[2025] KETAT 188 (KLR)

Tazama Commodities Limited v Commissioner of Investigations and Enforcement (Tax Appeal E103 of 2024) [2025] KETAT 188 (KLR) (Civ) (28 February 2025) (Judgment)

Neutral citation: [2025] KETAT 188 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E103 of 2024

RO Oluoch, Chair, Cynthia B. Mayaka, AK Kiprotich & G Ogaga, Members

February 28, 2025

Between

Tazama Commodities Limited

Appellant

and

Commissioner of Investigations and Enforcement

Respondent

Judgment

1. The Appellant is a private limited company registered by the Registrar of companies according to provisions the Companies Act, Cap. 486.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and 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 issued a tax demand and assessment dated 27th September, 2023.

4. The Appellant filed an objection on 11th October, 2023.

5. The Respondent issued its objection decision on 8th December, 2023 partially allowing the objection application.

6. The Appellant being dissatisfied with the Commissioner’s decision lodged a Notice of Appeal at the Tribunal dated and filed on 30th January, 2024.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated and filed on 30th January, 2024:-i.That the Respondent erred in law and fact by demanding additional assessments of Kshs. 535,761,784. 00 for periods 2021, 2022 and 2023 on computations solely on the bank deposits in the Gulf African Bank Account 0900468202 and Equity Bank Account 1560281727815. ii.That the Respondent erred gravely in law and fact by wrongly assuming that every single deposit to Gulf African Bank Account 0900468202 and Equity Bank Account 1560281727815 constituted taxable income.iii.That the Respondent erred gravely in law and fact by disregarding all the documents of original entry which formed the basis of the Appellant’s self-assessment.iv.That the Respondent erred in law and fact by ignoring the importance of self-assessments in giving an indication of what is income as compared to all the deposits in the Accounts.v.That the Respondent erred gravely in law and fact by failing to appreciate that the deposits in Gulf African Bank Account 0900468202 and Equity Bank Account 1560281727815 cannot be wholly summarized as expected income. The company despite operating the Accounts, does not limit the source of funds being deposited to the account as income. Varied transactions that may include related party capital injections, loans from directors, retained profit for the years may also form part of the said deposits.vi.That the Respondent erred gravely in law and fact by failing to appreciate that not all sale are subjected to VAT general rate at estimated percentiles as used by the Respondent in arriving at the purported VAT since the provisions of the VAT ACT 2013 defines what is to be charged to VAT and what is not to be charged to VAT.vii.That the Respondent erred in law and fact by declining to share with the Appellant the evidence it allegedly had on and or against the company, or invite the company or its representative to make representation on the alleged evidence of tax evasion in violation of the Appellant’s right to fair administrative action and fair hearing as guaranteed under Articles 47 and 50 of the Constitution.viii.That the Respondent erred in law and fact by demanding additional assessments of Kshs,535,761,784. 00 from the Appellant based on a process that was opaque and illegal from the beginning hence null and void ab initio.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:i.The Appellant’s Statement of Facts dated 30th January, 2024 and filed on 30th January, 2024, together with the documents attached thereto.ii.The Appellant’s written submissions dated 22nd October, 2024 and filed on 23rd October, 2024.

9. That the Appellant maintains the following bank accounts under its name:i.Gulf African Bank Account 0900468202ii.Equity Bank Account 1560281727815

10. That the Appellant receives and deposits monies into the said accounts, the source of such funds being from various engagements ranging from business to related party borrowings, to director capital injections.

11. That the Appellant has over the years been submitting its returns to the Respondent in accordance with Section 24(1) of Tax Procedures Act,2015 and Value Added Tax and therefore is fully tax compliant as statutorily required

12. The Appellant submitted that its Tax Compliance expired on 27th September, 2023, having fully satisfied the provisions as required by Section 72 of the Tax Procedures Act 2015.

13. That the Appellant paid all the requisite taxes for the years 2021, 2022 and 2023 as and when they fell due.

14. That the Respondent maliciously issued preliminary tax investigations findings on 20th June, 2023, and subsequently a notice of tax demand of Kshs. 582,950,951. 00 on 27th September, 2023.

15. That the Appellant raised an objection dated 11th October, 2023 and objected to the additional tax assessment and in the process gave explanations on the tax questions raised.

16. That following the said objection, the Respondent made a tax decision vide a letter dated 8th December, 2023, partly accepting the objections by the Appellant and revised the initial demand of additional taxes down to Kshs. 535,761,784. 00.

17. That the Respondent wrongfully elected to assume and treat every single deposit made into the accounts constituted sales income, an assumption that was wrong as literally each and every deposit made cannot be income realized.

18. That in its alleged findings, the Respondent analyzed bank credits with a view of establishing expected income. That it then made a comparison of the net banking to declared income as per the Appellant’s self-assessment and concluded that the variance is the under declared income. That this itself is contravening the provisions of the Income Tax Act (Cap. 470), that defines income to be charged to tax as;(a)A gain or profit from business as defined under Section 3(2) (a) as read together with Section 4 of the Income Tax Act.(b)A gain or profit from employment as defined under Section 3(2) (a) as read together with Section 5 of the Income Tax Act.(c)A dividend or interest as defined under Section 3 (2) (b) of the Income Tax Act(d)A pension, charge or annuity as defined under Section 3 (2) (c) of the Income Tax Act(e)Amounts deemed to be Income under Section 3 (2) (e) of the Income Tax Act.

19. That not all deposits were income and therefore no liability to taxation can be claimed on the same.

20. That the Respondent completely disregarded all the documents of original entry which formed the basis of the Appellant's self-assessment. That further, the Respondent charged tax to deposits without considering, if at all with goodwill, the expenditures of the company.

21. The Appellant averred that the Respondent completely disregarded the expenses that were subject of Appellant's self-assessment in violation of Section 15 (1) of the Income Tax Act, which entitles the taxpayer to deduct all expenditure incurred in that year of income. That by claiming that the Appellant over claimed and or made fictitious purchases defeats the whole purpose of self-assessment and as such, rendering the provisions of the Tax Procedures Act Section 28 as a walk about tax law

22. That additionally, the Respondent ignored the provisions of the Value Added Tax Act No. 35 of 2013. That the Appellant had already filed returns which showed how much it had paid in so far as Value Added Tax is concerned.

23. That the present dispute therefore highlights the unreasonable failure by the Respondent in discharging its statutory responsibility, abuse of power misinterpretation and violations of laws and statutes, violation of the Constitution by the Respondent and violation of the Constitutional rights of the Appellant.

24. That the Respondent failed to appreciate the fact that, when the company has closed its books of accounts and gains/profits are realized, the same maybe brought back as ploughed back capital, therefore, the Appellant may deposit such amounts as needed to the accounts in order to finance and run the business. That the fact that these amounts are already net from the taxes paid, then deposited back to the account, and for the Respondent thereafter to subject all the deposits to tax, amounts to double taxation.

25. The Appellant argued that whereas Section 31 (1) of the Tax Procedures Act empowers the Respondent to make alterations or additions to the original assessment, ostensibly, this re-assessment must be prompted by some new evidence which must be obtained by strict and defined provisions of Section 59 (1) of the Tax Procedures Act.

26. That the Respondent on the 20th June, 2023 made an intention to make substantial alterations to the Appellant's self-assessment's based on "Receipt Of Intelligence".

27. That it is therefore apparent that the Respondent never had evidence of tax evasion by the Appellant but went on a fishing expedition, and solely relied on bank statements, singling out all bank deposits treating each deposit as expected income. That the process undertaken by the Respondent therefore was opaque and illegal ab initio.

28. That there should be a lawful reason to alter and/or add to the original self-assessment of tax liability by a taxpayer, unless the taxing authority obtains evidence, information compelling the re-assessment.

29. That Section 59(1) of the Tax Procedure Act provides as follows:“(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 relating to a tax law, the Commissioner or an authorized officer may require any person ,by notice in writing, to 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 persons custody or under the person's control relating to the tax liability of any person; furnish information relating to the tax liability of any person in any manner and by the time and place specified in the notice ,for the purposes of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

30. That from the foregoing therefore, the re-assessment decision that led to the additional tax liability of Kshs. 535,761,784. 00 against the Appellant was arbitrary and without any reason and system.

31. That the Appellant has a genuine expectation under Article 47 of the Constitution that a decision to re-asses a taxpayer's liability under Section 31 (1) of the Tax Procedure Act has to be justifiable and procedural and as such information informing the addition of tax liability should be obtained in accordance with Section 59 (1) of the Tax Procedures Act.

32. The Appellant stated that the Respondent raised assessments on financial years that were yet to be accounted for by the Appellant and as such defied the provisions of Section 28 of the Tax Procedures Act 2015. That indeed, the Respondent agreed in its letter dated 8th December, 2023 that the accounting period of the Appellant ends on 31st December. That how and why these additional assessments were arrived at prior to the subsequent tax decisions, outrightly points to an illegal process in law ab initio.

33. That the Respondent demanded an amount of Kshs. 535,761,784. 00 that is excessive, punitive, unreasonable and beyond the ability of the Appellant to pay contrary to the canons of taxation. That the Appellant is being taxed over and beyond what it earned as income taxable in utter violation of canons taxation and in pure breach of the Constitutional guarantee to the right to equal protection and benefit from the law and right to fair administrative action under the Constitution of Kenya 2010.

34. That Article 201 (b) of the Constitution provides that:-“the public finance system shall promote and equitable society, and in particular-the burden of taxation shall be shared fairly.”

Appellant’s Prayers 35. The Appellant requested the Tribunal to consider the grounds of Appeal and find that;i.The demanded additional assessments conducted by the Respondent contained in the letter dated 8th December, 2023 amounting to Kshs.535,761,784. 00 as total additional amount of tax due and owing to the Respondent by the Appellant for the period 2021-2023 are illegal.ii.The Respondent be compelled to vacate in its entirety the additional demand of Kshs. 535,761,784. 00 contained in the letter dated 8th December. 2023. iii.The purported objection decision of the Respondent contained in the letter dated 8th December, 2023 directed at the Appellant demanding the payment of the sum of Kshs. 535,761,784. 00 as total tax due and owing to the Respondent by the Appellant for the period 2021-2023 is illegal and set aside in entirety.

Respondent’s Case 36. The Respondent’s case is premised on the following documents:i.The Respondent’s Statement of Facts dated 19th March, 2024 and filed on 20th March, 2024 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 23rd October, 2024.

37. That the Respondent commenced investigations against the Appellant following receipt of intelligence that the Appellant was under-declaring Corporation Income tax and VAT.

38. That to verify the allegations, the Respondent analyzed the Appellant's bank accounts held in Gulf African Bank, Kenya Commercial Bank and Equity Bank. That further, a gross banking analysis was done on the Appellant's banks and the Respondent proceeded to compute the net bankings by making adjustments for non-income items such as reversals, Withholding tax, output VAT as well as closing and opening debtors.

39. That the Respondent having computed the expected income from the banking analysis approach, proceeded to make a second test being a comparison between the Corporation Income tax declarations and VAT declarations.

40. That the Respondent also noted that the Appellant had been appointed as a WHVAT agent in October 2022. That however, the Appellant had failed to remit WHVAT and the Respondent therefore imposed a penalty on the company for the offence of not withholding and remitting WHVAT.

41. That having made the above computations, the Respondent adopted the variances between Income tax and VAT as the income and proceeded to add back over claimed purchases then applied a margin of 12% to determine the taxable income. That additionally, VAT was computed by applying a margin computed by analyzing purchases claimed from the Appellant and using that margin to establish general rated sales from the total VAT3 sales.

42. That on 20th June, 2023, the Respondent issued the Appellant with a preliminary tax investigations findings and requested the Appellant to respond to the said findings within fourteen days and pay uncontested taxes.

43. That the Appellant failed to respond to the preliminary findings hence the Respondent proceeded to issue a tax demand and assessment dated 27th September, 2023.

44. That the Respondent, in the tax demand, notified the Appellant of its right to object to the tax demand and assessment, and delineated the provisions of Section 51 of the Tax Procedures Act (TPA) on what constitutes a valid objection so that the Appellant would be properly guided.

45. That the Appellant being aggrieved with the assessments issued lodged an objection on Appellant's objection dated 11th October, 2023.

46. The Respondent stated that it considered the Appellant's objection and issued its objection decision on 8th December, 2023 partially allowing the objection application.

47. That aggrieved by the Respondent's objection decision, the Appellant instituted its Appeal on 31st January, 2024.

48. That the Appellant's borne of contention revolves around the use of the banking analysis method as the Appellant contends that the Respondent erred in deeming all the credits in its bank account as income. That to this regard, the Respondent averred that Kenya is a self-assessment tax regime meaning that a taxpayer determines what it considers income, assesses self and pays as seen in the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021]e KLR.

49. The Respondent stated that this model depends on the goodwill and the honesty of the taxpayer to disclose all the relevant facts and income to the Respondent. That as such, since not all taxpayers are truthful and honest, tax laws are couched in a manner that gives the Respondent a wide berth in determining what amounts to the taxes payable ex post facto long after the taxpayer has filed returns.

50. That it is therefore not in doubt that the Respondent is clothed with the requisite powers to audit a self-assessment or declaration and issue additional assessment where it is established that a taxpayer failed to make complete and accurate declarations.

51. That the Respondent reserves the right to audit the accounts of the Appellant and the returns as well as demanding for documents and where applicable, employ the available methods in arriving at the tax due.

52. That one such method that can be applied by the Respondent to determine ex-post facto what taxes are due and payable, is the banking analysis method as enumerated by the Tax Appeals Tribunal in the case of Digital Box Limited v Commissioner, Investigations and Enforcement (Tax Appeal Tribunal Act 115 of 2017).

53. That the Tribunal upon pronouncing itself on the legitimacy of the banking analysis method, proceeded to state that there are two ways of challenging the application of the banking analysis method i.e. demonstrating the non-income credit items as not taxable and thus moving for their exclusion or demonstrating that it supplied sufficient documentation to support the assessments and thus the Respondent has no basis for resorting to the banking analysis.

54. That to that end therefore, it is evident that the Appellant has not provided any reasonable basis for departing from the banking analysis method or how the Respondent erred in the use of the banking analysis method and thus the ground is unjustified.

55. The Respondent stated that it took into account the Appellant’s self-assessments in two obvious instances that is;-i.That it took into account the assessments in netting it off against the expected income established from the self-assessments; andii.That the Respondent employed the vatable versus non-vatable profit ration from the Appellant's assessments in apportioning the ration of vatable and non-vatable goods.

56. That the Appellant's ground is baseless and there is no demonstration of the manner in which the Respondent failed to take into account the Appellant's self-assessments.

57. That the Respondent took into account the documents supplied and thereby validated the Appellant’s objection that had previously been invalidated on insufficiency of documents. That further, the Respondent took into consideration the availed documents and issued its objection decision.

58. That Sections 24 and 28 of the Tax Procedures Act,2015 allows a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information.

59. That Section 31 of the Tax Procedures Act, 2015 allows the Respondent to issue additional assessments where a taxpayer has been assessed of a lesser amount based on any additional available information and to the best of his judgment.

60. The Respondent submitted that it employed the Appellant's own ratio of the vatable versus non-vatable goods in determining the Appellant's business model.

61. That the above was occasioned by the Appellant's failure to supply the documentation that it is required to keep in the course of its business as a going concern under Section 23 of the Tax Procedures Act, 2015.

62. That this shortcoming on the part of the Appellant then forced the Respondent to apply best judgment as provided by Section 29 of the Tax Procedures Act, 2015 and therefore cannot be heard to state that the Respondent erred while the Appellant itself fell short of the requirements on document keeping.

63. That in regard to whether the Respondent erred in not providing the Appellant with the evidence or accord the Appellant fair hearing after the issuance of the preliminary tax investigation, the Appellant was accorded fourteen days to respond, which it did not. That the Appellant only responded to the notice of tax demand vide its objection letter. That the Appellant should have addressed the issue of tax evasion at the preliminary findings stage or through the objection letter.

64. The Respondent verily asserted that it provided the Appellant with an opportunity to address it on the preliminary assessment and notice of tax demand. That it is therefore an odious averment by the Appellant that it was not provided an opportunity to address the Respondent on any matter.

65. That the Respondent is also stupefied with the Appellant's assertion that it did not have access to the evidence relied on by the Respondent. That the Respondent relied on information from iTax (Appellant's self-assessment), the Appellant's bank accounts and documents the Appellant provided during the objection. These are all information available to the Appellant.

66. The Respondent stated that Section 59 of the Tax Procedures Act does not place an obligation on the Respondent, rather it places the obligation on the Appellant to produce necessary documents to assist the Respondent to determine the proper tax liability.

67. That the Appellant failed to provide documents to assist the Respondent ascertain the proper tax liability, thereby forcing the Respondent to rely on his best judgement.

68. That therefore, the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts, unless where in agreement by the Respondent, are unfounded in law and not supported by evidence.

69. The Respondent stated that the confirmed assessment issued is proper in law and the same should be upheld. That further, from the facts as provided, the law as it guides and the arguments presented, the Respondent has proved that its actions were justified, lawful and reasonable, hence this Appeal is unmerited.

70. The Respondent relied on the following cases to buttress its arguments:i.The London County Council & Others vs. The Attorney General [1901] ACC 26. ii.Digital Box Limited vs. Commissioner of Investigations & Enforcement (TAT 115 of 2017).iii.TAT 551 of 2021; Atronix Limited vs. Commissioner of Domestic Taxes.iv.Civil Appeal 154 of 2007; Pili Management Consultants vs. Commissioner of Income Tax Kenya Revenue Authority [2010] eKLR.v.Commissioner of Domestic Taxes vs. Galaxy Tools Limited [2021] eKLR. Golden Cara Investments Limited vs.Commissioner of Domestic Taxes (Tax Appeal E078 of 2023) [2024] KEHC 5570 (KLR).vi.Nicholas Kiptoo Arap Korir Salat vs. independent electoral and Boundaries commission & 7 Others SC Petition No. 23 of 2014 [2015] eKLR.vii.Kenya Human Rights Commission vs. Non-Governmental Organizations Coordination Board [2016] eKLR.viii.Prima Rosa Flowers Limited vs. Commissioner of Domestic taxes [2019] eKLR.ix.Ushindi Exporters Limited vs. Commissioner of investigation & Enforcement (Tax Appeals Tribunal No. 7 of 2015).x.Commissioner of Domestic Taxes vs. Metoxide Limited (2021).

Respondent’s Prayers 71. The Respondent prayed that this Tribunal considers the case and finds that:i.The Respondent's objection decision issued on 8th December, 2023 confirming principal taxes of Kshs. 535,761,784. 00 be found to be proper in law and upheld.ii.The Appeal is devoid of merit and ought to be struck out with costs to the Respondent.

Issues For Determination 72. The Tribunal has carefully considered the pleadings and documentation filed by both parties and is of the view that the singular issue falling for its determination is:

Whether the Respondent was justified in confirming the disputed tax liability Analysis And Findings 73. The Tribunal having established the issue falling for its determination, proceeds to analyse it as hereunder.

74. The Tribunal notes that that the Respondent demanded Corporation tax, Withholding VAT and VAT for the years 2021, 2022 and 2023 vide a letter dated 27th September, 2023. The Corporation tax assessment for 2023 was however vacated in the objection decision.

75. The basis of the Respondent’s demand and subsequent objection decision was an analysis of the Appellant’s bankings. The Respondent stated that there was under-declaration of Corporation tax and VAT by the Appellant.

76. The Appellant averred that the Respondent erred by taxing non-income items. That further the Respondent erred by disregarding the documents of original entry which formed the basis of the Appellant’s self-assessment returns.

77. The Appellant additionally argued that the Respondent neither shared with the Appellant the evidence it allegedly had against the company. That further, the Appellant was wrong in assuming all sales are subject to VAT at the general rate.

78. The Respondent argued that the Appellant did not provide any reasonable basis to enable the Respondent depart from the banking analysis method. That further, the Respondent relied on its best judgment to establish the taxes due from the Appellant.

79. The Respondent also averred that the Appellant did not supply documentation that it is required to keep in the course of its business as a going concern as per Section 23 of the Tax Procedures Act.

80. The Tribunal, reviewed the Appellant’s pleadings and noted that while the Appellant alluded to various bank statements and original entry documents that were provided to support its averments, the attachments to its pleadings only had Equity Bank statements for 2022 and 2023.

81. The Tribunal additionally observed that the objection decision by the Respondent stated, inter alia, the following:i.That the Appellant did not explain the variance between income declared for Income tax and income declared for VAT.ii.That the Appellant did not provide any documentation to support any adjustments to be made to the disallowed purchases and therefore no adjustments were made to the same.iii.That the objection decision was limited to the documents supplied by the Appellant and examined by the Respondent which included bank account statements for Equity Bank and Gulf African Bank.

82. The Tribunal notes that the Appellant did not supply any other documents other than its bank account statements for Equity Bank in its pleadings. Seemingly, these bank statements had already been reviewed by the Respondent in arriving at the conclusions in its objection decision.

83. The Tribunal has perused through the Appellant’s objection dated 11th October, 2023 and notes that it was a single page document with no documentary attachments to it.

84. The Tribunal notes that in its letter to the Appellant dated 20th June, 2023, and referenced “Preliminary Tax Investigation Findings” the Respondent stated that it had undertaken a review of the Appellant’s banking transactions and invited the Appellant to avail any other information or documents that it wished to disclose to the Commissioner.

85. From the above observations, the Tribunal notes that all documents supplied by the Appellant were reviewed by the Respondent in arriving at its objection decision and that the Appellant did not avail any other documents to dispel the same as part of its Appeal.

86. It is trite law that the burden of proof in tax cases lies with the Appellant. This is well stated in Section 30 of the Tax Appeals Tribunal Act and Section 56(1) of the Tax Procedures Act.

87. The Tribunal and the Courts have severally pronounced themselves on this position. The Tribunal relied on Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where it was stated as follows:“The party that carries the burden of proof must produce evidence to meet a threshold or “standard” in order to prove their claim. If a party fails to meet their burden of proof, their claim will fail. “Burden of Proof” at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a Taxpayer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner’s position. This is the basic principle.”

88. The Tribunal observes that while the Appellant provided some documents to the Respondent in support of its objection and to the Tribunal as part of its pleadings, it did not discharge its burden of proof to enable the Respondent or the Tribunal, at the Appeal stage, arrive at a different outcome as far as assessed taxes are concerned.

89. The Tribunal therefore concludes that the Respondent was justified in confirming the tax liability it arrived at in its objection decision.

Final Decision 90. The upshot of the foregoing analysis is that the Appeal is unmeritorious. Consequently, the Tribunal makes the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 8th December, 2023 be and is hereby upheld.c.Each Party to bear its own costs.

91. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF FEBRUARY, 2025DR. RODNEY O. OLUOCHCHAIRPERSONCYNTHIA B. MAYAKA ABRAHAM K. KIPROTICHMEMBER MEMBERGLORIA A. OGAGAMEMBER