[2023] KETAT 965 (KLR)

Techno Atom Limited v Commissioner of Domestic Taxes (Tax Appeal 1255 of 2022) [2023] KETAT 965 (KLR) (Commercial and Tax) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 965 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 1255 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, BK Terer & W Ongeti, Members

November 24, 2023

Between

Techno Atom Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya in.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and mandated with the responsibility for the assessment, collection, and accounting for all the tax revenues, and is also responsible for the administration and enforcement of the statues set out under the said Act.

3. The Appellant was issued by the Respondent with VAT and Income tax additional assessment on 16th November 2021 with a tax liability of Kshs. 187,171,382. 00.

4. The Appellant objected to the assessments on 29th March 2022, upon which the Respondent advised the Appellant that its objection notice was lodged late. On 14th June 2022, the Respondent advised the Appellant that it had considered and accepted the lodging of its objection out of time. The Appellant was subsequently advised to provide supporting documentation for its objection.

5. On 22nd August 2022, the Respondent confirmed the assessment in the sum of Kshs. 138,354,916. 00 on the basis that the Appellant having failed to provide the supporting documents requested by the Respondent, the notice of objection was not validly lodged.

6. Aggrieved by the Respondent ‘s decision, the Appellant filed the Appeal herein on 26th October 2022.

The Appeal 7. The Appellant filed its Memorandum of Appeal on 26th October 2022, and set out the following grounds of Appeal;a.That the Respondent misdirected itself in both law and fact by failing to take into account the fact that input tax is allowable and the purchase documents in question such as in VAT Act Schedule ii are authentic documents which qualify deduction within six months after the end of the tax period in which supply or importation occurred, and thereby arriving at a wrong VAT assessment in respect of the Appellant.b.That the purchase invoices had ETR receipts or fiscal signature code approved by the Respondent.c.That upon the Appellant submission of the VAT returns the system did not reject the submission as in error that the PIN of the purchaser is not registered.d.That the Respondent erred in law and fact by not taking account the Appellant’s grounds of objection as per the provisions of Section 51 (8) of the Tax Procedures Act No. 29 of 2015.

The Appellant’s Case 8. The Appellant has set out its case on the Statement of Facts filed on 26th October 2022.

9. The Appellant stated that the supplier invoices/receipts that were disallowed by the Respondent in the VAT additional assessment were legitimate and timely as per VAT Act, 2013, Deduction of Input Tax, Part iv, Section 17 (2), which provides;“If at the time when a deduction for input tax would otherwise be allowable under sub-section (1), the person does not hold the documentation referred to in sub-section (3), the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation. Provided that the input tax shall be allowable for a deduction within six months after the end of the tac period in which the supply or importation occurred.”

10. The Appellant also stated that the Respondent misdirected itself in both law and fact by failing to take into account the fact that input tax is allowable and the purchase documents in question such as in VAT Act Schedule (ii) are authentic records which qualify for deduction within six months after the end of the tax period in which supply or importation occurred, and thereby arriving at a wrong VAT and Income tax assessments in respect of the Appellant.

11. The Appellant also stated that upon submission of its VAT returns, the system did not reject the submission as in error that the PIN of the purchaser is not registered.

12. The Appellant further stated that the Respondent erred in law and fact by not taking into account the Appellant ‘s grounds of objection as per the provisions of Section 51 (8) of the TPA.

13. The Appellant did not file its written submissions and the Tribunal shall proceed with its case on the basis of the Memorandum of Appeal and Statement of Facts.

Appellant’s Prayers 14. The Appellant for the aforestated reasons prayed that the Respondent’s Objection decision dated 22nd August 2022 be set aside and its Appeal herein be allowed with costs.

The Respondent ‘s Case 15. The Respondent has set out its case on its;a.Statement of Facts dated and filed on the 24th November 2022, andb.Written submissions dated and filed on the 19th July 2023.

16. The Respondent stated that on 13th October 2021, it issued the Appellant with a notice under Section 59 of the TPA informing the Appellant that it will conduct a compliance check on them for the period 2017 to 2020 for Corporate tax (company income tax), and January 2017 to August 2021 for VAT and PAYE. The Respondent also listed and sent to the Appellant eight records/books of accounts/other documents required for examination.

17. The Respondent stated that it established inconsistencies between what was claimed as purchase vis a vis what was declared as sales, and issued the Appellant with an assessment on 16th November 2021.

18. The Appellant objected to the assessment on 29th March 2022, which was out of time, and the Respondent informed the Appellant of the lateness. However, the Respondent considered and allowed the Appellant’s Objection out of time, it stated.

19. The Respondent also stated that it subsequently wrote to the Appellant vide email and requested it to provide supporting documentation for the Objection.

20. On 22nd August 2022, the Respondent confirmed the Income tax and VAT assessment in the sum of Kshs. 138,354,916. 00 and issued the said confirmation to the Appellant.

21. The Respondent averred that the Appellant failed to provide purchase invoices, delivery notes (where applicable) and map the invoices to bank statements to demonstrate the expenses had been incurred in furtherance of business in line with Section 17 of the VAT Act and consequently the purchases could not be allowed.

22. The Respondent also stated that the Appellant did not provide evidence in support of its claim for disallowed purchases.

23. The Respondent cited Section 17 (2) of the VAT Act which makes provision on credit for input tax against output tax;“If, at the time when a deduction for input tax would otherwise be allowable under subsection (1) -a.The person does not hold the documentation referred to in sub-section (3), or,b.The registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation.”

24. The Respondent averred that its email correspondence with the Respondent clearly demonstrates the Appellant’s reluctance in providing documentation in support of its Objection.

25. It stated that the Appellant kept giving excuses for the delay and requesting more time to provide the said documents despite being given adequate time to provide the same.

26. The Respondent further averred that in the notice of assessment it issued, the Appellant was assessed for VAT and Income tax by disallowing purchases, and was very specific on the purchases that had been disallowed.

27. It stated that it was the Appellant’s duty to demonstrate that it had procured the goods. The Respondent averred that it had not noted that the suppliers had not declared the said sales and the Appellant did not provide documentary evidence showing having paid for the purchases to enable the Respondent pursue the sellers.

28. The Respondent also stated that some of the purchases as per the notice of assessment were purported by the Appellant to have been procured from reputable companies who declare their sales correctly, and it was of interest to the Respondent to establish as to why the particular sales by the Appellant had not been declared by the seller if indeed the same had been bought. The Appellant claimed that it purchased the same in cash, but did not demonstrate to the Respondent that it had the cash to be able to procure the said purchases at the time it purported to have purchased the goods.

29. The Respondent further averred that the Appellant failed to provide all documentation to enable the Respondent to verify the authenticity of the claim. In particular, the proof of payment would have demonstrated that the Appellant had paid for the goods and therefore the expense was a legitimate one and not a situation where an invoice was generated with the aim of creating the impression a purchase took place so as to reduce the VAT payable, the Respondent added.

30. The Respondent submitted that Section 24 of the TPA allows the Appellant to submit its tax returns and the Respondent has provided the iTax system for that purpose. However, pursuant to that provision, the self-assessment filed does not bind the Respondent as to the accuracy and content of the same. The Respondent can review the self-assessment and make amendments as empowered by Section 31 of the TPA.

31. The Respondent further stated that while filing the self-assessment returns on iTax, the Appellant was not required to attach purchase invoices, proof of payments and any other documents, but rather provide a listing of its sales and purchases. It stated that it expected the Appellant to provide correct and accurate information while filing the returns, and where the Respondent has doubts as to the accuracy of declaration, the Respondent can call for documents in line with Section 59 of the TPA on productions of records to verify the accuracy of the declaration. The Respondent added that the same was done as per the notice issued under Section 59 of the TPA to the Appellant.

32. The Respondent further stated that the Appellant lodged a late Objection application under Section 51 (7) of the TPA on the basis that the Company had not been in operation due to Covid-19.

33. The Respondent allowed the Appellant to lodge the late objection on 14th June 2022, but the Appellant failed to adhere to the requirements of Section 51 (3) (c) of the TPA by providing a valid notice of objection.That the subject provision reads;“(3)A notice of objection shall be treated as validly lodged by a taxpayer under section (2) if;(c)all the relevant documents relating to the objection have been submitted.”

34. The Respondent averred that in the confirmation assessment issued, the Respondent highlighted six (6) documents that the Appellant needed to provide in order for its objection to be valid. Out of the six documents required, the Appellant only provided two of the documents, the Respondent averred.

35. The Respondent stated that the Appellant failed to provide the following documents which were crucial to validate its notice of objection;a.Purchases invoice for year 2019;b.Delivery notes for period 2018 to 2019;c.Proof of payments for period 2018 and 2019;d.Stock analysis for period 2018 and 2019;e.Sales ledger for period 2018 and 2019. f.Audited Financial statements for period 2018 and 2019.

36. The Respondent further stated that it had at all times informed the Appellant that its Objection was not valid due to lack of supporting documentation to support its grounds of Objection.

37. The Respondent also averred that in specific, the Appellant failed to provide purchase invoices mapped to bank statements to prove the expense was incurred in furtherance of the business. It was the Appellant‘s failure to prove that the said purchases took place, that led the Respondent to confirm the assessments, and issue its decision, it averred.

38. The Respondent also stated that the Appellant had stated that the supplier invoices/receipts that were disallowed were legitimate and timely as per Section 17 (2) of the VAT Act, to which the Respondent in rebuttal, stated that the basis of the assessment was not about the six months allowed for one to claim for input VAT, rather the issue was as to whether the purchases were incurred in the first instance, for them to be considered as legitimate expenses for claiming input VAT. The Appellant provided invoices however without proof of payment, and it was not possible to authenticate the purchases.

39. The Respondent cited the case of Commissioner for Investigations and Enforcement vs. Sangyug Enterprises (K) Ltd ITA E056/ 2020 (2022) KEHC 59 (KLR), where the Court stated,“After reviewing the records provided by the taxpayer, we have observed that the taxpayer failed to provide evidence confirming direct purchases between the company and the traders whose invoices were disallowed…The purchases totaling Kshs. 249,901,583. 00 are still disallowed considering that you are not able to support them fully as required by section 17 and 42 of the VAT Act, 2015. ”

40. The Respondent also cited the case of Commissioner of Domestic Taxes vs. Galaxy Tools Ltd E088/2020 (2021) eKLR, and also Metacash Trading Ltd vs. south Africa Revenue Service & anor, where it was stated;“the burden of proving the Commissioner wrong then rests on the vendor…because VAT is inherently a system of self-assessment based on the vendor ‘s own records.”

41. The Respondent also submitted that in its decision all documents availed were considered and in the absence of supporting documents, the assessments were confirmed. The onus therefore remains on the Appellant to show which information and documents it provided, and the Respondent omitted in making its decision.

42. The Respondent submitted that in challenging a tax assessment, the burden is on the Appellant to demonstrate that the assessment is excessive and erroneous, a fact that has not been discharged by the Appellant.

43. The Respondent further submitted that in failing to provide supporting documentation, the Appellant failed to meet its statutory burden of proof as required under Section 56 (1) of the TPA to disprove the assessments raised by the Respondent.

44. By reason of the foregoing the Respondent prayed that its objection decision dated 22nd August 2022 be upheld and the Appeal be dismissed with costs.

Issues For Determination 45. The Tribunal having carefully considered the parties’ pleadings and submissions made is of the considered view that the Appeal herein raises one issue for determination as follows;Whether the assessments issued against the Appellant by the Respondent were justified.

Analysis and Determination Whether the assessments issued against the Appellant by the Respondent were justified. 46. This is a matter arising out of a compliance audit conducted on the Appellant by the Respondent, for the period 2017 to 2018 for Corporation tax, and January 2017 to August 2021 for VAT, from which the Respondent stated that it established inconsistencies between what was claimed as purchases vis a vis what was declared as sales and the Appellant was issued with an assessment on 16th November 2021 with a tax liability of Kshs. 187,171,382. 00. The Appellant lodged a late objection notice on 29th March 2022 which was however allowed by the Respondent on 14th June 2022.

47. The Respondent has averred that on the same date (14th June 2022) it wrote to the Appellant advising the Appellant highlighting the requirements of a valid objection, and on 21st June 2022 to 14th July 2022 the Appellant responded supplying some invoices and requesting for time to sort and submit other of the required documents.

48. However, due to failure by the Appellant to submit further required documentation, the Respondent reviewed the documentation already submitted and issued an Invalidated the Objection on 22nd August 2022, subsequently confirming the additional assessment of Income tax and VAT in the sum of Kshs. 138,354,916. 00, which triggered the Appeal herein.

49. As per the provisions of Section 56 (1) of the TPA,“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect ...,”

50. Consequently therefore, upon receipt of the additional assessment, the burden of proof shifts to the Appellant to disprove the Respondent’s assessment. The Appellant ought to provide evidence to demonstrate that the Respondent erred in coming up with the tax decision.

51. In order to shift the burden of proof from itself to the Respondent, the Appellant is required to lodge an Objection against the assessment, in line with the provisions of Section 51 (3) of the TPA, which Objection is subjected to the legal requirements thereunder in order to meet the validity threshold.

52. The Respondent submitted that the Appellant did not meet the required threshold under Section 51 (3) by not aligning its Objection notice under the guidelines provided thereunder, in the sense that it did not provide all the relevant documents relating to the objection as requested by the Respondent. Due to the failure to provide supporting documents, the grounds of objection remained mere averments without basis.

53. The Respondent also averred that it requested the Appellant for the following documents which were critical to support its objection, but the Appellant failed to provide the same;a.Purchase invoices for the year 2019;b.Delivery notes for the period 2018 to 2019;c.Proof of payments for the period 2018 to 2019;d.Stock analysis for the period 2018 and 2019;e.Sales ledger for the period 2018 and 2019;f.Audited financial statements for the period 2018 and 2019.

54. The Respondent further averred that the Appellant in specific failed to provide purchase invoices mapped to bank statements to prove the expense was incurred in furtherance of the business.

55. The Respondent submitted that it was the Appellant’s failure to prove that the said purchases took place, that led to the Respondent confirming the assessments, and invalidating the Appellant’s objection.

56. The Tribunal having had the opportunity to peruse through the documentation presented to it, observed that, whereas the Appellant made numerous commitments to furnish the same and indeed provided some documents, the documents did not confirm to the request made by the Respondent.

57. The Respondent also submitted that though the Appellant stated in its grounds of objection that the supplier invoices/receipts that were disallowed were legitimate and timely in line with Section 17 (2) of the VAT Act, in rebuttal, the Respondent stated that the basis of the assessment was not about the six months allowed for one to claim for input VAT, rather the issue was as to whether the purchases were incurred in the first instance, for them to be considered as legitimate and allowable for VAT input claims. It was averred that the Appellant provided invoices without proof of payment, thereby making it difficult for the Respondent to authenticate the purchases.

58. In the case of Commissioner for Investigations and Enforcement vs. Sangyug Enterprises (K) Ltd, ITA No. E056/2020, [2022] KEHC 59 (KLR), the court stated:-“… After reviewing the records, provided by the taxpayer, we have observed that the taxpayer failed to provide evidence confirming direct purchases between the company and the traders whose invoices were disallowed. The Purchases totaling Kshs. 249,901,583. 00 are still disallowed considering that you are not able to support them fully as required by section 17 and 42 of the VAT Act “.

59. In Metcash Trading Ltd vs. South Africa Revenue Service & Anor, CCT /2000, it was held:-“The burden of proving the Commissioner wrong then rests on the Vendor … because VAT is inherently a system of self- assessment based on the vendor ‘s own records.”

60. The Respondent submitted evidence that it considered the all documents that were submitted by the Appellant and in the absence of the other critical documents listed requested from the Appellant, before issuing its decision.

61. It is therefore this Tribunal‘s view that the onus of proof remained on the Appellant to show which information and documents it provided, and the Respondent omitted in making its decision.

62. In failing to provide the required supporting documentation, the Appellant failed to meet its statutory burden of proof as required under Section 56 (1) of the TPA in order to disprove the assessments made by the Respondent.

63. Therefore, the Tribunal comes to the conclusion that the Appellant did not meet the required evidentially threshold in discharging its burden of proof in proving the Respondent’s assessment was not correct.

64. In light of the foregoing the Tribunal holds and determines that the Respondent was justified in issuing its assessments against the Appellant.

65. The upshot of the foregoing is that the Appeal fails and the Tribunal proceeds to issue the appropriate orders.

Final Decision 66. The Appeal having failed, the Tribunal issues the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 22nd August 2022 be and is hereby upheld.c.The parties to bear their own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023. ROBERT M. MUTUMA..............CHAIRPERSONELISHAH N. NJERU............MEMBERMUTISO MAKAU................MEMBERBONFACE K. TERER...........MEMBERDR WALTER J. ONGETI.....MEMBER