT returns of 2017 and the sales declared in the Income Tax Returns of 2017.

18. Finally, the Appellant submitted that the documents to support the objection (copies of the above-mentioned invoices) were too bulky to be attached to the Notice of Objection yet the Respondent did not direct the Appellant to which office to avail them for scrutiny. The Appellant further submitted that the Respondent did not respond to the Appellant’s alleged requests but rather went ahead and confirmed the assessment.

Appellant’s Prayers 19. The Appellant urged this Honourable Tribunal to make orders that:a.This Appeal be allowed.b.The Respondent’s Objection Decision dated 25th February 2023 be dismissed and be deemed hasty and improper.c.That the Appellant Objection Decision be referred back to the Respondent for further review.

The Respondent’s Case 20. The Respondent’s case is premised on its;a)Statement of Facts dated 21st June 2023 and filed on 22nd June 2023 together with documents attached thereto; and,b)Written submissions dated 20th December 2023 and filed on 21st December 2023.

21. The Respondent averred that the documents provided by the Appellant did not effectively demonstrate the claim of its duplication of sales. The Respondent stated that the Appellant herein availed copies of bank statements and sales ledger for review by the Respondent.

22. The Respondent alleged that after review of the availed documentation, the Respondent was unable to point out any double reported sales as claimed in the VAT returns and that the Appellant herein did not make attempt to demonstrate the duplication of sales in its return by providing a reconciliation of the same. Therefore, the Respondent maintained that the Appellant did not provide any explanation/reconciliation with respect to these inconsistencies which was the basis for the rejection of the Appellant’s Notice of Objection.

23. The Respondent argued that at all material times, the Appellant had the obligation to provide documentation in support of the invoices but failed to discharge the mandate as provided under Section 56 (1) of the Tax Procedures Act.

24. Apart from the above, the Respondent stated that the Appellant has an obligation to keep documents that enable their tax liability to be readily ascertained as provided for under the provisions of Section 23 of the Tax Procedures Act.

25. The Respondent also relied on Section 54A of the Income Tax Act which provides that:“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.”

26. The Respondent also stated that it amended the assessments based on the available information pursuant to the provisions of Section 31 of the Tax Procedures Act.

27. The Respondent in its written submissions identified a single issue for determination, as follows:whether the Appellant discharged the burden of proof in challenging the additional assessments.

28. The Respondent relied on following casesa.Kenya Revenue Authority vs. Maluki Kitili Mwendwa [2021] eKLR andb.Mbuthia Macharia Vannah Mutua Ndwiga & Another [2017] eKLR,c.Primarosa Flowers Ltd vs. Commissioner of Domestic Taxes [2019] eKLR where the court referred to the case of Mulherin v. Commissioner of Taxation [2013] FCAFC 115.

Respondent’s prayers 29. The Respondent prayed that this Honourable Tribunal do:a.Uphold the Objection Decision dated 25th February 2023 since the same is regular and issued in accordance with the law; and,b.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Issues For Determination 30. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth the following issue for determination:Whether the Appellant discharged its burden of proof in challenging the additional assessment.

Analysis And Findings 31. The Tribunal wishes to analyse the issue as hereunder.

32. The Appellant submitted that it provided all documentary evidence to the Respondent who failed to evaluate the same. The Appellant also submitted that the documents to support the objection were too bulky to be attached to the notice of objection on iTax.

33. Subsequently, the Appellant submitted that it engaged the Respondent seeking direction on how else it could have presented the bulky documentation for review and consideration, however the Respondent did not direct the Appellant to which office to avail the documents. The Appellant further alleged that the Respondent did not respond to the Appellant but rather went ahead and confirmed the assessment.

34. Therefore, the Appellant argued that the Respondent infringed its right to Fair Administrative Action under the Fair Administrative Actions Act and under the Constitution of Kenya.

35. On the other hand, the Respondent submitted that the Appellant availed copies of bank statements and sales ledger for review by the Respondent. Further, the Respondent averred that the documents provided by the Appellant did not effectively demonstrate Appellant’s claim of duplication of sales. The Respondent alleged that after review of the availed documentation, it was unable to point out any double reported sales as claimed in the VAT returns and that the Appellant herein did not make attempt to demonstrate the duplication of sales in its return by providing a reconciliation of the same.

36. The Tribunal noted that the Respondent in its pleadings did not challenge the Appellant’s allegation as regards the its requests for submission of its bulky documentation that could not be attached to the Notice of Objection on iTax. Further, the Respondent did not address allegations of unfair administrative action and to add on that, the Respondent did not point out documents that it expected from the Appellant which the Appellant failed to provide.

37. The Tribunal has examined the prayers by both parties, a common prayer made by both parties is that the Appellant’s Objection be referred back to the Respondent for reconsideration. This is an admission on the part of the Respondent that the Objection Decision maybe have been made devoid of consideration of all the Appellant’s documents.

38. The Tribunal therefore comes to the conclusion that the Respondent in the making of its Objection Decision failed in its duty to consider all the Appellant’s documents and the Appellant has discharged its burden of proof.

39. Under the circumstances, the Tribunal invokes its powers under Section 29 (2) (c) (ii) of the Tax Appeals Tribunal Act, which empowers the Tribunal to issues orders to the effect of;“referring the matter to the Commissioner for reconsideration in accordance with any directions or recommendations of the Tribunal.”

40. Consequently, the Tribunal, in the interest of justice, finds that Respondent’s Objection Decision was not properly issued, the Appeal therefore succeeds.

Final Determination 41. In view of the aforementioned and the Appellant’s Appeal having been found to be merited, the Tribunal makes the following orders; -a.The Appeal be and is hereby allowed;b.The Respondent’s Objection Decision issued on 25th February 2023 be and is hereby set aside.c.The Appellant’s Notice of Objection dated 28th December 2022 be and is hereby remitted back to the Respondent for reconsideration with directions that the Appellant avails the necessary documents within 14 days of the issuance of this judgement and the Respondent to issue an Objection Decision within sixty (60) days thereafter;d.Each party to bear its own cost.

42. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF JUNE 2024ROBERT M. MUTUMA - CHAIRPERSONBERNADETTE M. GITARI - MEMBERELISHAH N. NJERU - MEMBERABDULLAHI M. DIRIYE - MEMEBERMUTISO MAKAU - MEMBER