[2023] KETAT 275 (KLR)

Wambui v Commissioner of Domestic Taxes (Appeal 656 of 2021) [2023] KETAT 275 (KLR) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 275 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 656 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

May 19, 2023

Between

Fasilio Muita Wambui

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is an “individual” resident taxpayer. The principal activity of the Appellant is that of a hardware shop.

2. The Respondent is a principal of officer appointed under Section 13 of the Kenya Revenue Authority Act and the Authority is a Government agency established under the Kenya Revenue Authority Act, Cap 469 Laws of Kenya for the collection of Revenue and the administration of tax laws within the republic.

3. The Respondent’s iTax system detected insistency between the invoices used by the Appellant for input claim and the VAT sales declared by the various suppliers.

4. This inconsistency was for the months of January 2018, March 2018 and April 2018.

5. As a result, three VAA automated assessments totaling Kshs. 2,125,469. 09 were issued to the Appellant on November 15, 2019.

6. The Appellant objected to the said assessments by lodging a notice of objection on January 13, 2020.

7. The Appellant provided documents to support the objections and as a result, the objection was partially allowed.

8. On September 15, 2021, the Respondent rendered its objection decision in which it allowed VAT amount of Kshs. 1,122,161,01 and disallowed VAT amount of Kshs. 1,003,308,08.

9. That objection decision is the basis of this Appeal.

The Appeal 10. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated October 15, 2021 and filed on October 18, 2021:-a.That the additional estimated assessments are excessive by some error or mistake of fact in the taxed value of purchases or supply of good's value.b.That the Respondent while raising additional estimated assessment (Input VAT) made a substantial error in the procedure provided by the VAT Act, 2013 Section 17 and rules made thereunder which may possibly have produced error or defect in the decision of the case upon the merits. By not taking into the account credit of input tax against output tax the decision is contrary to the Law.c.That the aforesaid additional assessment being based on disallowed Input tax alleged that was either non-deductible or not fully supported is invalid in Law as being contrary to the requirement of Section 17 of theVAT Act, 2013. d.That the Respondent was wrong in disallowing input tax as he alleges that the suppliers declared input some sales in their VAT returns and also Invoices numbers and references mismatch in the Appellant's VAT returns and Appellant's suppliers VAT returns.e.That the Respondent erred in not agreeing with all the documents submitted to prove that:i.The assessment is excessive.ii.The tax decision should not have been made or should have been made differently.f.That the Appellant provided the documents to the satisfaction of the Respondent under Section 62 of VAT Act, 2013read together with section 30 of Tax Appeal Tribunal Act, 2013. g.That the additional assessment should have been amended in accordance with the objection, hence the Respondent's decision was contrary to Law, failed to determine some material issue of law.

Appellant’s Case 11. The Appellant’s case is premised on the Appellant’s Statement of Facts dated October 15, 2021 and filed on October 18, 2021 together with the documents attached thereto stating as follows:-a.The Respondent carried out verification, and in-depth examination of documents submitted for the purpose of obtaining full information in respect of the Income of a person or class of persons chargeable to tax for the year of Income 2018 January, March and April. The additional estimated assessment was raised totaling to Kshs. 2,125,469. 09 on input ax as the Commissioner alleges that:-i.The disallowed input tax was either non-deductible.ii.The inconsistency that the Appellant's supplier declaring lumpsum sales in their VAT 3 Returns.iii.The Invoice number/reference mismatch in the Appellant returns and Supplier’s VAT Returns.b.On review of the additional assessment, the notice of objection to the assessment was served to the Respondent on the January 13, 2020 on the following amongst other grounds:-i.That the additional assessment is excessive by reason of some error or mistake of fact in the assessed figure.ii.That the Commissioner refused to admit all the documents furnished under Section 61 of VAT Act 2013as read together with Section 30 of Tax Appeals Tribunal Act, 2013 of which the Appellant has the burden of proving that:a.The assessment is excessive.b.The tax decision should not have been made or should have been made differently.c.That the Commissioner while raising additional assessment made a substantial error or defect in the procedure provided by the VATAct2013Section 17 and rules made thereunder which may possibly have produced error or defect in the decision of the case upon merit. By ignoring credit for input tax against output tax is a decision contrary to the Law.d.That the Respondent erred by failing to consider purchases invoices presented to him in full, a professional deficiency on his part.e.That the Respondent erred in failing to allow purchases that the Appellant legally incurred in the production of income in those respective months.f.That the Respondent’s claim that the purchases were not supported was a surprise to the Appellant as all documents requested by the Respondent were availed. This is against Section 30 ofTax Appeal Tribunal Act, 2013 as read together withVAT Act 2013Section 62. The Respondent's decision is contrary to the law.g.That the Respondent was given all supporting documents for the input tax claimed.h.That at the objection review meetings held severally between the Appellant and the Respondent, it was confirmed that all the documents were furnished and accepted.i.That the Respondent erred in law and fact not to accord the Appellant a fair hearing more specifically failing to hear the Appellant and consider the substance of the objection and further giving untrue and dishonest reasons for rejecting the objection. Actually, no hearing was accorded by the Respondent before the objection decision was made on September 15, 2021. j.That the Respondent by amending the assessment in the light of the objection according to the best of his judgement was a decision contrary to the Law, the decision having failed to determine some material issues of Law.

Appellant’s Prayers 12. The Appellant made the following prayers:-a.The assessment by annulled with costs.b.The Appellant be permitted to pay tax leviable on his true income ascertainable from the evidence which has always been available.

Respondent’s Case 13. The Respondent’s case is premised on the hereunder filed documents:-i.The Respondent’s Statement of Facts dated and filed on November 15, 2021 together with the documents attached thereto.ii.The Respondent’s written submissions dated June 13, 2022 and filed on June 14, 2022 together with the authorities filed therewith.

14. In the Statement of Facts, the Respondent stated that:-a.The Respondent’s iTax system-detected inconsistency between the invoices used by the Appellant for input claim and the VAT sales declared by the various suppliers.b.The inconsistency was for the months of January 2018, March 2018 and April 2018. The same is summarized as below:Month Acknowledgement No. VAT on Disallowed Invoices Amount Objected

Jan-18 KRA201915649820 676,649. 25 676,649. 25

Mar-18 KRA201915638603 634,307. 13 634,307. 13

Apr-18 KRA201915646483 814,512. 71 814,512. 71c.The review of the Appellant’s records and the iTax returns together with its suppliers revealed the following discrepancies:i.Some suppliers lumped their sales under customers not registered for VAT while filing their monthly VAT returns while the taxpayer claimed individual invoices.ii.Invoice numbers and date mismatch inconsistencies.iii.The taxpayer failed to provide all the relevant supporting documents, that is, copies of invoices and sufficient proof of payment for most of the inputs claimed for the period January 2018, March 2018 and April 2018. d.The Inconsistency notices were sent both to the Appellant and to the suppliers informing them to amend the VAT returns for the months in dispute to eliminate the inconsistencies.e.The Appellant having failed to amend the VAT assessments for the months of January 2018, March 2018 and April 2018 as required, VAA automated assessment was issued to the Appellant.f.The Appellant subsequently objected to the said assessment by lodging a notice of objection.g.The Respondent requested for documents to support the Appellant’s claim and the objection lodged. The Appellant provided some supporting documents and a review process was commenced by the Respondent.h.The Respondent after review of the documents disallowed the objection partially and rendered an objection decision dated September 15, 2021. i.From the forgoing, the claim by the Appellant did not qualify for claim under Section 17 of theVAT Act, 2013 and the attendant Regulations, 2017.

15. The Respondent reiterates its position as stated in the objection decision communicated to the Appellant and responds to the Appeal as follows;-a.The Respondent avers that the decision to arrive at the assessment was justified and had basis in law as required under Section 31 of the Tax Procedures Act and Section 17 of the VAT Act, 2013. b.That in order to claim input VAT, the Appellant was required to comply with Section 17 of the VAT Act which states as follows:“(1)Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.”c.That specifically, Section 17(3) of the VAT Act provides for documents necessary to support the input VAT claim. That the documents include an original tax invoice issued for the supply or a certified copy thereof.d.The Respondent states that claiming of input tax is subject upon providing proper invoices to support the claim. That the claim for input VAT was not supported by valid documentation as required by Section 17(3) of the VAT Act and as such the claim was fatally defective.e.The Respondent reiterates that the invoices relied upon by the Appellant did not meet the legal threshold of a proper invoice under Paragraph 9 of the VAT Regulations, 2017. f.The Respondent further avers that the burden of proof is on the Appellant to produce the evidence challenging the Respondent’s decision to reject the input VAT claim.g.The Respondent avers that the Appellant failed to demonstrate how the Respondent’s decision was excessive neither has it demonstrated how a different decision should have been reached.h.That as a result, it is the Respondent’s position that the input VAT claim was legally and procedurally rejected and the assessment legally and procedurally issued and that the Appellant’s objection was duly considered and objection decision made as per the law. That the Appellant’s grounds for appeal are not sufficient. That from the facts of the case, the Appellant did not provide any evidence contrary to the basis of Respondent’s assessment.

16. In the submissions, the Respondent stated that in its view, there are only two issues for determination namely:-a.Whether the assessment was justified.b.Whether the Appellant has discharged the burden of proof?

17. On whether the assessment was justified, the Respondent submits as follows:-a.The right to claim input VAT is premised on the assumption that the taxpayer paid VAT during the purchase of his supplies. This is provided for in Section 17(1) of the VAT Act which states that:“Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.”b.Section 17(1) of the VAT Act 2013 is categorical that a taxpayer, in this case the Appellant is only allowed to claim input VAT to the extent that the supply or importation acquired was used to make a taxable supply.c.The Respondent notes that the documents required for one to be entitled to claim a refund are provided for under Section 17(3) of the VAT Act. However, where it is doubtful, the Respondent is entitled to ask for additional information to satisfy itself as to the self- assessment made by a taxpayer. This is under Sections 59 of the Tax Procedures Act and Section 43 of the VAT Act.d.In this context, the claim for input VAT was not supported by valid documentation and as such was fatally defective.e.Further the Appellant was required to adduce documents by way of invoices and evidence of underlying transactions demonstrating that supply indeed occurred. The invoices that the Appellant purportedly states in its Appeal did not meet the legal threshold of a proper invoice as provided for in Paragraph 9 of the VAT Regulations, 2017 which provides as follows:“(l)A registered person who makes a taxable supply shall, at the time of supply, furnish the purchaser with a tax invoice containing-(a)the words “TAX INVOICE” in a prominent place;(b)the name, address, and PIN of the supplier;(c)the name, address, and PIN, if any, of the recipient;(d)the individualised serial number of the tax invoice;(e)the date on which the tax invoice is issued and the date on which the supply was made, if different from the date of issue of the tax invoice,(f)the description of the goods supplied including quantity or volume or services provided;(g)the details of any discount allowed at the time of supply; and(h)the consideration for the supply and the amount of tax charged.”f.Further, even if the invoices existed, that on its own would not be enough. Evidence demonstrating that the underlying transaction indeed took place is important. Assurance needs to exist that indeed the transaction for which the supplies relate to took place. Accordingly, copies of cheques or confirmation from banks that payments were made to the suppliers are material, being the underlying information supporting the supplies made.g.In Osho Drappers Limited vs. Commissioner of Domestic Taxes TAT No. 159 of 2018, the Honorable Tribunal noted that:“It is not enough to have the documentation listed in Section 17 of the VAT Act. The documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase.”h)Further, that this principle was emphasized in the case of Mutsimoto Motor Company Ltd –v- Commissioner of Investigations & Enforcement (TAT Appeal No. 42 of 2019) as follows:“64. A reading of this Section shows that it is not just enough for the original tax invoice to be availed, the invoices must themselves relate to an actual supply or importation that was acquired by the trader to make the taxable supply.65. ………… the right to claim input tax is hinged upon the transaction meeting the requirements set out. According to Section 17(1) of the VAT Act, input tax is deductible where it is incurred in on purchases made in making taxable supplies. This means that for a taxpayer to deduct input tax, it must have actually made a purchase. It is not merely enough to possess documentation. The documentation must be supported by an underlying transaction and the taxpayer must furnish proof that there was an actual purchase.”i.It is therefore the Respondent’s submission that the assessment by the Respondent is in accordance with Section 17 of the VAT Act and Regulation 9 of the VAT Regulation which require documentary evidence was to be adduced when the Appellant claimed input VAT. It is the Respondent’s submissions that in disallowing the Appellant’s input tax claim and subsequently issuing the assessment, it established that the Appellant could not prove that indeed purchases were done as there were no documents in support of the same.

18. On whether the Appellant had discharged the burden of proof, the Respondent submits that:-a.The Appellant has failed to demonstrate how the Respondent’s assessment is excessive or is contrary to the law, the Appellant has not cited the law which has been violated. The Appellant was granted an opportunity to object as per the Tax Procedures Act and avail the supporting documentations.b.Having failed to provide supporting documents, the Respondent had no way of considering the Appellant’s objection. The Appellant herein has not adduced positive evidence to demonstrate that the Respondent’s assessments were incorrect. The position that the Appellant ought to prove its allegation was reiterated by Justice Kasango J in Sheria Sacco Limited vs. Commissioner Domestic Taxes (2019) eKLR when held that:“The Sacco however needs to appreciate that what the Tribunal was dealing with was an appeal against the Commissioners’ confirming notice that Sacco had taxes to pay. When one appreciates that then the burden of proof lay on the Sacco. This is what is provided under Section 30(b) of the Tax Appeals Tribunal Act. The Section 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.”c.The Appellant having failed to provide supporting documents which were required for the Respondent to make any amendments to the assessment means the Respondent’s assessment stands.d.It is our humble submission that the Respondent was acting within the confines of the law in issuance of the assessment and it is only just that the Honourable Tribunal upholds the assessment and makes such orders in favour of the Respondent.e.The upshot therefore is that the Appellant did not avail the supporting documents for its objection and as such it failed to discharge its burden of proof as provided for under Section 56(1) of the Tax Procedure Act 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.”f.The Respondent reiterates that the Appellant has failed to discharge its burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56(1) of the Tax Procedures Act and therefore the objection decision is proper in law.g.In view of all the above, the Respondent urges this Honorable Tribunal to uphold the objection decision dated 15th September 2021 and order the Appellant to pay the confirmed tax assessments issued by the Respondent.

Respondent’s Prayers 19. The Respondent prays that The Tribunal considers the case and finds that:a.The Respondent's objection decision be upheld as proper in law and in conformity with the provisions of the law.b.This Appeal be dismissed with costs to the Respondent as the same is devoid of any merit.

Issues for Determination 20. The Tribunal has carefully studied the pleadings and documentation filed by both parties and is of the respectful view that the issues falling for its determination are as follows:-a.Whether the objection filed by the Appellant on 13th January 2020 was allowed by operation of the law.b.Whether the objection decision made by the Respondent on 15th September 2021 was proper in law.c.Whether the Respondent erred in fact and in law in issuing additional tax assessments.

Analysis and Findings a. Whether the objections filed by the Appellant on 13th January 2020 were allowed by operation of the law. 21. On 15th November 2019, the Appellant received three assessments on VAT whose assessment numbers were KRA201915649820 for the period of 1st January, 2018 to 31st January, 2018; KRA201915638603 for the period of 1st March, 2018 to 31st March, 2018; and KRA201915646483 for the period of 1st April, 2018 to 30th April, 2018 from the Respondent.

22. The Appellant objected to all the three assessments on 13th January 2020 and received objection application acknowledgements on the same day.

23. The Respondent made the Objection decision on 15th September 2021. Out of the total amount of Kshs. 2,125,469. 09 objected to, Kshs. 1,122,161. 01 was allowed and the Appellant was required to pay Kshs. 1,003,308,08 which was not allowed.

24. The objection decision was made more than 20 months (one year and seven months), after the Appellant lodged the objection. No reasons were given for the long delay in making the decision.

25. The Tax Procedures Act in Section 51 (11) states that:-“The Commissioner shall make the objection decision within sixty days from the date of receipt of-a.The notice of objection; orb.Any further information the Commissioner may require from the taxpayer.Failure to which the objection shall be deemed to be allowed.”

26. The Court, in the case of Republic vs Commissioner of Domestic Taxes Ex Parte Fleur Investments Limited [2020] eKLR the Honorable Judge John M. Mativo held that:“I find backing in Republic v Commissioner of Customs Services Ex-Parte Unilever Kenya Limited in which the court stated that if the Commissioner does not render a decision within the stipulated period, the objection is deemed as allowed by operation of the law. The act requires that where the Commissioner has not made an objection within 60 days from the date the taxpayer lodged the notice of objection, the decision objection shall be allowed. This means that the issues that the taxpayer had raised in the objection will be accepted”.

27. In the Case, TAT 127 of 2020, BIC East Africa Ltd vs Commissioner of Customs & Border Control, the Tribunal held that;“Additionally, the Tribunal finds the Respondent's late response to the review application to be in gross violation of Section 229 (5) of the EACCMA 2004 which stipulates that the where the Respondent had not communicated his or her decision within the specified time of 30 days, the review application shall be deemed to have been allowed by the Respondent. To contextualize this, as of 7th June 2019 the Appellant's review application was deemed allowed meaning that it had not tax liability in the eyes of the law. It also meant that the Appellant was well within its right to apply for a refund of the taxes paid earlier under protest. Our resolve in this regard is further cemented in light of the fact that Section 229 (4) & (5) of the EACCMA are cushioned in mandatory terms, hence the Respondent was not allowed to extend the same timelines. (See Associated Battery Manufacturers limited versus Respondent of Customs Services (TAT Appeal No 1 of 2015).”

28. Further, the High Court in emphasizing the strict application of statutory timelines had this to say in Equity Group Holdings Limited vs. Commissioner of Domestic Taxes 2021 (eKLR):-“A statutory edict is not procedural technicality. It’s a law which must be complied with. Parliament in its wisdom expressly and in mandatory terms provided………”

29. It is not in dispute that the Appellant filed three objections on 13th January 2020 and they were acknowledged on the same date. The Respondent did not make the Objection decision within sixty days as required by the law. The objections were therefore allowed by operation of the law.

30. Having found that the objections by the Appellant were allowed by operation of the law, the Tribunal did not delve into the other issues that fell for its determination as they have been rendered moot.

Final Decision 31. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 15th September 2021 be and is hereby vacated.c.Each party to bear its own costs.

32. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. ...............................…..ERIC N. WAFULACHAIRMAN...................................CYNTHIA B. MAYAKAMEMBER.............................GRACE MUKUHAMEMBER............................JEPHTHAH NJAGIMEMBER............................ABRAHAM K. KIPROTICHMEMBE