[2023] KETAT 1024 (KLR)

This is Africa (K) Travel Agency Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal 871 of 2022) [2023] KETAT 1024 (KLR) (Commercial and Tax) (8 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1024 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 871 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

September 8, 2023

Between

This Is Africa (K) Travel Agency Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya whose principal activity is offering travel agency services to Chinese clients by assisting them in booking air tickets and hotels.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority and the Kenya Revenue Authourity is a public body duly established under the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (KRA Act) whose primary mandate Under Section 5 (1) of the Act 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 & 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 verification exercise on the Appellant for the period 2015, 2016 and 2017 and issued a preliminary finding of additional income tax and Value Added Tax liability amounting to Kshs. 137,650,762. 00.

4. The Respondent confirmed the findings and issued the Appellant with an assessment dated 14th October, 2021 covering Value Added Tax (VAT) and Income tax.

5. The Appellant objected to all the additional assessments on 25th November, 2021 and on 13th January, 2022 the Respondent invalidated the Appellant’s notice of objection for failure to meet the legal threshold set under Section 51(3) of the Tax Procedures Act, CAP No. 29 of 2015 (hereinafter TPA). The Respondent subsequently sought for information from the Appellant that was not supplied prompting the Respondent to invalidate the Appellant’s Objection on 6th July, 2022.

6. The Appellant being dissatisfied with the decision of the Respondent lodged a Notice of Appeal dated 5th August, 2022 and filed on the even date.

The Appeal 7. In its said Memorandum of Appeal, the Appellant set out the following grounds of Appeal:-a.That the Respondent erred in law and in fact by assuming that all the bank deposits into the Appellant’s bank accounts were business income and subjecting them to tax.b.That the Respondent erred in law and in fact by failing to take into consideration the explanation given by the Director of the Appellant on the circumstances in which the deposits were made.c.That the Respondent erred in law and in fact by failing to take into consideration the position of the Appellant’s Director in Kenya which led to the Appellant’s accounts being used to deposit the collect third party amounts.d.That the Respondent erred in law and in fact by failing to consider the business expenses incurred in the ordinary business of the Appellant.

The Appellant’s Case 8. The Appellant’s case is premised on the Memorandum of Appeal and the Statement of Facts both dated 19th August, 2022 and filed on the same date together with written Submissions dated 22nd February, 2023 and filed on the same date.

9. The Appellant argued in its Statement of Facts dated 19th August, 2022 that its Director, Mr. Zhuo W is the Chair of the Chinese local community in Kenya.

10. According to the Appellant’s Statement of Facts, some companies in China had supplied construction materials to Chinese Companies based in Kenya who had either refused to pay or delayed payment to their said suppliers who are based in China.

11. The Appellant further stated that the Chinese Companies that were owed money contacted the Embassy of China in Kenya for assistance. In turn, the Embassy of China contacted Mr. Zhuo on the basis of his role as the Chair of the local (Kenyan) Chinese community and requested him to offer assistance to the Chinese companies by collecting their debts. To aid Mr. Zhuo, the Chinese Companies sent a representative (Ms. Huang Chu) to collect the debts with the assistance of Mr. Zhuo and it was further agreed that to ease collection of the debts all the collections would be deposited in the bank account of the Appellant and then sent to the Chinese companies listed in the Statement of Facts.

12. On the basis of the above background, the Appellant outlined its case along the following headings:-

a. Failure by the Respondent to take into account non-income deposits 13. The Appellant stated that the Respondent did not take into account non-income deposits and merely assumed that all bank deposits in the Appellant’s bank accounts were business income and thereby treated all the bank deposits as income that was subject to tax. That accordingly, the Respondent failed to appreciate that in the ordinary course of business, not all money credited to a company’s bank account relates to its business income.

14. That during the period under investigation, the Appellant stated that it received several non-revenue deposits in its bank accounts including the third-party debt collections, inter account transfers related party transfers, director’s deposits, payment reversals and other deposits to cater for bank charges and other business expenses.

b. Arithmetic Errors 15. The Appellant noted that there were summation errors in the Respondent’s workings regarding its United States Dollars (USD) Bank Account Statement. That more specifically, according to the Appellant, the Respondent mis-stated two entries on 23rd May, 2016 in the USD Bank Account Statement amounting to US$ 1,700 and 24,000 respectively as US$ 170,000 and 2,400,000. 00 thereby leading to an over-statement of the amount received by the Appellant of KSh. 254,430,000. 00 being included in the Respondent’s workings yet deposits of such an amount were non-existent.

c.Failure to allow deduction of business expenses contrary to Section 5 of the Income Tax Act. 16. The Appellant stated that Section 15 of the ITA allows the taxpayer to deduct all expenditure wholly and exclusively incurred by it in the production of income in ascertaining its income in a specific year.

17. The Appellant further stated that despite this provision, the Respondent did not allow any expenses claimed by it. As such the Appellant stated that such failure by the Respondent to claim its business expenses assumed that it earned all its income without incurring any expenses. The Appellant further stated that this was impractical and that the Respondent ought to have considered all expenses incurred wholly and exclusively for the production of income that have instead been subjected to tax.

d. Abuse of authority by the Respondent 18. The Appellant stated that the Respondent acted ultra vires, unreasonably, unfairly and illegally by failing to take into consideration the Appellant’s explanation regarding the deposits in its bank accounts.

19. The Appellant stated that given that the Respondent as an organ of the State under the 2010 Constitutional dispensation, it has an obligation to comply with Article 47 on fair administration actions. To buttress its statement the Appellant quoted, Judicial Commission v. Mbalu Mutava & another [2014] EKLR; Jotham Mulati Welamondi vs the Electoral Commission of Kenya Bungoma HC MISC APPL. No. 81 of 2002 [2002] 1 KLR 486; [2008] 2 KLR (EP) 393 as discussed in the Republic Vs Kenya Revenue Authority Exparte Funan Construction and Republic vis Commissioner of Co-operatives , Kirinyaga Tea Growers Co-operative & Savings & Credit Society Ltd Civil Appeal No. 39 of 1997 [1999] 1 EA 245 which were all cases to indicate that the Respondent used its powers excessively, arbitrarily and with disregard for natural justice.

e. Legitimate expectation 20. The Appellant stated that it had a right to expect that the Respondent will strictly follow the provisions of the law and the Constitution and would not subject to tax deposits that are not business income within the definition of income subject to tax.

21. The Appellant cited the case of Diana Kethi Kilonzo & another vs Independent Electoral & Boundaries Commission and 10 others [2013] and JP Bansal Vs State of Rajastan & Another Appeal (Civil) 5982 of 2001 to buttress its statement on legitimate expectation. In the case of and JP Bansal Vs State of Rajastan & Another Appeal (Civil) 5982 of 2001 the basic principles relating to legitimate expectation were enunciated by Lord Diplock in Council of Civil Service Unions and Others Vs. Minister for the Civil Service (1985 AC 374 (408- 409) [commonly known as CCSU case]. It was observed in that case that for legitimate expectation to arise, ‘the decisions of the administrative authority must affect the person by depriving him of some benefit or advantage which either:i.he had in the past been permitted by the decision maker to enjoy and which he can legitimately expect to be permitted to continue to do until there has been communicated to him some rational grounds for withdrawing it on which he has been given an opportunity to comment; orj.he has received assurance from the decision maker that they will not be withdrawn without giving him first and opportunity of advancing reasons for contending that they should not be withdrawn.’

22. The Appellant finally stated that its expectation was that since the deposits in its accounts were not from its business income, the amount would not be subjected to tax. That further based on its Statement of Facts the Respondent was acting outside the law in issuing disputed assessments.

23. The Appellant stated and promised that they would adduce further oral and documentary support/evidence during the hearing.

24. The Appellant’s prayers were therefore that the Appeal is allowed and orders be granted for the Costs of the Appeal to be awarded to the Appellant.

The Respondent’s Case 25. The Respondent has opposed the Appeal by filing a Statement of Facts dated 19th September, 2022 and filed on the same date as well as Submissions dated 7th March, 2023 filed on the same date together with several attachments thereto.

26. In its Statement of Facts, the Respondent has stated that on 27th August 2021 it served the Appellant with initial preliminary findings of income tax and VAT tax liability of Kshs. 137,650,762. 00 and since the Appellant did not respond the Respondent sent a further reminder on 15th September, 2021 through electronic mail.

27. Since the Appellant never responded the Respondent confirmed the findings and issued the Appellant with an assessment on 14th October, 2021. The Respondent further stated that the Appellant lodged an objection in relation to the tax assessment on 25th November, 2021.

28. On 13th January, 2022 the Respondent stated that it invalidated the Appellant’s notices of objection for failure to meet the requirements of Section 51(3) of the TPA whilst requesting the Appellant to provide the information and documents required to validate the objection.

29. The Respondent stated that it sent the Appellant a letter on 23rd February, 2022 inviting them for a meeting on 2nd March, 2022. However according to the Respondent, despite several reminders and the Respondent’s efforts to obtain the relevant supporting documents from the Appellant, the Appellant did not act accordingly and as such the Respondent invalidated the objection on 6th July, 2022.

30. The Respondent outlined the Appellant’s grounds for the Appeal as set out in its Memorandum of Appeal dated 19th August, 2022 and went further to state their case under four (4) headings.

a. Whether the Respondent’s Actions were an abuse of Authority 31. The Respondent stated that Section 4(3) of the TPA provided that ‘An Authorised officer shall enforce and ensure due compliance with, the provisions of the tax law and shall make all due inquiries in relation thereto.’

32. The Respondent stated that Section 7 of the TPA empowers an authorised officer of the Respondent to have all the powers rights, privileges and protection of a police officer. That these powers include but are not limited to investigating any taxpayer to ascertain compliance with tax laws. Therefore, the Respondent’s investigation and subsequent findings are legitimate actions grounded in law.

33. The Respondent stated that investigations were launched against the Appellant following receipts of intelligence. The intelligence received was that the Appellant and its directors were suspected to be involved with tax evasions schemes of money laundering through the pretext of operating a travel agency business. The investigations covered Corporation tax and Value Added Tax (VAT) for the years 2015 to 2017. The aim of the investigations was to verify the intelligence.

34. The Respondent stated that its investigations involved a comparative analysis for establishing the true income of the taxpayer including an examination of third-party records. That the Respondent compared the net bank deposits against the declarations in income tax and VAT returns. Further information from the Registrar of Companies showed that the Directors of the Appellant are Sun Yuee; Huang Ruimei, Zhuo Wu and Zhuo Xiaoliu.

35. On 27th November, 2018 the Respondent analysed the Respondent’s bank statement of both their Kenya Shillings and Dollar Accounts in Equity Bank Kenya Limited and found that between the years of 2015 and 2017 the Appellant received a total of KSh. 578,733,708. 00 which was net of VAT. The Respondent also found that in those years there was under declared income comparisons between net banking income and income declared in the VAT Returns. The established under declared amounts were subject to VAT amounting to Kshs. 92,168,211. 00.

36. On Corporation tax, the Respondent found that the Appellant had been consistently in filing income tax returns. However, the Appellant was declaring nil income which was inconsistent with its bank account statements which showed that the Appellant was earning income.

37. The Respondent further stated that it found that between the years of 2015 and 2017 the net banking was less that the self-assessments and in 2016 the Respondent established a variance that indicated that the tax on the under declared income amounted to Kshs. 45,482,551. 00.

38. The Respondent found in summary the income tax and VAT tax liability came to a total of Kshs. 137,650,762. 00.

b. Whether the Respondent erred in failing to consider the Appellant’s explanations 39. The Respondent stated that the legal principle of ‘he who asserts must prove’ applied and that during the objection review stage, the Appellant was called upon to provide evidence to explain the bank deposits and substantiate their claims but failed to do so and to buttress this statement the Respondent quoted the case of Christian Juma Wabwire v Attorney General [2019] Eklr in which the judge stated’ I find the allegation by mere words without any other evidence , the court cannot find that the Petitioner has proved violations of his rights and freedoms….’

40. The Respondent further quoted Section 51(3) of the TPA which states as follows:-“(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute, or has applied for an extension of time to pay the tax not in dispute under section 33(1).c.all the relevant documents relating to the objection have been submitted.”

41. The Respondent further stated that pursuant to the provisions of Section 51(3) of the TPA that it was a requirement that for an objection to be deemed valid it must be accompanied with necessary documentation in support of the grounds. The Respondent stated that the Appellant ‘s explanations on the circumstances in which its accounts were being used to deposit third party amounts were not supported by any credible evidence. This amount to mere allegations by words without any evidence. Hence by the Appellant only giving explanations without providing corroborative evidence, the Respondent could not reasonably be expected to deem the explanations as proven.

c. Whether the Respondent failed to consider business expenses incurred in the ordinary business of the Appellant. 42. The Respondent stated and repeated that any assertion by the Appellant had to be accompanied by relevant evidence and that since the Appellant failed to provide evidence to ascertain the type of business, it engaged in but also failed to quantify the expenses that were incurred by it.

43. The Respondent quoted Section 16 of the Income Tax Act in stating that they were not mandated to allow any of the alleged ‘expenses’ incurred by the Appellant and upon looking at the bank statements they established the taxable income.

44. The Respondent stated that the notice of objection filed by the Appellant was invalid as it failed to conform to the requirements of Section 51(3) of the TPA as it was not accompanied by the relevant documents in support of the objection, which fact was communicated to the Appellant on 13th January, 2022.

45. The Respondent’s prayers are therefore that the Honorable Tribunal;a.Finds that the objection decision dated 6th July, 2022 be upheld.b.Dismisses this Appeal with costs to the Appellant.

Submissions By The Appellant 46. In its Written Submissions dated 22nd February, 2023 and filed on 23rd February, 2023, the Appellant submitted it objected to all the additional assessments on 25th November, 2021 and that the Respondent confirmed the assessment by way of an objection decision vide a letter dated 6th July, 2022, the subject of this Appeal.

47. The Appellant submitted that the main issues in its view that emerged for determination were to be summarized as follows:i.Whether the Respondent was proper in law by subjecting to tax non-income third party deposits made into the Appellant’s Bank Account;ii.Whether the Respondent’s tax assessment was flawed with arithmetic errors;iii.Whether the Respondent was proper in law in disallowing deduction of business expenses;iv.Whether the Respondent acted ultra vires in their mandate; andv.Whether the Respondent violated the doctrine of Legitimate expectation.

48. The Appellant proceeded to make its own analysis and define what it considered as its issues for determination by disputing the Objection decision of the Respondent on the following grounds:

i. Whether the Respondent was proper in law by subjecting to tax non-income third party deposits made into the Appellant’s bank accounts: 49. The Appellant submitted that the companies based in China had supplied construction materials to Kenya based Chinese Companies.

50. The Appellant further submitted that since the companies in China were facing challenges in collecting the payment for the materials supplied, the Chairman of the Kenya Local Chinese Community in conjunction with the affected companies in China resolved to have the payments for the debts to be made to one bank account in Kenya.

51. The Appellant averred that the said companies in China settled on using its bank account to ease the collection of debts and it was agreed that all payment would be deposited in the Appellant’s bank account and upon being deposited the Appellant would transfer the amount to the relevant Chinese companies in whose favour the amount has been deposited.

52. The Appellant submitted that the deposits made in its bank account were not income but deposit held on stakeholder basis for collection of debt from the Kenyan companies and thereafter the Appellant would transfer to the Chinese companies’ bank account.

53. The Appellant averred that the Respondent issued it with a tax assessment on the deposits contained in the bank account without interrogating the source and that the Appellant objected to the said tax assessment on grounds that the Respondent had unlawfully subjected all the deposits in its bank account without putting into consideration that some deposits were non-business income where no income had been generated by the Appellant and that as such the assessment was erroneous.

54. The Appellant submitted that it had informed the Respondent through explanations and supported it with evidence and documentation with regard to the deposits made in its bank account which was that due to the nature of the Appellant’s business the Chinese companies had appointed the Appellant’s bank account to be utilized as the deposit bank account for the payment of debt owed from Kenya companies to the Chinese companies.

55. The Appellant further submitted that the Respondent failed to appreciate the fact that the deposits were made in its bank account by the Kenyan companies and were merely made towards the payment of debts and not for conducting business, which payments would thereafter be transferred to the Chinese Companies.

56. The Appellant averred that it was acting as an agent for the Chinese companies who were the principals in collecting these debts through its bank account where upon receiving it would thereafter transfer the amount to the relevant Chinese companies bank accounts.

57. It is the Appellant’s submission that during the period under investigations it received in its bank account several non-revenue deposits being the third party debt collections inter account transfers, related party transfers, director’s deposits, payment reversals, bank charges and other business expense, all of which were not income related, thus the Respondent erroneously subjected all its deposits to tax assessment.

58. Further, the Appellant submitted that the deposits amount applied by the Respondent in the computation were deposits made from non-business income and were therefore not subject to taxation. It further submitted that the assertion was supportable and verifiable from the Appellant’s bank accounts which documents were adduced before the Tribunal.

59. The Appellant averred that it has been co-operative with the Respondent in providing all necessary documentation objecting the assessment, a fact the Respondent blatantly denied. The Appellant further gave a detailed analysis and workings of all the disputed deposits made to its bank account but the Respondent failed to take the documents and workings into considerations.

60. The Appellant cited the case of Ergo Enterprises and Ergo Car Hire & Leasing Vs Commissioner of Investigations & Enforcement TAT No. 62 of 2021, where the Tribunal in setting aside an objection decision held that the Respondent was mandated to take into consideration the documents availed to it by the Appellant.

(ii) Whether the Respondent’s tax assessment was flawed with arithmetic errors. 61. The Appellant submitted that there existed summation errors in the Respondent’s workings with regards to the amount in the Appellant’s USD bank account and that as per its bank statement, the amount deposited in its bank account during the period under review was USD $ 25,700. 00 although the Respondent’s calculations showed that the amount was USD$ 2,570,000. 00 which overstated the amount received by the Appellant by USD$ 2,544,300. 00 or KShs. 254,430,000. 00.

62. The Appellant submitted that the Respondent relied on the wrong figures due to its fatal arithmetic errors and that therefore the Respondent ought to rework the calculations to apply the correct figures.

63. In view of the foregoing the Appellant submitted that the entire tax assessment issued by the Respondent in the sum of Kshs. 137,650,762. 00 and affirmed vide an Objection decision dated 6th July, 2022 was erroneous and unlawful since the Respondent placed reliance on incorrect information.

(iii) Whether the Respondent was proper in law in disallowing deduction of business expenses. 64. The Appellant submitted that the statutory anchorage for the deduction of expenses incurred wholly and exclusively to the generation of income is provided for under Section 15(1) of the Income Tax Act (CAP 470 of Kenya’s Laws).

65. The Appellant submitted that the Respondent issued it with a tax assessment that was inconsistent with Section 15(1) of ITA since the Respondent failed to take into account the expenses incurred wholly and exclusively by the Appellant in the generation of income.

66. The Appellant submitted that the Respondent’s assessment is contrary to the law erroneous and unreasonable in the circumstances as the Respondent failed to factor in all the expenses incurred wholly and exclusively by the Appellant in generating income hence arriving at a wrong assessment. To buttress this submission the Appellant cited the case of TenHos Sacco Society Limited Vs. Commissioner of Domestic Taxes TAT 413 of 219.

67. The Appellant further submitted that the Respondent’s tax assessment is erroneous as it disregarded material evidence and documentation availed to it and in addition it misinterpreted and misdirected itself as to the law and facts surrounding the Appellant’s case.

(iv) Whether the Respondent acted ultra vires in its mandate 68. That the law enjoins the Respondent to act strictly in accordance with the rule of law. That all its activities that bear upon the rights of taxpayers must meet the standards of fairness prescribed in the Constitution as well as the Fair Administrative Actions Act.

69. Further, it was its submission that it is a settled position in law that where statutory powers are being exercised or duties being performed , the same ought to be exercised and performed reasonably and fairly, Accordingly the Appellant averred that the Tribunal is ‘perfectly entitled’ to intervene where the discretion is not being exercised judicially, that is to say rationally and fairly and to arbitrarily, whimsically, capriciously or in flagrant disregard of the rules of natural justice. In this regard the Appellant cited Noor Maalim Husseint & 4 others Vs. Minister of State for Planning, National Development and Vision 2030 & 2 others [2012] EKLR.

70. The Appellant submitted that the Respondent ought to have properly interpreted the law and fairly exercised its statutory power to subject the non-business income that was the Appellant’s bank account to tax assessment. That by subjecting such non-business income to taxation amounted to abuse of office by the Respondent who, according to the Appellant, acted arbitrarily and in bad faith.

71. It was also the Appellant’s submission that failure by the Respondent to allow it to make deductions of business expenses incurred wholly and exclusively in generating income was unlawful as it was in blatant breach and /or violation of Section 15 of ITA and amounted to unfair administrative action contrary to Article 47 of the Constitution which stipulates that every person has the right to administrative action that is expeditious efficient lawful, reasonable and procedurally fair. Accordingly, the Appellant submitted that the Respondent’s actions resulted in unproportioned, unjust unlawful, unfair and excessive punishment as well as frustration to the Appellant as it acted outside of its statutory powers by failing to follow the prescribed provisions of the law.

(v) Whether the Respondent violated the doctrine of legitimate expectation 72. The Appellant submitted that the Respondent violated Section 15 (1) of ITA by disallowing expenses that were incurred wholly and exclusively in the generation of income. According to the Appellant this was in blatant regard and violation of the law as it had a legitimate expectation on the Respondent following strictly the provisions of the ITA.

73. The Appellant cited paragraph 133 in the case of Diana Kethi Kilonzo & Another v Independent Electoral & Boundaries Commission & 10 others [2013] eKLR and J.P. Bansal v. State of Rajastan & Another, Appeal (Civil)5982 of 2001 in deducing its view that it expected the Respondent to adhere to the relevant provisions of the law and allow expenses incurred in generating income. The Appellant also reiterated that in the practice and ordinary conduct of business it was expected that the Respondent would not subject to taxation the deposits made into its bank account that were non-income as income deposits are normally subjected to taxation.

74. The Appellant submitted that its right of legitimate expectation was violated as the Respondent made tax assessment on deposits made in it bank account which were unrelated to its business income thus depriving the Appellant of some benefit or advantage which it is expected to enjoy and prayed for the Tribunal to allow the Appeal.

Submissions By The Respondent 74. The Respondent provided a background analysis of the facts and timelines from the time it issued the assessment on 14th October, 2021, the Objection of the Appellant on 25th November, 2021 and the final decision which was an invalidation decision by the Respondent on 6th July, 2022.

75. The Respondent brought out the following issues in its Submissions along the following headings:

i. Whether the Appellant’s Objection was valid? 76. The Respondent submitted that since the Appellant failed to provide all the necessary documentation to support its objection the Appellant cannot fault the Respondent for arithmetic errors and acting ultra vires.

ii. Whether the Objection Invalidation Notice was valid 78. The Respondent submitted that it acted pursuant to Section 51(11) of TPA by submitting that it was in constant communication with the Appellant since the date it lodged the objection. It further submitted that the Appellant did not lodge a valid objection and cited Ngurumani Traders Limited Vs. Commissioner of Investigations and Enforcement (TAT No. 125 of 2017) to support its claim that where there is improper objection the Respondent is at liberty to confirm the assessment.

79. The Respondent also cited Boleyn International Limited vs Commissioner of Domestic Taxes (TAT No. 55 of 2019) where it was held as follows‘…. on 8th March, 2018, the Appellant lodged an objection with the Respondent . However, the said objection did not reiterate the grounds of objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide the relevant documents in support of its alleged objection. Therefore, there was no conceivable way the Respondent would have considered the Appellant’s objection as the same did not place itself with in the parameters of Section 51(3) of the TPA.’

iii. Whether the Respondent erred in assessing bank deposits in determining taxable income during the assessment period. 80. The Respondent submitted that it has the powers under Sections 29 and 31 of TPA to issue an assessment based on their best judgment and relying on all the information at its disposal. The Respondent submitted that it used the information available to it through the Appellant’s bankers to the best of its judgment in making amendments to the original assessment of the Appellant during the periods under investigations.

81. The Respondent averred that it was guided to use the indirect method of using the banking deposit due to the fact that the Appellant failed to demonstrate loan items and inter-bank transfers as alleged by it.

82. The Respondent went on to submit that its tax investigation program embraces several methods and techniques of determining and diversifying a taxpayer’s income if it is to be an effective component of a balanced compliance management strategy. That detecting and deterring non-compliance requires more than a mere examination of a taxpayer’s books and records and necessitates an analysis of the taxpayer’s financial affairs to correctly assess tax liabilities.

83. The Respondent submitted that indirect methods of investigations like the use of bank deposits involve the determination of tax liabilities through an analysis of a taxpayers’ financial affairs utilizing information from a range of sources beyond the taxpayer’s declaration and formal books and records. Assessments, according to the submissions of the Respondent are often based on circumstantial evidence indicating a reasonable estimate of the taxpayer’s correct liability.

84. The Respondent further submitted that the bank deposits method is based on the premise that money received must either be deposited or spent. It further submitted that the approach is useful if an analysis of bank accounts and a taxpayer’s cash expenditure indicates a likelihood of undeclared income and the taxpayer makes regular payments into bank accounts that appear to be from a taxable source.

85. The Respondent averred that since it had used the banking method to raise the assessment, the burden of proof now shifted to the Appellant to explain which of the deposits that had been included in the assessment was not from a taxable source, was already taxed or was not income. To buttress its argument, it cited Atronix Limited vs. Comm DTD (TAT 551 of 2021) where it was found that the Appellant failed to provide material information for the Respondent to determine appropriate taxes payable on its part. It also cited Commissioner Investigations and Enforcement Vs. Kidero (Income Tax Appeal E028 of 2020) [2022] KEHC 52 (KLR) [Commercial and Tax].

iv. Whether the Respondent erred in disallowing expenses incurred by the Appellant during the assessment period 86. The Respondent submitted that Section 15 of the ITA provided for deductions allowed in ascertainment of total income and further submitted that it gave the Appellant the opportunity to provide information and evidence to support its expenses. The Respondent further submitted that pursuant to Section 54A of the ITA a person carrying out a business is expected ‘to keep records of all receipts and expenses of goods purchases sold and accounts, books deeds contracts and vouchers adequate for the purpose of computing tax.’

87. The Respondent further cited Leah Njiru V. Commissioner of Investigations and Enforcement Kenya Revenue Authority & Another [2021] ELR to buttress its submission that the Respondent could have allowed deductions of expenses under Section 15(1) of the ITA if they were supported to its satisfaction.,

v. Whether the Respondent’s actions are contrary to legitimate expectation and abuse of authority 88. The Respondent submitted that Section 4(3) of the TPA mandates the Respondent to ensure due compliance with tax laws of any tax payers and Section 24(2) of the TPA provides that the Respondent is not bound by the information provided by a taxpayer on its tax return.

89. The Respondent further submitted that upon completing its investigations it found that the Appellant to be non-compliant with tax laws and if it had been fully compliant then the tax investigations and assessments issued against the Appellant would not have been necessary.

90. According to the Respondent there could not be legitimate expectation against the clear provisions of statute and it cited Republic v. Kenya Revenue Authority; Proto Energy Limited (Exparte) [Judicial Review Application E023 of 2021] {2022} KEHC 5 (KLR) and Communications Commission of Kenya & 5 Others v Royal Media Services Limited & 5 others [2014] EKLR.

91. The Respondent submitted that Section 56(1) of the TPA provides that the burden of proving that a tax assessment is wrong lies with the taxpayer and the taxpayer failed to prove to the satisfaction of the Commissioner that the assessment is wrong and that despite making a request for information from the Appellant to support its objection, no such information was availed leading to the assessment being confirmed.

92. The Respondent, in conclusion submitted that it was correct in bringing to charge all the bank deposits from which the Appellant had failed to demonstrate to be from sources from which tax is not chargeable or that the taxes had already been levied up and second that the Appellant failed to prove the incurred expenses.

93. The Respondent prayed that the Tribunal finds that the Invalidation Notice dated 6th July, 2022 be upheld, the additional assessment be confirmed and that the Appeal be dismissed with costs.

Issues For Determination 94. The Tribunal has analysed the pleadings and submissions of the parties and arrived at the considered view that a single issue falls for its determination, namely:-Whether the Respondent’s Invalidation of the Objection Notice dated 6th July, 2022 was proper in law.

Analysis And Findings 95. The Respondent vide an Invalidation of the objection notice dated the 6th July, 2022 issued a decision invalidating the Appellant’s notice of objection under Section 51(3) of the Tax Procedures Act for failure by the Appellant to provide documents in support of its objection and thereby proceeded to confirm its tax assessment on the Appellant.

96. Section 51(3) of the Tax Procedures Act provides as follows with regard to validity of notices of objection:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if –a.–b.–c.all the relevant documents relating to the objection have been submitted.”

97. The Appellant was availed several opportunities subsequent to its lodging the notice of objection to provide documents in support of the objection and to accordingly validate the objection, to no avail.

98. The Respondent is enjoined in law to issue an objection decision when a taxpayer has validly lodged a notice of objection and not otherwise whatsoever. This is immortalized under Section 51(8) of the Tax Procedures Act which provides as follows:-“where a notice of objection has been validly lodged in time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and the Commissioner’s decision shall be referred to as an “objection decision”.

99. The Respondent following the Appellant’s failure to lodge a valid objection did not issue an objection decision in respect of the Appellant’s notice of objection dated 25th November, 2021. Faced with a decision of invalidation what was available to the Appellant was to appeal against the Respondent’s exercise of its powers to invalidate an objection to an assessment and not to challenge the confirmation of the tax assessment as the notice of objection was not dealt by the Respondent on its merits.

100. The Tribunal notes that the Appeal as lodged by the Appellant was calculated at challenging the tax assessment as opposed to challenging the invalidation of the notice of objection.

101. The Tribunal in the circumstances finds that the Appellant failed to discharge its burden in demonstrating in what manner the Respondent failed to exercise its powers appropriately under Section 51(3) of the Tax Procedures Act by invalidating the notice of objection. The Appellant did not in any manner indicate or demonstrate that it supplied the Respondent with the documents in support of the objection at the instance of lodging the notice of objection or subsequent to the requests by the Respondent. The decision to invalidate the notice of objection is to that extent merited.

Final Decision 102. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s Invalidation Notice dated 6th July, 2022 be and is hereby upheld.c.Each party to bear its own costs.

103. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF SEPTEMBER, 2023. ERIC NYONGESA WAFULA...............CHAIRMANDELILAH K. NGALA...........MEMBERCHRISTINE A. MUGA...........MEMBERGEORGE KASHINDI...........MEMBERMOHAMMED A DIRIYE...........MEMBERSPENCER S. OLOLCHIKE...........MEMBER