[2024] KETAT 1049 (KLR)

Wilken Aviation Limited v Commissioner of Intelligence, Strategic Operations, Investigations and Enforcement Department (Tax Appeal E441 of 2023) [2024] KETAT 1049 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1049 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E441 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

July 12, 2024

Between

Wilken Aviation Limited

Appellant

and

Commissioner of Intelligence, Strategic Operations, Investigations and Enforcement Department

Respondent

Judgment

1. The Appellant is a private limited liability company incorporated in the Republic of Kenya and engaged in the business of operating charters and hiring aircraft.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued a tax assessment on 8th November, 2022 for Kshs. 63,287,036. 00 for Income tax, Withholding tax and PAYE.

4. The Appellant filed an objection on 31st March, 2023 requesting for extension of time to lodge a late objection.

5. The Respondent, vide a letter dated 24th April, 2023, allowed the Appellant to file the late objection. The Appellant thereafter lodged an objection on 2nd May, 2023.

6. The Respondent issued its objection decision on 30th June, 2023 reviewing the said taxes as assessed to Kshs. 26,903,764. 00.

7. The Appellant being dissatisfied with the Commissioner’s decision filed a Notice of Appeal dated and filed on 26th July, 2023.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 26th July, 2023 and filed on 7th August, 2023:i.That the Respondent erred in law and in fact by assessing Withholding Tax for the period August 2016 to September 2019 without any statutory basis.ii.That the Respondent erred in law and fact in its objection decision as it improperly analyzed the Appellant's bank statement. The Respondent misapplied the banking analysis test in an attempt to determine the Appellant's income during the period under review, which ultimately led to an inaccurate and inflated taxable income figureiii.That the Respondent erred in law and fact by treating four pilots who are independent service providers as employees and assessing them to PAYE contrary to Section 37 of the Income Tax Act as applicable then.

Appellant’s Case 9. The Appellant’s case is premised on the following documents:i.The Appellant’s Statement of Facts dated 26th July, 2023 and filed on 7th August, 2023 together with the documents attached thereto.ii.The Appellant’s written submissions dated 8th March, 2024.

10. That the Respondent's assessment was inclusive of Withholding taxes for the period August 2016 to September 2019. That there is no legal basis to charge any Withholding income tax for this period and it should be noted that Section 35(6) of the ITAwhich provided that the Commissioner could claim taxes from a payer who fails to make a deduction as though the taxes were due from them was deleted by Finance Act, 2016 and this position remained until the enactment of the Finance Act, 2019 which came into force on 7th November, 2019 when the previously deleted provisions of Section 35(6) of the ITA were reintroduced and reproduced as a new Section 39A under the TPA.

11. That the Respondent misapplied the banking analysis test in an attempt to determine the Appellant's income during the period under review, which ultimately led to an inaccurate and inflated taxable income figure.

12. That on 29th June, 2023, the Appellant delivered as requested by the Respondent, the supporting documentation for the inter-company transfers in the bankings, inter account transfers and this was ignored due to being time barred. That the Respondent went ahead and treated this as income yet these transactions do not qualify as income by the definition of business income.

13. That the definition of business income in the Income Tax Act (ITA) of Kenya is the income of any person arising from or in connection with any trade, profession, vocation, calling, employment, adventure or concern in the nature of trade carried on by that person either solely or in partnership with others.

14. That this definition is broad and includes a wide range of activities. That however, it is inconceivable that the Respondent would classify intercompany transfers in the bankings and inter-account transfers as business income. That these transfers are not motivated by profit and do not involve any level of organization or planning. That they are simply transfers of funds between related entities and do not constitute a business activity.

15. That the transactions in question cannot be classified as income chargeable to tax because they do not meet the definition of income under Section 3 of the ITA. That the nature, purpose, and intention of the person carrying on the transactions are not consistent with a business activity. That therefore, the Respondent’s attempt to classify the transactions as business income is an overreach.

16. That from the objection decision the Respondent assessed four pilots whom the Appellant treats as independent service providers as employees. That the definition of employee in the Income Tax Act (ITA) is any person who is employed under a contract of service, whether written or oral, express or implied, and includes a person who is apprenticed or indentured to serve under a contract of service.

17. The Appellant averred that this comprehensive definition encompasses a diverse spectrum of individuals who fall under the categorization of employees for income tax purposes. That several instances of such employees include: salaried employees, hourly employees, commissioned employees, piecework employees and apprenticeships.

18. The Appellant stated that it is imperative to acknowledge that the delineation of an “employee” within the Income Tax Act (ITA) may not always possess unambiguous clarity. That the criteria employed to ascertain the presence of an employer-employee relationship encompasses the following elements: the inherent nature of the association between the employer and the employee, the extent of control exerted by the employer over the employee's tasks, the manner of remuneration, the benefits extended to the employee and the mutual intent of the involved parties.

19. That the Appellant lacks control over the four pilots involved in the dispute, as these pilots maintain the freedom to engage in work for competing companies. That the service contract with the pilots specifies their engagement on an as-needed basis, and they are compensated at a rate of $100 per hour. The Appellant stated that it promptly remunerates the pilots upon fulfilling their obligations. That given these circumstances, it is surprising that the Respondent categorized these four pilots as employees rather than independent service contractors.

20. The Appellant averred that an elucidation of Section 37(1) of the Income Tax Act (ITA), in conjunction with the PAYE Rules, reveals that the concept of Pay-As-You-Earn (PAYE) is strictly predicated upon the presence of an Employer-Employee relationship. That the Respondent's attempt to extend the scope of PAYE to a scenario where no such relationship exists, but instead a supplier relationship is present, is erroneous.

21. That the principles of certainty and legality are key in any good taxation system. That therefore certainty mandates that the law states clearly and in a simple way what is expected to be paid by taxpayers and when to pay it. That this is to enable taxpayers know where they stand. Therefore a simple tax system makes it easier for individuals and businesses to understand their obligations and entitlements. That as a result, businesses are more likely to make optimal decisions and respond to intended policy choices. That it follows therefore that a system where taxpayers can be called upon to pay taxes that were not supposed to be paid during the period of review lacks the certainty that is required in order for the taxpayer to properly plan his or her affairs in as far as tax is concerned.

22. The Appellant stated that this position was reiterated by the Court in Civil Appeal No. 180 of 2019; Export Trading Company vs Kenya Revenue Authority [2018] eKLR. That in that case, the Court of Appeal held that the principle of certainty in tax law:-“should not be restricted because it has its roots in what is gradually becoming a universal but fundamental principle of law namely the rule of law with its offshoot principle of legal certainty. If the reason for the principle is for the challenged bodies or decision makers to demonstrate regularity, predictability and certainty in their dealings, this is, in turn enables the affected parties to plan their affairs, lives and businesses with some measure of regularity, predictability, certainty and confidence.”

23. As such, as was stated by the Court of Appeal in Export Trading Company vs Kenya Revenue Authority [2018] eKLR, decision makers ought to demonstrate regularity, predictability and certainty in their dealings. That this is because this enables the affected parties to plan their affairs, lives and businesses with some measure of regularity, predictability, certainty and confidence.

24. That in the instant case, it is clear from the actions of the Respondent that it did not apply itself to the position of the law during the period of assessment of Withholding tax, i.e. the period between August 2016 to September 2019. That during the period of assessment, there was no legal basis to charge any Withholding income tax.

25. That based on the repeal of Section 35(6) of the Income Tax Act by the Finance Act, 2016,it was incumbent upon the Respondent to take that into consideration. That this is because the Appellant did not withhold any tax during that period based on the law not requiring that. That the Appellant planned its affairs, lives, and business along the strictures of the law and since the law did not require the withholding of the impugned taxes, it acted accordingly. That therefore, it is an abuse of the law and a misapplication of the law for the Respondent to demand Withholding taxes for the period of assessment since the Appellant was not under the obligation of the law to withhold any taxes.

26. That additionally, it is an established principle that Lex posterio derogat priori, i.e., a subsequent law imparts the abolition of a previous one. That as per the famous Austrian legal jurist Kelsen, the principle presents the logic of the law.

27. That Hans Kelsen in “Law and Logic” states:“It is a widely held view among jurists that there is a particularly close relation between law and logic (in the traditional, two-valued, true-or false sense) that it is a specific property of law to be “logical”; which is to say, that in their mutual relations the norms of law correspond to the principles of logic. This presupposes that these principles - notably the law of non-contradiction and the rule of inference - are applicable to norms in general and to legal norms in particular. This is assumed by jurists to be self-evident. A conflict of norms, i.e., a situation in which two norms are valid, of which one prescribes a certain course of conduct, and the other a course incompatible with this, is regarded as a logical contradiction. And just as, of two mutually contradictory statements, such as that God does, and does not, exist, only one can be true and the other must be false, so, according to this assumption, only one of the two conflicting norms can be valid and the other must be invalid. This finds expression in the principle: “lex posterior derogat priori”, which is considered an axiom of legal logic.”

28. That what this means is that where two norms conflict, they fail at their test of logic. That two norms, one that has been repealed, and another one that is in enactment cannot operate at the same time. That similarly, a subsequent norm cannot be used to determine the legality of an act that was done when that law was not in enactment. That therefore, in the present case, the Respondent cannot apply the provisions of Section 39A of the Tax Procedures Act, a law that was enacted in November 2019, long after the impugned assessment period. That indeed, as stated by Lord Diplock's dictum in the Council of Civil Service Unions O Others v Minister for the Civil Service [1985] AC 374, the application of Section 39A of TPA, a provision that became effective in November 2019, long after the period of assessment, was “so outrageous in its defiance of logic or accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.”

29. That additionally, a tax assessment is an administrative process. That therefore, the Respondent is under an obligation not to act in a manner that is contrary to Article 37 of the Constitution as read together with the provisions of the Fair Administrative Action Act which mandate all persons exercising administrative powers to do so under the authority of written law or else their acts are held to be ultra vires. That this is the position established under Section 4(1) of the Fair Administrative Action Act which provides that every person has the right to administrative action, which is expeditious, efficient, lawful, reasonable and procedurally fair.

30. That the High Court in Okiya Omtatah Okoiti 3 others v Anne Waiguru, the Cabinet Secretary, Devolution and Planning & 6 others [2021] eKLR held that:“An act of ultra vires occurs when the decision-making authority commits an error of law in the process of taking the decision or making the act, the subject of the complaint. Acting without jurisdiction or ultra vires or contrary to the provisions of law or its principles renders the decision made laced with illegality.”

31. That therefore, considering that the Respondent demanded Withholding taxes for a period of assessment for which the impugned law was not in operation, the Respondent acted ultra vires and therefore, the assessment decision is laced with illegality and does not stand the test of the law. That as such, it is the Appellant’s prayer that the decision be declared illegal and inconsistent with the principles of fair administration.

32. That in the instant case, in response to the income tax assessment, the Appellant delivered documents as requested by the Respondent, the supporting documentation for the inter-company transfers but this was ignored for being time-barred. That the Respondent went ahead and treated this as income.

33. The Appellant relied on the case of Gichengo v Commissioner of Investigations Enforcement (Tax Appeal 484 of 2022) [2023] KETAT 517 (KLR), to demonstrate that it is able to differentiate its case and prove that it provided documents to the Respondent.

34. That the documents it presented were not considered by the Respondent on the grounds that the submissions were time barred. That it follows that the Respondent did not consider the evidence provided by the Appellant to prove that the interbank transfers were not income but just normal transfers between related entities.

35. The Appellant further relied on the following cases to support its averments:i.Boleyn International Ltd Vs Commissioner of Investigations and Enforcement, Nairobi TAT Appeal No. 55 of 2018. ii.Re B (Children), Re [2008] UKHL 35. iii.Nairobi TAT No. 25 of 2016 Family Signature LTD Vs The Commissioner of Investigations Enforcement.iv.Ludwick Musindu vs. Nancy Nduta (2021) eKLR.v.Ready Mixed Concrete (South-East) Ltd v Ministry of Pensions and National Insurance [1968] 1 All ER 433HC to determine the issue of control in employment.vi.Commissioners of Inland Revenue v Brander &Cruickshank [1970] UKHL J1208-2.

Appellant’s Prayers 36. The Appellant prayed for orders that:i.The Respondent's Objection decision contained in the letter dated 30th June, 2023 demanding payment of Kshs. 26,903,764. 00 be set aside partially;ii.The Appeal be allowed;iii.The costs of and incidental to this Appeal be awarded to the Appellant; andiv.Any other orders that the Tribunal may deem fit.

Respondent’s Case 37. The Respondent’s case is premised on the following documents:i.The Respondent’s Statement of Facts dated 7th September, 2023 and filed on 8th September, 2023 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 1st March, 2024.

38. The Respondent averred that the assessments were correctly issued and conform to the Income Tax Act. That the Appellant did not provide any evidence that would have altered the assessment. That the Tax Procedure Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision. That the Section provides as follows:-“56(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

39. The Respondent averred that examination of the Appellant's records, audited accounts and Income tax returns established that the Appellant failed to declare business income and all its incomes for years of income 2015-2019 respectfully. That the Respondent is empowered under the Income Tax Act, 2013 to bring to charge income where the same is established due. That the relevant Section provides as follows:“73(1)Save as otherwise provided, the Commissioner shall assess every person who has income chargeable to tax as expeditiously as possible after the expiry of the time allowed to that person under this Act for the delivery of a return of income.(2)Where a person has delivered a return of income, the Commissioner may(a)if he has reasonable cause to believe that the return is not true and correct, determine, according to the best of his judgement, the amount of the income of that person and assess him accordingly.”

40. The Respondent further averred that Section 72D of Income Tax Act provides for 20% penalty for late payment of taxes hence the Respondent relied on Section 35 of the Income Tax Act which provides that a person making certain payments is required to deduct tax at the applicable rate and remit the tax to the Respondent on behalf of the recipient. That categories of payments subject to Withholding tax include professional fees, audit fees, consultancy fees and contractual fees among others.

41. That the Appellant failed to provide documentary evidence to demonstrate payments of Withholding taxes on professional fees among other services analyzed under the period of audit.

42. The Respondent stated that the tax assessment was reached based on the information available and provided by the Appellant and that the Commissioner is empowered by the Tax Procedure Act to make such decisions. That the relevant Section provides as follows:-“29(1)Where a taxpayer has failed to submit a tax return for a reporting period in accordance with the provisions of a tax law, the Commissioner may, based on such information as may be available and to the best of his or her judgment, make an assessment (referred to as a “default assessment”).”

43. That the Appellant failed to lodge a proper objection contrary to Section 51(3) of Tax Procedures Act, 2015 which provides as follows:“A notice of objection shall be treated as validly lodged by a 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; and(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.”

44. That in light of the inconsistencies within the Appellant's Income and PAYE ledgers, the Tax Procedures Act empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the best judgment. That the relevant Section provides as follows:“31. Amendment of assessments(1)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 information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that-(a)in the case of a deficit carried forward under the Income Tax Act(Cap.470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;(b)in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; or(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.”

45. The Respondent submitted that the taxpayer, despite declaring some income knowingly, continued to under declare income for the period under review contrary to the provisions of the Income Tax Act. That according to the Income Tax Act, it is the responsibility of any person carrying on business to maintain records of all transactions. That the relevant Sections provide as follows:“54A(1)A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”and;55(2)person carrying on a business shall preserve every book of account, and every document which is essential to the explanation of any entry in any book of account, relating to the business for a period of not less than ten years after the year of income to which that book of account or document relates.”

46. The Respondent stated that the Appellant filed all necessary returns and paid what it had assessed itself to be payable. The Respondent further averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents hence no relevant documents or records were provided to support the objection by the Appellant. That as a result, the assessments were made based on the only available information based on the best judgement by the Respondent. That Section 59(1) the Tax Procedure Act empowers the Respondent to require production of such documents vide issuance of notice as deemed necessary in determination of tax liability.

47. The Respondent submitted that the Appellant did not file income tax returns for the accounting period 2019-2020 in contravention of Sections 94 and 95 of the requirements of the Tax Procedures Act and that the estimated assessments were correct.

48. The Respondent reiterated that the Appellant failed to provide signed financial statements and books of account to support its allegations. That the Tax Procedure Act empowers the Respondent to carry out assessment based on the information available.

49. The Respondent denied that the Appellant had paid all its tax dues and reiterated that because of its under-declaration, the Appellant is in debt of Kshs. 26,903,764. 00.

50. The Respondent relied on the following cases to support its averments:i.Monaco Engineering Limited vs. Commissioner Domestic Taxes TAT Appeal No.67/2017. ii.Osho Drapers Ltd vs. Commissioner of Domestic Taxes, TAT No. 159 of 2018. iii.Miao Yi v Commissioner of Investigations & Enforcement TAT no 441 of 2019. iv.Ritz Enterprises Limited vs. Commissioner of Investigations &Enforcement TAT No. 227 of 2018. v.Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR.vi.Janet Kaphiphe Ouma and another vs. Marie Stopes International (Kenya), HCC No. 68 of 2007. vii.Dyer & Dyer Limited vs. Commissioner of Domestic Taxes TAT 139 of 2020. viii.Commissioner of Domestic Taxes vs. Metoxide Limited [2021].ix.Ken Iron and Steel Limited vs. Commissioner Investigations and Enforcement (2021).x.Commissioner of Domestic Services vs. Galaxy Tools Limited (2021) eKLR.

Respondent’s Prayers 51. The Respondent prayed that this Tribunal considers the case and finds that:i.The Respondent's Objection decision be upheld.ii.The outstanding tax arrears of Kshs. 26,903,764. 00 are due and payable by the Appellant.iii.The confirmed assessments dated 8th November, 2022 were proper in law.

Issues for Determination 52. The Tribunal has carefully considered the pleadings and documentation filed by both parties and is of the view that the issues falling for its determination are:i.Whether the assessments by the Respondent were within statutory timelinesii.Whether the Respondent’s objection decision was justified

Analysis and Findings 53. The Tribunal having established the issues for its determination, proceeds to analyse them as hereunder.

i. Whether the assessments by the Respondent were within statutory timelines 54. The Tribunal notes that the Respondent demanded taxes for the period 2015 to 2019 in its assessment dated 8th November, 2022.

55. The statutory timelines within which the Respondent should demand taxes is expressly provided for under Section 29(5) of the Tax Procedures Act. The Section provides as follows:“(5)Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.(6)Subsection (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer. ”

56. The Tribunal notes as follows regarding the statutory timelines in relation to the instant assessments and based on the assessment date:i.Withholding tax – Withholding taxes are accounted for by the 20th of the subsequent month. This is per Rule 8(1) of the Income Tax (Withholding Tax) Rules, 2001 which states as follows regarding payment of withholding tax:“On or before the twentieth day of the month following the month in which the deduction is made or before such other day as may be notified to him by the Commissioner, a person shall, subject to subparagraph (3), pay to the Commissioner or to such other person as the Commissioner may direct, all amounts of tax deducted in accordance with the Act and these rules.”In this regard, a 5 year timeline per the date of assessment and as per Section 29(5) would cover the month of August 2022 back 5 years; in which case the period that complies with Section 29(5)of the TPA is September 2017 to August 2022. Any withholding tax assessment relating to periods prior to September 2017 is therefore void.ii.Income Tax – The compliance date for Income tax is the 6th month of the subsequent year after the financial year of a company. This is provided for under Section 52B(1)(b) of the Income Tax Act which states as follows regarding the filing of final return with self-assessment:“every person, other than an individual chargeable to tax under the Act, shall for any accounting period commencing on or after 1st January, 1992 furnish to the Commissioner a return of income, including a self-assessment of his tax on such income, not later than the last day of the sixth month following the end of his accounting period:”It follows therefore that a 5 year timeline per the date of assessment and as per Section 29(5) would cover the month of August 2022 back 5 years; in which case the period that complies with Section 29(5) of the TPA is 2017 to 2021 years of income. Any Income tax assessment relating to any period prior to January 2017 would therefore be void.iii.PAYE - The compliance date for PAYE is the 9th day of the subsequent month after the PAYE is withheld. This is provided for under Rule 10(1) of The Income Tax (PAYE) Rules which provides as follows on payment of tax by employer:“Before the tenth day following the end of every month or before any other day which may be notified to him by the Commissioner, an employer shall, subject to paragraph (2), pay, to such person as the Commissioner shall direct, all amounts of tax which the employer has deducted under these Rules during that month.”It follows therefore that a 5 year timeline per the date of assessment and as per Section 29(5) would cover the month of August 2022 back 5 years; in which case the period that complies with Section 29(5)of the TPA is August 2017 to July 2022. Any assessment prior to this date is therefore void.

57. The Tribunal, having established and delineated the assessment periods that fell outside the five year statutory limit as discussed in the foregoing paragraphs, finds that the Respondent’s tax assessments beyond the delianated periods are not sustainable in law.

ii. Whether the Respondent’s objection decisions was justified. 58. This dispute arose from the Respondent’s assessment of Withholding taxes, Income tax and PAYE on the Appellant’s transactions.

59. The Appellant averred that the assessments were erroneous while the Respondent argued that it raised the assessments based on the information available to it.

60. The Tribunal, having reviewed the Appellant’s pleadings and has established as follows regarding the confirmed assessments on various tax heads:-

a. Withholding Tax 61. The main issue here is that the Withholding tax assessment was inclusive of withholding tax for the period August 2016 to September, 2019.

62. The Tribunal has established that prior to the enactment of the Finance Act 2016 and on 9th June, 2016, Section 35 (6) (a) of the ITAprovided as follows;“Where a person who is required under this section and in accordance with the rules made under section 130, to deduct tax—a.fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted; orb.……………the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”

63. The Tribunal notes that this provision, however, was deleted via the Finance Act, 2016 and was only subsequently reinstated in the Tax Procedures Act (TPA), via the Finance Act, 2019, which came into force on 7th November, 2019 through the inclusion of Section 39(A) which reads as follows;“where a person who is required under this section, and in accordance with the rules made under section 130, to deduct tax fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted, the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by the person and the due date for the payment of which has the date on which the amount should have been remitted to the Commissioner”

64. It is apparent therefore that the key provision of the law that would make the Appellant liable to Withhold the tax during the stated period was removed by the Finance Act 2016 and re-introduced under the Tax Procedures Act by the Finance Act 2019. The question therefore is whether the Appellant could be held responsible to account for the Withholding tax for the period between August 2016 to September, 2019.

65. The legal maxim on retrospectivity of laws states that nova constitutio futuris formam imponere debet, non praeterit (a new law ought to be prospective and not retrospective, in operation). Courts have severally expressed themselves on the non-retrospectivity of new laws. In James v I.R.C1 [1977] STC 240 the plaintiff challenged the validity of Section 8 of the Finance Act of 1974 which increased the rate of surcharge retrospectively for the year of assessment 1972-73, in dismissing the case Slade J stated as thus;-“…It is in my judgment that as the constitutional law of England stands today parliamentarians have the power to enact by-statute any fiscal law whether of a prospective or a retrospective nature and whether or not it may be thought by some persons to cause injustice to individual citizens and note. If the wording of the legislation is clear the court must give effect to it even though it may have or will have a retrospective effect.”

66. Further, in Samuel Kamau Macharia and Another v Kenya Commercial Bank Ltd and 2 Others, SCK Application No. 2 of 2011 [2012] eKLR, the Supreme Court while considering the question whether the retrospective application of a statutory provision is unconstitutional stated that:“As for non-criminal legislation, the general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or evidence are prima facie prospective, and retrospective is not to be given to them unless, by express words or necessary implication, it appears that this was the intention of the legislature. (Halsbury’s Laws of England, 4th Edition Vol. 44 at p.570). A retroactive law is not unconstitutional unless it:(i)is in the nature of a bill of attainder;(ii)impairs the obligation under contracts;(iii)divests vested rights; or(iv)is constitutionally forbidden”

67. It follows therefore that since the Finance Act 2019 was enacted on November 7, 2019, the only period during which the Respondent could legally enforce collection under the new law was subsequent to 7th November, 2019 while the old law was only applicable prior to the enactment of the Finance Act 2016.

68. The Tribunal concludes therefore that the Withholding tax assessment relating to the period between 9th June, 2016 and 7th November, 2019 was not backed by the law and therefore not enforceable on the Appellant.

69. On the residual Withholding tax assessed, the Tribunal notes that while the Appellant argued that it withheld all applicable taxes, it did not provide information and/ or documentation to prove that the remittances of Withholding tax were made. This is contrary to Section 30 of the Tax Appeals Tribunal Act and Section 56(1)of the Tax Procedures Act which provide that the burden of proof for tax disputes falls on the taxpayer.

70. In regard to this portion of the Withholding tax assessment, the Tribunal found therefore that the assessment in relation to this portion of withholding tax was justified.

b. Income Tax 71. The dispute relating to Income tax arose due to the alleged misclassification by the Respondent of intercompany transfers in the bankings and inter-account transfers as business income. That these transfers are not motivated by profit and do not involve any level of organization or planning. The Appellant posited that these transactions are simply transfers of funds between related entities and do not constitute a business activity.

72. The Tribunal notes that the Appellant provided the following documentation, as part of its pleadings, to support its averments in relation to Income tax:i.Intercompany transfers schedules and bank statementsii.Loans disbursements schedules and bank statementsiii.Inter-account transfers schedules and bank statementsiv.Bounced cheques in bank statements

73. On its part, in the objection decision, the Tribunal notes that the Respondent stated as follows in relation to adjustments for non-income deposits:“…You only provided supporting documentation for further loans to be adjusted.”

74. The Tribunal notes that the Respondent, through a letter dated 3rd October, 2022, requested the Appellant to provide bank statements, loan statements, bounced cheques/reversals and the details of the relationships between the taxpayer and its related parties.

75. The Tribunal further observed that while the Respondent stated that it only received loans information, in its letter dated 7th November, 2022, the Appellant provided banking summaries, bank loan statements and bounced cheque samples to demonstrate that there were non-income amounts that the Respondent had erroneously classified as income for Income tax purposes.

76. The Tribunal established that the Appellant, vide an email dated 8th November, 2022, submitted various banks’ loan statements, invoices, freight handling charges documentation and a banking reconciliation for the period 2015 to 2019.

77. The Appellant further provided, with its objection dated 2nd May, 2023, banking summaries, bank loan statements and bounced cheque details to demonstrate that there were non-income amounts in its bankings, Further, vide the same letter it provided contractual agreements for loans for the Respondent’s review. The Respondent stated that it adjusted for the same in its objection decision and went ahead to state that it even dropped a deemed interest assessment based on these agreements. It is therefore not in dispute that the said agreements were provided to the Respondent.

78. The Tribunal, however, took note that the Appellant stated, in its Statement of Facts, that, at the time of objection, it provided the same information to the Respondent who ignored the details of inter-company transfers, inter-account transfers, loans disbursements and bounced cheques on the basis that the information was time barred. The Respondent did not address or object to this averment by the Appellant.

79. The Tribunal confirmed from the bank statements, detailed general ledgers on loan repayments and detailed general ledgers on inter-company transfers as well as bank statements attached to the Appellant’s pleadings, that the Appellant demonstrated that the non-income amounts it alluded to in support of non-income amounts were inter-company transfers as well as loan repayment to various banks and related parties.

80. It is manifestly clear that the Appellant provided extensive documentation at objection stage, in the lead up to the objection decision and with its appeal documents to support its non-income transactions in its various banks. It is further apparent that the Respondent did not address all the information provided to it in relation to the same.

81. In this regard, the Tribunal is of the considered view that the Appellant discharged its burden of proof in relation to the non-income items assessed for Income tax as it provided all the information requested of it by the Respondent.

82. While it is settled that the burden of proof in tax cases lies with the Appellant as is encapsulated in Section 30 of the TATAct, this onus may, however, shift to the Respondent if the Appellant has made a prima facie case. In this case, the onus may then shift to the Respondent to rebut the prima facie case, failure to which the taxpayer succeeds.

83. This position was explained in the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR, where Mativo J ( as he then was) adopted the doctrine in the Canadian Supreme Court case of Johnston v Minister of National Revenue where the court {1948} S.C.R. 486 where the court decided that:“… the onus is on the taxpayer to “demolish the basic fact on which the taxation rested.” Again, the Supreme Court of Canada provided guidance on this issue inHickman Motors Ltd. v Canada which held that the onus is met when a Taxpayer makes out at least a prima facie case. Prima facie is another legal term that literally means “on its face.” To prove a case “on its face” you must provide evidence that, unless rebutted, would prove your position. According to the said decision, a prima facie case is made when the taxpayer can produce unchallenged and uncontradicted evidence. Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed…” (Emphasis ours)

84. The Tribunal also aligns itself with previous decisions regarding the swinging nature of the burden of proof as held in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) and Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR.

85. In relation to the instant case and the assessment on income tax, the bottom line is that once the Appellant has provided evidence that the Respondent’s assessment was wrong, then the Respondent must push back and show that its assessment was not erroneous or excessive. The pendulum (onus of proof) would swing back to the Appellant once the Respondent has discharged its burden on a balance of convenience.

86. By tabling the information that the Appellant did, it succeeded in making a prima facie case that non-income items were taxed erroneously by the Respondent. The onus, therefore, shifted to the Respondent to disprove these documents by making a prima facie case that its Income tax assessment was justified. The Respondent did not disprove the information and documentation provided by the Appellant at the various stages of this dispute. The result of this is that the presumption of correctness of the Respondent’s Income tax assessments varnishes and therefore the Appellant’s appeal in relation to Income tax on non-tax items succeeds.

c. PAYE 87. On this aspect, the Appellant argued that the Respondent assessed PAYE on persons who were independent service providers.

88. The Tribunal has reviewed the Appellant’s pleadings and submissions and notes that while it averred that the variances cited by the Respondent were due to adjustments the Appellant made to its PAYE returns in relation to independent service providers it had erroneously treated as employees, it did not provide any documentation to support this grounds. Further, it did not provide information relating to the four pilots that it averred were not employees.

89. It is trite law that the burden of proof in tax cases lies with the Appellant. This is well stated in Section 30 of the Tax Appeals Tribunal Act and Section 56(1) of the Tax Procedures Act.

90. The Tribunal and the Courts have severally pronounced themselves on this position. The Tribunal relied on Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR where it was stated as follows:“The party that carries the burden of proof must produce evidence to meet a threshold or “standard” in order to prove their claim. If a party fails to meet their burden of proof, their claim will fail. “Burden of Proof” at the Tax Court is somewhat unique. At the Tax Court, a taxpayer is required to disprove an assessment by the Commissioner. In other words, a Taxpayer challenging a tax assessment will need to collect and present evidence in order to disprove the Commissioner’s position. This is the basic principle.”

91. The Tribunal therefore finds that the Appellant did not discharge its burden of proof in relation to the PAYE assessment by the Respondent. The Respondent was therefore justified in confirming the assessment relating to this tax head.

Final Decision 92. The upshot of the foregoing analysis is that the Appeal is partially merited and consequently, the Tribunal proceeds to make the following Orders:-a.The Appeal be and is hereby partially allowed.b.The confirmed assessment in relation to Withholding tax for any period prior to September 2017 and the period between 9th June 2016 and 7th November 2019 be and is hereby set aside.c.The confirmed assessment in relation to Withholding tax for the period subsequent to 7th November 2019 be and is hereby upheld.d.The confirmed assessment in relation to Income tax be and is hereby set aside in its entirety.e.Any PAYE assessment pertaining to any period prior to September 2017 be and is hereby set aside.f.Each Party to bear its own costs.

93. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER