[2024] KETAT 1652 (KLR)

Tema Homecare Limited v Commissioner of Domestic Taxes (Tax Appeal E633 of 2023) [2024] KETAT 1652 (KLR) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1652 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E633 of 2023

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

November 21, 2024

Between

Tema Homecare Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company engaged in the business of garbage collection services on behalf of the County Government of Nairobi as well as supply of dry food to the County Government of Nairobi and the County Government of Homabay.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted a returns review and after noticing variances in the income tax and VAT returns issued the Appellant with a notice of intention to audit on 18th January 2022 in relation to the 2016-2021 review period.

4. On 14th February 2022, the Respondent raised additional corporation tax and Value Added Tax (VAT) assessments against the Appellant totaling Ksh 34,550,285. 00 inclusive of penalties and interest in relation to 1st December 2016 to 31st December 2019 review period.

5. The Appellant in a letter dated 20th June 2023 objected against the assessment as well as via the i-Tax platform.

6. The Respondent fully rejected the Appellant’s objection and confirmed the principal assessment of Ksh 24,956,140. 42 on 16th August 2023.

7. Aggrieved by the Respondent’s objection decision dated 16th August 2023, the Appellant filed its Notice of Appeal dated 14th September 2023 on even date.

The Appeal 8. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 27th September 2023 and filed on even date.i.That some part of the exercise covered beyond five years within which the law requires the Appellant to keep records necessary to argue their case. Additionally, that the Appellant declared turnover of Ksh 28,689,564. 00 as per VAT3 but declared Ksh 0 in annual returns hence a sales variance of Ksh 71,813,062. 00 between years 2016 to 2021. These sales included exempt supplies of Ksh 22,307,937. 00. The Respondent did not consider the incomes exempted from VAT for the assessed periods. This resulted to total assessed VAT income of Ksh 71,813,062. 00 between 2016 to 2021 instead of Ksh 49,505,125. 00. ii.That the Respondent’s income tax computation did not consider the cost of sales and administration expenses incurred by the Appellant while generating the income.iii.That apart from garbage collection services, the Appellant also dealt with supply of dry foods in the assessed periods.

Appellant’s Case 9. The Appellant’s Statement of Facts were dated and filed 27th September 2023.

10. The Appellant averred that it prepares its books of accounts in accordance with the International Financial Reporting Standards ( hereinafter “IFRS”) for Small and Medium Enterprises (hereinafter “SME”) and that it computes and declares taxable income as provided for by the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).

11. The Appellant stated that the Respondent confirmed additional assessment completely disregarding records and information adduced and based the assessment on information from IFMIS and withholding tax certificates.

12. The Appellant averred that whereas it filed nil returns for 2016 to 2020 years of income and did not file income tax returns for year 2021, it declared turnover of Ksh 28,689,564. 00 in the VAT3 instead of Ksh 100,502,626. 00 leading to a variance of Ksh 71,813,062. 00 for the 2016-2021 years of income. It was the Appellant’s contention that the Respondent issued principal corporate tax assessment of Ksh 13,466,051. 00 based on variances in turnovers and sought to adjust sales without allowing corresponding cost of sales and other administrative expenses.

13. The Appellant claimed that it did not deliberately fail to file its self-assessed returns for the 2016 to 2021 review period but it was due to incompetence of the personnel who were handling its operations at the time and that its Director took full responsibility for this and put in place control measures and pleaded with the Tribunal to accept his plea. Further, that in the interest of fair administration of justice, the Appellant be allowed to deduct cost of sales and administrative expenses as provided for under Section 15 of the ITA as read with Section 31 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) as the expenses were wholly incurred in generation of the income.

14. The Appellant claimed that its audited financial statements for years 2016 to 2021 established corporation tax at Ksh 468,919. 00.

15. It was the Appellant’s assertion that the Respondent established principal VAT assessment of Ksh 11,466,050. 50 for the 2016-2021 years of income based on income established from IFMIS and withholding taxes yet some of the withheld VAT related to exempt supplies that resulted in excess assessment by Ksh 22,307,937. 00 as per the attached purchase orders and invoices. That when considered, the correct additional principal VAT was Ksh 9,794,768. 00 after considering withholding tax and input VAT.

16. The Appellant averred that its Appeal herein was based on principles of tax law, accounting and law of natural justice where in the absence of documents like purchase records in the instant case, the Respondent had discretion to apply reasonable estimates based on industry to relate tax assessed due to lack of documentation. This was primary reason the Appellant was requesting the Respondent to consider additional cost of sales and administrative expenses while arriving at the taxable profit or loss noting that in the course of the Appeal the Appellant had learned many lessons including accurate analysis of all transactions, logical filing of original transaction records, need for software as a solution to generating timely and accurate data for decision and making payments of correct taxes at the input time.

17. The Appellant stated that it was co-operative and endeavoured to provide all explanations and information that the Respondent requested in order to put the matter to rest but the Respondent had applied immense pressure leading to the present Appeal that was mostly factual than legal.

18. The Appellant asserted that it operated a business that generated sales revenue that the Respondent based upon to amend turnovers and that it incurred costs while generating the revenues yet the Respondent failed to consider the costs as well as exempt sales while arriving at the assessed tax as explained by the Appellant in their objection.

Appellant’s Prayer 19. The Appellant’s prayed for the following reliefs:(a)That the Tribunal sets aside the objection decision.(b)That the Tribunal allows the Appellant to accommodate the additional costs and exempt sales

Respondent’s Case 20. The Respondent replied to the Appeal through its Statement of Facts dated 31st October 2023 and filed on 1st November 2023.

21. The Respondent averred that the Appellant mostly filed nil VAT returns except for the months between June 2017 and October 2017 and similarly filed nil income tax for 2016 to 2020 years of income. That this was established by the Respondent who carried out an in-depth review of documents from IFMIS that indicated that the Appellant had undeclared sources of income which were compared with declared income in the VAT returns resulting in variances that yielded additional assessments.

22. The Respondent reiterated its position as held in the objection decision and asserted that it requested records and documents but was not provided the same by the Appellant who was given every reasonable chance and opportunity to respond to the assessments by providing documents but failed to comply. The Respondent relied on Section 54 A of the ITA which requires every person carrying on business to maintain records of all transactions for purposes of taxation and went on to cite Section 23 of the TPA which provides as follows:“(i)A person shall-a.Maintain any document required under a tax law, in either of the official languages;b.Maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained; and…..”

23. The Respondent asserted that the Appellant’s ground (i) of Appeal was in bad faith considering that the Appellant was given a chance to defend their position and was in breach of their mandatory provisions of the law by failing to maintain proper record of expenses and this was the primary reason the Respondent could not consider unsupported additional cost of sales and administrative expenses. The Respondent relied of Section 59(1) of the TPA which provides as follows:“For the purpose of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purpose relating to a tax law, the Commissioner or an authorized 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; orc.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.”

24. That contrary to Appellant’s averments, the Respondent did not consider the exempt sales as the same had not been brought to its attention when requested. The Respondent relied on Section 31(1) of the TPA which provides as follows;“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the ‘original assessment’) by making alterations or additions, from the available information and to the best of the Commissioner’s judgment, to the original assessment of an Appellant for a reporting period…”

25. It was the Respondent’s assertion that the Appellant lodged an invalid objection that was not supported by relevant documents contrary to Section 51(3)(c) of the TPA thus the objection was rejected and the assessments confirmed because the Appellant failed to extinguish its burden of proof.

Respondent’s Prayer 26. The Respondent prayed for the following reliefs:i.That the Tribunal dismiss the Appeal with costs.ii.That the Tribunal upholds the Respondent’s assessment and decision dated 16th August 2023.

Parties’ Written Submissions 27. On 17th July 2024, the Tribunal adopted the Respondent’s written submissions dated 18th April 2024 and filed on 25th April 2024 noting that despite indulging the Appellant with more time to file its submissions, the Appellant’s submissions were not on record as at the date of the hearing.

28. In its submissions, the Respondent submitted on a single issue for determination as herein under;

Whether the Appellant herein discharged their burden of proof in challenging the additional assessments. 29. It was the Respondent’s case that the Appellant failed to provide all the relevant documents during the objection stage and simply blamed the Respondent for their lack of accountability this is despite being given every reasonable opportunity to do so noting that it was keen to observe the statutory timeline provided for the objection review cycle of 60 days. That this could be easily established as the parties communication happened on diverse dates from 26th June 2023 to 14th August 2023 which the Appellant failed to comply with.

30. The Respondent asserted that whereas Section 24 and 28 of the TPA allow a taxpayer to file returns, the Respondent is not bound by any information provided therein and can assess the tax liability based on any other available information as Section 31 of the TPA empower it to do so. In firming up this position, the Respondent relied on the case of Osho Drappers Limited vs Commissioner of Domestic taxes [2022]eKLR in asserting that Section 59 of the TPA empowers the Commissioner to request for more and additional information to satisfy himself on the taxable income declared.

31. The Respondent submitted that while Section 17(3)(a) of the VAT Act requires a tax payer to possess original tax invoices for the supply or certified copies thereof, the Appellant failed to provide any supporting documentation to support its objection leading to the confirmation of the additional VAT assessments thus failed in its discharging its tax liability as couched under Section 56 of the TPA.

32. The Respondent further submitted that in disallowing Appellant’s objection, it was guided by Section 51(3) and 51(4) of the TPA as read with Section 43(3) of the VAT Act when it confirmed the VAT assessments that it was the Appellant who failed in its obligation to keeping documents as provided for by Section 23 of the TPA which provides as follows:“A person shall-a.Maintain any document required under tax law, in either of the official languages;b.Maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained.”

33. The Respondent cited the following case law in further buttressing its position. Kenya Revenue Authority v Maluki Kitili Mwendwa [2021]eKLR

Mbuthia Macharia v Annah Mutua Ndwiga & Another [2017]eKLR

Primarosa Flowers ltd vs Commissioner of Domestic Taxes [2019]eKLR

34. It was the Respondent’s assertion that the Appellant failed to discharge the burden of proof as stipulated under Section 56(1) of the TPA yet the general rule of evidence is that he who alleges must prove. The Respondent relied on Section 107 of the Evidence Act, Cap 80 of the Laws of Kenya which provides as follows:“1)Whoever desires any court to give judgement 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”

35. The Respondent concluded by asserting that it amended the assessments based on available information pursuant to the provisions of Section 31 of the TPA since the Appellant never discharged its burden through documentary evidence in support of its notice of objection.

Issues for Determination 36. The Tribunal having carefully considered the parties’ pleadings, documentation and Respondent’s submissions adduced before it notes that two issues distill for its determination as follows:i.Whether the Respondent erred in assessing beyond the five-year statutory period.ii.Whether the Respondent’s objection decision dated 16th August 2023 was justified.

Analysis and Findings 37. The Tribunal notes that the origin of the instant dispute is a return review by the Respondent which established that the Appellant mostly filed nil VAT returns except for the months between June 2017 and October 2017 and similarly filed nil income tax for 2016 to 2020 years of income. The Appellant claimed that it did not deliberately fail to file its self-assessed returns but the same were not filed due to incompetence of the personnel who were handling its operations at the time and that its director took full responsibility for this and put in place control measures and was pleading with the Tribunal to accept this plea.

38. The Tribunal having established two issues for determination proceeds to analyze them as follows;

(i) Whether the Respondent erred in assessing beyond the five-year statutory period. 39. The Tribunal notes that the Appellant did not controvert the Respondent’s assertion that it mostly filed nil VAT returns except for the months between June 2017 and October 2017 and similarly filed nil income tax for 2016 to 2020 years of income. The Tribunal is guided by Section 52B(1)(b) of the ITA which provides as follows:“…every person, other than an individual chargeable to tax under this Act shall for any accounting period commencing on or after 1st January 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax on such income, not later than the last day of the sixth month following the end of the year of income.”

40. The Tribunal also notes that Section 24(1) of the TPA provides as follows:“A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”

41. The Tribunal observes that the Appellant failed to explain why it failed to file its returns during the review period despite engaging in trading activities as evidenced by the Respondent’s in-depth review of documents from IFMIS that indicated that the Appellant had undeclared sources of income.

42. The Tribunal notes that the Respondent could not be faulted for assessing the Appellant beyond the five-year period as it was the Appellant who failed in its duty as a diligent taxpayer of filing its returns or even amend them as provided for by Section 31(1) of the TPA which provides as follows:“1. Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner’s judgement…”

43. Section 31(4) of the TPA provides that an amendment outside the five-year period can only be permitted if there is evidence of willful neglect, evasion, or fraud by or on behalf of the tax payer. It provides as follows:“(4)The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment:Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

44. In the instant case the Appellant wilfully neglected to file its returns and has not demonstrated any reason why the Respondent should not have assessed it for the period where it had failed to file its returns.

45. The Tribunal finds and holds that the Respondent did not err in assessing beyond the five-year statutory period.

(ii) Whether the Respondent’s objection decision dated 16th August 2023 was justified. 46. The Tribunal notes the Appellant’s averments that the Respondent confirmed additional assessment completely disregarding records and information adduced and based the assessment on information emanating from the IFMIS and withholding tax certificates; which was countered by the Respondent who insisted that the Appellant failed to maintain proper records of expenses or transactions of business records and equally failed to adduce them in support of its claim thus the Respondent was justified in disallowing the cost of sales and administrative expenses. The Tribunal notes that a plain reading of Section 23 of the TPA and Section 54 A (1) of the ITA provides as follows:“A person shall-a.Maintain any document required under a tax law, in either of the official languages;b.Maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained;”“54A.(1)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.”

47. The Tribunal notes the Appellant’s own admission and more specifically the fact that its director gave the excuse that it lacked personnel and that where it had personnel they were technically incompetent in handling its tax matters. The Tribunal also takes note of the Appellant’s assertion that its audited financial statements for the period under review yielded a corporation tax of Ksh 468,910. 00 and VAT of Kshs. 9,794,768. 00. The Appellant did not controvert the Respondent’s assertion that it failed nor did it file the correct returns which is a primary duty of a diligent taxpayer. In this case the Appellant did not file returns which would have reflected its correct tax liability as indicated in its financial statement. The Tribunal notes that Section 31(1)(c) of the TPA provides as follows:“…(c)in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

48. The Tribunal notes that the Appellant did not furnish the Respondent with requisite documents to enable it make an accurate assessment and arrive at the same conclusion the Appellant itself had arrived at in yielding the said corporation tax and VAT due. The Respondent, based on the information available to it from IFMIS established that VAT due was Kshs. 24,956,140. 42. However, no corporation tax was assessed or confirmed in its objection decision.

49. The Tribunal notes that the Appellant has two lines of business, namely, garbage collection and the supply of dry foods. The Tribunal also notes that there are dry foods that are exempt from VAT and others that are not. The Appellant has argued that VAT exemption emanates from exempt supplies whilst the Respondent has assessed the Appellant’s entire income as vatable. Pursuant to section 56 (1) of the TPA, the burden of proving the tax decision of the Respondent is incorrect lies on the Appellant. The principle of discharging one’s burden of proof was upheld in the following case of KRA Vs.Man diesel & Turbo Se Kenya Income Tax Appeal No. E125 of 2020:“The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non persuasion) is said to bear the burden of proof. The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect.”

50. The Tribunal notes that save for a VAT turnover analysis provided by the Appellant showing the breakdown of vatable and exempt sales for the period 2016 to 2021, the Appellant did not provide any further documentation to corroborate its assertions on the existence of the exempt sales.

51. The Tribunal therefore finds that the Appellant did not discharge its burden of proving that the Respondent’s decision was incorrect and accordingly, the Respondent’s objection decision dated 16th August, 2023 was justified.

Final Decision 52. The upshot of the foregoing is that the Appeal herein lacks in merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 16th August 2023 be and is hereby upheld.c.Each party to bear its own costs.

53. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER