[2023] KETAT 875 (KLR)

Usafi Services Limited v Commissioner of Domestic Taxes (Tax Appeal 1094 of 2022) [2023] KETAT 875 (KLR) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 875 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1094 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

November 24, 2023

Between

Usafi Services Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company duly incorporated pursuant to the Companies Act, 2015 laws of Kenya; whose principal business activity is manufacture of soft drinks, production of mineral water and other bottled water.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued assessments to the Appellant on 13th September, 2021. Subsequently, the assessments were effected on iTax and issued to the Appellant between 20th September, 2021 and 24th September, 2021.

4. The Appellant filed a late objection manually and on iTax on 9th February, 2022 which the Respondent accepted on 6th May, 2022.

5. The Respondent issued its objection decision on 19th August, 2022 demanding principal Corporation tax, VAT and PAYE together with penalties and interest totaling to Kshs.78,124,059. 00.

6. Following its dissatisfaction with the Respondent’s decision, the Appellant filed a Notice of Appeal to the Tribunal on 16th September, 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated and filed on 30th September, 2022:a.That the Respondent erred in law and fact in its decision to bring to charge all bank deposit entries appearing in the Appellant's bank statements as sales and revenue and charging VAT and Corporation Tax.b.That the Respondent erred in law and in fact in failing to recognise that not all the Appellant's bank deposits are income of the Appellant as the Appellant had financial loans, intercompany transfers, proceeds of sale of assets and directors’ loans to the Appellant deposited in the Appellant's bank accounts.c.That the Respondent erred in law and in fact in failing to consider the Appellant's VAT payments for 2016 and PAYE payments for 2016 and 2017 and evidence of the Appellant's correct calculation of VAT and PAYE payable and supporting documentation.d.That the Respondent erred in law and in fact in charging 30% PAYE to the Appellant's salaries and wages in the Appellant's financial statements and failing to consider the Appellant's payroll and correct calculation of PAYE to factor in employees below the minimum PAYE tax bracket, employees in the middle and lower-level PAYE tax bracket and employee benefits not taxable under Section 5 of the Income Tax Act.e.That the Respondent erred in law and in fact in charging PAYE on loans to the Appellant’s directors in contravention of Section 12B of the Income Tax Act that provides that the correct tax payable is Fringe Benefit Tax by the Appellant on the interest charged below the market rate.f.That the Respondent erred in law and in fact in adjusting the Appellant's Corporation tax loss in 2016 by provisions for accruals, doubtful debts and impairment loss which the Appellant did not deduct as expenses for the purpose of determining taxable income under Sections 15 and 16 of the Income Tax Act.g.That the Respondent erred in law and in fact in ignoring the evidence, explanations and supporting documentations provided by the Appellant and proceeding to issue its objection decision dated 19th August, 2022.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated and filed on 30th September, 2022 together with the documents attached thereto.b.The Appellant’s submissions dated 15th August, 2023 and filed on 16th August, 2023.

9. The Appellant posited that the following are the issues that fall for determination:a.Whether the notice of objection was valid in law.b.Whether the objection decision was valid within the meaning of Section 51(10)of the Tax Procedures Act.c.Whether the Respondent's decision to bring to charge all bank deposits as sales and revenue was valid.d.Whether the Respondent erred in disregarding VAT and PAYE payments made in the years 2016 and 2017. e.Whether the Respondent erred in applying a flat rate of 30% in its PAYE assessment.f.Whether the Respondent erred in charging PAYE instead of FBT on loans advanced to directors.g.Whether the Appellant discharged its burden of proof

10. That the Respondent's main contention in both the objection decision and at the Tribunal is that the Appellant failed to provide sufficient primary evidence to support its position and that for that reason, the objection was not valid within the meaning of Section 51(3) of the Tax Procedures Act, 2015 (TPA).

11. That on 12th October, 2021 the Appellant responded to the tax assessment informing the Respondent that:a.The deposits in the Appellant's bank accounts do not represent income of the Appellant as the Appellant obtained several loans to finance its operations, there are interbank transfers made by the Appellant from one account to another, the Appellant sold assets, the proceeds of which were deposited to the bank account; and the directors of the Appellant deposited substantial amounts to the Appellant’s bank accounts to finance the Appellant.b.Indicated that for the year 2016, the Appellant did not file VAT returns due to the transition from the manual system to iTax, the Appellant for 2016 generated payment slips and paid the resultant taxes but did not file the VAT tax returns. The Appellant indicated that it has tried to submit the VAT returns for 2016 but iTax did not allow the submission.c.Indicated that for PAYE for the year 2016 and 2017 the Appellant similarly did not submit returns, but generated payment slips and paid PAYE for the emoluments that qualified to be taxed under PAYE.d.Indicated that the Appellant, had employed several casual employees whose emoluments did not satisfy the minimum taxable amount. The Appellant also paid benefits to its employees that do not qualify to be taxed under the minimum benefits taxable under Section 5 of the Income Tax Act such as subsistence allowance for working outside employee's usual place of work.e.Indicated that the KRA had adjusted its tax loss by disallowing the Appellant's provisions for accruals which the Appellant did not deduct as expenses for the purpose of determining taxable income.

12. That the Appellant had various engagements with the Respondent with a view to resolve the outstanding matters.

13. That the Appellant on 8th February, 2022 responded to the Respondent's letter dated 27th January, 2022 indicating that the Appellant had received the notice of assessments on iTax on 24th September, 2021 and had filed its notice of objection on 12th October, 2021, which was received by an officer of the Respondent, and that the Appellant however sought that the Respondent allows for a late notice of objection.

14. That the Respondent on 6th May, 2022 allowed the Appellant's late objection notice but requested for further supporting documentation, the grounds of objection and amendments required for the objection to be valid.

15. That the Appellant provided the following documents attached to its notice of objection dated 13th May, 2022:a.Signed audited financial accounts for the years 2016 to 2019. b.Bank statements for the years 2016 to 2019. c.Banking analysis for the years 2016 to 2019 highlighting all non-income transactions such as interbank transfers.d.Bank facility letter demonstrating that some of the bank deposits were loans advances to the Appellant.e.Details of assets sold.f.Debtors and creditors listings.g.Withholding VAT summaries.h.VAT summaries for the year 2016

16. That further, by the letter dated 13th May, 2022 the Appellant:a.Provided the Respondent an analysis of its bank deposits showing the Appellant's deposits that did not amount to income such as loans, interbank transfers and sale of assets.b.Reiterated that the Appellant had difficulties filing its VAT returns for 2016, and PAYE returns for 2016 and 2017 on iTax but correctly calculated its VAT and PAYE payable and generated payment slips and paid the correct taxes.c.Provided the Respondent its payroll for the year 2016 and 2017 as forwarded in the Appellant's letter dated 10th March, 2022. d.Indicated that it objected to the Respondent using a flat rate of 30% for calculation of PAYE as many of the Appellant's employees were taxable on the lower and middle PAYE tax bracket.e.Provided the Respondent with a PAYE reconciliation to show that the Appellant paid the correct tax.f.Objected to the PAYE assessed on the director's account on the grounds that the correct tax payable is Fringe Benefit Tax by the Appellant under Section 12B of the Income Tax Act.g.Provided the Respondent with the Appellant's audited financial statements, bank facilities letter, details of assets sold, debtors and creditors listings, WHVAT summaries and VAT summaries for 2016.

17. That subsequently, the Appellant provided further documentation, in particular, payment slips for VAT paid in 2016, a sales versus bank deposits analysis and proof of payment of PAYE. That lastly, by a letter dated 24th June, 2023, the Appellant provided extensive explanations on the adjustments proposed to be made, together with the banking analysis.

18. That the Appellant provided an analysis of its bank statements. That the Appellant's deposits net of VAT and adjusted for debtors amounts to Kshs.651,813,205. 00 whereas the sales for the period amounts to Kshs.749,065,881. 00 as shown in the table below:

Year Sales as perIncome TaxReturn Sales as perBankings Variance

Dec-16 190,748,956 101,622,083 (89,126,873)

Dec-17 214,070,228 195,722,089 (18,348,139)

Dec-18 199,904,429 185,950,325 (13,954,104)

Dec-19 144,342,268 168,518,708 24,176,440

Total 749,065,881 651,813,205 (97,252,676) 19. That the Appellant's sales as per its VAT returns is higher than its bank deposits as per the analysis of the bank statement as shown in the table below. That the Appellant therefore has no outstanding VAT liability.

Year Sales as perVAT returns Sales as pernetbankings Variance

Dec-16 190,710,133 101,622,083 89,088,051

Dec-17 215,929,894 195,722,089 20,207,805

Dec-18 198,085,804 185,950,325 12,135,479

Dec-19 144,342,268 168,518,708 (24,176,440)

Total 749,068,099 651,813,205 97,254,894 20. That it is therefore clear that all the supporting documentation was supplied to the Respondent and contention that the Appellant's objection was invalid does not hold water at all.

21. That Section 51(3) of the TPA provides that:“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; and(b)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.”

22. That the Appellant's notice of objection clearly set out the grounds of objection, indicated that the entire amount of tax under assessment was disputed and all the relevant documents relating to the objection were submitted at the point of filing the objection and subsequently at the Respondent's request. That it was therefore a valid objection within the meaning of Section 51(3) of the TPA.

23. That the Respondent was however quick to conclude that the evidence provided was not sufficient, without addressing the specific documents that were not supplied and without making any reference whatsoever to any of the facts and documents provided. That this is clearly is an affront to justice and it is evident that the Respondent did not consider the Appellant's explanations at all.

24. That Section 51(10) of the TPA provides that:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”That this was not the case when it comes to the Respondent's objection decision.

25. That in the case of Total Kenya Limited vs. Kenya Revenue Authority, Barclays Bank of Kenya Limited & 2 others (Interested Parties) [2020] eKLR, the High Court stated the following:“In this case, the duty imposed by the law which was not discharged by the Commissioner is the failure to decide on the issues raised in the Petitioner's notice of objection dated 31st October, 2019. Although the Respondent did respond through the letter dated 7th November, 2019, the response did not address any of the issues in the notice of objection and it cannot therefore be said to be an must “include a statement on findings on the material facts and the reasons for the decision.” The letter dated 7th November, 2019 does not include such a statement or any reasoning and therefore cannot amount to an objection decision as defined by the law.”

26. That to the extent that the Respondent's objection decision did not provide a statement of findings on the material facts provided by the Appellant, it is not valid and does not amount to an objection decision within the meaning of Section 51(10)of the TPA.

27. That the Respondent's adjustments to the Appellant's losses (Corporation tax) and the assessments relating to VAT was based on a banking analysis. That the Respondent's banking reconciliation in its tax findings and the objection decision picks out the total bankings and only adjusts them to cover debtors and VAT paid to conclude that there were undeclared sales. That it does not make adjustments on bankings that constitute non-income transactions, which are inherent in the ordinary course of business.

28. That the Appellant clearly explained that some of the deposits into its bank account constituted loans advanced to it and facilities that were availed to it by various banks as it was undergoing financial problems, inter-bank transfers, proceeds from sale of assets and deposits made by directors. That the Appellant provided all the relevant documentation in relation to these transactions including a banking analysis and bank statements, audited financial statements, facility letters from Equity Bank and Standard Chartered Bank and a schedule of the assets sold which correspond with the deposits made in that regard.

29. That the Respondent disregarded all these explanations and documents and did not make adjustments or at the very least, issue findings on the facts and documentation provided to explain the Appellant's bankings. That it is therefore clear that it did not exercise its best judgment and was in breach of its obligation under Section 31(1) of the TPA in issuing the assessments.

30. That in failing to consider non-income transactions, the Respondent is seeking to bring to charge amounts that do not constitute income contrary to Section 3(2) of the Income Tax Act. That it also seeks to charge VAT on amounts that do not constitute proceeds from taxable supplies.

31. That the Appellant therefore submits that the Respondent's adjustments and VAT assessments issued on the basis of the banking analysis were erroneous in their entirety. That in so submitting, the Appellant relies on the following decisions issued by this Tribunal:-a.Afya X Ray Centre Limited vs. the Commissioner of Domestic Taxes (TAT Appeal No.70 of 2017).b.Moses Kiarie Kuria vs. the Commissioner of Domestic Taxes [2021] eKLR.c.Cussens vs. Revenue and Customs Commissioners [2019] UKFTT 543 (TC)

32. That the Respondent's assessment was wholly unreasonable. That it was substantially and methodologically flawed and did not constitute a fair inference that would have otherwise been made if the Respondent had actually exercised its best judgment.

33. The Appellant explained that for the year 2016, when the Respondent was transitioning from the manual system to the iTax system, it was unable to file its VAT returns. That it however computed the VAT payable, generated payment slips and remitted the VAT due for each of those months. That in its letter dated 12th October, 2021, the Appellant brought the system error to the Respondent's attention.

34. That the Appellant provided the VAT payment slips, its withholding VAT ledger and proof that it was still unable to file VAT returns for the year 2016 owing to a system error.

35. That with regard to PAYE for the years 2016 and 2017, the Appellant explained that it was similarly unable to file returns owing to the system error. That it however provided its payroll summaries for both years and proof of payment of the PAYE that was payable.

36. That once again, the Respondent completely disregarded the Appellant's explanations that whereas it had been unable to file returns, it had duly remitted all the VAT and PAYE that was payable for the two years. That the Respondent did not even provide a statement of findings on the amounts that it considered payable vis-à-vis the amounts that the Appellant had duly paid.

37. That the Appellant relied on the case of Rabai Operation & Maintenance Limited vs. Commissioner of Domestic Taxes [2019] eKLR where the High Court set aside an assessment issued against the taxpayer on the basis that there was proof that the taxpayer remitted VAT even though it had been unable to register for the same owing to a system error. That the High Court concluded that once the taxpayer provided proof that there was a system error, the burden shifted to the Commissioner to rebut.

38. That the Respondent therefore erred in issuing the VAT and PAYE assessments without considering the payments made in that regard in 2016 and 2017.

39. That the Respondent's PAYE assessment for the entire period under review applied a flat rate of 30% to all the Appellant's employees.

40. That notably, the PAYE assessment relates to the years of income 2016 to 2017. That during these two years, the individual rates of tax under the Head B of the Third Schedule to the Income Tax Act (which was subsequently amended) were as follows:“On the first Shs. 147,580 - 10%On the next Shs. 139,043 - 15%On the next Shs. 139,043 - 20%On the next Shs. 139,043 - 25%On all income over Shs. 564,709 - 30%”

41. That by applying a flat rate of 30%, the Respondent made the erroneous assumption that all the Appellant's employees were earning an annual salary of over Kshs. 564,709. 00.

42. That in fact, the Appellant had several casual labourers who did not fall within any of the tax bands. That the rest of the employees mostly fell within the lower and middle-level tax bands and the PAYE in that regard was duly remitted in the two years of income. That the Appellant provided its payroll documents to the Respondent but the same was not addressed in the Respondent's objection decision.

43. That accordingly, the Respondent's application of a flat rate was erroneous and unreasonable as it did not consider whether the salaries in question fell within other tax bands.

44. That the Respondent assessed PAYE on the directors' accounts at the rate of 30%. The Appellant's explanation on this issue was that these amounts constituted loans advanced to the directors, which would therefore be subject to FBT and not PAYE.

45. That Section 12B of the Income Tax Act provides that:“(1)Notwithstanding any other provision of this Act, a tax to be known as fringe benefit tax shall be payable commencing on the 12th June, 1998 by every employer in respect of a loan provided at an interest rate lower than the market interest rate, to an individual who is a director or an employee or is a relative of a director or an employee, by virtue of his position as director or his employment or the employment of the person to whom he is related:Provided that the fringe benefit tax shall not apply to loans advanced on or before 11th June, 1998. ”

46. That the market interest rate for purposes of FBT for the years 2016 and 2017 as declared by KRA was 8%. That since the loans were advanced interest-free, the FBT would have been payable at the rate of 8%, being the difference between 8% (the market interest rate) and 0% (being the interest charged on the loans).

47. The Appellant stated that itprovided this explanation in its notice of objection and even subsequently provided a computation at the request of the Respondent. That the explanation was however disregarded in its entirety.

48. That the Respondent has correctly noted that the burden of proof is on the Appellant, which is required to prove that the assessment was erroneous.

49. That based on the explanations provided above, it is clear that the Appellant duly discharged its burden of proving that the assessments under each tax head were not only erroneous, but also unreasonable, unjustified and unlawful. That the Appellant duly supplied factual explanations, reconciliations and extensive documentation, all of which have been placed before this Tribunal.

50. That it is imperative to note that the burden of proof in tax cases is not static or stationary, as has been explained in several judicial decisions issued by both this Honourable Tribunal and the High Court. That the burden is first on the taxpayer to prove prima facie that an assessment is erroneous. That once the taxpayer provides documentation and explanations as to the incorrectness of the assessments, it is for the Commissioner to prove that the taxpayer's explanations were insufficient or unjustifiable. That if the Commissioner proves the same, then the burden would then shift back to the taxpayer.

51. That in this case, the Appellant has evidently proved prima facie that the Respondent's decision was erroneous and materially flawed. That it was therefore for the Respondent to prove that the taxpayer's contentions were not correct. That the Respondent has failed to do so and for that reason, the objection decision ought to be set aside in its entirety.

52. That the Appellant relies on the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR where the High Court explained the following:“48. The burden placed upon the Respondent by the law was to establish by evidence that it was not the importer and to confirm its role under the contract. Simply put, it was required to demonstrate that the tax was not due. The test is whether the Respondent established a prima facie case and having done so, the It never did so.”

53. That the Appellant reiterates that the Respondent's entire assessment was materially and substantially flawed and was not issued in exercise of the Respondent's best judgment. That further, it is plainly clear from the objection decision itself that the Respondent did not consider any of the Appellant's explanations at all and documentation and as such, it arrived at an erroneous conclusion that the Appellant is liable to pay additional taxes.

54. That it is clear from the foregoing that the Respondent's assessment and objection decision are erroneous, unjust and based on a misapprehension of the relevant legal provisions and as such, they ought to be vacated.

Appellant’s Prayers 55. The Appellant prayed that:a.The Respondent's objection decision dated 19th August, 2022 and its assessment dated 13th September, 2021 be struck out in its entirety;b.The Respondent, its employees, agents, or other person purporting to act on its behalf be barred and/or estopped from demanding or taking any further steps towards enforcement or recovery of principal tax, penalties and interest on the Respondent's demand as stipulated above;c.The costs of this Appeal; andd.Any other remedies that the Honourable Tribunal deems just and reasonable.

Respondent’s Case 56. The Respondent’s case is premised on the hereunder filed documents before the Tribunal: -i.The Respondent’s Statement of Facts dated 30th October, 2022 and filed on 31st October, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 9th May, 2023 and filed on 10th May, 2023.

57. That it is the Respondent's view that the following issues arise for determination;-a.Whether the assessments were justified in law.b.Whether the Appellant's notice of objection was proper in law.

58. That Section 24(1) of the Tax Procedures Act, 2015 requires a taxpayer to submit its tax return in the prescribed form and in the manner provided by the Commissioner.

59. That Section 24(2) of the Tax Procedures Act further provides that the Commissioner is not bound by the information provided in a return and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.

60. That Section 31 of the Tax Procedures Act empowers the Respondent to interrogate a taxpayer's return and issue additional assessment to ensure a taxpayer pays the correct taxes.

61. That further, Section 29(1)of the Tax Procedures Act, 2015 allows the Commissioner to use such information as may be available to him and to the best of his judgment issue a tax assessment to a taxpayer who has failed to submit a tax return.

62. That Section 52B(1) b of the Income Tax Act also requires a person to file a return of income and assess how much tax is payable by him/her from all the sources of income.

63. The Respondent submitted that the Appellant has a duty to keep records for a period of five years in accordance with the provisions of Section 23 of the Tax Procedures Act. That Section 23 of the Tax Procedures Act provides that:“(1)A person shall-(a)Maintain any document required under a tax law, in either of the official languages;(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained and:(c)subject to subsection (3) retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

64. That the Respondent is to receive and scrutinize documents provided before making a decision. That the High Court held at Paragraph 24 in Commissioner of Domestic Taxes vs. Metoxide Africa Ltd, E121 of 2021 that:“I therefore find and hold that the Respondent did not discharge its burden of proof before the Commissioner and the Tribunal when the competence, relevance and veracity of its evidence was challenged meaning that the presumption of correctness of the Commissioner's decision remained as such...........The Commissioner is entitled to ask such questions and call for such documents that would enable it correctly assess the liability of a taxpayer.”

65. The Respondent submitted that the Appellant did not provide documents in support of its position and reconciliations. That the Appellant cannot fault the Respondent's decision whereas the Appellant did not provide evidence to demonstrate that the Respondent's decision is wrong.

66. That the Appellant failed to discharge its burden by adducing evidence. That the Court in Alfred Kioko Muteti vs. Timothy Miheso & another [2015] eKLR held that:“A party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough. "In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party....Pleadings are not evidence.”

67. The Respondent submitted that Section 56(1) of the Tax Procedures Act dictates that: “in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

68. The Respondent averred that Makau J in Primarosa Flowers Limited vs. Commissioner of Domestic Taxes (2019) eKLR, whilst making reference to the Australian case of Mulherin vs, Commissioner of Taxation [2013]FCAFC 115 held that:-“.......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....”

69. The Respondent submits that Kasango J in Sheria Sacco Limited vs. Commissioner of Domestic Taxes (2019) eKLR in dismissing the Appellant's Appeal held the following on the issue of the taxpayer discharging its burden of proof:“..The SACCO however needs to appreciate that what the Tribunal was dealing with was an appeal against the Commissioners' confirming notice that the SACCO had taxes to pay. When one appreciates that then the submissions of the Commissioner, under this head, are correct that the burden of proof lay on the SACCO. This is what is provided under Section 30(b) of the Tax Appeal Tribunal Act cap 40. That section provides: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; orb.In any other case, that the tax decision should not have been made or should have been made differently.The SACCO did not meet that burden of proof...”

70. The Respondent relied on the following cases:a.Ngurumani Traders Ltd vs. Commissioner of Investigations and Enforcement (TAT Appeal No. 125 of 2017).b.Dryer & Dryer Limited vs. Commissioner of Domestic Taxes TAT No.139 of 2020 [2021] eKLR.

Respondent’s Prayers 71. The Respondent prayed that the Tribunal:a.Upholds the Respondent's tax assessment as proper and in conformity with the provisions of the law.b.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issues For Determination 72. The Tribunal has evaluated the pleadings and documentation filed by both parties and is of the respectful view that the issues falling for its determination are:i.Whether the Respondent’s Corporation Tax assessment was justified.ii.Whether the Respondent’s VAT assessment was justified.iii.Whether the Respondent’s PAYE assessment on employees and directors’ current accounts was justified.

Analysis And Determination 73. The Tribunal having ascertained the issues for determination as set out above proceeds to deal with the same as hereunder.

Whether The Respondent’s Corporation Tax Assessment Was Justified. 74. The Respondent raised the Corporation tax assessment on the basis that there were variances noted after comparing the Appellant’s sales as per VAT returns with the expected sales as per the Appellant’s bankings.

75. The Appellant averred that in determining the net bankings, the Respondent treated all bankings/deposits into the accounts as taxable income despite the fact that not all deposits were income. The Appellant posited that the bankings included non-income items such as loans, bounced cheques, transfers and sale of assets.

76. The Tribunal reviewed the parties’ pleadings and noted the following documents that were provided by the Appellant:a.Loan facility letters to support loans it undertook with Equity Bank and with Standard Chartered Bank.b.A letter confirming sale of a motor vehicle to a third party.c.Bank statements for Equity Bank and Standard Chartered Bank confirming details of all transactions including financing transactions, inter-bank transfers and bounced cheques.d.Signed financial statements for the period under dispute.

77. The Tribunal further noted that, from the objection decision issued by the Respondent, it was not stated whether the Respondent reviewed the above listed documents in determining the final tax liability that was brought to Appeal by the Appellant. However, the above listed documents have been provided by the Appellant to support its averments that the non-income items were part of its bankings and should not be treated as income for Corporation tax purposes.

78. The Tribunal noted the two pleadings by the parties’ contained opposite and varying arguments in relation to documentation provided by the Appellant.

79. It is settled that the burden of proof in tax cases lies with the Appellant as is encapsulated in Section 30 of the 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.”

80. This burden may however shift to the Respondent if the Appellant has made a prima facie case. In this case, the onus may then shift to the Respondent to rebut the prima facie case failure to which the taxpayer succeeds.

81. The Tribunal is guided by the case of Kenya Revenue Authority vs. Maluki Kitili Mwendwa [2021] eKLR, where Mativo J ( as he then was) adopted the doctrine in the Canadian Supreme Court case of Johnston v Minister of National Revenue where the court {1948} S.C.R. 486 where the court decided that:“―… the onus is on the taxpayer to ―demolish the basic fact on which the taxation rested.” Again, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada which held that the onus is met when a taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means ―on its face. To prove a case ―on its face you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.”

82. The Appellant, having provided documents to support its averments, discharged its burden of proof and the onus lies on the Respondent to review the documents provided in making a decision as to what tax liability sits with the Appellant.

83. Due to the foregoing, it is clear to the Tribunal that the income computed by the Respondent in establishing the Appellant’s Corporation tax liability should be adjusted to exclude non-income amounts.

Whether The Respondent’s VAT Assessment Was Justified. 84. The Respondent confirmed the VAT assessment on the basis that correspondences between the Appellant and the Respondent regarding challenges that impeded the company from filing VAT returns for the year 2016 had not been availed.

85. The Appellant, on its part, averred that it had explained to the Respondent that for the year 2016, when the Respondent was transitioning from the manual system to the iTax system, it was unable to file its VAT returns due to system errors. That it however computed the VAT payable, generated payment slips and remitted the VAT due for each of the months in the period under dispute. Further, that in its letter dated 12th October, 2021, the Appellant brought the system error to the Respondent's attention. The Appellant urged that it also provided VAT payment slips, its withholding VAT ledger and proof that it was still unable to file VAT returns for the year 2016 owing to a system error.

86. The Tribunal confirmed from the Appellant’s Statement of Facts that it attached:a.A VAT reconciliation showing sales as per its declared return vis a vis VAT paid to the Respondent for the years 2016 to 2019. b.A VAT ledger for the period under dispute showing the Customer details, invoice numbers, transaction descriptions, invoice amounts and VAT amounts per each transaction.c.Itax payment slips for the period under dispute as well as the cheque payments and banking slips making VAT payments to the Respondent.d.Signed financial statements for the period under dispute.

87. The Tribunal notes that the Appellant provided supporting documents, in its pleadings, to support its averments that indeed it made payments for VAT for the year 2016.

88. Section 30 of the TAT Act provides that the burden of proof lies with the Appellant in appeals to the Tribunal. Specifically, this Sections 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.”

89. The Tribunal notes that the Appellant in the instant case discharged its burden of proof in relation to the VAT assessment by providing documentation proving that it indeed computed and remitted VAT to the Respondent for the year 2016 which is under dispute.

90. The Tribunal relied on the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, where it was stated that:-“―Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.”

91. The Tribunal therefore finds that, based on the documentation supplied with the Appellant’s pleadings, the Appellant computed and remitted VAT for the year 2016 and therefore the Respondent should have taken these remittances into consideration in computing the Appellant’s revised VAT liability in its objection decision.

Whether the Respondent’s PAYE assessment was justified. 92. The Respondent raised PAYE assessments on employees on the basis that there was a variance between the staff cost expense in the audited accounts as compared to the iTax PAYE monthly returns.

93. It raised a further assessment on the basis that the directors had overdrawn their accounts with the company and therefore PAYE was due on the overdrawn amounts.

94. The Appellant, on its part, posited that it experienced system issues in filing PAYE returns on iTax in the years 2016 and 2017 but had computed the taxes manually and remitted them to the Respondent.

95. The Appellant averred that the use of a flat rate of 30% on computation of PAYE by the Respondent was erroneous as a substantial number of the company’s employees fell in the lower and middle PAYE tax brackets. That further, the Respondent sought to tax benefits such as out of office stipends that were below the taxable minimum in law.

96. In relation to overdrawn directors’ accounts, the Appellant averred that Section 12B of the Income Tax Act provides that where an employer provides a loan to an employee, the applicable interest rate should be based on the fringe benefit tax rates applicable.

97. The Tribunal confirms that the Appellant provided the following documents to support its averments:a.A reconciliation providing details of payments made to both permanent and contract employees for the tax period under dispute, the allowances paid to various employee categories, pension relief accorded to employees, canteen food provisions for the employees and the PAYE computed and paid.b.The company’s PAYE ledger for the period in dispute.c.The signed and dated payroll details for each employee under both categories (permanent and contract) for the period under dispute.d.Signed financial statements for the period under dispute.

98. The Tribunal confirmed that for the period under dispute, 2016 and 2017, the Third Schedule to the Income Tax Act provided the applicable rates of tax for computation of PAYE.

99. The Tribunal noted that based on the signed and dated payrolls provided, most of the Appellant’s employees’ emoluments fall under the first and/ or second tax band for PAYE in the period under dispute.

100. The Tribunal further noted that while the Appellant averred that it had computed PAYE manually and remitted the same to the Respondent, other than the documents listed above, it did not provide proof of payment of the same to the Respondent. In this regard, the Tribunal could not establish that PAYE taxes were not owed to the Respondent for the period under dispute.

101. Due to the foregoing, the Tribunal finds that the Respondent was justified in raising PAYE assessments for the Appellant’s permanent and contract employees in the years 2016 and 2017. However, the PAYE should have been computed based on the PAYE bands provided for in the Third Schedule to the Income Tax Act.

102. On directors’ overdrawn amount or loans, the Tribunal noted that the Appellant seeks to rely on Section 12B of the Income Tax Act that provides for fringe benefit tax payable on loans advanced by companies to their employees or directors. This Section provides as follows:“(1)Notwithstanding any other provision of this Act, a tax to be known as fringe benefit tax shall be payable commencing on the 12th June, 1998 by every employer in respect of a loan provided at an interest rate lower than the market interest rate, to an individual who is a director or an employee or is a relative of a director or an employee, by virtue of his position as director or his employment or the employment of the person to whom he is related:Provided that the fringe benefit tax shall not apply to loans advanced on or before 11th June, 1998. (2)For the purpose of this section, the taxable value of a fringe benefit shall be in the case of a loan provided after 11th June, 1998, or a loan provided on or before 11th June, 1998 the terms or conditions of which are varied after 11th June, 1998, the greater of-(i)the difference between the interest that would have been payable on the loan if calculated at the market interest rate and the actual interest paid on the loan; and(ii)zero:Provided that where the term of the loan extends for a period beyond the date of termination of employment, the provisions of this section shall continue to apply for as long as the loan remains unpaid.(3)Fringe benefit tax shall be charged on the total taxable value of a fringe benefit provided by an employer in a month and shall be due and payable on or before the tenth day of the following month:Provided that the fringe benefit tax charged prior to 1st January, 1999 shall be due and payable on or before 10th January, 1999. (4)The Commissioner may prescribe the form and manner in which the fringe benefit tax shall be payable and any other period for which the market rate of interest may be applicable.(5)The provisions of this Act in respect to fines, penalties, interest charges, objections and appeals shall apply mutatis mutandis to the fringe benefit tax imposed under this section.(6)For the purpose under this section -"employee" and "relative of a director or employee" shall have the meaning assigned thereto under section 5(2A) of this Act:"loan" includes a loan from an unregistered pension or provident fund:“market interest rate" means the average 91-day treasury bill rate of interest for the previous quarter.”

103. The Tribunal, however, notes that while the Appellant argued that the overdrawn directors’ accounts should have been subjected to fringe benefit tax and not PAYE, the Appellant did not provide any documentation confirming that indeed the Appellant advanced loans to its directors.

104. In the absence of this documentation, the Tribunal cannot confirm the veracity of this averment by the Appellant and can only conclude that the Respondent was justified in raising the PAYE assessment on the directors’ overdrawn accounts.

Final Decision 105. In view of the foregoing, the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby partially allowed.b.The objection decision dated 19th August, 2022 be and is hereby varied in the following terms;i.The Respondent to recompute the assessment relating to Corporation tax by excluding the non-income items from the computation of taxable income.ii.The Respondent to recompute the assessment relating to VAT by excluding non-income items from taxable sales and deducting VAT payments made by the Appellant in 2016 from its computation of taxable income for VAT purposes.iii.The Respondent to recompute PAYE by applying the tax bands as per the Third Schedule to the Income Tax Act to employee emoluments.iv.The Respondent’s assessment of PAYE on directors accounts be and is hereby upheld.c.Each party to bear its own costs.

106. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023ERIC NYONGESA WAFULA....................CHAIRMANCYNTHIA B. MAYAKA.................MEMBERDR. RODNEY O. OLUOCH...........MEMBEREUNICE NG’ANG’A.......................MEMBERABRAHAM K. KIPROTICH..........MEMBERBERNADETTE GITARI..................MEMBER