[2024] KETAT 1251 (KLR)

Villa Grazia Luxury Hotel Limited v Commissioner of Domestic Taxes (Appeal E413a of 2023) [2024] KETAT 1251 (KLR) (Nairobi) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1251 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Nairobi

Appeal E413a of 2023

E.N Wafula, Chair, Jephthah Njagi, E Ng'ang'a & G Ogaga, Members

August 23, 2024

Between

Villa Grazia Luxury Hotel Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. The Appellant is in the business of accommodation and food services along the Naivasha-Nakuru Highway. The Appellant is registered for Income Tax PAYE, VAT and Income Tax Corporation Tax.

2. The Respondent is appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Authority 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 carried out a tax compliance audit on the Appellant for the purpose of obtaining full information for the year of income 2022.

4. On 9th March 2023, the Respondent issued the pre-assessment demand notice of Kshs. 1,644. 512. 06 as the principal tax. In the letter, the Respondent also asked the Appellant to file and declare the correct sales within 7 days.

5. The Respondent issued additional VAT assessments via iTax platform on 18th April 2023 in the sum of Kshs. 1,662,244. 71, exclusive of penalties and interest.

6. The Appellant was dissatisfied with the said additional assessments and on 15th May 2023 lodged objections against the said assessments.

7. The Respondent issued an objection decision on 12th June 2023 fully rejecting the Appellant’s objections and subsequently confirming the assessments.

8. Aggrieved by the Objection decision, the Appellant filed this Appeal on 28th July 2023.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal filed on 28th July 2023 raising the following grounds: -a.That the additional assessments are estimated.b.That the additional estimated assessments are excessive by reason of some error or mistake of fact in the alleged income.c.That the estimated additional assessments are punitive, erroneous and not as per the income.d.That the Respondent while raising additional estimated assessments (Output VAT) made a substantial error or defect in the procedure provided by VAT Act, 2013 Section 17 and Rules made thereunder which may possibly have produced error or defect in the decision of the case upon merit.e.That the allegation that made the Commissioner to disallow the purchases is baseless, untrue, punitive, unlawful, dishonest, unprocedural and unreasonable hence imposition of uncollectable, and uncertainty as to any question of law or fact.f.That the allegations of under-declared sales in the month of January 2023 VAT returns and lack of supporting documents for declaration of exempt and zero-rated sales in the month of June, July were erroneous and dishonest.g.That by the Respondent disregarding or neglecting credit for input tax against output tax is a decision contrary to the Law.h.That the Commissioner having ignored or neglected to grant input tax against output tax, is the decision having failed to determine some material issue of law or usage having the force of law, disregarded "Fair Administrative Action" as provided under Section 47 of the Constitution of Kenya 2010. i.That no fair hearing was granted by the Commissioner. The Respondent erred in law and fact by not according the Appellant a fair hearing, more specifically to hear the Appellant’s grounds and consider the substance of the matter and further untrue assessments and dishonest reasons for raising assessments. That no hearing was accorded to the Appellant before the decision was made and the Respondent overlooked Section 50 of the Constitution of Kenya 2010. j.That the Commissioner denied the taxpayer access to information. That as the Commissioner has power to access any taxpayer’s documents and without seeking clarification from the taxpayer or the owner of the documents, he raised punitive and defective estimates which have no basis. That this is against Section 35 of Constitution of Kenya, 2010. k.That the Respondent's action to demand additional assessment of Kshs. 2,246,046. 00 is arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant, despite fulfilling Section 30 of Tax Appeals Tribunal Act, 2013 as read together with Section 62 of Value Added Tax Act, 2013. l.That the alleged variance was brought about by exempt and zero-rated turnover, hence the tax liability of Kshs. 1,692,292. 03 is not collectable as they fall under the First Schedule exempt supplies and Second Schedule, to the VAT Act, No 35 of 2013.

Appellant’s Case 10. The Appellant’s case was premised on the Appellant’s Statement of Facts dated 27th July 2023 and filed on 28th July 2023 together with the documents attached thereto.

11. The Appellant averred that the business is entirely owned by a single Kenyan director whose major area of business operations is sales of cereals, farm produce and mixes up with hotel industry thus making it difficult to differentiate between the company operations and director’s operations.

12. That Villa Grazia Luxury Hotel Limited commenced its business in February 2021. That the business has been under financial constraints, financial hardship and financial uncertainty. That the Director borrowed huge loans from Absa Bank and invested it in the hotel industry which he has limited knowledge of.

13. That the Hotel is servicing the tax arrears on monthly plan signed with KRA-Naivasha Tax Service Office. That the payment of tax arrears is under Section 3(2)(a)(iii) as read together Section 5(2)(a) of Income Tax Act Cap 470.

14. That the Respondent carried out the tax compliance audit on the Company for the purpose of obtaining full information in respect of a person or class of persons chargeable to tax for the year of income 2022 to 2023 on which the following allegations of the tax due were made:-a.Under declared sales in January 2023 VAT Returns.b.Lack of supporting documents for declaration of exempt and zero rated Sales for the months of June, July, August, October and December 2022. c.That VAT returns of the above (i) and (ii) headings of the allegations by the Commissioner of Domestic Taxes came up with the estimated additional assessments of Kshs. 1,692,292. 03 as at 12th January 2023.

15. The Appellant averred that on 9th March 2023, the Respondent issued additional estimated assessments of Kshs. 1,860,738. 96 including penalties and interest based on total sales ignoring the fact that sales were inclusive of both general and exempt sales (cereals and farming).

16. That following the allegation by the Respondent on the additional estimated assessments issued on 9th March 2023, the notice of objection of assessments was served on the 15th May 2023.

17. The notice of objection to additional estimated assessments were against the decision on the following amongst other grounds.a.That the said decision is erroneous in the law that it confirms the assessments and purports to be collectable hence is the subject of the Appeal.b.That the Commissioner alleges that the Appellant under declared sales in January 2023 VAT returns and did not provide supporting documentation for declaration of exempt and zero rated sales in the months of June to December 2022 hence returns were chargeable to tax.

18. That the Commissioner while disallowing or adding back the alleged taxable services, made a substantial error/defect in the procedure provided by the VAT Act, 2013 First Schedule, exempt supplies and the Second Schedule Zero rating, Part A-zero rated supplies and the rules made thereunder which may possibly have produced error or defect in the decision of the case upon the merit.

19. That the Commissioner by bringing to charge the exempt supplies and zero-rated supplies is a decision contrary to the law or to some usage having the force of law. That the decision having failed to determine the material issue of law or usage having the force of law hence against "Fair Administrative Action" under Section 47 of the Constitution of Kenya 2010.

20. That the Respondent erred in law and fact by bringing to charge the exempt (sale of cereals and farming) contrary to the first Schedule of VAT Act, 2013.

21. That the Respondent erred in law and fact by failing to appreciate and understand the general nature of the Appellant’s business of its sole director even after being provided with all material facts related to the operations.

22. That the Respondent erred in law and fact by allowing and computing Output VAT on exempt sales (cereals and farming), which originated from the director’s operations.

23. That the Respondent’s action was unjustified by making a decision that that the Appellant did not provide necessary records to support the objection when they were fully explained to about the cereal business operations by the Appellant.

24. That by the Respondent disregarding or neglecting credit for input tax against Output tax is a decision contrary to the law.

25. That the Commissioner having ignored or neglected to grant Input tax against Output tax is the decision having failed to determine some material issue of law or usage having the force of law, disregarded "Fair Administrative Action as provided under Section 47 of the Constitution of Kenya, 2010.

26. That no fair hearing was granted by the Commissioner. That the Respondent erred in law and fact by not according the Appellant a fair hearing and or specifically to hear on the Appellant’s grounds and consider the substance of the matter.

27. That the Respondent denied the taxpayer access to information. That since the Respondent has power to access any taxpayer's documents and without seeking clarification from the taxpayer or the owner of the documents, it raised punitive and defective estimates which have no basis. That this is against Article 35 of Constitution of Kenya.

28. That the Respondent's additional assessments of Kshs.1,692,292. 00 is arbitrary, capricious, unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant, despite fulfilling Section 30 of Tax Appeals Tribunal Act, 2013 as read together with Section 62 of Value Added Tax Act, 2013.

Appellant’s prayers 29. The Appellant prayed to the Tribunal:-a.That there be a stay of execution of the decision of the Respondent pending the hearing and determination of the Appeal.b.The decision of the Respondent to be set aside.

Respondent’s Case 30. The Respondent’s case was premised on the following documents:a.The Respondent’s Statement of Facts dated 24th August 2023 and filed on 2nd September 2023 together with the documents attached thereto.b.The Respondent’s Written Submissions dated 14th February 2024 and filed on 28th February 2024.

31. The Respondent averred that it exercised its best judgment in making the assessments in full consideration of the documentation and information available pursuant to Section 31 of the Tax Procedures Act.

32. That the assessments were a result of under declared sales in the Appellant’s January 2023 VAT return and lack of documentation for declaration of exempt and zero rated sales in their June, July, August, September, October and December 2022 returns.

33. That the Appellant contended that the variance was brought about by exempted and zero rated turnover, and that the Appellant had just acquired a payment plan on liabilities it had not settled due to financial constraints.

34. That on the contrary, the Respondent averred that the assessments were not estimated and excessive as they originated from the Appellant's failure to amend its returns and declare the correct taxable supplies despite the notice issued on 9th March 2023.

35. The Respondent averred that the Appellant was granted a fair hearing as the Respondent allowed the Appellant sufficient time to provide supporting documentation in support of the exempt and zero rated supplies however, the same was not forthcoming.

36. The Respondent averred that hotel and restaurant services are vatable at the general rate of 16% as they are not listed as exempt or zero rated in either the 1st and 2nd Schedules to the Act and the Appellant ought to have declared them as such.

37. That the Appellant failed to provide evidence of the zero rated and exempt supplies at the point of review, and as such the Respondent was justified in raising the assessments in order to tax the Appellant’s supplies under the standard rate and to bring the under-declared sales to charge.

38. The Respondent submitted that the following should be the issues for determination in this matter:-a.Whether the Respondent was justified in issuing the additional assessments.b.Whether the Appellant has discharged its burden of proof.

39. The Respondent submitted that the Appellant was not entitled to charge its supplies at anything other than the standard rate as the same are not listed as exemptions in the law and the Appellant did not provide any documents and information to dispel the Respondent's assessments in regard to the same.

40. That the Appellant alleged that it had a payment plan. That the Respondent reviewed the payment plan in its objection decision, where it was revealed that the payment plan was not in regard to the taxes in dispute.

41. The Respondent submitted that it is mandated to consider and use the available information to make an assessment of the correct amount of tax payable in line with Section 31 of the Tax Procedures Act.

42. That the Court in the case of Oliver Merrick Fowler & another v Kenya Revenue Authority [2022] eKLR quoted with authority the case of Saima Khalid vs The Commissioner for Her Majesty's Revenue and Customs- Appeal No. TC/2017/02292 and stated:-“... The very use of the word 'judgement’ makes it clear that the commissioners are required to exercise their power in such a way that they make a value judgement on the material which is before them... What the words 'best of their judgement' envisage, in my view is that the commissioners will fairly consider all material placed before them, and on that material come to decision which is one which is reasonable and not arbitrary as to the amount of tax which is due."

43. That the Tribunal in the case of Tenhos Sacco Society Limited V Commissioner of Domestic Taxes TAT No. 413 of 2019 [2022] stated as follows;-“In arriving at its assessments, the above provision does not specify any method or whether that method should be scientific. All it requires is that the Respondent use its best judgment .....what the words "best of their judgment' envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material, come to a decision which is reasonable and amount of tax which is due. As long as there is some material on which the commissioner's act then they are not required to carry out investigations which may or may not result in further material being placed before them."

44. The Respondent submitted that in exercise of the aforementioned mandate, it considered the information available and to the best of its judgment assessed the correct tax by disallowing the unsupported zero rated and exempt supplies claimed and issued the notice of assessment by charging them at the general rate.

45. The Respondent submitted that contrary to the Appellant’s statement that it was not accorded fair hearing before the issuance of the assessments, the Respondent submitted that it acted within the law by:-a.Issuing a pre- assessment demand notice dated 9th March 2023 requiring the Appellant to amend its VAT returns within 7 days.b.The Appellant failed to amend the returns in question and the Respondent issued assessments on 18th April 2023 after the lapse of the 7 days.c.The Appellant objected to the assessments on 15th May, 2023. d.The Respondent considered the Appellant’s objection and rendered its decision on 12th June 2023.

46The Respondent submitted that it afforded the Appellant an ample opportunity to contest the assessments within the statutory timelines set out in the provisions of Section 51 of the Tax Procedures Act.

47. The Respondent further submitted that Section 56(1) of the Tax Procedure Act provides that in any proceedings that relate to tax decisions, objections and Appeals, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

48. That further, Section 30 the Tax Appeals Tribunal Act provides that:-“ln 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."

49. The Respondent submitted that in the case of Ushindi Limited v Commissioner of Investigation and Enforcement Kenya Revenue Authority [2020] eKLR, the Court stated that:-“The burden of proof was on the Appellant to raise the specific items and/or aspects of the tax assessment that were manifest errors, wrongfully imposed or not liable to be paid as tax."

50. The Respondent submitted that the Appellant did not discharge the burden of proof that the assessments made by the Respondent were incorrect and/or that the documents and/or information relied upon by the Respondent in making the assessment was wrong.

51. Respondent submitted that in the case of Digital Box Limited versus Commissioner of Investigations and Enforcement [2020] the Tribunal held that: -“The question of burden of proof in taxation matters is provided for under the Tax Procedures Act as well as the Tax Appeals Tribunal Act. Section 56(7) of the Tax Procedures Act states that: "In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. "Section 30 of the Tax Appeals Tribunal Act similarly provides that: "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." In this case, the Appellant is the one seized of the desire to prove that the Respondent used extraneous information in arriving at its assessment.Thus, according to the provisions of the Evidence Act, the Tax Procedures Act and the Tax Appeals Tribunal Act, the burden of proof falls upon the Appellant. ... The Tribunal is of the view that the Appellant did not discharge its burden of proof in showing that the Respondent used extraneous considerations and documents other than those prescribed by the law. The averments made by the Appellant did not amount to evidence."

52. The Respondent submitted that the burden is on the Appellant to prove that the Respondent erred in raising the additional assessments on the under declared sales and mis-declared zero rated & exempt sales. That in doing so, the Appellant must adduce evidence in form of information and/or documents to support its objection.

53. That in the case of Republic V KRA: Proto Energy Limited (2022) eKLR the Court stated as follows:-“The most significant justification for placing the burden of proof on the taxpayer 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 taxpayer’s evidence must meet this minimum threshold."

54. The Respondent submitted that the Appellant had the responsibility to maintain records and avail them when requested to do so. The Appellant failed to discharge the burden of proof by failing to provide documents in support of its objection.

55. The Respondent submitted that the Appellant merely pleaded that the assessments were erroneous and the VAT exempt and zero-rated sales should be allowed without providing documents in support.

Respondent’s prayers 56. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s decision as proper and in conformity with the provisions of the law.b.Dismisses the Appeal with costs to the Respondent as the same is devoid any merit.

Issues For Determination 57. The Tribunal has considered the facts of the matter and the submissions made by the Respondent and considers the issues for determination to be as follows:-a.Whether the Respondent was justified in issuing the additional assessments.b.Whether the Appellant has discharged its burden of proof.

Analysis And Findings. 58. Having identified the issues that fall for its determination, the Tribunal proceeds to analyse them as hereunder.

59. The genesis of this dispute is the tax compliance audit carried out by the Respondent on the Appellant for the year of income 2022. As a result of this audit, the Respondent wrote to the Appellant on 9th March 2023 asking it to amend its “VAT returns and declare the correct taxable supplies.”

60. The Respondent submitted that because the Appellant did not comply with the notice, it issued additional VAT assessments of Kshs. 1,662,244. 71 on 18th April 2023.

61. The Appellant objected to the additional VAT assessments on 15th May 2023 and the Respondent issued an objection decision on 12th June 2023. Aggrieved by the objection decision, the Appellant filed this Appeal.

a). Whether the Respondent was justified in issuing the additional assessments. 62. In its Statement of Facts, the Appellant contended that the Respondent did not consider the documents that it provided. Indeed in its paragraph 3 of the Statement of Facts, the Appellant stated as follows:-“The business is entirely owned by a single Kenyan Director whose major area of business operations is sales of cereals, farm produce and mixes up with hotel industry thus making it difficult to differentiate between the company operations and the director’s operations.”

63. The Tribunal notes that Section 23(1) (a) and (b), of the Tax Procedures Act requires a taxpayer to keep records. The Section states 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;”

64Further, the Tribunal notes that Section 54A (1) of the Income Tax Act also requires a taxpayer to keep records of its business transactions. The Section states as follows:-“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

65. The Tribunal also notes that Sections 58 ad 59 of the Tax Procedures Act 2015, give the Respondent powers to inspect records and to require a taxpayer to produce such records. The Sections state:-“Power to inspect goods, records etc. 1. Notwithstanding anything to the contrary in any written law, an authorised officer may inquire into the affairs of a person under any tax law, and shall at all times have full and free access to all lands, buildings, places to inspect all goods, equipment, devices and records whether in the custody or control of a public officer, or of a body corporate or of any other person, and may make extracts from or copies of those records

2. An officer acting under subsection 1) may require the owner or employee, or a representative of the owner of the business, to give him all assistance and to answer all questions relating to the inquiry.

66. Production of records1. 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 authorised 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 persons custody or under the person’s control relating to the tax liability of any person.

67. The Respondent submitted that the Appellant failed to provide evidence of zero rated and exempt supplies at the point of review and as such, the Respondent was justified in raising the assessments in order to tax the Appellant’s supplies under the standard rate and to bring the under-declared sales to charge.

68. The Tribunal notes that the Appellant attached various documents to its pleadings. But no evidence was tendered that the documents were provided to the Respondent and that the Respondent failed or refused to review them.

69. The Tribunal is guided by the Court of Appeal holding in CMC Aviation Ltd v Kenya Airways Ltd (Cruisair Ltd) [1978] eKLR where the Court faulted the reliance on averments as evidence in arriving at a decision. The Court stated as follows:-“The pleadings contain the averments of the parties concerned. Until they are proved, or disproved, or there is admission of them or any of them by the parties, they are not evidence and no decision could be founded upon them. Proof is the foundation of evidence. As stated in the definition of “evidence” in section 3 of the Evidence Act, evidence denotes the means by which an alleged matter of fact, the truth of which is submitted to investigation, is proved or disproved. Averments are matters the truth of which is submitted for investigation. Until their truth has been established or otherwise they remain unproven. Averments in no way satisfy, for example, the following definition of “evidence” in Cassell’s English Dictionary, p 394:Anything that makes clear or obvious; ground for knowledge, indication or testimony; that which makes truth evident, or renders evident to the mind that it is truth.The pleadings in a suit are not normally evidence. They may become evidence if they are expressly or impliedly admitted as then the admission itself is evidence. Evidence is usually given on oath. Averments are not made on oath. Averments depend upon evidence for proof of their contents.”

70. Since the Appellant did not give evidence of the documents that it may have supplied to the Respondent which were not considered in arriving at the decision to issue additional VAT assessments, the Tribunal finds that the Respondent was justified in issuing the additional assessments.

b). Whether the Appellant has discharged its burden of proof. 71. The Respondent submitted that the Appellant failed to discharge its burden of proof by failing to provide relevant supporting information and documents that would be used to support its claim for zero rated and exempt sales.

72. The Tribunal notes that The Respondent invoked Section 56 of the TPA which provides that:-“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. 2. An appeal to the High Court or Court of Appeal shall be on question of law only.”

73. This Section places the burden of proof in tax cases on the taxpayer. The Section is reinforced by Section 30 of the TAT Act which states that:-“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”

74. The Tribunal is guided by the holding of the Court in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR wherein the Court stated that:-“The import of the above provisions is that the party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof.[9] The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy.The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency.[10] The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position.”

75. The Tribunal also relies on Section 107 (1) of the Evidence Act (Cap 80 Laws of Kenya) which states as follows:-“Whoever desires any Court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

76. Section 109 of the Evidence Act which further provides as thus:-“The burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence, unless it is provided by any law that the proof of that fact shall lie on any particular person”

77. After the review of the documents submitted by the parties, the law and the case laws cited above, the Tribunal finds that the Appellant did not discharge its burden of proof and the Respondent was therefore justified in confirming the additional VAT assessments.

Final Decision 78. The upshot of the foregoing analysis 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 Objection decision dated 12th June 2023 be and is hereby upheld.c.Each party to bear its own costs.

79. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF AUGUST, 2024ERIC NYONGESA WAFULA - CHAIRMANJEPHTHAH NJAGI - -MEMBERUNICE N. NGA’NG’A -MEMBERGLORIA A. OGAGA-MEMBER