[2023] KETAT 873 (KLR)

Trophy Transporters Limited v Commissioner of Domestic Taxes (Tax Appeal 1186 of 2022) [2023] KETAT 873 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 873 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1186 of 2022

RM Mutuma, Chair, W Ongeti, M Makau, EN Njeru & BK Terer, Members

December 20, 2023

Between

Trophy Transporters Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act and has its operations based at Kitale Town.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority 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 raised additional assessments via iTax for Income tax on 10th June 2022 and VAT on 10th June 2022 and 13th November 2022 for the period 2017 to 2020 for Kshs 1,749,740. 00 and Kshs. 13,471,100. 87, respectively.

4. The Appellant raised an objection on iTax on 14th June 2022. The Respondent issued a Confirmation Assessment Notice via iTax dated 1st August 2022 fully rejecting the objection of 14th June 2022 and a Late Objection Rejection Notice dated 24th June 2022 for failure to support the late objection.

5. Aggrieved by the Respondent’s decision, the Appellant filed this Appeal on 13th October 2022, with leave of this Tribunal.

The Appeal 6. The Appeal is premised on the following grounds listed in the Memorandum of Appeal dated 11th October 2022 and filed on 13th October 2023: -a.The Commissioner of Domestic Taxes erred in law and fact by charging VAT on income that was not earned, resulting in VAT payable of Kshs. 1,749,740. 32 for December 2018 and December 2019. b.The Commissioner of Domestic Taxes erred in law and fact by introducing additional income of Kshs. 21,689,218. 00 in the year 2018 which was not received by the company in that year of income.c.The Commissioner of Domestic Taxes erred in law and fact by not allowing the company to deduct expenses that were exclusively incurred by the company in the generation of income in the years 2017, 2019, and 2020.

The Appellant’s Case 7. The Appellant’s case was premised on its;a.Statement of Facts filed on 13th October 2022 together with the documents annexed thereto.b.Written submissions dated 26th April 2023 and filed 27th April 2023.

8. It stated that the Respondent did an estimated assessment of its VAT and Income tax for December 2017, December 2018, December 2019, and the years 2017, 2018, 2019, and 2020 and issued an assessment notice requiring the Appellant to pay sums of Kshs. 1,749,740. 00 and Kshs. 13,471,100. 87 respectively.

9. It averred that it wrote to the Respondent on 14th June 2022 an Objection to the Respondent's assessment.

10. The Appellant contended that the Respondent at no other time wrote to it concerning the objection as required by the Tax Procedures Act in case an objection is not validly lodged and therefore as per Section 50 (3) (4) the objection was valid.

11. The Appellant averred that the Respondent further confirmed its decision on iTax platform on 24th June 2022 and 1st August 2022.

12. It stated that it filed a Notice of Appeal as per Section 52 of the Tax Procedures Act 2015 on 11th October 2022, and 12th October 2022 to the Tax Appeals Tribunal at Nairobi.

13. The Appellant submitted that the Respondent failed to disclose the substantive legal provision on which it raised both its assessments and the Objection decisions. It added that the Respondent failed and/or declined to demonstrate how it arrived at the amount of Kshs. 15,220,841. 19 as indicated in its Objection decisions as the decisions do not contain any statement of findings on the material facts nor are there any adequate reasons for confirming the contested assessment.

14. It argued that the Objection decision is null and void, of no legal effect, invalid, and should be set aside.

15. The Appellant submitted that Section 15 (1) of the Income Tax Act applies to an expenditure that has been incurred in the production of the Appellant's income. It reiterated that the Respondent was provided with evidence in support of the expenses and has without any reasonable factual or legal justification opted to ignore the same.

16. It argued that it is particularly galling, and quite beyond the pale for the Respondent to claim there were no expenses incurred, to exclude them from the Appellant's returns while retaining those sales for the alleged non-existent goods as part of the Appellant's revenue when computing the additional Corporation tax.

17. It reiterated that despite confirming that there was proof that the Appellant did incur expenses, the Respondent opted to ignore the same and concluded that the suppliers were non-existent.

18. It asserted that the Appellant was cooperative throughout the investigation exercise and provided the Respondent with all the documents and/or information requested.

Appellant’s prayer 19. The Appellant urged the Tribunal to allow the Appeal with costs as the tax imposed is not only illegal, but it was also unfair and unreasonable.

The Respondent’s Case 20. The Respondent’s case is premised on its;a.Statement of Facts dated 16th October 2022 and filed on 16th November 2022 together with the documents annexed thereto; andb.Written submissions dated and filed on 15th February 2023.

21. The Respondent stated that the onus of proving erroneous assessments lies with the taxpayer. It added that the law places the onus of proof in tax objections on the Appellant who in this case failed to avail evidence that would support a contrary position or that would have guided the Respondent in arriving at a different decision.

22. It averred that it could not ascertain the correct records of the company since the documents supporting the expenses and income were not provided as requested. Further, the Respondent posited that the determination of the tax liability of a taxpayer depends on the submission of necessary records.

23. The Respondent contended that the Appellant failed to lodge a proper objection as the Appellant did not provide any grounds of objection nor any records to explain the queries raised by the Respondent.

24. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to the request for documents hence no relevant documents or records were provided to support the objection by the Appellant. It reiterated that the assessment was made based on the only available information based on the best judgment by the Respondent.

25. It cited Section 59 (1) of the Tax Procedures Act and contended that the law empowers the Respondent to require the production of such documents vide issuance of notices as deemed necessary in the determination of tax liability.

26. The Respondent stated that after conducting various analyses it discovered that the Appellant had undeclared sales for VAT purposes and was therefore prompted to issue an additional assessment.

27. It averred that it could not allow the Appellant to deduct expenses allegedly incurred in the generation of income in the years 2017, 2019, and 2020 because there was no documentation to support the same.

28. The Respondent contended that it had to disallow expenses for lorries' running costs, tyres, tubes, spares, and repairs due to a lack of supporting records.

29. It stated that it resorted to data obtained from Kenya Seed Company Limited, the main customer for the Appellant, to establish the amount of Corporation tax due to the Respondent.

30. The Respondent relied on Section 24 (1) of the Tax Procedure Act contending that the law empowers the Respondent to carry out the assessment based on the information available.

31. It further relied on Section 31 of the Tax Procedure Act and averred that it empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the best judgment.

32. The Respondent submitted that the Appellant claimed lorries running costs, tyres, tubes, spares, and repairs as expenses but failed to provide documents to support the same.

33. It contended that it analyzed the Appellant's banking’s and established undeclared sales in the year 2018 and undeclared transport income in the year 2017. These were brought to charge accordingly.

34. The Respondent reiterated that the onus of proving erroneous assessments lies with a taxpayer and the onus of proof in tax objections is on the Appellant who in this case failed to avail evidence that would support a contrary position or that would have guided the Respondent at arriving at a different decision.

35. The Respondent asserted that the determination of a taxpayer's tax liability depends on the submission of necessary records and the taxpayer has an obligation under Sections 23, 58, and 59 of the Tax Procedures Act to maintain proper records and produce the same upon request by the Commissioner.

36. The Respondent submitted that the Appellant failed to lodge a proper Objection as the Appellant did not provide any grounds of objection nor any records to explain the queries raised by the Respondent.

37. The Respondent maintained that the Appellant was uncooperative in the provision of relevant records and failed to respond to the request for documents hence no relevant documents or records were provided to support the objection by the Appellant. As a result, the assessment was made based on the only available information based on the best judgment by the Respondent.

38. It relied on Section 59 (1) The Tax Procedures Act and maintained that it is empowered to require the production of such documents vide issuance of notice as deemed necessary in the determination of tax liability.

39. The Respondent submitted that after conducting various analysis, it was discovered that the Appellant had undeclared sales for VAT purposes and was therefore prompted to issue an additional assessment.

40. It reiterated that it could not allow the Appellant to deduct expenses allegedly incurred in the generation of income in the years 2017, 2019, and 2020 because there was no documentation to support the same adding that it disallowed expenses for lorries running costs, tyres, tubes, spares, and repairs due to lack of supporting records.

41. It maintained that it resorted to data obtained from Kenya Seed Company Limited, the main customer for the Appellant, to establish the amount of Corporation tax due to it and cited Section 24 (1) of the Tax Procedure Act submitting that it empowers the Respondent to carry out assessment based on the information available.

42. It relied on Section 31 of the Tax Procedure Act to buttress its position that it is empowered to make alterations or additions to original assessments from available information for a reporting period based on the best judgment.

43. It further relied on the case of Primarosa Flowers Limited vs. Commissioner of Domestic Taxes [2019] eKLR where the decision in Mulherin vs. Commissioner of Taxation [2013] FCAFC 115 was quoted and submitted that by failing to provide evidence to controvert the Respondent's assessment, the Appellant failed to discharge the burden of proof as provided under Section 30 of the Tax Appeals Tribunal Act.

44. The Respondent asserted that it used the taxpayer's income tax returns and followed proper procedures as provided in the law therefore the assessments were not at all unreasonable in the circumstances.

45. It cited the case of Tumaini Distributors Company (K) Limited vs. Commissioner of Domestic Taxes, the High Court upheld the decision of the Tribunal where the High Court found out that the Appellant had failed to provide the relevant documents despite several requests by the Commissioner. The parties also held meetings hence the claim that there were no meetings was baseless. The Tribunal had underscored the importance of self-assessment and held that it was the duty of the taxpayer to make full disclosure in good faith. It further held that the Company failed to comply with its duty to provide full documentation. The Tribunal held that the Company complies with its duty to provide full documentation. It then held that since the Company did not provide all the documents, the Commissioner was correct in reaching the assessment based on the material available.

The Respondent’s prayers 46. The Respondent consequently prayed for the Tribunal to:a.Dismiss this Appeal and uphold the assessments and resultant interest and penalties as issued.b.Award costs of this Appeal to the Respondent.

Issues For Determination 47. After perusing the Memorandum of Appeal and parties' Statements of Facts together with their submissions and documentation attached therewith, the following crystalized as the main issue for the Tribunal’s determination:Whether the Respondent’s Late Objection Rejection Notice dated 24th June 2022 were proper in law.

Analysis And Findings 48. The Tribunal proceeds to analyze the issue as follows.

49. The Respondent contended that its decision to reject the late Objections were proper since the Appellant had raised its Objection without filing the necessary documents to support its Objection thus invalidating the same.

50. The Appellant reiterated that the Respondent’s decisions were invalid since it at no other time wrote to it concerning the invalidity of its objection as required by the Tax Procedures Act.

51. It also reiterated that the Respondent’s decisions did not provide or disclose the substantive legal provision on which it raised both its assessments and the decisions.

52. The Tribunal upon perusal of the documentation presented by the parties, noted that the Respondent vide the correspondence dated 13th June 2022, which correspondence confirmed the findings of additional assessments for VAT and Income tax for the entire period of assessment which has been issued on the iTax system. Further, the Respondent advised the Appellant to either settle the taxes outline therein or object in the form and manner described under Section 51 of the TPA.

53. The Tribunal further observes that the Appellant proceeded to file its objections on the 14th June 2022, which the Respondent deemed as late Objections. Subsequently, the Respondent issued its decision vide a Late Objection Rejection Notice on the 24th June 2022 and confirmed the assessments, premised on the ground that the Appellant failed to support its late Objections with documents as per Section 51 (7) of the TPA.

54. The Tribunal has scrutinized the documents including the correspondence dated 13th June 2022, and is of the view that, the document alluded to herein above takes the form, structure and shape of an assessment as provided for under Section 31 (8) of the Tax Procedures Act.

55. Indeed, the Respondent, in the said correspondence advised the Appellant of its right of objection to the assessment within the statutorily prescribed timelines, more particularly under Section 51 of the TPA.

56. The Appellant pursuant to the assessment lodged its various Objections on the 14th June 2022, which were rejected and deemed as a late Objection by the Respondent on the 24th June 2022.

57. Having found that the letter of 13th June 2022 amounted to an assessment, it cannot lie on the Respondent’s mouth to state that the Objections made on the 14th June 2022, one (1) day later, amounted to a late Objection.

58. Consequently, the Tribunal finds that the Respondent’s Late Objection Rejection Notice of 24th June 2022 was not proper in law.

Final Decision 59. The upshot to the foregoing is that the Appeal is merited and the Tribunal therefore makes the following Orders; -a.The Appeal be and is hereby allowed;b.The Respondent’s Late Objection Rejection Notice dated 24th June 2022 be and is hereby set aside;c.The Respondent be and is at liberty to review the Appellant’s Objections dated 14th June 2022 within Sixty (60) days of the date of delivery of this Judgment.d.Each Party to bear its own costs.

60. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023. ROBERT M. MUTUMA ...................CHAIRPERSONDR. WALTER ONGETI........................MEMBERMUTISO MAKAU................................MEMBERELISHAH N. NJERU............................MEMBERBONIFACE K. TERER.........................MEMBER