[2023] KETAT 565 (KLR)

Wambugu v Commissioner of Domestic Taxes (Appeal 1039 of 2022) [2023] KETAT 565 (KLR) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 565 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1039 of 2022

Grace Mukuha, Chair, G Ogaga, Jephthah Njagi, E Komolo & T Vikiru, Members

October 19, 2023

Between

Esther Muthoni Wambugu

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is an individual registered taxpayer whose economic activity is listed as wholesale and retail trade.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 460 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part I & II of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent established variances between the Appellant‘s VAT returns and income tax returns for the year 2020. The Respondent assessed the Appellant for additional VAT amounting to Kshs. 294. 462. 00 vide assessment number KRA202204069463 dated 30th March 2022 for the period 1st December 2020 to 31st December 2020.

4. The Appellant lodged a late objection against the additional assessment on 28th June 2022, the late objection was accepted by the Respondent on 20th July 2022.

5. The Respondent confirmed the assessments vide its objection decision dated 23rd August 2022.

6. The Appellant, being dissatisfied with the Respondent‘s objection decision confirming the additional VAT assessments, lodged a Notice of Appeal filed on 22nd September, 2022.

The Appeal 7. In her Memorandum of Appeal dated 19th September 2022 and filed on 22nd September 2022, the Appellant premised her Appeal on the following grounds:-a.That the Respondent erred in law and fact by compelling the Appellant to pay VAT for the period 1st December 2020 to 31st December 2020 when the Appellant did not make any vatable supplies amounting to such a figure.b.That the Respondent erred in law and fact in attempting to compel the Appellant to pay tax for the period 1st December 2020 to 31st December 2020 by relying on Resident individual income tax return filed for the period 1st January 2020 to 31st December 2020 yet the Respondent is not questioning the Appellant‘s action to file the said figure under Part II Other Income of the Resident Individual Income Tax Return.c.That since the Respondent is relying on erroneous information which ought to be understood first, the Respondent has erred in law and in fact by compelling the Appellant to pay VAT for the period 1st December 2020 to 31st December 2020 without revealing the documents or information it relied upon to arrive at its decision.d.The Respondent erred in law and fact by compelling the Appellant to pay VAT for the period 1st December 2020 to 31st December 2020 when the Appellant did not make any vatable sales for the said period.e.The Respondent erred in law and fact in compelling the Respondent to pay VAT by unlawfully capitalising on declared zero-rated (LPG) sales that were realised for the period 1st January 2020 to 31st December 2020.

The Appellant‘s Case 8. The Appellant‘s case was premised on her Statement of Facts dated 21ST October 2022 and filed on the same date.

9. The Appellant stated that the Respondent assessed the additional VAT of Kshs. 294,462. 00 for December 2020 on the basis of her Resident Individual tax Return for the entire period 1st January 2020 to 1st December 2020 yet she had not received such amount for the period December 2020.

10. The Appellant averred that the sales in question were for Liquefied Petroleum Gas (LPG) which was zero-rated at the time of supply.

11. The Appellant stated that the Respondent assessed her for VAT based on her Resident Individual Tax Return yet the financial statements for her business clearly outlined the taxable sales and the zero-rated sales.

12. The Appellant averred that the Respondent did not question her Resident Income Tax Return neither was its objection decision about reassessment of the tax for the year 2020. That the Appellant inquired how the Respondent could then term its assessment to be for the period 1st December 2020 to 31st December 2020.

13. The Appellant stated that the Respondent was acting ultra vires.

14. The Appellant further averred that according to her bank statements, there was no such payment of Kshs. 2,103,300. 00 received from the sale of LPG for the period 1st to 31st December 2020 therefore the Respondent had the duty to demonstrate that such amount was paid to the Appellant in the month of December 2020 but it failed.

15. The Appellant contended that the Respondent was unlawfully compelling her to pay taxes that were already filed and paid for in the year 2021 under the Resident Individual Income Tax Return.

16. The Appellant further asserted that the Respondent had the legal duty to show that the Appellant received payments or had vatable transactions for the period to warrant assessment.

17. The Appellant stated that the Respondent alleged that she had not provided documents in support of the objection yet she had availed all documents including bank statements and invoices for the year 2020 which indicate that by the time of supply, delivery and sale of LPG was zero-rated.

18. The Appellant questioned whether the Respondent was at liberty to claim VAT for December 2020 just because the Resident Income Tax Return had the additional Kshs. 2,103,300. 00 yet the sales were zero-rated supplies.

The Appellant‘s Prayers 19. The Appellant prays that the Appeal be allowed.

The Respondent‘s Case 20. The Respondent premised its case on the following documents before the Tribunal: -a.Respondent‘s Statement of Facts dated 21st October 2022 and filed on even dateb.The Respondent‘s Written Submissions dated 4th April 2023 and filed on even date.

21. The Respondent stated that it established variances between the Appellant's VAT returns and income tax returns for the period 2020 and issued the Appellant with a pre-assessment notice dated 9th February 2022 which was not responded to. Consequently, it issued additional assessment to the Appellant on 30th March 2022.

22. The Respondent stated that in summary, the Appellant was issued with additional assessments for December 2020 after the Respondent established variances between the Appellant's VAT returns and income tax returns for the aforementioned period.

23. The Respondent stated that the Appellant lodged a late objection against the additional assessment on 28th June 2022 which was accepted by the Respondent on 20th July 2022.

24. The Respondent averred that it was the Appellant's ground of objection that the variance was a result of sale of LPG and gas which was VAT exempt in 2020.

25. The Respondent averred that it sought clarification and wrote to the Appellant severally requesting the Appellant to provide details to allow it ascertain whether the items sold were exempted from VAT as claimed by the Appellant pursuant to the Part I of the First Schedule to the VAT Act 2013.

26. That the Appellant failed to provide the documents which informed the Respondent‘s decision to reject the Appellant's objection and subsequent issuance of an objection decision.

27. The Respondent submitted that it acted within the confines of the law in issuing the additional assessments to the Appellant pursuant to Section 24 (2) of the Tax Procedures Act (TPA) which allows the Respondent to assess a taxpayer's tax liability using any information availed to it.

28. That having raised the aforementioned assessments based on variances between the Appellant's VAT returns and income tax return, the Appellant ought to have lodged its objection pursuant to the dictates of Section 51 (3) of the TPA. That instead, the Appellant made a late and invalid objection contrary to Section 51(3) of the TPA which provides that: -“A notice of objection shall be treated as validly lodged by the 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; andb)....c)all the relevant documents relating to the objection have been submitted.‖

29. The Respondent stated that breach of compliance with Section 51(3) of the TPA compelled it to reject the Appellant's objection. That the Appellant not only filed its objection late but also failed to adduce sufficient accompanying evidence to support the objection.

30. The Respondent stated that in the absence of supporting documents from the Appellant, it was left with no option but to issue an objection decision pursuant to the provisions of Section 51 of the TPA.

31. The Respondent averred that it was further guided by Section 23 of the TPA which imposes the responsibility on the Appellant to maintain and provide all material documents required by the Respondent in order to ascertain what taxes were due and payable by the Appellant who ought to have been paying taxes for the year under review.

32. The Respondent relied on Primarosa Flowers Limited vs. Commissioner of Domestic taxes (2019) eKLR, where the Hon Makau J. 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 the assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied ‖

33. The Respondent submitted that having demonstrated that the assessments were issued due to inconsistencies noted which the Appellant had failed to counter, the Respondent submitted that its assessment as well as the objection decision were issued based on the best judgment principle by considering materials that were within its custody, the Appellant having failed to provide the required documents.

34. The Respondent cited the case of Commissioner for her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid Appellant Vs The Commissioners For Her Majesty's Respondents Revenue & Customs at paragraph 29 where the Tribunal set out the following requirements for a decision to be to the best of HMRC's judgment as follows:-“... the very use of the word ‗judgment‘ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them ...Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due.Thirdly, it should be recognized, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be made available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words 'best of their judgment' does not envisage the burden being placed on the commissioner of carrying out exhaustive investigations, What the words 'best of the commissioners 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 one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."

35. The Respondent submitted that the assessment order issued as well as the objection decision were valid for reasons that although the Appellant was given an opportunity to sort out the inconsistencies noted in its returns, the Appellant failed to do so within the given timelines. Further, that the Appellant failed to support its notice of objection as provided for in Section 51(3) of the TPA.

36. The Respondent asserted that the onus was on the Appellant to provide all material documents to enable the Respondent ascertain its position, which it failed to do.

37. Based on the foregoing, it is the Respondent's humble submission that the Honourable Tribunal should be guided by the decision of the High Court in Republic vs. Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited {2014] eKLR, where it was stated that: -―.... Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obligated to pay a single coin more than is due to the taxman. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.‖

Respondent‘s Prayers 38. The Respondent prayed that this Honorable Tribunal:-a.Dismisses this Appeal in its entiretyb.Proceeds to uphold the Respondent's objection decision dated 23rd August 2022 and find that the VAT assessments are due and payable by the Appellant.

Issue For Determination 39. The Tribunal having carefully considered the parties‘ pleadings, documentation and submissions, determines that the issue that calls for its determination is:

Whether the additional VAT assessments were justifiedAnalysis And Determination 40. Having determined the issue that calls for its determination, the Tribunal proceeded to analyse it as hereunder.

41. The Respondent stated that it established variances between the Appellant's VAT returns and income tax returns for the period 2020 whereby it issued an assessment for additional VAT of Kshs. 294,462. 00 for the month of December 2020.

42. The Appellant contended that the income that formed the basis of additional assessments was made from sale of LPG which at the time of supply was zero-rated.

43. The Respondent averred that despite several requests for clarification, the Appellant did not provide documents to support its claim that the income was derived from supply of LPG which was zero-rated.

44. The Tribunals‘ analysis of the documents provided by the Appellant, copies of which she annexed to this Appeal, only show the purchases of LPG made by the Appellant from various distributors.

45. The Tribunal observes that the Appellant did not attach documentation to show corresponding sales of LPG, as such it would not have been possible to determine whether the goods sold were zero-rated, the period to which the sales related and whether any VAT was charged.

46. Whereas the Appellant contended that it did not receive any such amounts in December 2020 so as to warrant a VAT assessment, Section 12 (1) of the VAT Act 2013 defines the ‗time of supply‘ as below: -―Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of—a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;c.the date on which the invoice for the supply is issued; ord.the date on which payment for the supply is received, in whole or in part.‖

47. The Tribunal finds that despite the Appellant claiming that she did not receive amounts that gave rise to the VAT assessment in December 2020, she was required to declare the LPG sales at the time of supply, and to demonstrate that the LPG supplied was zero-rated. The only way to ascertain whether or not the Appellant dealt in zero-rated supplies would only be by analysing the Appellant‘s sales records which she failed to provide.

48. Section 24 (2) of the TPA allows the Respondent to assess a taxpayer's tax liability using any information available to it, while Section 30 of the Tax Appeals Tribunal Act is in relation to burden of proof which 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; orb.In any other case, that the tax decision should not have been made or should have been made differently.‖1. The Tribunal is guided by its previous determination in the case of Afya Xray Centre Limited vs Commissioner of Domestic Taxes Appeal number 70 of 2017 where the Tribunal held that: -―From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents.‖

50. The Appellant having failed to discharge the burden of proof to show that the Respondent‘s assessment was erroneous, incorrect or excessive, the Tribunal determines that the additional assessment was justified.

Final Decision 51. The upshot of the foregoing is that the Appeal is unmerited 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 23rd August 2022 be and is hereby upheld.c.Each party to bear its own costs.

52. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF OCTOBER, 2023. GRACE MUKUHA CHAIRPERSONGLORIA A. OGAGA JEPHTHAH NJAGI MEMBER MEMBERERICK KOMOLO TIMOTHY VIKIRU MEMBER MEMBER