[2023] KETAT 317 (KLR)

Vyezinina Restaurant v Commissioner of Domestic Taxes (Appeal 379 of 2022) [2023] KETAT 317 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 317 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 379 of 2022

RM Mutuma, Chair, EN Njeru, RO Oluoch, D.K Ngala & EK Cheluget, Members

May 19, 2023

Between

Vyezinina Restaurant

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated under the Companies Act of the laws of Kenya, and is in the business of manufacturing drinkable juice drinks from non-drinkable compounds obtained from fresh fruits.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the Laws of Kenya. The Respondent is an agency of the Government for the collection and receipting of all tax revenue. The Respondent is further mandated to administer and enforce all provisions of the written laws as set out in the Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting, and accounting for all revenue in accordance with those laws.

3. The issue in dispute herein arose when Respondent carried out a tax audit of the Respondent’s affairs and came out with a verdict vide a letter dated 11th March 2020 stating that the Appellant had underdeclared its sales in regard to VAT for the year 2018 amounting to Kshs 7,722,724. 00.

4. The Appellant failed to correct this alleged under declaration of its sales and the Respondent vide a letter dated the 20th July 2020 issued a demand for VAT arrears amounting to Kshs 1,729,890. 16.

5. The Appellant objected to this tax demand vide a letter dated 1st September 2020 and the said objection was rejected by the Respondent vide an Objection decision dated the 28th December 2020.

6. The Appellant being dissatisfied with the Respondent’s Objection decision filed an Appeal against it before the Tribunal on the 13th April 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal filed on 13th April, 2022is premised on the following grounds of Appeal, that:a.The KRA tax assessors didn’t consider all the evidence presented to it by the Appellant.b.The Respondent did not advice it correctly on the documents it required for the assessment.c.The Respondent erred in assessing the Appellant in the same way as that of established supermarkets.d.Not all goods purchased for sale by the Appellant attract VAT,e.The supermarket did not reach the VAT threshold in the earlier days of its incorporation.f.The Appellant erroneously made its declarations under the PIN number of Vyeznina Restaurant Ltd and thus this erroneous tax assessment.

The Appelant’s Case 8. The Appellant’s case is premised on its Statement of Facts filed on the 13th April, 2022 and the Written Submissions dated and filed on 7th October, 2022.

9. The Appellant stated that the Respondent ignored its sales income amounting to Kshs 8,063,226. 00 from the supermarket sales in the year 2018.

10. The Appellant further stated arising from these sales as confirmed by its points of sale (POS) the VAT payable for the year 2018 was Kshs 97,834. 00

11. The Appellant argued that the Respondent did not proffer an explanation on why it ignored the POS figures in computing their tax assessments.

12. Appellant contended that even if all the goods sold by the Appellant were to be taxed, then:a.Its VAT tax liability for the year 2018 would be Kshs 99,751. 00 This is arrived at by subtracting VAT on purchases (16% of 7,509,081. 00) from VAT on sales (16% of 8,063,226).b.Its tax liability for the sales and purchases of 100 days when the supermarket operated in year 2017 would be Kshs 47,812. 00 arrived at by taxing the net of the total sales of Kshs. 10,016,175. 00 from purchases of Ksh.9,711,350. 00

13. The Appellant argued that the Respondent’s objection decision did not meet the mandatory requirements of Section 51 (10) of the Tax Procedures Act which states as follows:“An objection decision shall include a statement of findings of the material facts and the reasons for the decision”.

14. It was the Appellant’s argument that the impugned objection decision lacked a statement of finding on the material facts and the reasons for the decision.

15. That the Respondent affirmed that the Respondent’s assessment was based on a combination of income derived from the restaurant business and the supermarket without providing the portion of the income from the restaurant and that from the supermarket. It argued that this amounted to abuse of power and grave injustice contrary to the decision of the court in Republic vs. Kenya Revenue Authority Ex Parte Cooper K-Brands Limited (2016) eKLR .

16. The Appellant stated that contrary to the Respondent’s assertion that it had not provided POS reports that gave a breakdown of the sales reports, the Appellant argued that it presented the following documents to the Respondent;a.Sales transactions 2018; sample of online document derived from the POS System and emailed to KRA on Tuesday 9th November 2021. b.Purchase transactions 2018; sample online documents derived from the POS system and emailed to KRA on Tuesday 9th November 2021. c.VAT report 2018; sample of online documents derived from the POS System and emailed to KRA on Tuesday 9th November 2021.

17. On the issue of whether it provided monthly ETR Z-reports giving a breakdown of sales into exempt, zero rated and vatable categories, the Appellant stated that it provided 3,000 pages of manual book which showed purchases, sales and the margins of sale. The documents included computer generated VAT report for each month in the year 2018, which in essence provided the monthly ETR Z-reports and that the receipt of this document was confirmed by the Respondent.

18. The Appellant stated that it was at a loss on which documents the Respondent required of it considering that it had provided all the documents that were in its possession. It buttressed this point by relying on the case of TAT No. 58 and 126 of 2019, Shreeji Enterprises Limited vs. Commissioner of Investigation of Enforcement, where the Tribunal observed that:“Although the current law provides that the Appellant prove the tax was paid or that the Respondent’s assessment was wrong …in demanding the production of documents which are not prescribed by legislation the tax authority should be guided by reasonableness, the nature and circumstances of the trader otherwise it would, as it occasionally does, demand information, which the trader cannot produce because he does not have…’

Appellant’s Prayer 19. The Appellant’s prayer to the Tribunal was for orders that:a.The Objection decision issued by the Respondent did not meet the mandatory requirements as set out in Section 51(1) and is therefore null and void.b.The Tribunal vacates the erroneous assessment and find that the Applicant has no outstanding taxes.c.The Honourable Tribunal be pleased to issue any other order favourable to the Appellant as it may deem just and fair to the issue.d.The Respondents bear the costs of the Appeal.

Respondent’s Case 20. The Respondent opposed the Appeal vide its Statement of Facts dated and filed on 28th April 2022 and the Written submissions dated and filed on the 30th of September 2022 wherein it stated that it had carried out an audit into the Appellant’s tax affairs and it noted variances in between Income tax sales and VAT sales for the year 2018 as follows:PIN NO Total VATTurnover Total ITTurnover Variance

PO51XXX448X 1,414,147 9,136,871 (7,722,724)

21. That it subsequently requested the Appellant to amend its returns to capture this variance as undisclosed income vide a letter dated 11th March 2020. That a reminder was done on 20th July 2020 but the Appellant failed to amend the returns.

22. The Respondent stated that the Appellant later wrote to it on the 11th August 2020 stating that the cited variance arose from impulsively combination of accounts of its two businesses namely the Supermarket and Restaurant. That in response it sent the Appellant several emails guiding it on how to file an objection and the documents it ought to have provided to support its objection including company & personal bank statements, monthly ETR Z-reports and audited financial statements.

23. That the Appellant filed its objection on 1st September 2020 and the Respondent issued its objection decision on 28th December 2020 rejecting the Appellant’s objection and confirming taxes in the sum of Kshs 1,482,763. 00

24. The Respondent posited that its analysis of the documents provided by the Respondent showed that the supermarket sales consists of exempt, zero-rated and vatable sales. That it thus requested the Appellant to provide monthly ETR Z-reports giving a breakdown of sales into those categories so as to determine which portion of the variance belonged to vatable sales. That however, the Appellant did not provide these documents or any Point of Sale reports providing a breakdown of the sales.

25. The Respondent contended that the documents provided by the Appellant were not conclusive because they showed that all its goods had been charged VAT. That it was thus compelled to make an amended assessment in the objection decision on the basis of documents that were available to it as is envisaged in Section 24 (2) of the Tax Procedures Act 2015. It supported this assertion with the case of Boleyn International Limited versus Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No 55 of 2019) and the case of Kenya Revenue Authority V Man Diesel & Turbo Se, Kenya (2021) eKLR.

Issues for Determination 26. Having gleaned through the pleadings of the parties the Tribunal has arrived at a decision that the single issue that falls for determination in this Appeal is:a.Whether the Respondent erred in confirming its Additional Assessment for Income Tax and VAT.

Analysis and Detrmination 27. The crux of this Appeal falls on the fact that the Respondent issued additional assessment against the Appellant because of the latter’s failure to provide it with sufficient and relevant documents.

28. It is now settled that Section 30 of the TAT Act places the burden of proof in tax proceedings on the taxpayer. It reads 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’.

29. Section 23 of the TPA requires the taxpayer to keep all records that are related to its tax affairs. It reads as follows:‘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.’

30. Undoubtedly therefore, it was the responsibility of the Appellant to proof its case against the amended assessment and to keep all the documents that are related to its tax affairs.

31. Once the Respondent stated that the Appellant had specifically failed to provide it with monthly ETR Z-reports or a related document giving a breakdown of sales to help it determine which portion of the variance belonged to vatable sales, the burden immediately shifted to the Appellant to prove that it indeed provided these documents. This burden would have been discharged by the production of a letter or an email confirming that it indeed submitted these document as requested. This was not done.

32. The effect of this omission or refusal to share the documents required is that the Appellant had failed to discharge its statutory obligation under Section 30 of the TAT Act to show that the Respondent erred in confirming its additional assessment. For which reasons the Tribunal does not find any fault with the impugned objection decision.

33. The conclusion of the Tribunal was supported by the Superior court in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, where Justice Mativo J, stated as thus:’32. 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. 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. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer’.

34. Based on the above analysis and supported by the case of Man Diesel (supra) the Tribunal finds and hold that Appellant failed to perform its statutory duty of supplying the Respondent with the documents that it required to help it re-consider its tax demand. Therefore, the presumption that the Respondent’s additional assessment was correct has not been dislodged. The Tribunal shall thus not interfere with the said objection decision.

Final Decision 35. The upshot of the foregoing is that the Appeal has no merit and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby dismissed;b.The Respondent’s Objection decision dated 28th December 2020 be and is hereby upheld; andc.Each party to bear its own costs.

36. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. …………………………………………………………………………………………………………………………………………ROBERT M. MUTUMACHAIRPERSON……………………………ELISHAH N. NJERUMEMBER……………………………RODNEY O. OLUOCHMEMBER……………………………DELILAH K. NGALAMEMBER……………………………EDWIN K. CHELUGETMEMBER