[2023] KETAT 130 (KLR)

Vinepack Limited v Commissioner of Investigations &Enforcement (Appeal 552 of 2021) [2023] KETAT 130 (KLR) (Civ) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 130 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 552 of 2021

E.N Wafula, Chair, Rodney Odhiambo Oluoch, RM Mutuma & Edwin K. Cheluget, Members

February 10, 2023

Between

Vinepack Limited

Appellant

and

Commissioner of Investigations &Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act and is a registered taxpayer. Its principal business is in the manufacture and sale of compounded spirits and beverages.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act. 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 instituted investigations against the tax affairs of the Appellant on 13th December 2019 which culminated in investigation findings being issued to the Appellant dated 2nd November 2020 of Kshs. 676,420,434. 00 as tax due and payable.

4. Upon further correspondence, the Respondent issued a Notice of Assessment dated 25th May 2021. The Appellant applied for an extension of time to file an Objection dated 22nd June 2021 which the Respondent rejected for lack of reasonable grounds.

5. The Appellant nonetheless filed the objection on 30th July 2021. The Respondent confirmed its assessment for the reason that the Appellant was late in filing its objection thereby invalidating the Objection.

6. On receiving the decision, the Appellant filed the Appeal before the Tribunal on the 14th September 2021.

The Appeal 7. In its Memorandum of Appeal dated 14th September 2021 and filed on even date, the Appellant premised its Appeal on the following grounds;-a.The Respondent confirmed the Notice of Assessment without due regard to all records, explanations, and information provided by the Appellant.b.The Respondent erred in law and fact by assessing taxes and demanding the production of documents in contravention of Section 23(1) (c ) of the Tax Procedures Act No. 29 of 2015 hereinafter called the Act which provides;“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.”c.The Commissioner has erred in their calculation of Excise duty payable from stamp reconciliation.d.The Commissioner has erred in fact by assuming a high selling price that was not the Appellant’s selling price at the time of operations to calculate VAT payable.e.The Commissioner has erred in fact by not providing for excise duty rebates as provided for under Section of Excise Duty Act.f.The Commissioner erred in law and facts by taxing the Excise Duty as part of the income when coming up with the income tax for the period under review.g.The Commissioner erred in fact and law by contravening Section 3(2)(i) as read together with Section 4 of the Income Tax Act on the following:i.Not providing for contra entries i.e transfers between related accounts.ii.Assuming that bounced cheques formed part of loans and Directors' contributions formed part of the income.iii.Calculating additional income taxes in years no self-assessment returns have been made.iv.We are not done in accordance with Section 29(2) of the TPA and as so not valid and per the same act.h.The Commissioner erred in fact and law by using a speculative approach in raising additional tax even after being given all the documentary evidence by the taxpayer which are ignored without proof of otherwise to the taxpayer. The tax law provides that the taxes paid must be factual and just.

The Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated and filed on 14th September 2021 and the Written submissions dated 2nd September, 2022 and filed on 5thSeptember, 2022.

9. The Appellant averred that it responded to the Respondent’s request and for one year both parties engaged each other resulting to investigation findings communicated to it vide the Respondent’s letter referenced I&E/NRB/DTIS/151/020 dated 2nd November 2020.

10. The Appellant further averred that the Respondent communicated additional revenue of Kshs. 676,420,434. 00 which included an assessment of two directors, Mr. Johnson Muthigoro and Mr. Dickson Mbogo for Kshs. 14,891,698. 00 and Kshs. 3,330,933. 00, respectively.

11. It was the Appellant’s assertion that it provided all the necessary documents where it raised several issues to the Commissioner for review and determination.

12. It contended that the Commissioner acknowledged receipt of the reply but it did not respond to it until 25th May 2021 when it was issued with a Notice of Assessment confirming the initial assessment without taking into consideration the points of disagreement laid out in the Appellant’s initial objection.

13. It further posited that the Respondent gave it 30 days to object but it was not able to respond in time because of reconciliation challenges, difficulties posed by the Covid-19 Pandemic and the fact that its factory was sealed by the Respondent. It therefore applied for 45 days extension of time on 22nd June 2021 and the Commissioner without any proper reason declined to grant this request. Its objection was also rejected for being out of time vide a letter dated 3rd August 2021.

14. The Appellant averred that the objection was not handled carefully and diligently by the Respondent who refused to amend its assessment despite the fact that it had supplied it with all the documents it required.

On whether the Respondent acted ultra vires contrary to Section 23(1)(c) of the Tax Procedures Act No. 29 of 2015 in its assessment of the Appellants. 15. The Appellant submitted that even after undertaking a physical audit of its premises, provision of relevant documents and several exchange of correspondences the Respondent still affirmed its assessment of income for the period January 2015 to July 2020 of Kshs. 868,391,081. 00.

16. It reiterated that it filed an objection on 30th July 2021 where it argued that the Respondent acted ultra vires on its reliance on documents that are more than five years old contrary to Section 51(3) of the TPA.

17. It submitted that its request for extension of time was rejected within 3 days without much consideration to its situation and that the Respondent acted ultra vires to the provisions of the Tax Procedures Act by raising an additional assessment with regard to the 2015 year of income.

18. It invoked Section 29 of the Tax Procedures Act which provides that the Respondent had the powers to raise default assessments where the taxpayer has not filed tax returns for a particular tax period.

19. It quoted Section 29(5) of the Tax Procedures Act which states that:“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.”

20. It argued that although the investigations began in December 2019, the assessment was issued on 25th May 2021 covering the period from January 2015 to July 2020. By the time of the issuance of the assessment, the 5-year statutory period dictated that the maximum assessment could only extend up to 2015.

21. It reiterated that Section 29(6) of the Tax Procedures Act allows the Respondent to carry out an assessment beyond the five-year period in cases of willful neglect or fraud.

22. It contended that it is trite law that fraud must be specifically alleged and proved and that the Respondent should not be allowed to assess tax by merely stating that there was fraud or willful neglect on the part of the Appellant without providing sufficient proof. It posited that in the absence of proof of fraud or willful neglect then the Respondent’s assessment in respect of the year 2014 was statutorily barred and should hence be vacated.

23. It relied on the case of Kenya Revenue Authority v. Jimmy Mutuku Kiamba [2015] eKLR where the Judge stated that:“by dint of the provisions of Section 79 (1) (a) of the Income Tax Act, the Kenya Revenue Authority is permitted to conduct an assessment of tax even after the lapse of 7 years, provided that the person for who tax was being assessed, willfully neglected to provide an accurate self- assessment, or where the said person was deemed to have been fraudulent… I am very cautious about being perceived as making any pronouncement which could be construed to imply that the Respondent was guilty of a criminal offence, yet he had not been charged, tried and convicted for any such criminal offence. It is important to distinguish between criminal culpability and civil liability. A person is only said to be criminally culpable upon his being convicted of a criminal offence. And in order for the court to find somebody criminally culpable, the evidence adduced must prove the guilt of that person beyond any reasonable doubt.”

24. It submitted that its directors have not at any time been tried and convicted of a criminal offence in relation to fraud and therefore the Respondent acted illegally and contrary to Section 29(6) when it assessed its tax affairs outside the five-year statutory period.

On whether the Respondent was right to assess the nontaxable income on assumptions 25. The Appellant submitted that the Respondent’s assessment is illegal because loans, contra entries, bounced cheques, and directors' injections were considered as taxable income for the period in question. That the same was analysed and submitted to the Respondent on 9th May 2022.

26. It quoted Section 3(2) of the Income Tax Act which provides as follows:-“Subject to this Act, income upon which tax is chargeable under this Act is income in respect of - (a) gains or profits from – (i) a business, for whatever period of time carried on; (ii) employment or services rendered (iii) a right granted to another person for use or occupation of property; (b) dividends or interest; (c) (i) a pension, charge or annuity; and (ii) any withdrawal from, or payments out of, a registered pension fund, or a registered provident fund or a registered individual retirement fund; and (iii) any withdrawals from registered home ownership savings plan. (ca) income accruing from a business carried out over the internet or an electronic network including through a digital marketplace;”

27. It contended that the Respondent failed to consider its objection which affirmed that the deposits in its various bank accounts included loans, contra entries, bounced cheques, and directors’ capital injections which could not constitute taxable income within the confines of Section 3(2) of the Income Tax Act.

28. It asserted that the Respondent’s decision to charge tax on Kshs. 979,59,098. 00 contravened the provisions of Section 3(2) and Section 13 of the VAT Act.

29. It quoted Section 5 of the VAT Act which provides that:“Charge to tax (1) A tax, to be known as value-added tax, shall be charged in accordance with the provisions of this Act on— (a) a taxable supply made by a registered person in Kenya; (b) the importation of taxable goods; and (c) a supply of imported taxable services.”

30. It submitted that if any assessment must be done, the Respondent should have limited itself to Section 5 of the VAT Act, Section 31(5) of the Tax Procedures Act and Section 3 of the VAT Act.

31. It reiterated that it did not provide for these deductions because the Respondent did not provide an analysis for the same.

32. It relied on the case of Raghubar Mandal Harihar Mandal v. The State of Bohar 1957 AIR 810, 1958 SCR 37 where the court held that:“The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee's circumstances, and his own knowledge of previous returns by, and assessments of, the assessee, ”

33. It submitted that the Respondent’s assessment was contra statute and therefore ought to be quashed.

On whether the Respondent was right in assessing Corporation tax without deducting the Charged Excise Duty which does not form part of the income 34. In quoting Sections 3(2) and 5 of the Income Tax Act, the Appellant submitted that Section 3(2) does not include Excise Duty as part of income and that the Respondent did not provide for the excise duty while assessing additional Corporation tax on bankings and treated the same as income contrary to the Act.

35. It relied on the case of Republic v. Kenya Revenue Authority [2009] eKLR where Justice Sergon held that:“Let me begin by examining the above issues raised by both sides. It has been argued that the assessed tax is illegal because it violates section 34 of the Income Tax Act. I agree with the submissions of the applicant that where tax is assessed without strict compliance with the provisions of the Act, the same becomes illegal hence will be reviewed and quashed… The Respondent was obliged to apply the graduating rate. Under the Third Schedule, the individual rates of tax shall be rates of Personal Relief and Tax. Section 34 (1) (a) of the Act provides as follows: Tax upon the total income of an individual other than that part of comprising of wife’s emolument income, fringe benefits and the qualifying interest, shall be charged for the year of income at the individual rates for that year of income. I am convinced the Respondent in applying a flat rate of 30% acted in contravention of Section 34 of the Act. The amount demanded therefore became illegal. The same is not even subjected to Personal Relief as required under S.29 of the Act.”

The Appellant’s prayers 36. The Appellant prayed for orders that:a.The Appeal be allowed;b.The demand for Kshs. 868,391,081. 00 together with interest and resultant penalties be set aside and in its place thereof, the Honourable Tribunal finds that no tax is payable; andc.Costs be borne by the Respondent.

The Respondent’s Case 37. The Respondent’s case is premised on the hereunder documents:a.Its Statement of Facts dated and filed on 12th November 2021;b.The Witness Statement of Eugene Wanende filed on 6th July 2022 and adopted in evidence on oath on the 18th August, 2022c.Its Written submissions dated and filed on 9th September 2022.

38. It stated that the tax demanded was computed based on information available to it pursuant to the provisions of the Tax Procedures Act

39. It quoted Section 23 of the Tax Procedures Act which provides that:“(1) A person shall— (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. (3) When, at the end of the period specified in subsection (1)(c), a document — (b) is necessary for a proceeding commenced before the end of the five-year period, the person shall retain the document until all proceedings have been completed.”

40. It stated that investigations into the affairs of the Appellant commenced in 2019 and covered the period of January 2015 to July 2020 which was well within the five-year timeframe provided in the law with respect to bookkeeping.

41. It contended that from its investigations, it found that the Appellant was issued with Kshs. 14,986,089 in excise stamps and that it had in its initial findings computed excise duty payable on stamps unaccounted for and activations with no corresponding tax declarations and payments using the volume of expected finished products and declared products.

42. It averred that the Appellant raised issues with the fact that the Respondent had not factored in its computation the opening and closing excise stamp stocks and wastage/spillage amounts on finished products.

43. It stated that in its confirmed assessment for excise duty, it was able to confirm that out of the stamps issued, 14,284,454 stamps were consumed while 775,461 formed part of the closing stock which resulted in no additional excise duty being tabulated from the reconciliation.

44. It further stated that in computing excise duty based on production volumes, it factored in the issue of wastage/spillage amounts of finished producers totaling 38,080 litres for both Spirits and ready to Drink as provided by the Appellant before arriving at the variance of 1,854,777 litres of activated but unaccounted litres of product which formed the basis for calculation of additional excise duty payable by the Appellant of Kshs. 257,946,923. 00 out of which the Appellant conceded Excise duty of Kshs. 219,129,232. 00 as due and payable.

45. It averred that:a.The Appellant based its VAT computation on excise stamps activated as opposed to the equivalent production volumes.b.The Appellant provided an average selling price of Kshs. 80 per 250ml bottle for both spirits and Ready to Drink which the Respondent found to be realistic.1. It averred that it maintained its position and used volume as per the excise stamps reconciliation and applied the ex-factory price of Kshs. 350 and Kshs.200 per litre for spirits and Ready to Drink respectively in computing additional VAT.

47. It quoted Section 56 of the Excise Duty Regulations which provides that:“A person shall not offset excise duty on the raw materials under section 14 of the Act, where raw materials - (a) remains unused while in the factory; (b) are used to manufacture goods which are still under excise control; or (c) are used to manufacture exempt goods.”

48. It stated that the Appellant did not qualify for any rebate as the excise duty was calculated on activated but unaccounted-for volumes of finished products and not raw materials as provided under the Excise Duty Regulations.

49. It contended that in determining the expected income for purposes of computing Corporation tax, it compared the adjusted banking with the expected turnover based on the stamp analysis and declared turnover with the higher of the two taken to represent the income.

50. It averred that pursuant to Section 3(2)(i) of the Income Tax Act, income tax was computed from the expected income earned by the Appellant through the sale of spirits and ready to drink products and that the income was calculated from the information provided by the Appellant and the information obtained from various third parties.

51. It asserted that in accordance with Section 29(2) of the TPA, the Commissioner notified the Appellant of the findings of its investigations and the additional tax assessments due and payable to it.

52. It confirmed that the taxes of Kshs. 674,420,434. 00 as computed in its initial tax findings to the Appellant differed from its confirmed tax assessments of Kshs. 623,705,475. 00 and that there would be no difference in the computed additional taxes if the Respondent did not consider the information and documents presented by the Appellant.

53. It reiterated that it disallowed claims only in instances where the Appellant was unable to provide supporting documentation.

On whether the objection decision was issued contrary to Section 23(1) of the Tax Procedures Act, 2015 54. The Respondent quoted Sections 23(1)(b), (c), and 3(b) of the Tax Procedures Act and submitted that investigation into the affairs of the Appellant commenced in 2019 and covered the period of January 2015 to July 2020 which was well within the five-year timeframe provided in law with respect to bookkeeping. It therefore, did not contravene the provisions of the law as alleged by the Appellant.

On whether the tax demand was justifiable 55. The Respondent contended that the tax demanded was computed on information available to it pursuant to the provisions of the law.

56. It quoted Section 31 of the Tax Procedures Act to buttress its position that where an assessment has already been made by the Appellant, the Commissioner can issue additional assessments that will be an amendment to the assessment made earlier.

57. It submitted that it called upon the Appellant and various third parties to provide documentation which it reviewed and raised an assessment amounting to Kshs. 868,391,081. 00 and that the additional taxes were not erroneously issued.

58. It confirmed that the taxes of Kshs 674,420,434. 00 in its initial findings differed from its confirmed tax assessment of Kshs. 623,705,475. 00 and that there would be no difference in the computed additional taxes if the information and documents presented were not considered.

59. It submitted that the burden of proof is on the taxpayer to show that the tax assessed is excessive and not due as per Section 56(1) of the Tax Procedures Act, Section 30 of the Tax Appeals Tribunal Act, and Section 107 of the Evidence Act which it quoted.

60. It further submitted that the Appellant failed to provide satisfactory explanations and supporting documents in accordance with Section 59 of the Tax Procedures Act and that this left it with no choice but to demand taxes.

61. It relied on the case of Pierson v. Belcher (H.M Inspector of Taxes) Tax Cases Volume 38 which was referred to by Justice Majanja inPZ Cussons East Africa Limited v. Kenya Revenue Authority (2013) eKLR where it was stated that:“there is an additional assessment made by the Commissioner upon the Appellant; it is perfectly settled by cases such as Norman v. Galder 297C 293 that the onus is upon the Appellant to show that the assessment made upon him is excessive and incorrect and of course, he has completely failed to do. That is sufficient to dispose of the appeal, which I accordingly dismiss with costs.”

62. It submitted that this Appeal is not in compliance with Section 52(2) of the Tax Procedures Act which requires the Appellant to pay taxes not in dispute before appealing against an objection decision because the Appellant had conceded to Excise Duty payable of Kshs. 219,129,232. 00 in its letter dated 30th July 2021.

63. It quoted Section 52(2) of the Tax Procedures Act and cited the case of Hewlett Packard East Africa Limited v. Commissioner of Domestic Taxes [2019] eKLR where it was held that:“In the end, it follows that this Court, having determined that the Appellant’s appeal was not in compliance with Section 52 (2) of Tax Procedure Act grounds Nos. 1, 2, and 3 of this appeal are dismissed. They are dismissed because the appeal before the Tribunal was incompetent in view of Section 52 (2) of the Tax Procedure Act and having been incompetent no appeal can lie on those grounds before this Court.”

64. It argued that the Appellant has conceded to the Excise duty of Kshs. 219,129,232 but has failed to pay the undisputed taxes meaning that the present appeal was improperly lodged.

65. It cited the case of Alfred Kioko Muteti v. Timothy Miheso & Another [2015] eKLR where it was held that:“Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party. It was therefore not the duty of the 2nd defendant to prove who the owner of the accident motor vehicle was, whether by registration or by possession or beneficial use… Pleadings are not evidence and it is not enough to plead particulars of negligence and make no attempt in one’s testimony in court to demonstrate by way of evidence how the accident occurred and how the 1st defendant was to blame for the said accident. It is trite law that he who alleges must prove and that burden does not shift to the adverse party even if the case proceeds by way of formal proof and or undefended.”

66. It further cited the case ofCMC Aviation Limited v. Cruis Air Limited(1) [1978] KLR 103 where it was stated that“... pleadings contain the averments of the three parties concerned. Until they are proved or disproved, or there is an 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.”

67. It asserted that the Appellant has not provided evidence to show that the assessment was done contrary to the law.

The Respondent’s prayers 68. The Respondent prayed that the Tribunal:a.Dismisses the Appeal with costs to the Respondent;b.Upholds the assessment by the Respondent

Issues for Determination 69. The Tribunal upon consideration of the pleadings filed, the evidence adduced and the submissions made by the parties is of the view that the following issues fall for its determination:a.Whether the Appeal herein is valid?b.Whether the Respondent erred in considering information beyond five years in making its assessment?c.Whether the Respondent erred in confirming the additional assessments?

Analysis And Findings 70. The Tribunal wishes to separately analyse the issues identified as herein-under.

a) Whether the Appeal herein is valid? 71. Section 51(3)(b) of the Tax Procedures Act Provides that:“(3) A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if— (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).”

72. Further, Section 52 states as follows:“(1) A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013). (2) A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice. ”

73. In the instant case, it is noted that in its Objection, the Appellant conceded to Excise Duty of Kshs. 222,175,870. 00, which comprised VAT of Kshs. 82,433,536. 00, and Corporation tax of Kshs. 75,390,823. 00 but did not provide proof of payment, payment plan or a request for an extension of time to pay the amount that was not in dispute.

74. The Tribunal holds that Section 52(2) of the Tax Procedures Act is couched in mandatory terms. The Appellant does not have the luxury or discretion of determining whether it can pay the tax in dispute. The law requires that the tax in dispute must be paid and or a plan of its payment be provided before and or at the time of lodging an Appeal. The Appellant failed to oblige to this mandatory statutory directive. It thus follows that its Appeal is incompetent and invalid for contravening Section 51(2) if the TPA.

75. Having declared that the Notice of Appeal is invalid the other issues that were identified for determination do not invite a determination as they have been rendered moot.

Final Decision 76. The upshot to the foregoing analysis is that the Tribunal makes the following final Orders;-i.The Appeal be and is hereby struck out.ii.Each party to bear its own costs.

77. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ERIC N. WAFULA CHAIRMANRODNEY OLUOCH MEMBERROBERT M. MUTUMA MEMBEREDWIN CHELUGET MEMBER