[2024] KETAT 1014 (KLR)

Thiaka t/a Kithia Investments v Commissioner for Domestic Taxes (Tax Appeal E223 of 2023) [2024] KETAT 1014 (KLR) (19 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1014 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E223 of 2023

RM Mutuma, Chair, EN Njeru, M Makau, B Gitari & AM Diriye, Members

July 19, 2024

Between

Charles W Thiaka T/A Kithia Investments

Appellant

and

Commissioner For Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a sole proprietor who offers loading and offloading labour services to different companies on contractual basis in Nairobi.

2. The Respondent is the Commissioner for Domestic Taxes appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and is mandated with the responsibility of the assessment, collection and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out in the schedule to the said Act.

3. The Respondent assessed the Appellant for the period January 2017 - December 2018 in respect of understated VAT total sales declarations and income tax turnover declarations for the period, and raised additional VAT and income tax assessments for the period in the total sum of Kshs. 40,206,030. 00 in income tax and VAT inclusive of penalties and interest.

4. The Appellant lodged a Notice of Objection on 2nd January 2023, which was acknowledged by the Respondent on 18th January 2023.

5. The Respondent issued its Objection Decision on 28th March 2023 in which it partially allowed the Appellant’s objection, and amended the assessment from Kshs. 40,206,030. 00 to Kshs. 22,130,348. 00 inclusive of penalty and interest.

6. The Appellant dissatisfied with the Respondent’s decision, he lodged the Appeal vide Notice of Appeal herein dated 27th April 2023 and filed on 28th April 2023.

The Appeal 7. The Appellant filed its Memorandum of Appeal dated 12th May 2023 on the same date and set out the following grounds of appeal;a.That the Appellant is a sole proprietor duly registered under the Companies Act Cap 486 under the KRA PIN A********I carrying business within the Republic of Kenya. Its address for service for the purposes of this audit shall be care of CGA Consult located at the Trio Complex Nairobi.b.That the Respondent is a statutory body established under Section 3 of the Kenya Revenue Act Cap 469 the Laws of Kenya charged with the collection for and on behalf of the Government of Kenya, service of summons shall be effected through the Appellant’s tax agent’s office.c.That the Appellant received VAT and Income tax assessments on may 2022 relating from January 2017 to December 2018. d.The Appellant lodged an objection against the assessments on 31st January 2023 objecting to these additional assessments.e.That the Appellant followed the due process of objection by providing the Commissioner with the copies of the wage’s summary, clients’ contracts, expenses summary, and their supporting documents pertaining to the business he undertook to support the objection.f.That on 28th March 2023 the Respondent rejected the objection citing that the Appellant did not provide sufficient proof to support the grounds he had stated.g.That the assessed amounts are not factual as the Appellant gave all the supporting documents to fully support the variance in VAT claimed and VAT filed sales reported for the two years.h.That the Respondent will not suffer prejudice since the additional assessment demanded were non-vatable sales which are not subject to VAT as prescribed by law.

The Appellant’s Case 8. The Appellant has set out its case on its;a.Statement of Facts dated and filed on 12th May 2023 together the documents attached thereto;

9. The Appellant did not file any written submissions.

10. The Appellant stated that the Respondent assessed it for the period January 2017 – December 2018 in respect of understated VAT total sales declarations and income tax turnover declarations for the period.

11. It was also stated by the Appellant that following its Notice of Objection against the assessments, the Respondent partially allowed the objection, stating that it had succeeded in highlighting the reasons alluded to the variances in declarations of sales income in the VAT and income tax for the period. It further stated that the variance was due to discrepancies where its clients claimed input VAT from gross amounts payable rather than commissions realized from the transactions.

12. The Appellant also stated that pursuant to the applicable provisions of the law, it objected through a letter to the said assessment and demand.

13. The Appellant further stated that it provided all the documents, including copies of the wage’s summary, clients’ contracts, expenses summary, and supporting documents pertaining to the business it undertook, but the Respondent issued an objection decision only partially allowing the objection.

14. The Appellant contended that the assessments were uncalled for and that the Appellant having supported the variances in sales reported as being erroneous input VAT declarations by his clients, the Respondent ought to have thoroughly confirmed the matter at hand before issuing the decision.

Appellant’s Prayers 15. By reason of the foregoing the Appellant prayed that: -a.This Honourable Tribunal lifts the Objection Decision dated 28th March 2023;b.Vacate the additional assessments for the said period;c.In the alternative to (b) above and further to (a) hereinabove, the Tribunal be pleased to vary the assessment herein as per its wisdom;d.This Honourable Tribunal be pleased to order the Respondent to pay costs of this appeal;e.This Honourable Tribunal be pleased to issue any other order favorable to the Appellant as it may find just and expedient to issue.

The Respondent’s Case 16. The Respondent’s case is set out on its;a.Statement of Facts dated and filed on 9th June 2023, together with the documents attached thereto; and,b.Written submissions dated 26th February 2024 and filed on 27th February 2024.

17. The Respondent stated that it raised VAT and Income Tax additional assessments for the period between January 2017 and December 2018 on 12th May 2022 and the Appellant objected to the assessments on 2nd January 2023. The late objection was accepted on 18th January 2023, and the Appellant validated his objection on 31st January 2023.

18. On Income Tax, the Respondent stated that an analysis of the Appellant’s returns revealed that the total claims (sales) made from his PIN were understated in declaring the gross turnover for the years under review. It stated that the variances were charged to tax as follows;Principal Tax @ 30 %…………. Kshs 20,779,720;Penalty @ 5% …………………. Kshs 1,038,986;Interest @ 1 % …………………. Kshs 10,805,454. Total ……………………………. Kshs 32,624,160.

19. The Appellant objected on the basis that:i.There were variances in the amount of income tax declared in the income tax in regard to VAT filed. Thus, intended to make some amendments on the income tax returns filed over the course of years from the year 2017. ii.The proposal on the income tax amendment is as declared in having included the gross income, the cost of sales, and other expenses that had not been declared.

20. On VAT, the Respondent stated that the VAT Act provided for VAT to be charged on a taxable supply made by registered persons in Kenya. Section 34 of the Act requires a person who in the course of business (a) has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months shall be liable for registration, under the Act within thirty days of becoming eligible.

21. The Respondent stated that an analysis of the filed returns revealed income from taxable supplies exceeded five million shillings. However, records held by the Respondent indicated that the Appellant failed to account for correct VAT for all the years under review with an under declaration of sales pursuant to the above statute. It stated that the variance was charged to VAT as follows;i.The monthly VAT declarations were understated in all the years under review as revealed by claims made from the PIN. The VAT variance was computed as follows –Item 2017 2018Principal @16% Kshs 9,280,294 Kshs 10,252,683Penalty @5% Kshs 464,015 Kshs 512,634Interest @1% Kshs 4,825,753 Kshs 4,101,073Total ………… Kshs 14,570,061 Kshs 14,866,073. All totaling Kshs. 29,436,134 for the period.ii.In the year 2018, there were excess sales made as per the declared withholding tax certificates. The VAT on the excess sales was computed as follows; Excess sales …………….15,161,910. 80;

Principal @ 16% ………. 2,425,905,

Penalty @5% …………. 121,295,

Interest @1 % …………... 834,808.

TOTAL …………………… 3,372,009.

22. The total VAT assessment therefore amounted to Kshs 32,808,143. 00, which the Appellant objected to on the grounds that:i.VAT should be taxed on commission rather than the gross pay; and,ii.VAT was erroneously claimed as purchases.

23. The Respondent stated that due to failure to provide crucial documents in support of their objection, it partially confirmed the assessment on 28th March 2023 in the sum of Kshs. 22,130,348. 60 which is the subject of the instant Appeal.

24. The Respondent stated that it is not in doubt that the Appellant made some income chargeable to tax from his activity of contracting labourers. It stated that whereas the Appellant is allowed under Section 15 (1) of the ITA to deduct expenses wholly and exclusively incurred in generating income, the burden is upon him to justify that any such alleged expenditures, were wholly and exclusively incurred in generating income, failing which the Respondent is justified in refusing such alleged expenses.

25. The Respondent averred that the Appellant is contracted to provide casual labourers, who are remunerated weekly depending on the gazetted minimum wage rate set by the Government. It was also averred that the contract provided that the Appellant is responsible for the following employee costs; Salary processing fees, provision of safety clothing and equipment, provision of work injury benefit insurance cover and statutory payments for the employees (NSSF, NHIF).

26. It was also averred that the Appellant did not dispute earning the income charged by the Respondent, but instead pleads to be allowed the expenses incurred in generating the income in question.

27. The Respondent relied on the purchases claimed from the taxpayer to determine the income of the taxpayer. However, the Respondent did not allow any expenses as the taxpayer did not provide any documentation for his consideration.

28. The Respondent stated that it allowed the supported expenses as per Section 15 of the ITA for the Appellant to be assessed for the correct income.

29. The Respondent also averred that the Appellant provided a contract for service and therefore VAT should be charged on the contract sum, as the contract did not provide for a commission or computation for the commission, noting that the Appellant’s clients had claimed VAT based on the total sum of the contract rather than on the commission as computed by the Appellant.

30. The Respondent further stated that the Appellant provided a list of invoices included in the computation of the purchases claimed by him, and stated that the invoices listed therein were not from his suppliers. The Respondent further stated that it reviewed the list of the purchases claimed for the taxpayer provided by the assessing team and compared with the list provided by the taxpayer. It stated that it noted that the list used by the Respondent did not have the invoices listed by the Appellant as it had erroneously charged VAT on him.

31. The Respondent submitted that it placed reliance on Section 5 of the VAT Act, Sections 3, 15, and 16 of the Income Tax Act and Sections 31 and 51 of the Tax Procedures Act in it its justification of the assessment.

32. The Respondent submitted that the Appellant’s Memorandum of Appeal and Statement of Facts are not properly before the Tribunal in the absence of a Notice of Appeal.

33. It was further submitted that from the face of the Notice of Appeal in the bundle filed by the Appellant, the same was never served upon the Respondent, thus the pleading in the Respondent’s Statement of Facts; that the Appeal is fatally defective as no prior Notice of Appeal was served upon the Respondent as required by law.

34. The Respondent submitted that Section 52 (1) of the TPA provides that;“A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013. ”

35. It was further submitted that Section 12 of the Tax Appeals Tribunal Act provides;“A person who disputes the decision of the commissioner on any matter arising under the provisions of any tax law may, subject to the provisions of the relevant tax law, upon giving notice in writing to the commissioner, appeal to the Tribunal.”

36. The Respondent submitted that the word “upon giving notice in writing to the commissioner” is a condition precedent, for filing any valid Appeal before the Tribunal.

37. It was therefore submitted that it was trite that the said condition precedent was never complied with and even to date, no application has been made for leave to remedy the situation.

38. The Respondent cited the case of TAT 299 of 2021 – Andrew Mukite Musangi vs. Commissioner of Domestic Taxes, where it was held Tribunal cannot fortunately/unfortunately suo moto resuscitate the appeal that is fatally defective in the circumstances.

Respondent’s Prayers 39. By reason of the foregoing the Respondent prayed that: -a.The Appeal be dismissed with costs.b.The assessments be upheld.

Issues For Determination 40. The Tribunal having carefully considered the pleadings and submissions made by the parties is of the considered view that the Appeal distils into two issues that commend for determination as follows;i.Whether the Appellant’s Appeal is properly before the Tribunal; and,ii.Whether the Respondent was justified in issuing the Appellant with the additional income tax and VAT assessments for the period 2017- 2018.

ANALYSIS AND DETERMINATION 41. The Tribunal shall analyse the issued for determination as hereinunder;

i. Whether the Appellant’s Appeal was validly filed before the Tribunal; 42. The Respondent has submitted on a point of law to the effect that the Appellant’s Notice of Appeal and the Memorandum of Appeal with the Statement of Facts, are invalid, and null and void ab initio for offending the provisions of Section 52 of the TPA, and Section 12 of the TAT Act.

43. The Respondent has submitted that the Appellant’s Notice of Appeal annexed in the Appellant’s bundle of documents was never served upon the Respondent.

44. The Respondent also submitted that Section 52 (1) of the TPA provides that;“(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act.”

45. In addition, Section 12 of the TAT Act provides;“A person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax law, may subject to the provisions of the relevant tax law, upon giving notice in writing to the Commissioner, appeal to the Tribunal.Provided that such person shall before appealing, pay a non-refundable fee of twenty thousand shillings.”

46. The Respondent submitted that the word “upon giving notice in writing to the Commissioner” is a condition precedent, for filing any valid Appeal before the Tribunal, which condition precedent was never complied with, or leave to remedy the situation sought, and therefore the appeal is fatally defective in the circumstances.

47. The Notice alluded to by the Respondent is the Notice of Appeal contemplated by Section 13 (1) of the TAT Act, which provides;“(1)A notice of appeal to the Tribunal shall-a.Be in writing or through electronic means;b.Be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.”

48. Thereafter the Appellant shall, within fourteen days from the date of filing the Notice of Appeal, submit enough copies of, as may advised by the Tribunal, of a Memorandum of Appeal, Statement of Facts, and the Objection Decision. An Appellant is required to serve a copy of the Appeal on the Commissioner within two days of giving Notice of Appeal to the Tribunal.

49. The foregoing clearly sets out the chronology of the process of commencement of an Appeal with the Tribunal.

50. It is worth noting that though the Respondent did raise the issue of the service of the Notice of Appeal in paragraph 12 of its Statement of Facts and on the competence of the Appellant’s Appeal. It was not prejudiced in any manner as it filed its pleadings within the required timelines.

51. However, the Tribunal takes the view that a point of law can be taken at any stage of the proceedings, since the Notice of Appeal is the jurisdictional foundation for the Tribunal in entertaining any Appeal before it, there is nothing precluding the Tribunal from entertaining a P.O, or even considering the issue suo moto.

52. In considering the Respondent’s preliminary objection, it is worth noting that it is not in contention that the Notice of Appeal was filed as contemplated under Section 13 (1) of the TAT Act, and within the statutory timelines. The Respondent’s only contention is that the notice was not served on the Respondent.

53. The Respondent issued its Objection Decision on the Appellant on 28th March 2023, and the Appellant duly filed the Notice of Appeal on 28th April 2023. The Respondent filed its Statement of Facts dated 9th June 2023 on the same date.

54. The Respondent states in its submission that, “it is trite from the face of the Notice that the same was never served upon the Respondent”, and does not provide cogent evidence that service was not effected. The burden of proof was on the Respondent to prove that either there was no service of the notice as contemplated by the law, the notice was defective for lack of service, that lack of service is fundamental to the extent of disposing of the Appeal or lack of service prejudiced the Respondent. Which the Respondent failed to do.

55. In view of the foregoing the Tribunal takes the view that the objection placed by the Respondent is such that it has not prejudiced the parties from prosecuting their matter in a timely manner and as such requires the Tribunal to delve deep into the facts and interrogate the evidence, hence it is not a pure fact of law, which can on the face of it conclusively determine the Appeal at a preliminary stage.

56. Accordingly, the Tribunal is of the considered view that the Respondent’s Preliminary Objection is not merited and hereby fails.

57. In light of the foregoing the Tribunal holds that the Appellant’s Appeal is competently filed before the Tribunal.

ii. Whether the Respondent was justified in issuing the Appellant with the additional income tax and VAT assessments for the period 2017-2018. 58. The issue subject of the dispute are the additional assessments for income tax and VAT for the period January 2017 to December 2018 which the Respondent confirmed in the total sum of Kshs. 22,130,348. 60 in its Objection Decision dated 28th March 2013.

59. The initial assessment had been for the sum of Kshs. 32,624,160. 00 being income tax, and Kshs. 32,808,143. 00 in VAT. The Appellant objected to these assessments for VAT and income tax and upon review of the grounds of objection and supporting documents, the Respondent amended the assessment to the amount conformed in the decision. Dissatisfied with the Respondent’s decision, the Appellant filed the Appeal herein.

60. The Appellant averred that it highlighted the reasons giving rise to the variances in question in declarations of sales in the VAT and income tax for the subject period, which it attributed to discrepancies arising out of its clients claiming input VAT from gross amounts payable rather than on commissions it realized from transactions.

61. The Appellant also contended that it objected to the additional assessment as VAT ought to be charged for tax on the basis of commission earnings rather than gross pay, and that VAT was erroneously claimed as purchases.

62. The Appellant further averred that it provided all the documents, including copies of the wage’s summary, clients’ contracts, expenses summary, and supporting documents pertaining to the business it undertook, but the Respondent chose to partially allow the objection without justification.

63. The Appellant further contended that the assessments were uncalled for and that the Appellant having supported the variances in sales reported as being erroneous input VAT declarations by his clients, the Respondent ought to have thoroughly confirmed the matter at hand before issuing the decision.

64. The Respondent on the other hand averred that the Appellant’s failure to provide crucial documents in support of their objection informed its decision to partially confirm the assessment in the sum of Kshs. 22,130,348. 60 on 28th March 2024.

65. The Respondent further averred that as the Appellant is contracted to provide casual labourers to his clients who are remunerated weekly at the gazette minimum wages, its contracts provided that the Appellant will also be responsible for employee costs such as; salary processing fees, provision of safety clothing and equipment, provision of work injury benefit insurance cover and statutory payments for employees (e.g. NSSF, NHIF, WIBA).

66. It was averred by the Respondent that the Appellant did not dispute earning the income charged to tax by the Respondent, but only pleaded to be allowed the expenses incurred in generating the income in question.

67. It was further averred that the Respondent relied on the purchases claimed from the Appellant to determine its income, however it did not allow any expenses that the Appellant did not provide any supporting documentation for its consideration. but allowed the supported expenses as per Section 15 of Income Tax Act to enable assessment on correct income. For instance, the Respondent averred that the Appellant provided a breakdown of the payments made towards purchase of uniforms and PPEs, but the same were not made to specific suppliers and could not be relied on. He did not also provide invoices for the said uniforms and PPEs and stated that the same had been archived and retrieving them would be a challenge. The Appellant further did not provide policy documents for WIBA insurance, nor proof of payments for NSSF payments, WIBA, uniforms and PPEs which were listed as expenses. The Appellant further did not provide invoices and proof of payment for the operating expenses.

68. The Tribunal in reviewing this issue emphasizes that Tax Procedures Act Section 56 requires a party to satisfy the burden of proof by provision of all documents necessary to support or prove the issue in contention by the other party.

69. A Gleaning through the pleadings and supporting bundle of documents filed by the Appellant, it is apparent that the Appellant did not provide to the Respondent the documents requisite to support its listed expenses such WIBA, NSSF, NHIF, uniforms and PPEs purchases, operating expenses, more so invoices and proof of payments.

70. However, the Tribunal notes the Respondent took consideration of the supported expenses thus informing its partial adjustment of the Appellants from Kshs. 32,808,143. 00 (VAT) and Kshs. 32,624,160. 00 (income tax) to Kshs. 22,130,348. 60, which the Respondent confirmed.

71. While refereeing to the decision in the case of Pearson vs. Belcher CH.M (Inspector of Taxes) Tax Cases Vol.38, in the High Court case PZ Cussons EA Ltd vs. Kenya Revenue Authority (2014) eKLR, Justice Majanja stated;“There is an additional assessment made by the commissioner upon the Appellant ; It is perfectly settled in case such as Norman -vs- Galder 267c 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course he has completely failed to do so. That is sufficient to dispose the appeal, which I accordingly dismiss with costs.”

72. Accordingly, the Tribunal guided by the aforecited caselaw is satisfied that the Appellant while the onus was upon him, failed to show that the confirmed assessment made upon him was excessive or erroneous by submitting the requisite documents to discharge the burden of proof placed upon him by Section 56 of the Tax Procedures Act.

73. In view of the foregoing the Tribunal finds and holds that the Respondent was justified in issuing the Appellant with the additional income tax and VAT assessments for the period January 2017 to December 2018.

74. The upshot of the foregoing is that the Appellant’s Appeal is not merited and consequently fails.

Final Determination 75. The Appellant’s Appeal having failed, the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby dismissed;b.The Respondent’s Objection Decision dated 28th March 2023 be and is hereby upheld; and,c.Each party to bear their own costs.

76. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF JULY 2024ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERABDULLAHI M. DIRIYE - MEMBER