[2025] KETAT 70 (KLR)

Tazama Distributors Limited v Commissioner of Investigations and Enforcement (Tax Appeal E102 of 2024) [2025] KETAT 70 (KLR) (17 January 2025) (Judgment)

Neutral citation: [2025] KETAT 70 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E102 of 2024

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

January 17, 2025

Between

Tazama Distributors Limited

Appellant

and

Commissioner of Investigations and Enforcement

Respondent

Judgment

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

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 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. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act 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 to assess, collect, and account for all revenues under those laws.

3. The Respondent stated that it commenced investigations into the tax affairs of the Appellant following receipt of intelligence that the Appellant was involved in tax evasion schemes.

4. The Respondent issued to the Appellant its preliminary tax investigations findings on 20th June 2023, and on 27th September 2023, issued tax assessments of Corporation tax, Value Added Tax (VAT) and Withholding VAT.

5. On 11th October 2023, the Appellant objected to the additional assessments, and the Respondent issued an Objection decision on 8th December 2023 partly allowing the Appellant’s Objection.

6. The Appellant, being dissatisfied with the Respondent’s Objection decision, on 30th January 2024 filed its Notice of Appeal dated 29th January 2024, having been granted leave by the Tribunal on the 22nd February, 2024 to file the Appeal out of time.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 29th January 2024 and filed on 30th January 2024 which raised the following grounds: -a.That the Respondent erred in law and fact by demanding additional assessments of Kshs. 695,344,772. 00 for the periods 2020, 2021, 2022 and 2023 on computations solely based on the bank deposits in Gulf African Bank Account 038XXXX01, Equity Bank Account 1560XXXX3752 and Kenya Commercial Bank Account 1271018950. b.That the Respondent erred gravely in law and fact by wrongly assuming that every single deposit to Gulf African Bank Account 038XXXX01, Equity Bank Account 1560XXXX3752 and Kenya Commercial Bank Account 12XXXX950 constituted taxable Income.c.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.d.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.e.That the Respondent erred in law and fact by treating two distinct and separate entities as one and analyzing the bank accounts held by Sema Commodities in Equity Bank account 1560XXXX963 and Kenya Commercial Bank account 131XXXX823 all under the Appellant.f.That the Respondent erred gravely in law and fact by failing to appreciate that the deposits in Gulf African Bank Account 038XXXXS01, Equity Bank Account 1560XXXX3752 and Kenya Commercial Bank Account 12XXXX950 cannot be wholly summarized as expected income. That the Appellant despite operating the accounts, does not limit the source of funds being deposited to the account as income. That varied transactions that may include related party capital injections, directors’ loans, retained profit for the years may also form part of the said deposits.g.That the Respondent erred gravely in law and fact by failing to appreciate that not all sales are subjected to VAT at the general rate at estimated percentiles as used by the Respondent in arriving at the purported VAT since the provisions of the VAT Act, 2013 define what is to be charged to VAT and what is not to be charged to VAT.h.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’ right to fair administrative action and fair hearing as guaranteed under Articles 47 and 50 of the Constitution respectively.i.That the Respondent erred in law and fact by demanding additional assessments of Kshs. 695,344,772. 00 from the Appellant based on a process that was opaque and illegal from the beginning hence null and void ab initio.j.That the Respondent erred gravely in law and fact by outrightly violating Section 59(1) of the Tax Procedures Act in reaching its Objection decision dated 8th December 2023k.That the Respondent erred gravely in law and fact by demanding an amount of Kshs. 695,344,772. 00 that is excessive, punitive and beyond the ability of the Appellant to pay contrary to the cannons of taxation.

Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal:a.The Appellant’s Statement of Facts dated 29th January 2024 and filed on 30th January 2024 and the documents attached to it; andb.Its written submissions dated 22nd October 2024 and filed on 23rd October 2024.

9. The Appellant stated that the Respondent maliciously issued preliminary tax investigations findings on 20th June 2023, and subsequently a notice of tax demand of Kshs. 730,981,341. 00 on 27th September 2023.

10. The Appellant affirmed that it 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.

11. That following the said Objection, the Respondent purported to make a tax decision vide letter dated 8th December 2023, partly accepting the objections by the Appellant and revised the initial demand of additional taxes down to Kshs. 695,344,772.

12. The Appellant argued its case under the following headings:i.Additional assessments were based solely on bank deposits

13. The Appellant averred that the Respondent demanded additional tax of Kshs. 695,344,772. 00 on computations based solely on all the bank deposits in the Gulf African Bank Account 038XXXX01, Equity Bank Account 1560XXXX3752 and Kenya Commercial Bank Account 12XXXX950 and Sema Distributors Accounts at Equity Bank Account 1560XXXX963 and Kenya Commercial Bank Account 131XXXX823.

14. It was the Appellant’s argument that the Respondent wrongfully elected to assume and treat every single deposit made into the accounts as constituting sales income, an assumption that was wrong as each and every deposit made cannot be income realized.

15. The Appellant further averred that in the Respondent’s alleged findings, the Respondent analyzed bank credits with a view of establishing expected income. That the Respondent 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 underdeclared income.

16. That this itself contravenes the provisions of the Income Tax Act (CAP 470), that define income to be charged to tax as: a gain or profit from business as defined under Section 3(2)(a) as read together with Section 4 of the Income Tax Act; a gain or profit from employment as defined under Section 3(2)(a) as read together with Section 5 of the Income Tax Act; a dividend or interest as defined under Section 3(2)(b) of the Income Tax Act; a pension, charge or annuity as defined under Section 3(2)(c) of the Income Tax Act; amounts deemed to be Income under Section 3(2)(e) of the Income Tax Act. That thus, all deposits not being income, no liability to taxation can be claimed on the same.

ii. Completely disregarding the Appellant’s self-assessment 17. The Appellant asserted that the Respondent completely disregarded all the documents of original entry which formed the basis of Appellant’s self-assessment. That further, the Respondent charged tax to deposits without considering, if at all with goodwill, the Appellant’s expenditures.

18. That the Respondent completely disregarded the expenses that were the subject of Appellant’s self-assessment in violation of Section 15(1) of the Income Tax Act, which entitles a 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 Section 28 of the Tax Procedures Act as a walk about tax law.

19. The Appellant argued that 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 insofar as VAT is concerned.

20. It was the Appellant’s assertion 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.

iii. Subjecting the Appellant to Double Taxation 21. The Appellant stated 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 may be 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.

22. That the fact that these amounts are already net of 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.

iv. Arbitrary Exercise of Powers under Section 31 and Section 59(1) of the Tax Procedures Act 23. 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.

24. The Appellant stated that the Respondent on 20th June 2023 made an intention to make substantial alterations to the Appellant’s self-assessments based on receipt of intelligence. That according to that Appellant, based on this, it was 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 and treating each deposit as expected income. That the process undertaken by the Respondent, therefore, was opaque and illegal ab initio.

25. The Appellant submitted that there should be a lawful reason to alter and/or add to the original self-assessment of a tax liability by a taxpayer, unless the taxing authority obtains evidence or information compelling the reassessment.

26. That from the foregoing, the reassessment decision that led to the additional tax liability of Kshs. 695,344,772. 00 against the Appellant was arbitrary and without any reason and system.

27. That further, the Appellant has a genuine expectation under Article 47 of the Constitution that a decision to reassess a taxpayer’s liability under Section 31(1) of the Tax Procedures 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.

28. The Appellant averred that by obtaining and analysing bank accounts of Sema Commodities Limited and charging taxes to the Appellant, the Respondent not only violated the provisions of Section 3 of the Tax Procedures Act, but also contravened the definition of a company as a distinct separate legal entity, as provided for by the Companies Act Cap 486 of the Laws of Kenya which showed the lack of good faith, travesty to law and unlawful application of statutes and justifications on any additional taxes as demanded.

29. The Appellant also noted 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.

30. The Appellant affirmed that 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.

v. Violation of the canons of taxation 31. The Appellant reiterated that the Respondent demanded an amount of Kshs. 695,344,772. 00, which the Appellant asserted that it is excessive, punitive, unreasonable and beyond its ability to pay, contrary to the canons of taxation.

32. That the Appellant is being taxed over and beyond what it earned as taxable income in utter violation of canons of 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.

33. The Appellant finally referred to Article 201(b) of the Constitution which provides that: -“The public finance system shall promote an equitable society, and in particular the burden of taxation shall be shared fairly.”

Appellant’s prayer 34. The Appellant prayed that the decision of the Respondent be annulled or varied in such a manner that may appear just and reasonable to the Honourable Tribunal.

Respondent’s Case 35. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 14th March 2024; andb.Its written submissions dated and filed on 23rd October 2024.

36. The Respondent stated that it commenced investigations into the tax affairs of the Appellant following receipt of intelligence that the Appellant was involved in tax evasion schemes that involved under-declaration of Corporation tax and under-declaration of VAT.

37. The Respondent further stated that to verify the allegations, it analysed the Appellant’s bank accounts held in Gulf African Bank, Kenya Commercial Bank and Equity Bank and established that the Appellant had gross deposit receipts of Kshs. 2,267,485,422. 00 in 2020, Kshs.3,243,119,968. 00 in 2021, Kshs. 1,696,906,834. 00 in 2022 and Kshs. 907,423,293. 00 in 2023.

38. The Respondent affirmed that it issued preliminary tax investigations findings on 20th June 2023 after it found that the Appellant received the gross receipts for the period under review, which the Respondent, having established the gross receipts to be income, compared with the Appellant’s declarations for Income tax to determine variances for Income tax and compute additional Corporation tax thereon as shown in the table below:Details 2020 2021 2022 2023 Total

Net Bank Credit (A) 2,267,485,422 3,243,119,968 1,696,906,834 907,423,293 8,114,935,517

Add: WHT (B) 0 0 0 0 0

Gross banked sales (C) 2,267,485,422 3,243,119,968 1,696,906,834 907,423,293 8,114,935,517

Output VAT (D) 362,797,668 518,899,195 271,505,093 145,187,727 1,298,389,683

Net Banked sales (E) 1,904,687,754 2,724,220,773 1,425,401,741 762,235,566 6,816,545,834

Add: closing debtors (F) 0 0 0 0 0

Less: opening debtors (G) 0 0 0 0 0

Expected income (H)= (E+F-G) 1,904,687,754 2,724,220,773 1,425,401,741 762,235,566 6,816,545,834

VAT 3 Sales (I) 2,269,114,357 3,244,399,372 1,698,513,244 989,904,631

Declared Income (J) 424,409,869 961,614,311. 00 996,364,750 0

Underdeclared sales= Higher of (H, 1)-(J) 1,844,704,488 2,282,785,061 702,148,494 989,904,631 5,819,542,674

NPM Margin 12% 221,364,539 273,934,207 84,257,819 118,788,556 698,345,121

Corp Tax @25%/30% 55,341,135 82,180,262 25,277,346 35,636,567 198,435,309

39. The Respondent stated that it also made the same comparison for VAT as shown in the table below.Details 2020 2021 2022 2023 Total

Net Bank Credit (A) 2,267,485,422 3,243,119,968 1,696,906,834 907,423,293 8,114,935,517

Net bank credit- Sema (B) 0 0 0 72,810,500 72,810,500

Add: WHT (B) 0 0 0 0 0

Gross (VAT inclusive) banked sales (C)=(A+B) 2,267,485,422 3,243,119,968 1,696,906,834 980,233,793 8,187,746,016

Less Declared Output VAT (D) 48,649,958 125,173,526 95,400,607 45,360,675 314,584,766

Net Banked sales (VAT exclusive) (E)=(C-D) 2,218,835. 463 3,117,946,442 1,601,506,227 934,873,118 7,873,161. 250

Add: closing debtors (F) 0 0 0 0 0

Less: opening debtors (G) 0 0 0 0 0

Expected income (H)= (E+F-G) 2,218,835. 463 3,117,946,442 1,601,506,227 934,873,118 7,873,161. 250

Declared Income (I) 424,409,869 961,614,311. 00 996,364,750 0 1,386,023,186

VAT 3 Sales (J) 2,269,114,357 3,244,399,372 1,698,513,244 989,904,631 8,201,931,606

% of GNRL sales 89 69 41 42

Established GNRL 2,019,511,778 2,238,635,567 696,390,430 415,759,946 5,370,297,720

Declared GNRL sales 347,499. 702 782,334,544 596,253,799 325,946,234 2,052,034,279

Variance 1,672,012,076 1,456,301,023 100,136,631 89,813,712 3,318,263,441

VAT@14%/16% 267,521,932 233,008,164 16,021,861 14,370,194 530,922,151

40. The Respondent stated that it also noted that the Appellant had failed to remit Withholding VAT (WHVAT) and therefore imposed a penalty on the Appellant for the offence of not withholding and remitting WHVAT as highlighted below:Details 2021 2022 2023 Total

VAT purchases subject to WHVAT 688,668,177 650,379,714 323,322,644 1,662,370,535

Purchased subjected to WHVAT 0 527,108,309 340,720,911 867,829,220

Purchases not subjected to WHVAT 688,668,177 123,271,405 0 811,939,582

WHVAT due 13,773,364 2,465,428 0 16,238,792

10% penalty 1,377,336 246,543 0 1,623,879

41. The Respondent stated that on 27th September 2023 it issued tax assessments to the Appellant amounting to Kshs. 730,981,339. 00 comprising Kshs. 198,435,309. 00 of Corporation tax, Kshs. 530,922,151. 00 of VAT and Kshs. 1,623,879. 00 of Withholding VAT.

42. That aggrieved by that assessment, the Appellant objected to the same on 11th October 2023 and the Respondent, following its review vide letter dated 17th October 2023, informed the Appellant of the invalidation of the Objection stating that the Appellant failed to submit all the relevant documents relating to the Objection as provided for under Section 51(3)(c) of the Tax Procedures Act.

43. The Respondent averred that the Appellant proceeded to avail the relevant documents on 24th October 2023, and the Respondent issued a letter dated 25th October 2023 validating the Appellant’s Objection as validly lodged following the submission and review of the Appellant’s documents.

44. The Respondent, on 8th December 2023, issued its Objection decision partly confirming the assessments amounting to Kshs. 695,344,772. 00 comprising Kshs. 162,698,743 of Corporation tax, Kshs. 530,922,151. 00 of VAT and Kshs. 1,623,879. 00 of Withholding VAT.

45. That the Appellant, aggrieved by the above decision, lodged its Memorandum of Appeal before this Tribunal on 30th January 2024.

46. The Respondent summarised its issues for determination as follows:i.Whether the Respondent erred in employing the banking analysis method as a way of determining the taxes due from the Appellant.ii.Whether the Respondent failed to take into consideration the self-assessments by the Appellant and the documents supplied.iii.Whether the Respondent erred by treating two distinct and separate entities as one and analysing the bank accounts held by Sema Commodities in Equity Bank Account 1560XXXX963 and Kenya Commercial Bank 131XXXX823 all under the Appellant.iv.Whether the Respondent failed to appreciate that not all the goods were vatable in determining the taxes due.v.Whether the Respondent erred in not providing the Appellant with the evidence or accord the Appellant a fair hearing.vi.Whether the Respondent violated Section 59(1) of the Tax Procedures Act in issuing its Objection decision dated 8th December 2023.

47. The Respondent stated that it relied upon the following laws:a.Sections 23, 29, 34(4)(b)(i), 51(11), 56(1), 59(1) and 97 of the Tax Procedures Act, 2015;b.Section 13, 30 of the Tax Appeals Tribunal Act, No. 40 of 2013;c.Section 5 of the Value Added Tax Act No. 35 of 2013; andd.Sections 3 and 34 of the Income Tax Act, Cap. 470 Laws of Kenya.

i. Whether the Respondent erred in employing the banking analysis method as a way of determining the taxes due from the Appellant. 48. The Respondent averred that the Appellant’s bone 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.

49. In response to this, the Respondent averred that Kenya is a self-assessment tax regime meaning that a taxpayer determines what it considers income, assesses self and pays tax, as seen in the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR.

50. 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.

51. The Respondent submitted that it is therefore not in doubt that it is clothed with the requisite powers to audit a self-assessment or declaration and issue additional assessments where it is established that a taxpayer failed to make complete and accurate declarations. That in this particular case, the Respondent reserved the right to audit the accounts of the Appellant and the returns as well as to demand 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 Tribunal in the case of Digital Box Limited v Commissioner, Investigations and Enforcement (Tax Appeal Tribunal 115 of 2017).

53. The Respondent submitted that the Tribunal in that case, 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, that is, 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 method.

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

ii. Whether the Respondent failed to take into consideration the self-assessments by the Appellant and the documents supplied 55. The Respondent stated that it took into account the Appellant’s self-assessments in two obvious instances outlined below: -i.That it took into account the assessment in netting it off against the expected income established from the self-assessments; andii.That the Respondent employed the vatable versus non-vatable profit ratio from the Appellant’s assessments in apportioning the ratio of vatable and non-vatable goods.

56. That in that regard, 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. The Respondent affirmed that it took into account the documents supplied and hereby validated the Appellant’s Objection that had previously been invalidated on insufficiency of documents. That the Respondent took into consideration the availed documents and issued its Objection decision.

58. The Respondent referred to Sections 24 and 28 of the Tax Procedures Act submitting that the provisions allow 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 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 its judgment.

60. The Respondent averred that the Appellant failed to provide the documentations in support even after several requests from the Respondent for them to be availed.

61. The Respondent also stated that upon Objection to the VAT assessments, the Appellant failed to provide any supporting documentation to support the Objection leading to the confirmation of the additional VAT assessments.

62. The Respondent stated that it was also guided by Section 51(3) and 51(4) of the Tax Procedures Act and Section 43(3) of the VAT Act.

63. The Respondent noted that the Appellant, under the provisions of Section 23 of the Tax Procedures Act, has an obligation to keep documents that enable its tax liability to be readily ascertained.

64. That Section 54A of the Income Tax Act provides thus:“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.”

65. The Respondent averred that the general rule of evidence states that he who alleges must prove. That Section 107 of the Evidence Act, Cap 80 provides as follows: -“(1)whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

66. That the Appellant failed to comply with the mandatory statutory provisions of Section 51(3)(c) when lodging its Objection, and in failing to provide the supporting documents, the Appellant failed to exercise its statutory burden of proof as required under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, thus the Appeal herein is unmerited and should be dismissed with costs to the Respondent.

67. The Respondent averred that this burden was never discharged as no documentary evidence was availed to the Respondent to support the notice of objection.

A iii. Whether the Respondent erred by treating two distinct and separate entities as one and analysing the bank accounts held by Sema Commodities in Equity Bank Account 1560XXXX963 and Kenya Commercial Bank account 131XXXX823 all under the Appellant. 68. In response to the Appellant’s contention that it is a totally distinct entity from Sema Commodities, and therefore the Respondent erred in treating them as one, the Respondent averred that during the course of investigations, it received a letter dated 21st September 2023 from Sema Commodities Limited where Sema Commodities indicated that they had an arrangement with the Appellant among other sister companies such as Maha Store Limited to deposit their business proceeds directly to the accounts of Sema Commodities Limited.

69. That the letter further stated that the suppliers for the sister companies, that is, Maha Store Limited and Tazama Distributors Limited were paid from the accounts of Sema Commodities Limited.

70. That on that basis, the Respondent took the letter as a statement made by a taxpayer to an authorized officer under the provisions of Section 57 of the Tax Procedures Act and therefore, took the deposits of Sema Commodities as those of the Appellant.

71. The Respondent argued that to that end, the Appellant cannot be heard to raise the legal issue that the two are separate entities whilst they had an arrangement. That this forms the basis that the letter is admissible notwithstanding the provisions of any other written law as provided by Section 57 of the Tax Procedures Act.

iv. Whether the Respondent failed to appreciate that not all the goods were vatable in determining the taxes due. 72. The Respondent reiterated that the Appellant contended that not all the goods are vatable and thus the Respondent erred in assuming that all the goods were vatable.

73. In response to this, the Respondent stated that it employed the Appellant’s own ratio of the vatable versus non-vatable goods in determining the Appellant’s business model.

74. The Respondent asserted 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. That this shortcoming on the part of the Appellant forced the Respondent to apply best judgment as provided by Section 29 of the Tax Procedures Act.

v. Whether the Respondent erred in not providing the Appellant with the evidence or accord the Appellant a fair hearing. 75. The Respondent asserted that it is not mandated in law to share its intelligence with the Appellant considering that some of such intelligence may be anonymous. That the mandate of the Respondent is the collection of taxes.

76. That in addition, the Tax Procedures Act places the burden of proof on the Appellant under Section 56(1).

77. The Respondent argued that it is therefore, not the Respondent’s burden to prove its assessment but rather the Appellant’s obligation to avail documents to demonstrate that the Respondent’s tax demand is in error.

78. The Respondent submitted that the Appellant’s allegation would be antithetical to the tenets of a self-assessment regime as espoused by the High Court in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR.

vi. Whether the Respondent violated Section 59(1) of the Tax Procedures Act in issuing its Objection decision dated 8th December 2023. 79. The Respondent cited Section 59 of the Tax Procedures Act submitting that the provision speaks on the production of records as follows: -“(l)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.”

80. The Respondent affirmed that it issued the Appellant with a letter dated 17th October 2023 informing it of its invalid Objection to which the Appellant responded and availed its documents on 24th October 2023, thereby validating its Objection.

81. That the Respondent was therefore acting within its legal right in issuing its Objection decision after considering and reviewing the Appellant’s valid objection.

82. The Respondent averred that the Appellant herein failed to discharge its burden of proof in challenging the additional assessments, thus the Objection decision dated 8th December 2023 is proper in law.

83. That 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.

84. The Respondent stated that the confirmed assessment issued is proper in law and the same should be upheld.

Respondent’s prayers 85. The Respondent prayed that the Tribunal finds: -a.That the Respondent’s Objection decision issued on 8th December 2023 confirming the taxes be found to be proper in law and upheld.b.That the Appeal is devoid of merit and ought to be struck out with costs to the Respondent.

Issues for Determination 86. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent was justified in issuing the Corporation tax assessments for the years 2020, 2021 and 2022. b.Whether the Respondent was justified in issuing Value Added Tax (VAT) assessments for the periods 2020, 2021, 2022 and 2023. c.Whether the Respondent was justified in issuing Withholding VAT assessments for the periods 2021 and 2022.

Analysis and Findings 87. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned Objection decision.

a. Whether the Respondent was justified in issuing the Corporation tax assessments for the years 2020, 2021 and 2022. 88. The Respondent conducted a sales turnover variance analysis by comparing the sales declared by the Appellant in its Corporation tax returns with the sales declared in its Value Added Tax (VAT) returns and bank credits net of output VAT and established that the sales as per the VAT returns were higher than the sales declared in the Corporation tax returns for the years 2020, 2021 and 2022.

89. The Appellant disputed the Respondent’s assessments and averred the following:a.That the Respondent demanded additional assessments based solely on all the bank deposits having wrongfully elected to assume and treat every single deposit made into the accounts as constituting sales income realized.b.The Appellant asserted that the Respondent completely disregarded all the documents of original entry which formed the basis of Appellant’s self-assessment and charged tax to deposits without considering the Appellant’s expenditures.c.That the Respondent failed to appreciate that the gains/profits the Appellant realized on closure of its books of accounts that is ploughed back capital deposited as needed to the bank accounts are already net of the taxes paid and for the Respondent thereafter to subject all the deposits to tax, amounts to double taxation.d.That the Respondent’s assessment of additional tax was arbitrary and without any reason and system.e.That the Respondent violated the law by obtaining and analysing bank accounts of Sema Commodities Limited and charging taxes to the Appellant.f.That the Respondent raised assessments on financial years that were yet to be accounted for by the Appellant.g.That the Appellant is being taxed over and beyond what it earned as taxable income. That the assessment is excessive, punitive, unreasonable and beyond the ability of the Appellant to pay contrary to the canons of taxation.

90. The Tribunal analysed the Appellant’s assertions and all the evidence adduced in this matter to determine the sufficiency of the documentation to substantiate the Appellant’s claims.

91. Section 54A(1) of the Income Tax Act 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. It 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.”

92. A person is also obligated to maintain and retain any document required under a tax law for a period of five years from the end of the reporting period to which it relates, as per Section 23(1) of the Tax Procedures Act so as to enable the person’s tax liability to be readily ascertained.

93. The Appellant’s onus under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, was to prove that the Respondent’s assessment is incorrect or excessive with substantive grounds and competent evidence.

94. Contrary to the Appellant’s assertion that the Respondent assessed Corporation tax solely on its bank deposits, the Tribunal observes that the Respondent assessed the disputed Corporation tax on the gross margin of 12% of the variance between the sales as per the VAT returns and the sales declared in the Corporation tax returns for the years 2020, 2021 and 2022.

95. The Tribunal notes that the Appellant failed to explain the variances established between the sales as per its VAT returns and the sales declared in its Corporation tax returns for the years 2020, 2021 and 2022. The Tribunal is therefore in agreement with the Respondent that the bank statements provided by the Appellant did not address the variances in question.

96. The Appellant further stated in its grounds of Objection that it does not realize a profit of 12% because of the competitive nature of its business. However, the Tribunal notes that the Appellant failed to rebut the Respondent’s application of a 12% gross margin to establish sales turnover variances with any evidence of a contrary gross margin.

97. Based on the above, it is clear to the Tribunal that the Appellant made averments of its tax position, but failed to support the same with sufficient documentation and information. Due to the Appellant’s failure to discharge its burden of proof regarding the completeness of its income in the years assessed, the Tribunal finds that the Respondent was justified in establishing that the unexplained and unsupported variances were undeclared income that resulted in undeclared Corporation tax in the years 2020, 2021 and 2022.

98. In review of the Appellant’s assertion that the Respondent completely disregarded all the documents of original entry which formed the basis of Appellant’s self-assessment, and charged tax to deposits without considering the Appellant’s expenditures, the Tribunal referred to Section 15(1) of the Income Tax Act which provides that: -“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.”

99. The Tribunal perused the documents that the Appellant presented to the Tribunal and finds that the Appellant failed to present any proof of deductible expenditure to show that it wholly and exclusively incurred expenditure in the production of its income for 2020, 2021 and 2022 which the Respondent allegedly ignored, as required under Section 54A(1) and Section 15, subject to Section 16, of the Income Tax Act.

100. Based on the foregoing the Tribunal finds that the Appellant did not discharge its burden of proving that the Respondent’s Corporation tax assessments for the years 2020, 2021 and 2022 were incorrect or excessive.

b. Whether the Respondent was justified in issuing Value Added Tax (VAT) assessments for the periods 2020, 2021, 2022 and 2023. 101. The Respondent amended the Appellant’s VAT assessment by extrapolating the Appellant’s general rated sales from the computed proportion of general rated purchases to the total purchases and thereafter uplifted the output VAT assessments for the periods 2020, 2021, 2022 and 2023.

102. The Appellant’s argument against the assessments and basis applied was that the Respondent ignored the provisions of the VAT Act as the Appellant had already filed returns which showed how much it had paid insofar as VAT is concerned and that no VAT was due from it.

103. The Tribunal analysed the Appellant’s assertions in this matter and documents presented to determine their sufficiency to substantiate the Appellant’s claims. The Tribunal notes that besides the Appellant’s assertions, the Appellant did not adduce any relevant documents in support of its tax position.

104. The Tribunal refers to Section 43 of the VAT Act which provides that a person carrying on a business must keep certain records and documents and avail the same to the Commissioner for inspection, as follows: -“(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)purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name;(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.”

105. The Tribunal observes that the Appellant failed to present, for the Tribunal’s consideration, any relevant documents or records listed in Section 43 of the VAT Act, which could have supported its argument on the correctness of its self-assessments of VAT. Although the Appellant had the opportunity, during the objection and appeal stages of this dispute, to furnish information and documents that would have challenged the Respondent’s basis of assessments and the assessments that followed this premise, it failed to do so.

106. The Tribunal further refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that 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. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”

107. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly place a burden on the Appellant to prove that the Respondent’s additional assessments of VAT were incorrect or excessive. The Appellant, however, did not adduce as evidence in this Appeal any of the relevant documents that it is required to keep under Section 43 of the VAT Act and Section 23(1) of the Tax Procedures Act for the ascertainment of its tax liability and to support its arguments.

108. Consequently, the Tribunal finds that due to the Appellant’s failure to discharge its burden of proof, the Respondent was justified in assessing VAT for the periods of 2020, 2021, 2022 and 2023.

b. Whether the Respondent was justified in issuing Withholding VAT assessments for the periods of 2021 and 2022. 109. The Respondent assessed the Appellant a 10% penalty for not Withholding VAT on eligible payments for the periods of 2021 and 2022.

110. The Appellant did not make any pleadings against this assessment.

111. The Tribunal, however, refers to Section 42A(4C) and (4D) of the Tax Procedures Act which provides as follows regarding failure of a withholding agent to withhold VAT: -“(4C)A person who is required under this section to withhold tax commits an offence if the person —(a)fails to withhold the whole amount of the tax which should have been withheld; or(b)fails to remit the amount of the withheld tax to the Commissioner by the twentieth day of the month following that in which the deduction was made.(4D)A person who commits an offence under subsection (4C) is liable on conviction to a penalty of ten per cent of the amount involved.”

112. The construction of Section 42A(4D) of the Tax Procedures Act, the provision under which the Respondent assessed the 10% penalty on Withholding VAT, applies only on conviction of a taxpayer for an offence under Section 42A(4C) of the Tax Procedures Act.

113. The Tribunal observes that the Respondent did not present any evidence of the Appellant having been convicted of an offence under Section 42A(4C) of the Tax Procedures Act. For this reason, the Tribunal finds that the Respondent erred in assessing the penalty on Withholding VAT in the absence of the Appellant’s conviction of an offence committed under Section 42A(4C) of the Tax Procedures Act.

Final Decision 114. The upshot of the above analysis is that the Tribunal finds that the Appeal partially succeeds and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 8th December 2023 be and is hereby varied in the following terms:i.The Corporation tax assessments for the years 2020, 2021 and 2022 be and are hereby upheld.ii.The Value Added Tax (VAT) assessments for the periods of 2020, 2021, 2022 and 2023 be and are hereby upheld.iii.The Withholding Value Added Tax (Withholding VAT) assessments be and are hereby set aside.c.The Respondent is hereby directed to recompute the tax assessments based on the Tribunal’s findings under Orders b) (i), (ii) and (iii) above within Thirty (30) days from the date of delivery of this Judgment.d.Each party to bear its own costs.

115. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF JANUARY, 2025. DR. RODNEY O. OLUOCH - CHAIRPERSONCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBER