[2024] KETAT 708 (KLR)

Transmara General Store Limited v Commissioner for Domestic Taxes (Tax Appeal 134 of 2023) [2024] KETAT 708 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 708 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 134 of 2023

Grace Mukuha, Chair, Jephthah Njagi, E Komolo, G Ogaga & W Ongeti, Members

May 9, 2024

Between

Transmara General Store Limited

Appellant

and

Commissioner for Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose principal activity is wholesale and retail trade of hardware materials and transportation.

2. The Respondent is a principal officer of Kenya Revenue Authority, which Authority’s mandate is the collection of revenue and the administration of tax laws within the Republic of Kenya.

3. The Appellant was subjected to returns review covering Corporation tax and VAT declarations for the period January 2015 to December 2020. That the review was based on the risks identified in the Appellant's filing status.

4. Vide a notice dated 10th March 2022, the Appellant was notified that records held with the Respondent indicated that it had been filing credit returns since the year 2015. The Appellant was required to provide supporting documents for its inputs and give proper explanation as to why it was constantly on credit.

5. The Respondent sent a letter dated 29th March 2022 further requesting for certain documents from the Appellant to ascertain the correctness of the tax declarations.

6. The Appellant subsequently provided the workings for the variances through the document dated 16th June 2022. Consequently, the Appellant was notified via email on 23rd June 2022 and 29th June 2022 of the Respondent's intention to issue additional assessments for failure to reconcile the differences.

7. The Respondent issued additional assessments dated 31st August 2022 for VAT amounting to Kshs. 45,846,812. 00 as well as additional assessments dated 1st September 2022 for Corporation tax amounting to Kshs. 58,657,150. 00 inclusive of penalties and interest.

8. The Appellant lodged notices of objection to the additional assessments dated 27th October 2022 and the Respondent issued an objection decision on 3rd November 2022.

9. The Appellant aggrieved by the decision appealed against the same on 10th February 2023.

The Appeal 10. The Appeal is premised on the following grounds laid out in the Memorandum of Appeal filed on 10th February 2023:a.The Commissioner erred in law in issuing both Corporate tax and VAT assessment for the years 2014 to 2020. b.A valid objection was lodged on 28th October 2022 objecting to the above assessments. Inspite of the objections the Respondent went ahead and confirmed the assessment on 3rd November 2022 disregarding the fact that the Respondent had requested for the filing of the returns and accounts.c.The Commissioner erred in law in issuing objection decision on 3rd November 2022 disregarding the facts and issues raised in the objection filed.d.The Commissioner erred in law in issuing the objection decision of the assessments for the above period without even verifying the returns the Appellant had filed.

Appellant’s Case 11. The Appellant’s case is premised on:a.The Statement of Facts dated 9th February 2023 and filed on 10th February 2023b.The Written Submissions dated and filed on 22nd August 2023 together with the documents attached thereto and proceedings before the Tribunal.

12. That the Respondent issued Corporate tax and VAT assessments for the years 2014 to 2020 on 3rd November 2022 and a valid objection application was lodged and the objection acknowledgement receipt received for all the above taxes dated 28th October 2022.

13. That on 3rd November 2022 the Respondent issued the objection decision for the period 2015 to 2018 disregarding the objections filed by the Appellant and without verifying the returns the Appellant had filed.

14. That on 28th October 2022 letters were written to the Respondent objecting to the additional assessments issued but the Respondent did not respond to the letters and completely disregarded the issues mentioned.

15. That all queries raised were responded to and answered satisfactorily hence the need to accept the tax returns and accounts as they are.

16. The Appellant submitted that the Respondent’s actions resulted in unproportional, unjust, unfair and excessive punishment to the Appellant .

Appellant’s prayers. 17. The Appellant made the prayers that the Commissioner:a.Be ordered to accept the returns filed.b.Withdraws all the estimated assessments and reverses the debit vouchers issued.

The Respondent’s Case 18. The Respondent’s case is premised on:a.The Statement of Facts dated 9th March 2023 and filed on 10th March 2023. b.The Written Submissions dated 30th October 2023 and filed on 31st October 2023.

19. The Respondent submitted that it issued additional assessments to the Appellant dated 31st August 2022 for VAT and Corporation tax all totaling Kshs. 104,503,962. 00 and the Appellant consequently lodged objection notices to the same on 28th October 2022.

20. The Respondent submitted that a review of the bank statements availed by the Appellant in support of its objection showed that the Appellant had substantial amounts of returned cheques with respect to Corporation tax which were not supported. The Respondent therefore added back the variances established to the Appellant’s income and brought it to charge.

21. That further, a review of the sales turnover as per the financial statements compared to sales as per the VAT returns showed unexplained variances that were brought to charge at 16% in 2016 and 14% in 2020 years of income.

22. That with regard to VAT, the review established that the Appellant was accounting for zero rated supplies without support of the corresponding proof of purchases for the same. That in addition, it was noted that there were no supporting documents for the zero-rated supplies in stock at the end of each period and the Respondent therefore adjusted the same.

23. That in light of the foregoing, it is the Respondent's contention that the Appellant has not provided or offered any explanation with respect to these variances and as such this was the basis for the rejection of the Appellant's notices of objection and the consequential issuance of the objection decision.

24. The Respondent stated further that on 10th March 2022, 29th March 2022 and 23rd June 2022 the Respondent sought to be supplied with copies of documents in support of the tax credits, returned cheques and sales variances but the same were not provided.

25. That the Respondent in exercise of its mandate as per Section 31 of the TPA considered the information available and to the best of its judgment assessed the correct tax by disallowing the unsupported credit claimed and issued Assessment Orders.

26. The Respondent submitted that in the absence of the supporting documents and/or the return from the suppliers, the Respondent had no choice but to exercise its mandate in the aforementioned Section and disallow the credits claimed and assess the variances to Corporation tax.

27. The Respondent maintained that the assessments were issued after consideration of all information provided by the Appellant and in pursuant to the law and the Appeal should be dismissed on that ground.

28. The Respondent further submitted that Section 56 (1) of the Tax Procedure Act and Section 30 the Tax Appeals Tribunal Act provide that in all cases the Appellant has the burden of proving where an appeal relates to an assessment, that the assessment is excessive; or in any other case, that the tax decision should not have been made or should have been made differently.

29. The Respondent submitted that the Appellant can only discharge its burden of proof by producing documents that are relevant to the tax head and the tax period in question.

30. The Respondent also submitted that Section 17 (3) of the VAT Act provides for the documents to be produced in a claim for Input VAT. That the Appellant provided a working of the variances which the Respondent submitted were not primary documents to proof a claim for credits.

31. The Respondent averred that it is not enough to provide documentation listed in VAT Act, Income Tax Act and/or the Tax Procedures Act. That the documentation provided must be relevant to the period of taxation and the transactions from which the tax credit and sales are claimed. The Respondent submitted that the Appellant did not provide any relevant documents that could be used by the Respondent to make any amendments to the assessment made earlier.

32. It is the Respondent's submissions that the Appellant failed to discharge its burden of proof in failing to provide the relevant supporting documents. That in the absence of the said documents, the presumption of correctness of the assessment made by the Respondent remains.

33. The Respondent in support of its case relied on the cases of Commissioner of Investigations & Enforcement vs Dr. Evans Kidero [2020] Eklr;Mary Wanjiru Kinyua vs Commissioner of Investigations & Enforcement [2022] Eklr and Ushindi Ltd vs Commissioner of Investigations & Enforcement- [2020] Eklr amongst Others. Respondent’s Prayers

34. The Respondent prayed that the Tribunal do:a.Dismiss the appeal with costs to the Respondentb.Uphold the objection decision dated 3rd November 2022.

Issue For Determination 35. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises a single issue for its determination as set out hereunder.Whether the Respondent was justified to issue VAT and Corporation Tax Assessments.

Analysis And Determination 36. This dispute arose from the Respondent’s additional assessment of VAT and Corporate tax on the Appellant on 31st August 2022 and 1st September 2022 amounting to Kshs. 104,503,962. 00 in total.

37. The VAT period covered in the assessments spanned the years 2015 to 2019. The law is very clear that the tax Authorities can only issue assessment(s) before the expiry of five years from the date of filing the self-assessment by the taxpayer. This is as per the provisions of Section 31 (4) of the TPA which provides as follows:“The Commissioner may amend an assessment –(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the tax payer, at any time; or(i)for a self-assessment, the date that the self-assessment tax payer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the tax payer of the assessment.”

38. The exception applicable where the Respondent may issue an assessment beyond the five years is only where the Respondent can prove gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, which the Respondent did not allege or prove in the present matter.

39. The Tribunal reiterates its holding in a similar matter TAT Appeal number 411 of 2021, City Gas East Africa v Commissioner of Investigations & Enforcement where Tribunal held that the Respondent erred in assessing the Appellant for a period longer than five years when there was no evidence of wilful neglect or fraud.

40. Consequently, the Tribunal finds that the Respondent’s assessment on VAT was illegal for the periods from 2015, 2016 and until August 2017 is concerned and the same was unjustified.

41. The Respondent issued its assessment to the Appellant vide various assessment orders dated 31st August 2022 and 1st September 2022 for Corporate tax and VAT whereupon the Appellant lodged its objection notices to all the assessments.

42. The Appellant claimed in the objections that it had provided the Respondent with all the information and documents. The Respondent on the other hand claimed that the Appellant did not provide any documents to support its objection notices.

43. The correspondence between the parties before the assessment and strictly between March 2022 and June 2022 shows the Respondent requesting for documents from the Appellant some of which were provided and others were not. However, it is clear from the objection notices filed herein by the Appellant that it did not file supporting documents to buttress its objections. It has also not attached any documents to its pleadings in the Appeal to demonstrate otherwise.

44. It is trite law that in tax matters the Appellant always bears the burden to prove the Respondent’s assessments as excessive, should not have been made or should have been made in a different way. This is well laid down in Section 30 TAT Act which states as follows:“In a proceeding before the Tribunal, the Appellant has the burden of proving-(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently”

45. Similarly, Section 56 (1) of the TPA lays down as follows in relation to burden of proof;“In any proceedings under this Part, the burden shall be on the tax payer to prove that a tax decision is incorrect”.

46. The law requires under Sections 54A of the Income Tax Act, Section 43 of the VAT Act, and Section 23 of the TPA that taxpayers will at all times keep proper records as laid out in the three Sections of the law and produce the same as and when required to do so either by the taxing Authority or for the purpose of proving tax compliance matters.

47. The Tribunal also notes that case law supports the legal provisions above stated as was held in TAT No. 70 of 2017 Afya X-ray Centre Limited vs Commissioner of Domestic Taxes in which it was stated:“From then foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondent's finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent's assessment after all the Appellant by law bears the burden of proof.... "

48. Likewise, in Mulherin vs Commissioner of Taxation [2013] FCAFC 115 the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.

49. The Tribunal notes that the taxpayer failed to produce the relevant documents to prove its case and in the circumstances the Respondent assessed it as per the available records as allowed by the law under Section 24 (2) of the TPA which states as follows:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a tax payer and the Commissioner may assess a tax payer’s tax liability using any information available to the Commissioner”.

50. The upshot of the above is that the Appellant failed to avail the necessary documents and or information to the Respondent at the appropriate time and the Respondent was therefore justified to assess the former as per the information available.

Final Decision 51. In view of the foregoing, the Tribunal finds that the Appeal partially succeeds and accordingly makes the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 3rd November 2022 be and is hereby varied in the following terms:i.The VAT assessments for the periods in 2015, 2016 and until August 2017 be and are hereby vacated.ii.The VAT assessments for the periods from September 2017 to December 2019 be and are hereby upheld.iii.The Corporation tax assessments for the period 2017, 2018 and 2019 be and are hereby upheld.c.Each party to bear its own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024GRACE MUKUHA - CHAIRPERSONJEPHTHAH NJAGI - MEMBERDR. ERICK KOMOLO - MEMBERGLORIA A. OGAGA - MEMBERDR. WALTER J. ONGETI - MEMBER