[2024] KETAT 1644 (KLR)

Wincheru Construction Ltd v Commissioner Legal Services and Board Coordination (Tax Appeal E937 of 2023) [2024] KETAT 1644 (KLR) (Commercial and Tax) (21 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1644 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E937 of 2023

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

November 21, 2024

Between

Wincheru Construction Ltd

Appellant

and

Commissioner Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya and their primary business is construction services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent carried out investigations into the business of the Appellant for the years 2020 -2022 with a view of confirming its tax compliance under Income tax obligations and VAT. Consequently, the Respondent raised additional assessments on 9th June 2023 for VAT and income tax for period 2020-2021 totalling to Kshs 9,530,913. 00.

4. Dissatisfied with the findings, the Appellant lodged notice of objection on 8th July 2023 which was duly acknowledged by the Respondent. Upon consideration of the objection and the availed documents, the Respondent confirmed the said assessments vide the objection decision dated 31st August 2023.

5. Aggrieved by the decision of the Respondent, the Appellant filed a Notice of Appeal dated 18th December 2023 out of time, however the Tribunal deemed the same to be duly filed vide its Orders on 8th January 2024.

The Appeal 6. The Appeal is founded on the Memorandum of Appeal dated and filed on 18th December 2023 wherein the Appellant raised the following grounds of appeal:a.That the Respondent erred in law and fact by overstating the Appellant’s revenues for the periods in question based on erroneous summation of bank credits.b.That the Respondent erred in law and fact by charging income tax on banking credits that were not revenue in nature but rather loans and capital injections.c.That the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant.d.That the Respondent erred in law and fact by confirming the assessment without due regard to all records,documents, explanations and information provided, thereby failing to appreciate all issues presented and raised by the appellant before confirming the assessment.

Appellant’s Case 7. The Appellant lodged statement of facts dated and filed on 18th December 2023. The Appellant filed its written submissions dated 17th July 2024 on 23rd August, 2024 and the same were adopted by the Tribunal on 11th September, 2024.

8. In its statement of facts, the Appellant averred that it is registered for the Income Tax and VAT tax obligations.

9. The Appellant stated that it was subjected to an audit vide a Notice of intention to audit dated 22nd January 2023 which requested the Appellant to provide records. It averred that it provided the Respondent with the requested information where after the Respondent issued its notice of findings dated 15th March 2023 alleging that there were variances between what the Appellant had declared vis a viz established income as per its bank statements.

10. The Appellant then lodged its objection dated 8th July 2023 leading to issuance of the objection decision dated 31st August 2023 wherein the Respondent disallowed the Appellant’s objection and confirmed principal tax assessments with respect to Income tax and VAT amounting to Kshs 7,688,034. 39.

11. The Appellant’s case was that the Respondent erred in law and fact by overstating the Appellant’s revenues for the periods in question based on erroneous summation of bank credits. It stated that the Respondent disregarded the actual turnover realised by the Appellant in its financial statements and tax returns by arbitrary subjecting the Appellant to a bank analysis method that unfairly increased the Appellant’s turnover for the periods under review.

12. The Appellant stated that on request for documentation, it obliged and complied with the Respondent’s request and as such availed copies of its bank statements, financial statements, sales and purchases ledgers to the Respondent, therefore, the Appellant’s position was that the Respondent ought not to have used bank credits to assess taxes.

13. It averred that the Respondent having deliberately ignored the documents submitted by the Appellant, the Respondent had no basis or justification to adjust the turnover of the Appellant upwards for the periods under review by subjecting the Appellant’s bank accounts to scrutiny on assumption that all bank credits were income. Based on foregoing, the Appellant maintained that the Respondent’s actions of charging tax on bank credits are unreasonable.

14. The Appellant relied on the case of Afya X-Ray Centre Ltd V the Commissioner Appeal No 70 of 2017 where the Tribunal stated as follows:“However, we would remiss if we did not point this conduct of the Respondent relying solely on bank statements is likely to cause prejudice of untold measures to all taxpayers.”“The Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit is not necessarily income to the account owner...”“That being the case, we find that the assessment as it currently stands is in breach of basic accounting principles that if allowed will be prejudicial to the Appellant.”

15. The Appellant also stated that the Respondent erred in law and fact by charging Income tax on banking credits that were not revenue in nature but rather loans and capital injections. It stated that the Respondent erred by subjecting bank credits that were not revenue in nature to tax.

16. According to the Appellant, the Respondent failed to consider its objection and the supporting documentary evidence which included the Appellant’s bank statements, audited financial statements and relevant invoices and receipts to support the expenses claimed. Further, it stated that the documents provided demonstrated that the deposits in the Appellant’s bank accounts included loans, contra entries, bounced cheques and capital injections which could not constitute taxable income within the confines of Section 3(2) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).

17. It was the Appellant’s case that the Respondent erred by considering the loans, contra entries, bounced cheques and capital injections as taxable income for the period in question. The Appellant relied on Section 3(2) of the ITA which provides for the type of income upon which tax is chargeable but the Respondent chose to contravene the same by subjecting non-taxable bank credits to tax based on assumptions, therefore it argued that the Respondent’s decision should be quashed.

18. The Appellant averred that failure of the Respondent to take into consideration the documents provided by the Appellant during the periods in question was not only prejudicial but also excessive. The Appellant also stated that the Respondent failed to use all available information at its disposal in making its decision but instead evidently and selectively imposed a tax demand on the Appellant based on assumptions.

19. The Appellant asserted that it provided a schedule of non-revenue bankings for the periods in question and from the bank descriptions these transactions were direct deposits. Consequently, the Appellant urged the Tribunal to find that the non-revenue bank credits should not be charged to income tax as they are not gains from business.

20. Apart from the foregoing, the Appellant stated that the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant. According to the Appellant, the Respondent erred in alleging that the Appellant failed to provide relevant documentary evidence in support of its Objection, whereas the Appellant had supplied all relevant documentary evidence to support the expenses claimed.

21. It was the Appellant’s contention that the Respondent failed to consider its Objection and the supporting documentary evidence which included the Appellant’s bank statements, audited financial statements and relevant invoices and receipts to support the expenses claimed. The Appellant reiterated that the Respondent’s decision was contra statute and should be quashed.

22. According to the Appellant, the Respondent was bound by the express text of the ITA and was precluded from speculating as was established by the Superior court in the case of Republic v Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited [2014] eKLR.

23. The Appellant stated that failure of the Respondent to take into consideration the documents provided and the expenses incurred by the Appellant during the periods in question was not only prejudicial but also excessive.

24. It was the Appellant’s case that in the building and construction industry where the Appellant is based, profit margins are dictated by several factors and most importantly the operating expenses. It argued that not considering the documents provided to justify the expenses incurred in the periods in question amounts to an illegality under the ITA and the general fair administrative action contrary to Article 47 of the Constitution of Kenya, 2010 (hereinafter “the Constitution”). Based on the foregoing, the Appellant’s position was that the opportunistic and arbitrary action of the Respondent to issue the additional tax assessments was speculative and prejudicial.

25. The Appellant also asserted that the Respondent erred in law and fact by confirming the assessment without due regard to all records, documents, explanations and information provided, thereby failing to appreciate all issues presented and raised by the Appellant before confirming the assessment. The Appellant submitted that the Respondent’s decision dated 31st August 2023 was not justified on the basis that that the Respondent did not use the available information as provided by the Appellant.

26. It argued that failure to rely and consider the documents provided in essence denied the Appellant the rights provided by Section 15 of the ITA which provides a list of deductions that qualify for deduction before assessment of the tax payable.

27. The Appellant stated that the statement of income and expenditure, invoices and bank statement among the other documents supplied to the Respondent were disregarded. It also asserted that had the Respondent restricted itself to the provisions of Section 3(2)(a)(i) of the ITA and taking into account the allowable deductions under Section 15 of the ITA, the Respondent would not have made the impugned decision.

28. Apart from that, the Appellant averred that the Respondent in its decision failed to consider the nature of the business the Appellant is involved in by subjecting it to an arbitrary decision premised on assumptions and not the documentary evidence provided. It stated that had the Respondent appreciated all explanations, documents and information provided the Respondent would not have made the impugned decision.

29. In further support of its case, the cited the case of Republic v Kenya Revenue Authority (Ex parte) Jaffer Mujtab Mohammed (2015) eKLR where the learned Judge held as follows:“A taxing authority is not entitled to pluck a figure from the air and impose it upon the taxpayer without some rational basis for arriving at the figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court intervening.”

30. The Appellant in its written submissions identified two issues for determination. The first was whether the Respondent erred in law and fact by raising additional assessments for the appellant by solely relying on bank analysis and a Standard Gross Profit Margin and second was whether the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant.

31. On whether the Respondent erred in law and fact by raising additional assessments for the Appellant by solely relying on bank analysis and a Standard Gross Profit Margin, the Appellant submitted that the Respondent disregarded actual turnover realized by the Appellant in its financial statements and books of accounts but instead unfairly subjected it to a bank analysis method which prejudicially increased its turnover.

32. The Appellant submitted that it furnished the Respondent with all documents including schedules of sales and purchases therefore, the Respondent should not have solely relied on bank statements.

33. The Appellant avowed that the documents it provided demonstrated that the deposits in the Appellant’s bank accounts included loans, contra entries, bounced cheques and capital injections which could not constitute taxable income within the confines of Section 3(2) of the ITA.

34. The Appellant relied on the case of Minazini Enterprises Limited v Commissioner of Domestic Taxes where the Tribunal stated as follows:“The Tribunal has relied on the following cases in determining that the Respondent must always provide the rational and clarity while making or arriving at a determination. In the case of Republic v Kenya Revenue Authority Ex parte Jaffer Mujtab Mohamed [2015] eKLR the Court held that; a taxing authority is not entitled to pluck a figure from the air and impose it upon the taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the court in intervening.”

35. It also submitted that having provided the Respondent with material and factual evidence challenging its impugned and exaggerated Gross Profit Margin, the Respondent then had the burden to challenge the evidence provided as stated by the High Court in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR.

36. On whether the Respondent erred in law and fact by disallowing deductible expenses claimed by the Appellant, the Appellant submitted that the Respondent unlawfully disallowed the expenses claimed by the Appellant prior to making its objection decision on account of the claimed expenses being unsupported.

37. The Appellant maintained that it provided documents that were sufficient evidence showing the expenditure incurred for the periods in question and ought to have been allowed as legitimate business expenses to be factored in the calculation of taxable income but the Respondent ignored the documents.

38. The Appellant also submitted that documents it provided demonstrated that the deposits in the Appellant’s bank accounts included loans, contra entries, bounced cheques and capital injections which could not constitute taxable income within the confines of Section 3(2) of the ITA. The Appellant therefore, submitted that the Respondent erred by considering the loans, contra entries, bounced cheques, overdrafts and director’s injections as taxable income for the period in question.

39. The Appellant also cited the case of Afya X-ray Centre Limited v the Commissioner of Domestic Taxes where it was held that the Respondent is supposed to undertake the assessment using all the records provided because relying solely on bank statements is likely to cause prejudice of untold measures to all taxpayers.

Appellant’s Prayers 40. The Appellant prayed for the following reliefs:a.That this Appeal be allowed;b.That the Respondent’s decision dated 31st August 2023 be set aside and reversed;c.The costs of and incidental to this appeal be awarded to the Appellant; andd.Any other orders the Tribunal may deem fit.

Respondent’s Case 41. In opposition to the Appeal, the Respondent filed its Statement of facts dated 1st February 2024. The Respondent also filed its written submissions dated 25th July 2024 on 26th August, 2024 and the same were adopted by the Tribunal on 11th September, 2024.

42. The Respondent’s case is that it carried out investigations into the business of the Appellant for the period 2020 -2022 with a view of confirming its tax compliance under Income tax obligations and VAT with a view to confirm if Income declared under section 3(2) and part IV on ITA and Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).

43. The Appellant was identified through an analysis of their IFMIS payments and bank account information which appeared to show that the Appellant had received payments from the Bomet County Government being payment for various projects such as the loading of gravel and routine road maintenance but under-declared the income and VAT sales. A notice of this finding was shared vide letter dated 15th March 2023.

44. The information from the i-Tax data base on non-filers showed that the Appellant had received income through IFMIS for Kshs 5,764,642. 00 in year 2021 and in year 2021 declared sale turnover of Kshs 10,894,769. 00 against payments received through IFMIS of Kshs 30,638,250. 00 leading to an under declaration of sales turnover of Kshs 19,743,481. 00 as payment for services provided.

45. The Respondent stated that the investigations established that the Appellant had in year 2020 and 2021 under-declared gross sales turnover in the annual income tax returns for Kshs 25,508,123. 00 translating to an income tax liability of Kshs 2,945,682 .00 upon being subjected to under declared income to a 40% profit margin.

46. The Respondent stated that the review established that the Appellant’s VAT3 returns revealed that the Appellant filed zero sales in the years 2020-2022 with an under declaration of Kshs. 18,524,670. 00 in comparison to vatable sales payment received through IFMIS of Kshs 44,543,735. 00 thereby resulting in an under-declared vatable sale margin of Kshs 26,019,065 with a VAT liability of Kshs 3,798,784. 00.

47. Apart from that, the Respondent stated that analysis of the Appellant’s VAT purchase for year 2021 revealed that the Appellant claimed fictitious purchase amounting to Kshs 2,445,028. 00. The Respondent disallowed these expenses for income tax purposes.

48. During the said review, the Respondent averred its discovery that there were inconsistencies between the returns filed by the Appellant’s suppliers and invoices claimed by the Appellant for the period years 2020-2022. Further, various purchases in the Appellant’s VAT returns could not be circularized against supplier's declaration.

49. The Respondent averred that the Appellant was informed on the inconsistency of the VAT3 returns invoices for the Appellant to resolve the same however, the Appellant failed to resolve the said inconsistencies within the stipulated timeframe. As such, the lability resulting from income tax on under-declared sales, overstated purchases, and disallowed unsupported expenses.

50. The Respondent also stated that the Input VAT claimed on purchase invoices could not be verified against supplier declarations, were disallowed. As a result, the Respondent raised additional assessments on 9th June 2023 for VAT and income tax for the period 2020-2021 totalling to Kshs 9,530,913. 00 to which the Appellant objected on 8th July 2023.

51. The Respondent stated that it issued a demand for documents in line with objection lodged through email on 8th and 12th July 2023 and 24th August 2023 for audited financial statements, supplier statements, proof of expenses incurred and certified bank statements. It further stated that the Appellant failed to provide the relevant supporting documents of records and invoices for the period 2020-2021 in support of their objection. It stated that the Appellant’s VAT and Income was therefore estimated, as this was the only reasonable basis of assessing the VAT and income tax and notice invalidating the objection issued confirming the said assessments.

52. In response to ground (a) of Memorandum of Appeal and paragraphs 1-10 and 1. 1-1. 7 of the Appellant’s statement of facts the Respondent averred that the assessments were correctly issued and conform to the ITA. It stated that the Appellant did not provide any evidence that would have altered the assessment. The Respondent stated that Tax Procedure Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) 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.

53. In further response to ground (a) of the Memorandum of Appeal the Respondent averred that examination of the Appellant’s records, audited accounts and income tax returns established that the Appellant failed deciare business income and all their incomes for the years of income 2020-2021 respectively. The Respondent averred that is empowered under section 73 the ITA to bring to charge income where the same is established to be due.

54. In another response to ground (a) of the Memorandum of Appeal, the Respondent averred that the tax was reached at based on the information available and provided by the Appellant and that the Respondent is empowered under section 29(1) of the TPA to make such decisions based on the information provided.

55. In response to ground (b) of Memorandum of Appeal and paragraph 2. 1 -2. 11 the Appellant’s statement of facts, the Respondent submitted that the Appellant despite declaring some income knowingly continued to under declare income for the period under review contrary to the provisions of the ITA. The Respondent averred that pursuant section 54A (1) and 55(2) of the ITA, it is the responsibility of any person carrying on business to maintain records of all transactions.

56. In further response to further response to ground (b) of the Memorandum of Appeal the Respondent stated that the respondent empowered by section 31 of the TPA to carry out amendments on assessments where adjustments are due to bring to charge the correct amounts.

57. In response to ground (c) of the Memorandum of Appeal, and paragraph 3. 1 — 3. 10 the Appellant’s statement of facts, the Respondent insisted that the Appellant filed all necessary returns and paid what they had assessed themselves to be payable. The Respondent 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 its objection. As a result, the assessment was based on the only available information based on the best judgement by the Respondent. It argued that the TPA empowers the Respondent to require production of such documents vide issuance of notice as deemed necessary in determination of tax liability.

58. In further response to ground (c) of Memorandum of Appeal, the Respondent submitted that the appellant did not file income tax returns for the accounting period 2020-2021 in contravention of the requirements of the sections 84 and 95 of the TPA and that the estimated assessments were correct.

59. In further response to ground (c) of Memorandum of appeal the Respondent submitted that the tax assessments are correct and the same was based on the best judgement where the Appellant’s audited accounts and records were analysed and adjustments made for, income declared and Withheld Tax deducted at source. Hence, they were brought to charge.

60. In response to ground (d) of the Memorandum of Appeal and paragraph 4. 1-4. 8 the statement of facts the Respondent averred that the Appellant failed to provide the documents requested in support of their objection hence the input VAT was disallowed. The Respondent insisted that sections 17 (1) (2) and section 5 of the VAT Act empowers the Respondent to disallow such input VAT where the necessary documents are not provided.

61. In further response to ground (d) of the Memorandum of Appeal, the Respondent asserted that examination of the Appellant’s records established that the Appellant earned income from supply of goods in the period under audit, however, these incomes were not declared for tax purposes for the year earned. The Respondents asserted that the Appellant carried on business in contravention of the TPA which requires documents be maintained for purposes of taxation.

62. In response to paragraph 18 of the Appellant’s statement of facts. The Respondent denied that the Appellant has paid all its tax dues and reiterates that because of its under-declaration, the Appellant is in debt of Kshs 9, 687,578. 96. The Respondent averred that the Appellant is undeserving of the prayers sought due to the foretasted reasons.

63. In its written submissions, the Respondent identified the following three issues for determination:i.Whether Respondent took into consideration all additional information availed before making the decision.ii.Whether the Respondent erred by raising an assessment for the period of Income and VAT for years 2020-2022. iii.Whether the assessments issued were excessive.

64. The Respondent submitted that the Appellant failed provide documentary evidence to prove that the Respondent’s decision was wrong which was contrary to the provisions of section 51(3) of TPA. It also submitted that the Appellant failed to discharge burden of proof as provided for under section 56(1) of TPA. In this regard, the Respondent relied on cases of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, Janet Kaphiphe Ouma and another v Marie Stopes International (Kenya), HCC No. 68 of 2007 that Dyer & Dyer Limited v Commissioner of Domestic Taxes TAT 139 of 2020 among other case laws to submit that a taxpayer has to adduce documentary evidence to discharge burden of proof.

65. It submitted that Section 31 of TPA allows assessment on a taxpayer based on available information while Section 59 of the TPA allows it to request for documents to facilitation determination of the appeal but the Appellant failed to adduce the documents.

66. The Respondent submitted that whereas the section 23 and 54 of the TPA requires taxpayers to keep records to facilitate determination of tax disputes, the Appellant failed to so.

67. The Respondent relied on Joyce Mwende Titusv Commissioner of Domestic Taxes TAT E 072 of 2023 and Commissioner of Investigations and Enforcement v Kidero income Tax Appeal E028 of 2020 eKLR, where it was held as follows:‘‘the duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centred on a system of self-assessment. This system relies on the taxpayer making full and good faith disclosures in their tax declaration and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer...”

68. The Respondent also submitted that the Appellant earned income from partnership business in the period under audit, however, these incomes were not declared for tax purposes for the year earned. Therefore, the Respondent asserted that the Appellant carried on business in contravention of the section 42 of the TPA.

69. Further, the Respondent submitted that the Appellant failed to submit tax return and failed to pay taxes. The Respondent submitted that the Appellant knowingly and recklessly committed an offence according to Section 94 and 95 of the TPA.

70. The Respondent also submitted that the Appellant supplied insufficient documentation therefore, the Appellant could not rely on the provisions of Section 15 of the TPA.

71. The Respondent avowed that Section 23(1) (b) of the TPA makes it an obligation of a taxpayer to maintain any document required under a tax law to enable the person’s tax liability to be readily ascertained. The Respondent on the case of Julie Magwi Njue v Commissioner of Domestic Taxes TAT No. 1400 of 2022 wherein the Tribunal held as follows:“it was upon the Appellant to keep proper record and produce them as required by law in order for her actual tax liability to be ascertained at any time. In the instant case the Tribunal noted that the Appellant did not provide any evidence in support of its assertion that the Respondent’s assessments were unreasonable. The provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act.....”

72. The Respondent cited the case of Monaco Engineering Limited v Commissioner Domestic Taxes TAT Appeal No.67/2017; Osho Drappers Ltd v Commissioner of Domestic Taxes, TAT No. 159 of 2018]; and Miao Yi v Commissioner of Investigations & Enforcement TAT no 2019 to submit that the burden is on tax payers to have documents in disputing tax assessments.

Respondent’s prayers 73. The Respondent urged the Tribunal to uphold the objection decision and dismiss the Appeal with costs for lack of merit.

Issues For Determination 74. The Tribunal having considered the parties pleadings, documents and written submissions, puts forth the following issue for determination:Whether the Appellant discharged its burden of proof.

Analysis And Findings 75. The Tribunal wishes to analyse the single issue identified for determination as hereinunder.

Whether the Appellant discharged its burden of proof. 76. The dispute is that the Respondent ignored the documentary evidence that the Appellant adduced therefore, arriving at excessive tax demand. The Appellant also averred that the Respondent erred in law and fact by charging Income tax on banking credits that were not revenue in nature but rather loans and capital injections. On the other hand, the Respondent’s case is that the Appellant failed to provide documentary evidence to support its notice of objection therefore, the Appellant failed to discharge its burden of proof under section 56(1) of TPA and section 30 of Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”).

77. The Tribunal notes the provisions of Section 13(2)(b) of the TATA which mandates a taxpayer to file statement of facts. The statement of facts ought to support and expound on the contents of the Memorandum of Appeal. The statement of facts should explain why and how the Respondent’s decision is incorrect. Further, Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 provides as follows:‘‘(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal [emphasis ours].(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact [emphasis ours].’’

78. The Tribunal examined the Appellant’s pleadings carefully to find out whether the Appellant adduced documentary evidence to substantiate its claim. The Tribunal noted that the Appellant filed the following documents in support of its appeal: the objection decision marked as appendix ‘A’; notice of appeal as annex ‘B’; and Notice of findings and intention to issue additional Assessment as appendix ‘C’.

79. The Tribunal notes the Appellant’s averment that the Respondent erred in law and fact by overstating its revenues for the periods in question based on erroneous summation of bank credits, the Appellant did not file any documentary evidence in relation to revenue to demonstrate that the Respondent overstated the revenue. The Appellant did adduce as evidence, a bank statement. Therefore, the Appellant failed to substantiate the averment in the grounds (a) and (b) of its Memorandum of Appeal.

80. The Tribunal has also noted the Appellant’s averment that the Respondent erred in law and fact by disallowing deductible expenses claimed by it. The Appellant did not adduce single document as evidence before the Tribunal to confirm its averment that it incurred deductible expense. The Appellant cannot therefore rely on the provisions of section 15 of ITA to seek deductions without documentary evidence to indicate that it incurred deductible expenses. The Appellant’s ground (c)of the Memorandum of appeal is also unsubstantiated.

81. The Tribunal further notes that the Appellant averred that the Respondent erred in law and fact by confirming the assessment without due regard to all records, documents, explanations and information provided, thereby failing to appreciate all issues presented and raised by the Appellant before confirming the assessment, the Appellant never filed documentary evidence to substantiate this issue.

82. The Tribunal’s view is that the Appellant failed to adduce documentary evidence to support its claims. This contrary to the provisions of Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015, the provisions of section 23 of the TPA, section 43 of the VAT Act, and section 15 of the ITA.

83. Section 23 of the TPA provides as follows:‘‘(1)A person shall—(a)maintain any document required under a tax law, in either of the official languages;(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

84. Section 43 (1) and ()of the VAT Act provides as follows:‘‘(1)A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept for a period of five years from the date of the last entry made therein.(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.’’

85. The Tribunal also notes the provisions of Section 15 of the ITA, which provides for a taxpayer to qualify for deduction and a taxpayer has to demonstrate that. ‘‘all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income.’’ A taxpayer must adduce evidence of expenditure incurred in order for the expenditure to qualify as a deduction.

86. Section 30 of the TATA provides as follows:“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; or(b)In any other case, that the tax decision should not have been made or should have been made differently.”

87. On the other hand, section 56 (1) of the TPA provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

88. The Tribunal cites the case of Prima Rosa Flowers Limited Versus Commissioner of Domestic Taxes [2019] eKLR where the High Court relied on Mulherin Versus Commissioner of Taxation [2013] FCAFA 115 in which the Federal Court of Australia held that in tax disputes, a taxpayer must satisfy the burden of proof in order to successfully challenge income tax assessments. The onus is on a taxpayer in proving that the assessment was excessive by adducing positive and relevant evidence, which demonstrates the taxable income on which tax ought to have been levied. Further, in Commissioner of Domestic Taxes v Metoxide Limited [2021] it was emphasised that the taxpayer has a burden of proving that the Respondent’s decision was wrong. In the instant case the Appellant has failed to discharge this burden of proof.

89. Having perused the documents which the Appellant filed in support of the instant Appeal, the Tribunal finds that the Appellant failed to adduce evidence to discharge its burden of proof pursuant to the provisions of section 56 (1) of the TPA and section 30 of TATA. Without documentary evidence, the Appellant is unable to prove that the Respondent’s decision was incorrect. It follows that the Appellant failed demonstrate why the Respondent’s objection decision ought to be set aside by this Tribunal.

90. Consequently, the Tribunal finds and holds that there is no reason to interfere with the Respondent’s objection decision dated 31st August 2023 since the Appellant did not discharge its burden of proof.

Final Decision 91. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is lacks merit and consequently makes the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 31st August 2023 be and is hereby upheld.c.Each party to bear its own cost.

92. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER