[2023] KETAT 352 (KLR)

Wara Link Logistics Limited v Commissioner of Domestic Taxes (Appeal 563 of 2022) [2023] KETAT 352 (KLR) (Commercial and Tax) (9 June 2023) (Judgment)

Neutral citation: [2023] KETAT 352 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 563 of 2022

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

June 9, 2023

Between

Wara Link Logistics Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya, and whose principal business activity is the supply of repairs and maintenance services.

2. The Respondent is a principal officer appointed under Sections 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is responsible for the assessment, collection, receipting, and accounting for the tax revenue on behalf of the Government of Kenya, and is also mandated to enforce the statutes set out in the Schedule to the said Act.

3. The background to this dispute is that the Appellant filed a nil income tax return and the Respondent based its assessment on variances between turnover per VAT returns and what was declared on the income tax returns. Expenses were not allowed with the introduced turnover being subjected to taxation at the rate of 30 % to arrive at additional tax payable of Kshs 5,143,461. 00, upon which the Respondent issued an assessment to the Appellant on October 30, 2019 for the year 2017.

4. The Appellant lodged an objection on October 26, 2021 which was accepted on December 10, 2021.

5. The Respondent then through various correspondence, requested the Appellant to provide documents including audited accounts, general ledgers, trial balance and bank statements for 2017.

6. The Respondent subsequently issued a Notice of Invalidation dated February 3, 2022.

7. The Appellant being aggrieved with the Respondent’s decision preferred the Appeal herein.

The Appeal 8. The Appellant filed its Memorandum of Appeal on May 31, 2022 and set out the following grounds of Appeal;i.That the additional assessment is erroneous in fact and law.ii.That the Commissioner did not conduct a review of the audited financial statements and ledger provided before confirming the assessment and even disclosing the basis of rejection of the objection.iii.That despite provision of supporting documents, the general ledger, and audited financial statements, the Respondent adamantly ignored the factual documentation and instead chose to rely on imagination.

9. By reason of the foregoing the Appellant prayed that the Respondent’s decision be set aside and the Appeal herein be allowed.

The Appellant’s Case 10. The Appellant’s case is set out in the Statement of Facts filed on May 31, 2022 . There are no Written Submissions filed for the Appellant.

11. The Appellant stated that on October 30, 2019 it received an additional assessment with an incremental tax payable of Kshs 5,143,461. 60, and penalty, fine and interest on incremental liability of Kshs 1,491,603. 86.

12. The Appellant stated that on October 26, 2021 it objected to the assessment and submitted the general ledger and the audited financial statements.

13. The Appellant also stated that on March 7, 2022 it received a confirmation assessment rejecting the objection without giving any explanations as to the reasons for rejection.

14. By reason of the foregoing, the Appellant prayed that its Appeal be allowed with costs.

The Respondent’s Case 15. The Respondent has set out its response on the Statement of Facts filed on June 29, 2022 and the Written Submissions filed on February 6, 2023.

16. The Respondent stated that its decision subject of this Appeal is an invalidation to the Appellant’s objection dated February 3, 2022, made pursuant to Section 51(4) of the Tax Procedures Act (TPA), where a taxpayer fails to lodge a valid objection as required under Section 51(3) of the TPA.

17. The Respondent also submitted that where the decision is made pursuant to Section 51(4) of the TPA, any appeal therefrom can only be limited to the basis of the decision ie, whether there was a valid objection or not, and the appeal cannot extend to interrogating the substantive taxes as issued in the assessment.

18. The Respondent further stated that upon the objection being lodged challenging the assessment, the Appellant was requested to provide the following documents vide email dated December 10, 2021, as follows; -i.Audited accounts,ii.General ledgers,iii.Trial balance,iv.Bank statements.

19. The Respondent also stated that the Appellant failed to provide the necessary documentation it relied upon in its objection which were material to ascertain the validity of its objection, and submitted that Section 51(3) (c) of the Tax Procedures Act provides as follows;“A notice of objection shall be treated as validly lodged by an Appellant under subsection (2) if – ( c ) all the relevant documents relating to the objection have been submitted .”

20. Respondent stated that the Appellant failed to provide all the important documents requested. The documents including audited accounts, bank statements, ledgers, trial balance, despite objecting to the decision on the grounds that it has fully supported its case and is willing to provide all the relevant supporting documents for the review, bearing in mind that the basis of the assessment was premised on the NIL returns filed by the Appellant despite accruing or deriving income subject to tax. The Respondent asserted that no evidence has been adduced before the Tribunal necessary to challenge the invalidation decision.

21. The Respondent submitted that the burden of proof in tax matters lies on the Appellant who alleges that the Respondent made an incorrect decision.

22. The Respondent further submitted that it is upon the Appellant to prove that it provided all the supporting documents it is required to maintain pursuant to Section 59 of the Tax Procedures Act.

23. The Respondent further submitted that it is not bound by the Appellant’s returns, information or self-assessment and it is empowered to vary the assessment using any available information in the Respondent’s possession under Section 24(2) of the TPA.

24. The Respondent submitted that the legal burden of proof is upon the Appellant to demonstrate that it lodged a valid objection and that all the documents requested by the Respondent were provided to support its objection, and the Appellant failed to do so.

25. To buttress it submissions, the Respondent cited the following cases:a.Gashi -vs – Respondent of Taxation (2012) FCA638b.Ngurumani Traders Limited -vs- Commissioner of Investigations and Enforcement (TAT 125/2017)c.Primarosa Flowers Ltd -vs- Respondent of Domestic Taxes (2019) eKLR,d.Subaru Motors – vs- Commissioner of Investigations and Enforcement TAT 109/2016

26. It submitted that the Appellant has failed to discharge the onus of proving that the Respondent erred in rendering its decision.

27. In view of the foregoing submissions, the Respondent prayed that the Appellant’s Appeal be dismissed with costs.

Issues for Determination 28. The Tribunal having carefully considered the parties’ pleadings, submissions and documents submitted is of the view that the Appeal herein distils into one issue for determination:Whether the Respondent ‘s invalidation decision on the Appellant’s objection notice was justified.

Analysis and Determination Whether the Respondent’s invalidation decision on the Appellant’s objection notice is justified. 29. The issue in dispute in this Appeal arises out of Respondent’s assessment on the Appellant which was based on the variances between turnover per VAT returns and what was declared on the income tax returns. The Appellant has complained that the Respondent did not allow its expenses, and the introduced turnover was subjected to taxation at the rate of 30% to arrive at an additional tax of Kshs 5,143,461. 00 of which the Respondent issued the additional assessment to the Appellant on October 30, 2021 for the year 2017 and confirmed the same on March 7, 2022 through an Invalidation decision.

30. The Respondent submitted that upon the objection being lodged challenging the assessment, the Appellant was requested to provide the requisite supporting documents, such as audited accounts, general ledgers, trial balance, and bank statements to enable the Respondent ascertain the validity of its objection. The Appellant stated that it submitted the General ledger and the audited accounts. This fell short of the documents the Respondent had requested.

31. The Respondent therefore asserted that the Appellant failed to provide the necessary documentation it relied upon it its objection, which were the documents it requested, hence its decision to invalidate the Appellant’s objection.

32. The issue in contention herein is the decision subject of this Appeal invalidating the Appellant’s objection dated February 3rd February 2022, made pursuant to Section 51 (4) of the Tax Procedures Act, which applies when a taxpayer fails to lodge a valid objection under Section 51 (3) of the TPA.

33. The Respondent has submitted, and the Tribunal is of the same view, that, where a decision is made pursuant to Section 51 ( 4 ) of the TPA , any appeal therefrom can only be limited to the basis of the decision , whether there was a valid objection or not under Section 51(3) of the TPA, and not the issue on the substance of the assessment.

33. The foregoing being the case, Section 51 (3) of the TPA provides as follows:“A notice of objection shall be treated as validly lodged by a taxpayer under section (2) if – (c ) all the relevant documents relating to the objection have been submitted.”

34. It is the contention of the Respondent that the Appellant failed to provide all the relevant documents requested, which included audited accounts, bank statements, general ledgers and trial balances for the period in issue. Though the Appellant contends that it submitted the general ledger and audited accounts, only a copy of the audited accounts has been submitted in evidence. which the Respondent averred was not adequate to challenge the invalidation decision.

35. The burden of proof in tax matters lies on the Appellant complaining that the Respondent made an incorrect decision.

36. Section 56 (1) of the TPA provides that:“In any proceedings under this part , the burden shall be on the Appellant to prove that a tax decision is incorrect.”

34. The Appellant is also required to maintain its business documents under Section 59 of the TPA, and therefore it is incumbent upon the Appellant to prove that it provided all the relevant supporting documents it was requested to provide to justify the validity of its objection.

35. In the case of Primarosa flowers ltd -vs Commissioner of Domestic Taxes (2019)eKLR, the High Court agreed with the holding in Mulherin -vs- Commissioner of Taxation (2013) FCAFC 115 , where it was held that:-“In tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge the income tax assessment. The onus is on the taxpayer in proving that the assessment excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

34. The Tribunal having carefully considered the Appellant’s objection, the documents submitted and the details of the information requested by the Respondent, it is satisfied that the Appellant failed to discharge the onus of proving that the Respondent erred in rendering the invalidation decision.

35. In view of the foregoing the Tribunal determines and holds that the Respondent’s invalidation decision was justified.

Final Decision 34. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated Febraury 3, 2022 be and is hereby upheld.c.Each party to bear its own costs.

40. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF JUNE, 2023. …………………………ROBERT M. MUTUMACHAIRPERSON……………………………RODNEY O. OLUOCHMEMBER....................ELISHAH N. NJERUMEMBER…………………………DELILAH K. NGALAMEMBER