[2025] KETAT 50 (KLR)

Wamunyinyi v Commissioner of Intelligence, Strategic Operations, Investigations and Enforcement (Tribunal Appeal E906 of 2023) [2025] KETAT 50 (KLR) (17 January 2025) (Judgment)

Neutral citation: [2025] KETAT 50 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E906 of 2023

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & G Ogaga, Members

January 17, 2025

Between

Athanas Misiko Wafula Wamunyinyi

Appellant

and

Commissioner of Intelligence, Strategic Operations, Investigations and Enforcement

Respondent

Judgment

1. The Appellant is an individual registered taxpayer engaged in the business of farming and offering both residential and commercial rental spaces.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent conducted investigations on the Appellant’s transactions for the years 2016 to 2020 and raised additional Income tax and Value Added Tax (VAT) assessments in a letter of findings dated 21st April 2022.

4. The Respondent issued assessment orders on 22nd December 2022 to which the Appellant objected in a letter dated 28th August 2023.

5. The Respondent subsequently issued its Objection decision on 24th October 2023, partially allowing the Appellant’s Objection and confirming the VAT assessments.

6. The Appellant, being dissatisfied with the Respondent’s Objection decision, filed a Notice of Appeal on 17th November 2023.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 1st December 2023 and filed on 8th December, 2023 which raised the following grounds:-a.That the Respondent erred in law and fact by raising additional assessments for VAT on residential rental income contrary to the provisions of the First Schedule to the VAT Act, 2013. b.That the Respondent erred in law and fact by raising additional assessments for VAT on non-revenue items such as deposits received from tenants for both the commercial and residential rental income, contrary to the provisions of Section 5 of the VAT Act, 2013.

Appellant’s Case 8. The Appellant’s case is premised on his Statement of Facts dated 1st December 2023 and filed on 8th December, 2023 and the documents attached to it.

9. The Appellant stated that the Respondent carried out an investigation into his affairs due to queries raised on the income that the Appellant had received but failed to declare.

10. That the Respondent wrote to the Appellant’s bankers, that is, Cooperative Bank, Kenya Commercial Bank and Diamond Trust Bank, and obtained bank statements for the period between 2016 and 2020.

11. The Appellant asserted that the Respondent carried out an analysis of the bank deposits received in the Appellant’s bank accounts to establish the total deposits therein.

12. That after adjusting for salary, loans and SACCO receipts, the Respondent issued a letter dated 21st April 2022 detailing the tax investigation findings and summarising the cumulative tax payable for 2016 to 2020 as Kshs. 1,163,167. 00 of Income tax and Kshs. 3,699,721. 00 of VAT.

13. The Appellant further stated that the Respondent on 22nd December 2022, proceeded to raise additional assessments in the Appellant’s iTax portal covering the years 2018 to 2020, being Income tax of Kshs. 1,221,419. 00 of and VAT of Kshs. 3,680,690. 00.

14. The Appellant asserted that he wrote to the Respondent vide a letter dated 14th August 2023 requesting to be allowed to file his notice of Objection out of time, to which the Respondent replied on 23rd August 2023 granting him 7 days to file his late Objection.

15. The Appellant stated that he objected to the assessments in their entirety vide a letter of Objection dated 28th August 2023.

16. The Appellant averred that there was exchange of information between him and the Respondent which resulted in the Respondent issuing its Objection decision dated 24th October 2023, partially accepting the Appellant’s Objection by vacating the entire additional Income tax assessment and confirming the additional VAT assessment.

17. The Appellant filed his Notice of Appeal dated 17th November 2023, being aggrieved by the Objection decision.

18. The Appellant argued its case under two headings:a.Treating non-revenue items as revenue items leading to the erroneous imposition of VAT.b.Erroneously charging VAT on exempt income from residential rent.

a. Treating non-revenue items as revenue items leading to the erroneous imposition of VAT. 19. It was the Appellant’s contention that the Respondent erred in law and fact by subjecting non-revenue items received in the Appellant’s account to taxation.

20. The Appellant stated that he has taken note that the Respondent in its assessment and Objection decision, based the additional assessments on the bank deposits received in the Appellant’s bank account and incorrectly included non-revenue items including tenant deposits in the additional assessments.

21. The Appellant averred that the Respondent erroneously treated the tenant’s deposits as part of the Appellant’s taxable income yet the said amounts were either refunded or remain refundable to the tenants upon lapse of the tenancy period. That as such, no income was generated by the Appellant as the tenant deposit was refundable.

22. The Appellant argued that since the tenant’s deposit is not his money, and the Appellant is contractually liable to refund the deposit, the Respondent erred in law and fact by failing to adjust for the deposits in the bank deposits analysis, thereby subjecting the deposits to taxation.

b. Erroneously charging VAT on exempt income from residential rent. 23. The Appellant submitted that Paragraph 8 of Part II of the First Schedule to the VAT Act provides that residential rental income is an exempt supply and it is therefore erroneous for the Respondent to raise additional VAT on the same.

24. The Appellant asserted that he owned both residential and commercial property and that the Respondent made an error in assuming that all the properties were commercial, thereby raising additional VAT on exempt supplies contrary to the provisions of the law.

25. The Appellant challenged the imposition of VAT on non-revenue items (tenant deposits) and the charging of VAT on residential rental income, which is statutorily exempted. He argued that these actions by the Respondent are based on errors in both law and fact, further that he has provided supporting evidence, such as copies of tenancy agreements to substantiate his claims.

Appellant’s prayers 26. The Appellant prayed that:a.This Appeal be allowed.b.This Honourable Tribunal forthwith withdraws and cancels the Objection decision letter dated 24th October 2023. c.The Honourable Tribunal debars the Respondent from raising additional assessments on customer deposits held in the Appellant’s bank account.d.This Honourable Tribunal orders the Respondent to stay the enforcement of assessed taxes until the matter is conclusively determined.e.The Honourable Tribunal be pleased to issue any other orders favourable to the Appellant as it may deem just and expedient to issue.

Respondent’s Case 27. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 8th January 2024 and filed on 9th January 2024, and the documents attached thereto; andb.The Respondent’s written submissions dated 11th August 2024 and filed on 29th August 2024.

28. The Respondent stated that its investigation of the Appellant’s affairs as per the Respondent’s preliminary findings established that the Appellant had received income that he failed to declare.

29. That on 28th August 2023 the Appellant lodged an Objection challenging the additional assessment issued by the Respondent and on 24th October 2023, the Respondent delivered its Objection decision partially allowing the Objection.

30. In response to the Appellant’s grounds of appeal, the Respondent submitted that pursuant to Section 24(2) of The Tax Procedures Act, the Respondent is not bound by a tax return or information provided by, or on behalf of, a taxpayer and may assess a taxpayer’s tax liability using any information available to him.

31. That similarly, Section 73(2)(b) of the Income Tax Act, provides as follows: -“Where a person has delivered a return of income, the Commissioner may– (b) if he has reasonable cause to believe that such return is not true and correct, determine, according to the best of his judgment, the amount of the income of that person and assess him accordingly.”

32. The Respondent further submitted that Section 31(1) of the Tax Procedures Act allows it to amend a taxpayer’s assessment. That the provision states that: -“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the "original assessment") by making alterations or additions, from the available formation and to the best of the Commissioner's judgment, to the original assessment of a taxpayer for a reporting period to ensure that—

c) in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.” 33. The Respondent averred that its investigative findings revealed that in July 2019 the Appellant received Kshs. 10,575,266. 00 from Nabwaya Contractors and in May 2020, the Appellant also received Kshs 3,420,000. 00 from Nabwaya Contractors who is a contractor for Bungoma County Government.

34. The Respondent affirmed that it considered previous years’ losses and VAT credits in arriving at the final tax payable and made the necessary adjustments, which resulted in a nil Income tax assessment and VAT assessments totaling Kshs. 3,265,647. 00 covering the years 2016 to 2020.

35. The Respondent addressed the Appellant’s grounds of appeal under these headings:a.Erroneous categorization of non-revenue items as revenue items.b.Erroneous charge of VAT on exempt income from residential property.

a. Erroneous categorization of non-revenue items as revenue items. 36. The Respondent averred that the Appellant failed to tender credible and cogent evidence demonstrating that part of the underdeclared income constituted funds received as part of rental agreements and that said amounts comprised deposits under aforementioned tenancy agreements.

37. That in the absence of evidence supporting the Appellant’s allegation, coupled with the Respondent’s best judgement premised on banking analysis, the Respondent declined to admit explanation and the deductions sought therein.

b. Erroneous charge of VAT on exempt income from residential property. 38. The Respondent stated that it denies that the income for the subject period comprised income exempt from VAT under Paragraph 8 of Part II of the First Schedule to the VAT Act and puts the Appellant to strict proof thereof.

39. The Respondent reiterated that the Appellant failed to tender evidence in support of his claim that he was entitled for exemption under the VAT Act.

40. The Respondent submitted that Section 23 of the Tax Procedures Act and Section 43 of the VAT Act mandate the Appellant to maintain documents required under any tax law and to provide the same upon request by the Respondent to ensure that the taxpayer’s tax liabilities can be readily ascertained.

41. The Respondent cited the holding in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where the Court stated that:-“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 tax 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.… The taxpayer in such cases generally possesses the objective evidence. Certainly, with the exception of filed returns and information provided by the taxpayer, the Revenue authority is in a poor position to establish an affirmative case. Placing the burden of proof in tax cases on the taxpayer reflects the unique nature of the tax system.”

42. The Respondent further relied on the holdings in 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, to present its argument on what constitutes the Commissioner’s best judgment.

43. The Respondent also referred to the case of Digital Box Limited v Commissioner of Investigations and Enforcement (TAT No 115 of 2017) to support its use of banking analysis as a valid methodology of ascertaining the taxpayer’s correct position.

44. The Respondent relied on the holding in the case of Tax Appeal Number 25 of 2021 Mugo Macharia Kigo v Commissioner of Investigations & Enforcement, to argue that in the present case, the Appellant has failed to muster the test set out in the case to render a plausible explanation of the variances established.

45. The Respondent placed reliance on Section 56(1) of the Tax Procedures Act, to the effect that in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. That the Appellant is invited to disprove the Respondent’s decision with evidence.

Respondent’s prayers 46. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s decision dated 28th October 2023 as proper and in conformity with the provisions of the law.b.Finds that this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issues for Determination 47. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent’s assessments were time-barred.b.Whether the Respondent was justified in issuing the additional VAT assessments for December 2017, December 2018, December 2019 and December 2020. c.Whether the amounts admitted by the Appellant to tax payable are payable.

Analysis and Findings 48. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned Objection decision.

a. Whether the Respondent’s assessments were time-barred. 49. The Respondent stated in its Statement of Facts that it is allowed to amend a taxpayer’s assessment as per Section 31 of the Tax Procedures Act.

50. Before delving into the merits of the Respondent’s VAT assessments and the Appellant’s arguments against them, the Tribunal sought to establish whether the Respondent issued the assessments within the time allowed under Section 31 of the Tax Procedures Act.

51. On 22nd December 2022, the Respondent issued the Appellant with VAT assessments for the periods of December 2016, December 2017, December 2018, December 2019 and December 2020.

52. Section 31(4)(b) of the Tax Procedures Act provides the time limit within which the Respondent may issue assessments as follows: -“(4)The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment.” Emphasis added

53. According to Section 31(4)(a) of the Tax Procedures Act, the Respondent may only issue an assessment beyond the five years where the Respondent can prove gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer. It is thus clear that an assessment issued under Section 31 of the Tax Procedures Act beyond the five-year limit is unlawful unless the Respondent can prove gross or wilful neglect, evasion, or fraud by or on behalf of a taxpayer.

54. The Tribunal has examined the Respondent’s pleadings and notes that the issues under Section 31(4)(a) of the Tax Procedures Act regarding gross or wilful neglect, evasion or fraud on the part of the Appellant were neither pleaded, transacted and/or proved by the Respondent.

55. The Tribunal reiterates its holding in a similar matter TAT Appeal No. 411 of 2021, City Gas East Africa v Commissioner of Investigations and Enforcement where Tribunal held that the Respondent erred in assessing the Appellant for a period beyond five years when there was no evidence of wilful neglect or fraud.

56. The Respondent’s assessments were dated 22nd December 2022, meaning that the earliest periods that the Respondent could assess additional VAT were only the tax periods starting from December 2017.

57. Consequently, the Tribunal finds that the Respondent’s assessment of VAT for the tax periods before December 2017 was illegal and the same was not justified.

b. Whether the Respondent was justified in issuing the additional VAT assessments for December 2017, December 2018, December 2019 and December 2020. Residential rental income 58. The Tribunal analysed the Appellant’s assertion that the Respondent subjected to VAT residential rental income that is exempt from VAT by examining the applicable law to this case and the documentation required to substantiate the Appellant’s claims.

59. Based on the record of Appeal, the Tribunal notes that the Appellant presented to the Tribunal a schedule showing the amounts of residential rental income for the years 2016, 2017, 2018, 2019 and 2020, and copies of tenancy agreements for his commercial and residential properties. These tenancy agreements enumerated the following information:a.Amounts referred to as rent.b.Amounts referred to as refundable deposit.c.Biennial 10% increase in rent.

60. The Respondent averred in its Objection decision that the Appellant did not provide tenancy agreements to enable it to adjust the amounts of residential rent in the banking analysis. The Tribunal however notes that the Respondent, in response to the Appeal, did not challenge that the tenancy agreements provided by the Appellant in this Appeal were presented by the Appellant during the Objection review.

61. The Tribunal refers to Section 51(8) of the Tax Procedures Act which provides as follows regarding review of Objections: -“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".”

62. The Tribunal observes that the Respondent did not consider the tenancy agreements presented by the Appellant in arriving at its Objection decision, thus contravened Section 51(8) of the Tax Procedures Act and in the course of that contravention prejudiced the Appellant.

63. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”

64. Paragraph 8 of Part II of the First Schedule to the VAT Act expressly provides as follows regarding the VAT treatment of renting of residential premises: -“The supply of the following services shall be exempt supplies— …8. Supply by way of sale, renting, leasing, hiring, letting of land or residential premises;“residential premises" means land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation;Provided that this paragraph shall not apply where such services are supplied in respect of—(a)car park services; or(b)conference or exhibition services, except where such services are provided for educational institutions as part of learning.”

65. Accordingly, the Tribunal finds that the Appellant discharged his burden of proof, as required under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, by presenting tenancy agreements, thus, establishing that part of the bank deposits in the periods of 2017, 2018, 2019 and 2020 related to rents for residential premises that are exempt from VAT pursuant to Paragraph 8 of Part II of the First Schedule to the VAT Act.

66. The tenancy agreements marked by the Appellant as ‘Hse 1’, ‘Hse 2’, ‘Hse 3’, ‘Hse 4’, ‘Hse 5’, ‘Hse 6’, ‘Hse 7’, ‘Hse 8’, ‘Hse 9’, ‘Hse 10’, ‘Hse 11’, ‘Hse 12’, ‘Hse 13’, ‘Hse 14’, ‘Hse 15’, ‘Hse 16’, ‘Hse 17’, ‘Hse 18’, ‘Hse 19’, ‘Hse 20’, ‘Hse 21’, ‘Hse 22’, ‘Hse 23’ and ‘Hse 24’ in its bundle of documents demontsrated that the Appellant earned residential rental income in the years 2016, 2017, 2018, 2019 and 2020.

67. After the Appellant discharged his burden of proof, the Respondent could have dismantled the Appellant’s evidence, however, it failed to do so in its response to the Appeal.

68. Based on the foregoing, the Tribunal finds that the Respondent erred in treating residential rental income as taxable and assessing VAT on the residential rental income for the periods of 2017, 2018, 2019 and 2020.

Refundable tenant deposits 69. The Appellant claimed in his pleadings and the schedule that he provided in his Objection and in the instant Appeal that the bank deposits that are refundable tenant deposits are Kshs. 855,800. 00 for the period of 2016 and Kshs. 655,600. 00 for the period of 2017. The Appellant asserted that the Respondent erroneously charged VAT on the deposits, which the Appellant considered to be non-revenue items that are not subject to VAT.

70. The Tribunal analysed the Appellant’s argument and all the evidence adduced in this matter to determine the sufficiency of the documentation presented to substantiate the Appellant’s claim.

71. In its consideration of the Appellant’s assertion, the Tribunal considered Section 5(1) of the VAT Act with regard to charge of VAT which provides that: -“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.”

72. The Appellant claimed that for the period 2017, Kshs. 655,600. 00 represented refundable tenant deposits. In support of this claim, the Appellant presented to the Tribunal tenancy agreements for renting of commercial premises which demonstrated that he received refundable deposits paid in the period of 2017.

73. The Tribunal also notes that the tenancy agreements for residential premises only proved amounts of refundable tenant deposits paid by the Appellant’s tenants in the period of 2016 and that the Appellant did not provide any evidence of refundable deposits for the residential properties paid in the period of 2017. Therefore, as the period of 2016 is time-barred for an amendment of assessment by the Respondent, the Tribunal did not consider the rent deposits for 2016.

74. The Respondent averred in its Objection decision that the Appellant did not provide tenancy agreements to enable it adjust the amounts of refundable deposits in the banking analysis. The Tribunal, however, notes that the Respondent, in response to the Appeal, did not challenge that the tenancy agreements were provided by the Appellant in its Appeal were presented by the Appellant during the Objection review.

75. Refundable tenant deposits, unless applied to meet commercial rent, are not taxable under the VAT Act as they a not consideration for a taxable supply which is defined under Section 2 of the VAT Act as follows: -“"taxable supply" means a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person…”

76. The Tribunal, therefore, finds that the Appellant has discharged its burden of proof to show that the Kshs. 655,600. 00 relates to refundable tenant deposits in the period of 2017.

77. Based on the foregoing, the Tribunal finds that the Respondent erred in treating refundable tenant deposits as payments for taxable supplies in the period of 2017 and assessing VAT on the refundable tenant deposits for the period of 2017.

c. Whether the amounts admitted by the Appellant to tax payable are payable. 78. The Tribunal notes that the Appellant in its Objection admitted that Kshs. 863,948. 82 of principal VAT is payable, comprising of Kshs. 391,435. 85 in 2018 and Kshs. 472,512. 97 in 2019. The Respondent, however, did not address this admission both in its objection decision and Statement of Facts.

79. In the circumstances, the Tribunal thus finds and holds that it would only be fair that the Appellant is compelled to pay tax that he has admitted to be due and payable to the Respondent being principal VAT of Kshs. 863,948. 82,

Final Decision 80. The upshot of the above analysis is that the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 24th October 2023 be and is hereby varied to the extent that the Value Added Tax (VAT) tax liability in the sum of Kshs. 863,948. 82 admitted by the Appellant as the final tax payable be and is hereby upheld.c.Each party to bear its own costs.

81. It is so ordered.

MEMBERDATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF JANUARY, 2025. ERIC NYONGESA WAFULA - CHAIRMANRODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERGLORIA A. OGAGA - MEMBER