[2023] KEHC 23308 (KLR)

Thwama Building Services Limited v Commissioner of Domestic Taxes (Income Tax Appeal E016 of 2022) [2023] KEHC 23308 (KLR) (Commercial and Tax) (12 October 2023) (Judgment)

Neutral citation: [2023] KEHC 23308 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Income Tax Appeal E016 of 2022

A Mabeya, J

October 12, 2023

Between

Thwama Building Services Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. This is an appeal against the decision of the Tax Appeals Tribunal delivered on 11/2/2022. A brief background case is that the appellant rendered construction services to the University of Nairobi (“the University”) and a dispute ensued with regard to payment of the services rendered by the appellant.

2. On its part, the University paid Withholding VAT to the respondent and applied for a refund. The respondent reviewed the affairs of the appellant for the months January and February and noted inconsistencies between the returns filed by the appellant and the supplies and invoices claimed.

3. In this regard, the respondent raised an additional assessment of Kshs. 5,599,656/- on 19/11/2019. The appellant lodged an objection to the assessment and the respondent asked for supporting documents to verify the appellants tax compliance. The documents requested were not availed and the respondent confirmed the assessment.

4. Aggrieved by the objection decision, appealed against to the Tax Appeals Tribunal (“the Tribunal”). In its judgment of 11/2/2022, the Tribunal dismissed the appeal. Dissatisfied with that decision, the appellant has lodged this appeal through a memorandum of appeal dated 10/3/2022 setting out 12 grounds of appeal. The grounds can be summarized as follows: -a.That the Tribunal erred by not holding that the appellant had an arguable appeal with a high chance of successb.That the Tribunal erred in failing to consider that the respondent had no basis for raising the additional assessment on VATc.That the Tribunal erred in law and fact in failing to observe the rules of justice.

5. The respondent opposed the appeal through the statement of facts dated 13/4/2022. He contended that input VAT was disallowed because the appellant failed to provide sufficient evidence to support its case. That a perusal of the documents provided by the appellant showed inconsistencies in the returns filed by the suppliers.

6. That the assessment was based on the information that had been provided in view of the inconsistencies that had been discovered in the appellant’s ledgers. According to the respondent, since the appellant had provided insufficient documents, the respondent could only make an assessment based on the available information. In this regard, the respondent observed that the appellant had not paid all its tax dues and was indebted to a tune of Kshs 5,599,656/-.

7. The appeal was canvassed by way of written submissions. The respondent’s submissions buttressed the facts laid out in its statement of facts. Counsel submitted that the burden of proof was on the appellant to produce the required documents to assist in the assessment. It was further submitted that there had been inconsistencies in the returns that had been filed by the appellant with respect to the returns filed by the suppliers as this showed a variance as per the VAT returns. That the appellant did not declare all the income earned hence the reason for the variances.

8. I have considered the entire record. The first and second ground of appeal, the appellant challenged the Tribunals finding in not allowing its appeal. The gist of the appellant’s case was that the additional assessment of Kshs 5,599,656/- was punitive and erroneous as it was against the provisions of section 17 of the VAT Act 2013 which provides for credit input Tax against output Tax. The respondent was therefore faulted for not making deductions on the tax payable between the input tax and output Tax.

9. On its part, the respondent argued that a review of the appellant’s affairs demonstrated some inconsistencies which prompted him to raise the additional assessment. It was contended that the appellant failed to provide the necessary information to support its claim and consequently the respondent confirmed the assessment.

10. Section 17 of theVAT Act allows a taxpayer to claim a credit for input VAT against the output VAT for the purpose of ensuring that the input VAT is effectively passed to the final consumer. For purposes of input tax, section 17(3) provides for the documentation required. It provides that:-“(3)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).”

11. The respondent is also empowered under section 59 of the Tax Procedures Act and section 43 of the VAT Act to request for additional information to ascertain the tax chargeable. Section 43 of the VAT Act 2013 provides for the production of such records as follows: -43. Keeping of records(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.(2)The records to be kept under subsection (1) shall include—(a)copies of all tax invoices and simplified tax invoices issued in serial number order;(b)copies of all credit and debit notes issued, in chronological order;(c)purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name;(d)details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;(e)tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;(f)copies of stock records kept periodically as the Commissioner may determine;(g)details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; and(h)such other accounts or records as may be specified, in writing, by the Commissioner.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorized officer for inspection and shall give the officer every facility necessary to inspect the records.(4)For the purposes of this section, the Commissioner may, in accordance with the regulations, require any person to use an electronic tax register, of such type and description as may be prescribed, for the purpose of accessing information regarding any matter or transaction which may affect the tax liability of the person.(5)A person who contravenes any of the provisions of this section commits an offence.”

12. On the other hand, section 59 (1) of the Tax Procedures Act provides as follows: -“(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorized officer may require any person, by notice in writing, to—(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

13. In the present case, the Tribunal found that the appellant had failed to avail the necessary information and therefore failed to discharge the burden of proof.

14. Section 30 of the Tax Appeals Tribunal Act and section 56 of the Tax Procedures Act imposes the burden of proof on the tax payer to prove that an assessment was wrong or that it was excessive. In Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR, the court laid out a roadmap on balance of proof and how it should be applicable in tax matters. The court stated: -“Further, the tax laws reverse the well-known principle of evidence of “he who alleges must proof”. In this regard, the tax authorities would assess what it considers to be the tax due from a taxpayer and the tax laws would burden the tax payer to disprove that the assessment or tax demanded is wrong or incorrect. This is borne by the fact that the assessment and demand is ordinarily made way after the tax payer has assessed himself and made a declaration of what according to him is the tax payable and has already paid such tax. The burden is therefore shifted to the tax payer because, the tax authority has to rummage through the documents of the tax payer years after the tax payer assessed himself and paid what he considered to be his tax liability.”

15. In Republic v Kenya Revenue Authority Proto Energy Limited (JR Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment), the court stated that: -“The most significant justification for placing the burden of proof on the tax payer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability. It is simply fair to place the burden of persuasion on the taxpayer, given that he knows the facts relating to his liability, because the commissioner must rely on circumstantial evidence, most of it coming from the taxpayer and the taxpayer's records. The taxpayer must present a minimum amount of information necessary to support his position. This safety valve seems to place the burden of production on the taxpayer without relieving the Commissioner of the overall burden of proof. The tax payers’ evidence must meet this minimum threshold. A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.”

16. In view of the foregoing, the evidentiary burden lied with the appellant to prove that the additional assessment was wrong. The additional documents had been requested to demonstrate that the assessment was excessive. By failing to produce the same, the appellant failed to discharge its burden and the Tribunal cannot be held to have erred. Those grounds fail.

17. On the 3rd ground, it was alleged that the Tribunal’s decision was against the rules of natural justice. I have considered the entire record. There was evidence that the appellant was accorded the opportunity to present its case. There was no evidence that it was denied any opportunity to argue its case as best as it could. Accordingly, that ground also fails.

18. Accordingly, this court finds that the appeal lacks merit and is therefore dismissed with costs.

It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF OCTOBER, 2023. A. MABEYA, FCI ArbJUDGE