[2023] KETAT 867 (KLR)

Tex Trading Limited v Commissioner of Domestic Taxes (Tax Appeal 1464 of 2022) [2023] KETAT 867 (KLR) (8 December 2023) (Judgment)

Neutral citation: [2023] KETAT 867 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1464 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, Jephthah Njagi, AK Kiprotich & B Gitari, Members

December 8, 2023

Between

Tex Trading Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya and whose principal business activity is refilling and distribution of liquefied petroleum gas.

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

3. The Respondent issued a notice of investigation vide a letter dated January 7, 2021 and further on November 15, 2021 it issued a letter of findings

4. On December 31, 2021, the Respondent issued the assessments vide a letter and assessment orders in iTax for the period 2015 to 2019.

5. The Appellant objected to the assessments vide a letter dated January 28, 2022 and further in iTax on the same date. The Respondent subsequently issued its objection decision vide a letter dated 19th October 2022 confirming assessments amounting to Kshs 311,231,509 being Corporation tax of Kshs 139,638,217. 00, VAT of Kshs 171,365,050. 00 and advance tax of Kshs 228,242. 00.

6. Being dissatisfied with the Respondent’s decision, Appellant filed a Notice of Appeal to the Tribunal on November 18, 2022.

The Appeal 7. The Appellant’s Appeal is premised on the following grounds as stated in the Memorandum of Appeal filed on the December 2, 2022:-a.The Respondent erred in both law and fact in assessing Corporation tax for the year 2015 beyond the five-year limitation period contrary to Section 31(4)(b) of the Tax Procedures Act,2015. b.The Respondent erred in fact in issuing a Corporation tax assessment for the periods 2016 to 2019 based on derived figures and without reference to the information provided by the Appellant.c.The Respondent erred in both law and fact in assessing VAT for the periods January 2015 to May 2016 beyond the five-year limitation period contrary to Section 31(4)(b) of the Tax Procedures Act, 2015. d.The Respondent erred in both law and fact in assessing advance tax for the period 2015 beyond the five-year limitation period contrary to Section 31(4)(b) of the Tax Procedures Act, 2015.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts filed on 2nd December, 2022 together with the documents attached thereto.b.The Appellant’s submissions dated June 30, 2023 and filed on July 4, 2023.

9. The Appellant submitted that the assessment issued by the Respondent dated December 31, 2021 covered several tax periods including the period January 2015 to December 2015. That the Appellant noted that it filed its Corporation tax return for the year 2015 on 1June 5, 2016.

10. The Appellant further noted that pursuant Section 31(4)(b) of the Tax Procedures Act, 2015, amendments to self-assessments filed by taxpayers are limited to a period of five years from the date the return was filed.

11. That based on the above provision, the Respondent cannot issue an assessment for the period January 2015 to December 2015 after June 15, 2021 which is five years from the date it filed its self-assessment return for Corporation tax. The Appellant therefore contended that the assessment for the period January 2015 to December 2015 is time barred and should be vacated.

12. The Appellant further noted that in its objection decision, the Respondent alleges that there was wilful neglect and fraud on the part of the Appellant thereby allowing it to issue an assessment beyond the five-year period pursuant to Section 31(4)(b) of theTPA.

13. The Appellant averred that it did not engage in gross or wilful neglect, evasion or fraud at any time. That further, the Appellant noted that the Respondent did not allege or adduce any proof supporting its assertion, failure to which the time limit set to issue a default assessment is strictly limited to five years. To support its arguments, the Appellant cited the case of National Social Security Fund Board of Trustees vs Commissioner of Domestic Taxes, Kenya Revenue Authority (2016).

14. Regarding Corporation tax assessment for the period 2016 to 2019, it stated that to assist with monthly tax compliance and record keeping as required in the tax law, the Appellant had engaged an accountant to carry out these tasks. That upon receipt of the tax assessment, the Appellant reviewed the filed tax returns against its records and noted some errors of commission.

15. That the Appellant therefore recomputed its tax position which it shared with the Respondent for review and the Appellant noted that its correct tax position is as tabulated below:Particulars 2016 2017 2018 2019

Taxable profit (Loss) (14,950,059) 5,122,847 (3,653,816) 1,786,551

Loss b/f - (14,950,059) (9,827,212) (13,481,027)

Loss c/f - (9,827,212) (13,481,027) (11,694,476)

Tax due

Tax on separate sourced income

Tax on interest income - 79,803 61,010 95,156

Tax Paid (775,334) (715,626) (1,157,034) (1,236,954)

Tax Payable (775,334) (635,823) (1,096,025) (1,141,798)

16. The Appellant averred that the above analysis took into account the following considerations which had not been factored by the Respondent:a.Sales: The Respondent disregarded the sales as provided by the Appellant. The sales used by the Respondent in computing the assessments were lower than the actual sales figure as provided in the financial statements.b.Operating expenses: The Respondent did not consider the operating expenses rightfully incurred by the Appellant in earning its business income in determining the taxable income of the Appellant. The Appellant contended that the operating expenses were allowable as wholly and exclusively incurred to generate taxable income pursuant to Section 15 of theIncome Tax Act.

17. To support this position, the Appellant enclosed the financial Statements for 2016 to 2019.

18. The Appellant therefore contended that the assessment by the Respondent was based on derived figures without regard to the figures provided by the Appellant including expenses wholly and exclusively incurred in the generation of the taxable income. The Appellant averred that the assessments should be set aside and the Appellant allowed to amend its returns to reflect the correct position.

19. The Appellant further stated that the VAT assessments for the periods January 2015 to May 2016 were unlawful as they were issued beyond the five-year limitation period

20. According to the Appellant, the VAT assessments were issued for periods up to May 2016 and further that the return for the last assessment month (May 2016) was filed on 14th June 2016.

21. The Appellant further noted that the Respondent issued an assessment for the period January to May 2016 on December 31, 2021.

22. The Appellant contended that this was in contravention of Section 31(4)(b) of the TPA which limits amendments to self-assessments filed by a taxpayer to a period of five years from the date the return was filed. That given the last VAT return was filed on June 14, 2016, an assessment issued on 31st December was issued beyond the statutory five-year period and should be vacated.

23. The Appellant further submitted that in its objection decision, the Respondent alleges that there was wilful neglect and fraud on the part of the Appellant thereby allowing it to issue an assessment beyond the five-year period pursuant to Section 31(4)(a) of the TPA.

24. The Appellant averred that it did not engage in gross or wilful neglect, evasion or fraud at any time. That further, the Appellant noted that the Respondent did not allege or adduce any proof supporting its assertion, failure to which the time limit set to issue a default assessment is strictly limited to five years.

25. The Appellant further submitted that the advance tax assessment for the period 2015 is unlawful as it was issued beyond the five-year limitation period

26. That the assessment was issued on December 31, 2021 and based on the provisions of Section 31(4)(b) of the TPA, the advance tax assessments were out of time as it was beyond five-year period and it should be vacated fully.

Appellant’s Prayers 27. The Appellant prayed that:a.The Appeal be allowed with costs to the Appellant.b.The decision of the Respondent contained in the letter dated October 19, 2022 demanding payment of tax amounting to Kshs 311,231,509 be set aside.c.Any other orders that the Honourable Tribunal may deem fit.

Respondent’s Case 28. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on December 20, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on July 6, 2023.

29. The Respondent stated that it commenced investigations against the Appellant following intelligence received that the Appellant was trading in sale of Liquefied Petroleum Gas (LPG) but was not declaring the full amount of income earned for tax purposes.

30. That it thereby issued the Appellant with a tax investigations notice dated January 7, 2021 and requested the Appellant to avail its purchases ledger.

31. The Respondent averred that the Appellant was alleged to be understating its purchases from its main suppliers, One Gas Limited and One Petroleum Limited, which led to undeclared sales and subsequently loss of revenue by the Government.

32. That the investigation carried out by the Respondent covered the period between 2015 and 2019 for Corporation tax, Value Added Tax (VAT) and Advance tax.

33. That the investigation sought to establish the following: -a.Whether the Appellant declared all taxable income earned for the period under review.b.Whether the Appellant accounted for the taxes due for the period under review.c.Whether the Appellant and the directors deliberately committed an offence that warrants prosecution under the prevailing tax laws.d.Assess, demand and collect any taxes established from the investigation as being due and unpaid.

34. That in carrying out the investigation, the Respondent sought and considered the following information and documents: -a.National Transport and Safety Authority (NTSA) database;b.Customs data on importsc.Third party information such as bank statements and suppliers' information.

35. The Respondent stated that the Appellant had not been filing returns for the following taxes for the period under review: -a.Corporation Tax;b.Value Added Tax (VAT);c.Advance Tax.

36. That the Appellant was requested to provide the Respondent with the purchases ledger which the Appellant did so and the same information within the purchases ledger.

37. It averred that in order to determine the undeclared income, the Respondent adopted the markup approach after adjusting for the costs already claimed by the Appellant in its Income tax returns.

38. The Respondent submitted that the investigation findings were communicated to the Appellant vide a letter dated 15th November 2021. That the income tax was thereafter computed, and communicated to the Appellant as indicated in the tax assessment letter dated December 31, 2021;

39. The Respondent stated that in relation to Value Added Tax (VAT), it took into consideration that Liquefied Petroleum Gas (LPG) was vatable at 16% for the period between September 2, 2013 and June 9, 2016 and therefore in the period under review in this matter (2015-2019), only the year 2015 and half of 2016 was covered by the Respondent. That sales for the period 2016 were assumed to accrue evenly to obtain vatable value sales for five months only.

40. It averred that Value Added Tax assessments were issued on December 31, 2021 based on the tax established as communicated in the notice dated November 15, 2021.

41. The Respondent stated that the Appellant owned several motor vehicles upon which advance tax was not fully paid for. An analysis of the payments made and the number of motor vehicles chargeable to tax indicated some variances.

42. The Respondent submitted that it communicated the investigation findings to the Appellant vide an investigation findings letter dated November 15, 2021 and subsequently issued the Appellant with a tax assessments/demand letter dated December 31, 2021 requiring the Appellant to pay the taxes computed.

43. That the Appellant filed a notice of objection dated January 27, 2022 and received by the Respondent on February 10, 2022 disputing the Respondent's tax assessment. That the grounds of objection raised by the Appellant were the same grounds relied upon by the Appellant in this Appeal lodged before this Tax Appeals Tribunal.

44. It stated that the Appellant was requested to provide documents in support of the objection on February 21, 2022. That however, the engagements were delayed because the Appellant's director was indisposed. That the documents requested were thereafter availed on 23rd August 2022 providing explanation and information for review.

45. That this effectively meant that the 60 days contemplated under Section 51 of the Tax Procedures Act started running on August 23, 2022 when the Appellant's objection was validated.

46. The Respondent contended that it considered the Appellant's objection to the tax assessments and addressed them.

47. That the Appellant relied on Section 31 (4) (b) of the Tax Procedures Act to state that the Respondent should not have assessed the following taxes as according to the Appellant the Respondent was time barred: -i.Corporation tax for the period 2015. ii.Value Added Tax for the period January 2015 to November 2016. iii.Advance tax for the period 2015

48. The Respondent’s view was that the provisions of Section 29 (6) of the Tax Procedures Act gave the Commissioner latitude to expand the period in instances of gross or willful neglect, tax evasion or fraud by a taxpayer.

49. That in this matter, the Respondent noted that the Appellant had grossly under declared the income earned in the period under review as was evident from the assessments issued for Corporation Tax, VAT and Advance Tax.

50. The Respondent averred that it also took note of the fact that the Appellant conceded to the Advance taxes assessed and not paid for the period 2019 and 2020 and even proposed a payment plan.

51. That the Appellant has raised the same issue in this Appeal and the Respondent still relied on Section 29 (6) and 31 (4) (a) of the Tax Procedures Act which empower the Respondent to assess or amend an assessment beyond the five-year statutory limit in cases of gross or wilful neglect, evasion or fraud by, or on behalf of, the taxpayer, at any time.

52. That the Appellant objected to the Corporate tax assessment for the period 2016 to 2019 and presented the following documents for the period 2016to 2019:-a.Financial statementsb.Tax computationc.General ledgersd.Bank statements

53. That upon review of the documents availed by Appellant, it noted that the receipts purported to be the Appellant's income as per the sales ledger were way below the sales established from the banking analysis as well as other tests carried out by the Respondent at the assessment stage.

54. The Respondent further stated that in arriving at the taxable income for the period under investigation, the Respondent considered the total purchases from the Appellants' ledger for the period 2016-2019, which is the Appellant's own document that gave a higher figure compared with what had been declared by the Appellant's suppliers in the statements provided.

55. That in the prevailing circumstances, the Respondent was of the view that the documents availed at the objection review stage could not be relied on in determining the taxable income and as such no adjustments were made.

56. That the Appellant had also relied on the same ground in this Appeal and the Respondent stated that the Appellant's documents such as purchases' ledger and third party information such as bank statements were taken into consideration when coming up with the Appellant’s taxable income.

Respondent’s Prayers 57. The Respondent prayed that the Tribunal:a.Finds that this Appeal lacks merit.b.Upholds the Respondent's objection decision dated October 19, 2022. c.Dismisses the Appeal with costs to the Respondent.

Issues For Determination 58. The Tribunal has gleaned through the pleadings and documentation filed by both parties and is of the considered view that the issues falling for its determination are:a.Whether the Respondent was justified in issuing assessments beyond five years.b.Whether the Respondent’s confirmed assessments were justified.

Analysis And Determination 59. The Tribunal having ascertained the issues for determination as set out above proceeds to deal with the same as hereunder.

a.Whether The Respondent Was Justified In Issuing Assessments Beyond Five Years. 60. The genesis of this dispute was the Respondent’s assessment dated October 15, 2021 for the years 2015 to 2019.

61. It was the Appellant’s contention the assessment issued by the Respondent dated December 31, 2021 covered several tax periods including the period January 2015 to December 2015. That the Appellant noted that it filed its Corporation tax return for the year 2015 on 15th June 2016. That pursuant to Section 31(4)(b) of the Tax Procedures Act, 2015, amendments to self-assessments filed by taxpayers are limited to a period of five years from the date the return was filed.

62. The Respondent on its part averred that the provisions of Section 29(6) of the Tax Procedures Act gave the Commissioner latitude to expand the period in instances of gross or wilful neglect, tax evasion or fraud by a taxpayer.

63. That in this matter, the Respondent noted that the Appellant had grossly under declared the income earned in the period under review as was evident from the assessments issued for Corporation tax, VAT and Advance Tax.

64. The Tribunal noted that the Respondent while raising the tax assessments placed reliance on the provisions of Section 29 of the TPA. Under Section 29(5) & (6) of the TPA the law provides as follows regarding time limitations for raising amended assessments;“(5)Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.(6)Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.”

65. The law as cited above limits the Respondent to assess the Appellant five years unless issues of wilful neglect, evasion or fraud is proven. Given that the notice of assessment was issued on December 31, 2021, the law allowed the Respondent to assess the Appellant only up to 1st January, 2017 unless the exceptions under Section 29(6) of the TPA are shown to exist.

66. The Tribunal noted that in the whole process of investigations and assessments there were no issues raised regarding wilful neglect, evasion, or fraud on the part of the Appellant. The Tribunal noted that the Respondent only raised this in the Statement of Facts. However, in the letter of finding dated November 15, 2021 the Respondent indeed confirmed that the Appellant had filed both Income tax and VAT for the period under review. It follows therefore that as provided by law, the assessment ought to have been limited to five years (or 1st January 2017).

67. Following from the above provisions of the law and analysis, and given that income tax returns are filed annually by 30th June of the subsequent year, the assessments can therefore only apply up to the annual returns for the period ending December 31, 2016 while VAT whose returns are done monthly by 20th of the subsequent month the assessments can only apply up to returns filed in January 2017.

68. The Tribunal is bound to strictly enforce the provisions of taxing statutes as was stated in the case of Partington vs. AG[1869] LR 4 HL as follows:“As I understand the principle of all fiscal legislation it is this: if the person sought to be taxed, comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible in any statute what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you simply adhere to the words of the statute.”

69. Accordingly, the Tribunal finds that any income tax assessed prior to December 31, 2017 and VAT assessed prior to January 2017 were in contravention of the law.

b. Whether The Respondent’s Confirmed Assessments Were Justified. 70. It was the Appellant’s contention that to assist it with monthly tax compliance and record keeping as required in the tax statutes, the Appellant had engaged an Accountant to carry out these tasks. That upon receipt of the tax assessment, the Appellant reviewed the filed tax returns against its records and noted some errors of commission. That the Appellant therefore recomputed its tax position which it shared with the Respondent for review.

71. The Appellant averred that the above analysis took into account the following considerations which had not been factored by the Respondent:i.Sales: The Respondent disregarded the sales as provided by the Appellant. The sales used by the Respondent in computing the assessments were lower than the actual sales figures as provided in the financial statements.ii.Operating expenses: The Respondent did not consider the operating expenses rightfully incurred by the Appellant in earning its business income in determining the taxable income of the Appellant. The Appellant contended that the operating expenses were allowable as wholly and exclusively incurred to generate taxable income pursuant to Section 15 of the Income Tax Act.

72. The Respondent on its part submitted that upon review of the documents availed by Appellant, it noted that the receipts purported to be the Appellant's income as per the sales ledger were way below the sales established from the banking analysis as well as other tests carried out by the Respondent at the assessment stage.

73. The Respondent further stated that in arriving at the taxable income for the period under investigation, the Respondent considered the total purchases from the Appellant’s ledger for the period 2016-2019, which is the Appellant's own document that gave a higher figure compared with what had been declared by the Appellant's suppliers in the statements provided.

74. That in the prevailing circumstances, the Respondent was of the view that the documents availed at the objection review stage could not be relied on in determining the taxable income and as such no adjustments were made.

75. The Tribunal perused through the pleadings and noted that the key issue in contention in the dispute were the documents presented in support of the objection which the Respondent stated that they could not be relied upon.

76. In support of the Appeal, the Tribunal noted that some of the documents attached by the Appellant in support were its financial statements and its filed returns. The Tribunal further noted that the Respondent had relied on bank statements provided by the Appellant to assess the taxes. Given that the Appellant was assessed for Income tax and VAT it ought to have provided documents as provided in law to support its objection in order to rebut the Respondent’s use of the information obtained from its bank accounts. Additionally, it was upon the Appellant to provide the relevant documents in support of the entries in the bank statements it provided to the Respondent.

77. Section 17(3) of theVAT Actprovides as follows regarding documentation;“The documentation for the purposes of subsection (2) shall be—(a)an original tax invoice issued for the supply or a certified copy;(b)a customs entry duly certified by the proper officer and a receipt for the payment of tax;(c)a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;(d)a credit note in the case of input tax deducted under section 16(2); or(e)a debit note in the case of input tax deducted under section 16(5).”

78. Additionally, Section 54A of the Income Tax Actprovides as follows regarding record keeping;“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.”

79. Further, Section 23 of the Tax Procedures Act provides as follows regarding obligation for record keeping;“(1)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(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.(2)The unit of currency in books of account, records, paper registers, tax returns or tax invoices shall be in Kenya shillings.”

80. The Tribunal notes that the documents presented to the Respondent at the objection stage by the Appellant were its bank statements, financial statements, general ledgers and tax computation analysis. The Tribunal further notes that none of the documents that are prescribed under the ITA and VATActs were provided by the Appellant in support of its objection to the assessments.

81. It is the Tribunal’s position that the Appellant having been served with an assessment arrived at based on the bank statements it provided, was enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justifiable in the circumstances.

82. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act squarely places the burden of proof upon a taxpayer to discredit any tax assessment or decision.

83. Section 56(1) of the Tax Procedures Act reads as follow regarding burden of proof:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

84. Additionally, Section 30 of the Tax Appeals Act provides as follows in the burden on the taxpayer to dispute a tax decision:-“In any proceeding before the Tribunal the Appellant has the burden of proving-where an appeal relates to an assessment, that the assessment is excessive; orin any other case, that the tax decision should not have been made or should have been made differently.”

85. In the instant case, the Tribunal noted that the Appellant did not provide the documentation as required by law in support of the transactions in its bank account which would have explained the transactions in its own bank account.

86. It is the Tribunal’s position that it was upon the Appellant to furnish evidence to prove its case. This was the finding in Nicholson v Morris 51TC95 where it was held that:“Even supposing that I were myself to think that the amounts were wrong – and, as I have freely conceded, and as [Counsel for the Revenue] has freely conceded, they probably are wrong – what on earth could I or anybody else at this stage, in the total absence of evidence, substitute for them? The answer is that it is a complete and utter impossibility; and that is why, of course, the Taxes Management Act throws upon the taxpayer the onus of showing that the assessments are wrong. It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, “Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults.” That is not a duty on the Revenue. If it were, it would be a very onerous, very costly and very expensive operation, the costs of which would of course fall entirely on the taxpayers as a body. It is the duty of every individual taxpayer to make his own return and, if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean, and if he gives no evidence whatsoever he cannot be surprised if he is finally lumbered with more than he has in fact received. It is his own fault that he is so lumbered.”

87. Based on the above analysis, provisions of the law and the case laws, the Tribunal finds that the Respondent, save for the assessments beyond five years, was justified in confirming the assessments.

Final Decision 88. In view of the foregoing, the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby partially allowed.b.The objection decision dated October 19, 2022 be and is hereby varied in the following terms:i.The Income tax assessment for the years 2015 be and is hereby set aside.ii.The VAT assessment for the period prior to January 2017 be and is hereby set aside.iii.The Commissioner is hereby directed to re-compute the Income tax and VAT tax assessments excluding the assessments under Orders (i) and (ii) above within Thirty (30) days of the date of delivery of this Judgment.c.Each party to bear its own costs.

89. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF DECEMBER, 2023. ...................ERIC NYONGESA WAFULACHAIRMAN....................CYNTHIA B. MAYAKAMEMBER....................DR. RODNEY O. OLUOCHMEMBER....................JEPHTHAH NJAGIMEMBER....................ABRAHAM K. KIPROTICHMEMBER....................BERNADETTE GITARIMEMBER