[2023] KETAT 172 (KLR)

Yogi Supermarket Limited v Commissioner Domestic Taxes (Appeal 833 of 2021) [2023] KETAT 172 (KLR) (Commercial and Tax) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 172 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 833 of 2021

RM Mutuma, Chair, RO Oluoch & E.N Njeru, Members

February 10, 2023

Between

Yogi Supermarket Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

Judgment

1. The appellant is a private limited company incorporated in Kenya under the Companies Act. Its main form of business is retail.

2. The respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, 1995. Under section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all 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 & 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 appellant was investigated by the respondent and noted variances between the appellant’s turnover income declared under Income tax returns and VAT sales for the years of income 2017 and 2018.

4. The respondent issued an assessment order to the appellant on 29th March 2021 for December 2017 and December 2018.

5. The appellant objected to the assessments on April 13, 2021. The respondent then requested for documents from the appellant.

6. The respondent then issued its objection decision on November 19, 2021.

7. The appellant being dissatisfied with the respondent’s decision and assessment filed a notice of appeal on December 10, 2021.

The Appeal 8. The appeal is premised in the memorandum of appeal dated 22nd December 2021 and filed on even date on the following grounds:a.The respondent erred in fact by raising VAT Additional Assessments based on turnover income declared in the income tax returns for the years 2017 and 2018. b.The respondent erred in raising the VAT additional assessment whereas the appellant deals with the sale of merchandise goods which are mainly non-vatable for VAT purposes and the turnover for vatable goods does not reach the registration threshold of Kshs. 5,000,000. 00

THE appellant’S CASE 9. The appellant’s case is premised on its Statement of Facts dated and filed on 22nd December 2021.

10. The appellant stated that the respondent raised the Vat additional assessments for December 2017 and December 2018 and served the assessment orders dated March 30, 2021.

11. It averred that it responded to the assessment orders via its Objection acknowledgment receipts dated April 13, 2021.

12. It contended that it further furnished the Commissioner with documents in support of the objection application on June 3, 2021 as per the respondent’s request.

13. It averred that it deals mostly with goods that are non-vatable and hence not registered for VAT obligation. It stated that the turnover for vatable goods does not reach the registration threshold of Kshs. 5,000,000. That the VAT obligation was added when the additional assessment was raised for November 2016 where the sales amount of Kshs. 3,418. 00 and a VAT amount of Kshs. 546. 00 was declared. It further stated that it objected and requested the vacation and cancellation of the VAT obligation and is yet to receive any response for the same.

The appellant’s prayers 14. The appellant consequently prayed for:a.The Objection Decision dated November 19, 2021 be annulled and set aside in its entirety;b.The Appeal be allowed; andc.Any other remedies that the Honourable Tribunal deems just and reasonable

The Respondent’s Case 15. The respondent’s case is premised on its statement of facts dated and filed on January 27, 2022.

16. It stated that the appellant did not provide any relevant supporting documentation to support its assertions that the respondent erred by raising the VAT additional assessments based on turnover income declared in the income tax returns for the years 2017 and 2018.

17. It further stated that no evidence was provided to support the contentions that the appellant only deals with the sale of merchandise goods that are non- vatable and the respondent was obliged to disallow the objection.

18. It quoted section 56(1) of the Tax Procedures Act stating that it places the burden on the appellant to prove that a tax decision is incorrect.

19. It averred that the appellant has failed to discharge its burden of proving that the assessment was incorrect by adducing the relevant documents requested.

20. It asserted that due to the failure of the appellant to adduce the relevant supporting documentation it was unable to verify the objection and consequently it used the information available and its best judgment to arrive at the assessed amounts.

21. It relied on section 31 of the Tax Procedures Act which it opined empowers it to make an assessment according to the information available to it and best judgment ensuring that the appellant is only liable for the correct tax.

22. It was stated that where a taxpayer makes an objection to assessments issued by the Commissioner, the Taxpayer is obligated to provide the documentation it relies on to make the objection. Having failed to provide the documents requested, it acted fairly, within the confines of the law, in assessing the appellant’s VAT obligations as per their self-declared returns.

23. It posited that it is trite law that it is empowered to vary the assessments using any available information in its possession. It quoted section 24(2) of the Tax Procedures Act 2015 which provides:“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer, and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

24. It averred that it relied on the self-assessment returns in the appellant’s iTax account to arrive at the assessed amounts and therefore the appellant's assertion that the assessment was erroneous is a clear misrepresentation of the facts.

25. It further averred that in the absence of any additional information it was entitled to fully rely on the information available.

26. The respondent stated that the Allegations that the appellant was not registered for VAT are misleading as in its statements of facts, paragraph 7, it admitted that it had been previously registered for VAT and that it declared VAT for the month of November 2016 and at no point had the appellant applied to be deregistered for VAT. That at all material times when the dispute herein arose the appellant remains registered for VAT.

27. It posited that the Objection Decision complied with section 51(10) of the Tax Procedures Act by including the Statement of Findings and providing the reasons for the decision arrived at. The reasons adduced in the respondent's Objection Decision outline which the assessed amounts were rightful and sufficient.

28. It added that the appellant’s grounds for appeal are not sufficient. That from the facts of the case, the appellant did not provide any evidence contrary to the basis of its assessment.

The respondent’s prayers 29. The respondent prayed for orders that the Tribunal: -a.Upholds the respondent’s decision as proper and in conformity with the provisions of the law;b.This appeal be dismissed with costs to the respondent as the same is devoid of any merit.

THE PARTIES SUBMISSIONS On whether the respondent created a legitimate expectation 30. The appellant submitted that the respondent’s action to vacate the VAT additional assessments and cancel the VAT obligation brought forth a legitimate expectation, in reality, the company deals in groceries which include vatable and non-vatable goods, and never applied for VAT obligation since the turnover for vatable goods does not reach the registration threshold of Kshs. 5,000,000. The VAT obligation was added arbitrarily by the respondent when raising a VAT assessment in the month of November 2016, the details of which remain unexplained.

31. It opined that there is a lack of candour from the respondent in its inaction on the presentation dated 17th May 2019 and 13th April 2021 to vacate the VAT assessments and deregister the VAT obligation. Additionally, upon request from the respondent, it provided the purchase invoices to support the goods sold as groceries which include vatable and non-vatable and the turnover of vatable goods is below the VAT threshold of registration of Kshs. 5,000,000. The fact that the turnover of vatable goods did not reach the registration threshold of Kshs. 5,000,000 is evident from the respondent’s workings. The respondent refused to accept the VAT registration was forced and the vatable goods did not reach the threshold of Kshs. 5,000,000.

32. It relied on the case of Republic v Kenya Revenue Authority Ex Parte Cooper K-Branis Limited [2016]eKLR, where Odunga J stated that:“by not regularly monitoring its said instruments with a view to determining the actual taxes payable, the respondent placed the Applicant in the unenviable position where the Applicant is being exposed to shouldering the burden which legally ought not to have been shouldered by it.” It added that the responsibility of cancellation of the forced and unapplied VAT obligation is on the respondent.

33. It submitted that historically, it has never been registered for VAT obligation.The obligation was added by the respondent when raising the VAT assessment for November 2016 on 22nd June 2017 and on becoming aware of the same, it applied for Objection of the VAT assessment, provided the supporting documents required, and requested the respondent to vacate the assessments and deregister the VAT obligation on 17th May 2019 and that no action has been taken since then by the respondent. It contended that while this matter was pending, the respondent raised the VAT assessments for December 2017 and 2018 based on turnover declared in the Income tax returns.

34. It also cited the case of Blyth v Birmingham Waterworks (1856) 11 EXCH 781 where Baron Alderson stated as follow: -“The case turns upon the question, whether the facts proved, show that the defendants were guilty of negligence. Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do.”

35. It asserted that the respondent’s action fall short of a reasonable man’s duty of care and that the respondent was negligent and ought not to be allowed to punish the appellant for their negligence.

On whether the respondent’s objection decision constituted an abuse of law 36. It submitted that the respondent’s inaction on the presentation dated 17th May 2019 constitutes an abuse of the prevailing law and goes against the spirit of section 51(11) of the Tax Procedures Act, 2015 which requires the respondent to make an objection decision within 60 days from the date that the appellant lodged an objection.

37. It further submitted that the respondent’s inaction in the cancellation of forced VAT registration was a clear abuse of the law and contravened the provisions of Section 4 of the Fair Administrative Actions Act.

On whether the variance between the Income Tax Return and the Value Added Tax Return was explained and supported 38. The respondent submitted that the appellant did not provide any relevant supporting documentation to support its assertions that the respondent erred in raising the VAT additional assessments based on turnover income declared in the income tax returns for the years 2017 and 2018. It further submitted that no evidence was provided to support the contention that it only dealt with the sale of merchandise goods that are non-vatable.

39. It added that no documentation has been provided to support the averments that it deals both in vatable and non-vatable goods and that the variance related to non-vatable goods even at this appeal.

40. It quoted section 56(1) of the Tax Procedures Act and asserted that the appellant has the legal burden to support the averment which it has failed to do.

41. It relied on the case of Leah Njeri Njiru v Commissioner of Investigation and Enforcement Kenya Revenue Authority &another [2021] eKLR where it states that the Tribunal upheld the position that the taxpayer has the legal burden to show that an assessment is not correct.

42. It further relied on the case of Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR where the court held as follows:“under Section 56(1) of the TPA, the company bears the burden of demonstrating that the Commissioner’s decision in reaching the assessments complained of was incorrect.”

43. The respondent further submitted that the appellant was required to provide documentation showing the variance to non-vatable sales and no such document was provided even in this Appeal.

44. The respondent cited the case of Commissioner of Domestic Taxes v Metoxide Limited (Income Tax Appeal E100 of 2020) [2021] KEHC 3(KLR) (Commercial and Tax) (2 September 2021) (judgment) where Mabeya J stated as follows:-“In view of the foregoing, the Tribunal erred in holding that the respondent had discharged its burden under section 56 of the Tax Procedures Act. With due respect, those documents did not prove that the impugned entity had supplied the respondent with ‘taxable goods’…”

45. It quoted Sections 107 to 110 of the Evidence Act, Cap 80 Laws of Kenya to submit that the burden was on the appellant to explain the variance and support the explanation, which it failed to do.

46. It further quoted sections 29 and 31 of the Tax Procedures Act to argue that it is empowered to use information in its possession to raise an assessment which includes comparing the VAT data and ITC data to confirm their accuracy.

47. It was submitted that where a taxpayer makes an objection to assessments issued by the Commissioner, it is obligated to provide all the relevant documentation it relies on in making the objection and that having failed to provide the documentation requested, the respondent acted fairly, within the confines of the law in assessing the appellant's VAT obligations as per its self- declared returns.

48. It contended that it relied on the self-assessment returns in the appellant’s iTax account to arrive at the assessed amounts and therefore the appellant’s assertions that the assessments were erroneous is a clear misrepresentation of the facts and in the absence of additional information showing that the variance related to non-vatable sales, the respondent was entitled to fully rely on the information available and the assessment was proper.

On whether the question of VAT registration is properly before the Tribunal and whether the respondent was correct in 2016 in registering the appellant for VAT 49. It submitted that the appellant has chosen to ignore the key issue in dispute in its submissions but rather based its case on the issue of registration in 2016 and approached this on a point of legitimate expectation.

50. It noted that the decision to register the appellant for VAT in 2016 is not before the Tribunal and the Tribunal lacks jurisdiction to address the issue. It added that the Notice of Appeal and Memorandum of Appeal filed herein were against the decision of 19th November 2021 and not the decision to register the appellant for VAT in 2016.

51. To buttress its position that courts should not make decisions on documents not before it, the respondent cited the case of Samson Gwer & 5 others v Kenya Medical Research Institute & 3others [2020] eKLR where the Supreme Court stated:“(49) Section 108 of the Evidence Act provides that, “the burden of proof in a suit or procedure lies on that person who would fail if no evidence at all were given on either side;” and Section 109 of the Act declares that, “the burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence unless it is provided by any law that the proof of that fact shall lie on any particular person.” This Court in Raila Odinga & others v Independent Electoral & Boundaries Commission & others, Petition No 5 of 2013, restated the basic rule on the shifting of the evidential burden, in these terms: “…a Petitioner should be under obligation to discharge the initial burden of proof before the respondents are invited to bear the evidential burden….” In the foregoing context, it is clear to us that the petitioners, in the instant case, bore the overriding obligation to lay substantial material before the Court, in the discharge of the evidential burden establishing their treatment at the hands of the 1st respondent as unconstitutional. Only with this threshold transcended, would the burden fall to 1st respondent to prove the contrary. In the light of the turn of events at both of the Superior Courts below, it is clear to us that, by no means, did the burden of proof shift to 1st respondent.”

52. It further submitted that the Tribunal cannot make a determination on a decision that is not before it and that the said decision is not subject to the current Appeal to be considered by the Tribunal. It cited the case of Miguna Miguna v Lufthansa Group & 7 others where the Court held the following:“A perusal of the petitioner's annexed documentation divulges that whereas the existence of a red alert advisory is claimed there is no evidence adduced to support this claim. The 3rd, 4th, and 7th respondents in their replying affidavit have averred that the purported advisory does not exist. They have deponed that they have no intention of denying the petitioner/applicant entry into Kenya. With this averment at paragraph 9 of the replying affidavit this court being a court of law would have expected the petitioner/applicant to adduce evidence to confirm the existence of the ‘red alerts’ or the intentions to issue such an alert by the respondents. The petitioner's case is founded on the apprehension that history will repeat itself without evidence being adduced in support. The court cannot rely on speculation to grant the sought orders.”

53. It asserted that it registered the appellant for VAT in 2016 when it had not reached the threshold for registration for VAT as evidenced in the appellant’s own documents annexed with the current appeal that show the appellant’s vatable sales were Kshs. 7,761,589 and Kshs. 7,403,713. 60 in 2017 and 2018 respectively.

54. It contended that the documents produced by the appellant demonstrate that the decision to register the appellant in 2016 was proper in law. It quoted section 34 (1), (6), and (7) of the Value Added Tax which state as follows:“(1)A person who in the course of a business— (a) has made taxable supplies or expects to make taxable supplies, the value of which is five million shillings or more in any period of twelve months; or (b) is about to commence making taxable supplies the value of which is reasonably expected to exceed five million shillings in any period of twelve months, shall be liable for registration under this Act and shall, within thirty days of becoming so liable, apply to the Commissioner for registration in the prescribed form: Provided that this section shall not apply to persons supplying imported digital services over the internet or an electronic network or through a digital marketplace in respect to a turnover threshold of five million shillings.(6)If the Commissioner is satisfied that a person eligible to apply for registration has not done so within the time limit specified in subsection (1), the Commissioner shall register the person. (7) The registration of a person under subsection (1) or (6) shall take effect from the beginning of the first tax period after the person is required to apply for registration or such later period as may be specified in the person’s tax registration certificate.”

55. It reiterated that the appellant did not register for VAT in 2017 and 2018 despite making vatable sales of over the required amount however this decision is not a subject matter on the current appeal.

56. It argued that for there to be a legitimate expectation, the appellant should show the expression which was made and subsequently breached where in this case, no such representation was made. It cited the case of Pepe Limited v Kenya Railways Limited, Kenya Revenue Authority, and Kenya Ports Authority, ELRC Petition No. 29 of 2018 where it was held that:“the representation for which legitimate expectation is based must be shown for consideration”.

57. It further argued that the principle of legitimate expectation can only arise within the confines of the law and cited the case of Republic v Kenya Revenue Authority Ex Parte Shake Distributors Ltd [2012] eKLR where it was held thus:“What is legitimate expectation? According to Harry Woolf, Jeffrey Jowell, and Andrew Le Sueur at page 609 of the 6th Edition of De Smith’s Judicial Review, “Such an expectation arises where a decision-maker has led someone affected by the decision to believe that he will receive or retain a benefit or advantage (including that a hearing will be held before a decision is taken).” It follows therefore that the cornerstone of legitimate expectation is a promise made to a party by a public body that it will act or not act in a certain manner. For the promise to hold, the same must be made within the confines of the law. A public body cannot make a promise which goes against the express letter of the law. In the case before me, there is no evidence of a written or verbal promise made to the Applicant that its goods would be allowed into Kenya once he obtained the necessary licenses. One may argue that the legitimate expectation was based on the understanding that goods from Uganda would be admitted into Kenya at a duty rate of 0%. However, that argument cannot hold when one considers the fact that the respondent has a statutory duty to ensure that all the necessary taxes for goods entering Kenya have been paid. The Applicant’s argument that its legitimate expectation was breached therefore fails.”

58. It submitted that no expression was ever made to the appellant by it therefore no legitimate expectation can exist. It added that at all material times in the current case the appellant was registered for VAT and filed its returns every month without fail until the point when the variance was established after VAT returns were compared with the Income tax returns for the same period.

59. To buttress its argument that the issue of legitimate expectation was raised in the submissions stage but submissions are not pleadings and that parties should set their issues in their pleadings, it relied on the case of Dakianga Distributors (K) Ltd v Kenya Seed Company Limited [2015] eKLR where the Court stated that :-“In the adversarial system of litigation, therefore, it is the parties themselves who set the agenda for the trial by their pleadings and neither party can complain if the agenda is strictly adhered to. In such an agenda, there is no room for an item called “Any Other Business” in the sense that points other than those specific may be raised without notice.”

ISSUES FOR DETERMINATION 60. After perusing through the pleadings and documentation produced before it together with the parties’ submissions, the Tribunal is of the opinion that the following are the issues falling for determination:a.Whether the appellant discharged its burden of proof in this Appeal;b.Whether the respondent was justified in confirming its assessment order of March 29, 2021; andc.Whether the respondent erred in registering the appellant for VAT.

ANALYSIS AND FINDINGS 61. The Tribunal wishes to analyse the issues as hereunder.

a. Whether the appellant discharged its burden of proof in this Appeal. 62. The appellant argued that the respondent wrongfully registered the appellant for VAT having not met the Kshs. 5,000,000. 00 prescribed by the law as the threshold for VAT registration thereby forcing the appellant to file VAT returns, whereupon, the respondent went on to charge VAT on variances between the sales as declared on the income tax returns vis a vis those declared on the VAT returns.

63. The respondent on its part reiterated that the appellant had not objected to the registration but instead went on to file returns and therefore cannot appeal against the decision of having it registered for VAT.

64. On the non-vatable sales, the respondent argued that the appellant had not provided any evidence to prove its case on these issue and as such the Appeal lacks merit.

65. Section 30 of the Tax Appeals Tribunal Act provides as follows with regard to the burden of proof:-“Burden of proof 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.”

66. Further, section 38 of the Tax Appeals Tribunal Act states as follows;“In any proceedings, whether criminal or civil, under this Act— (a) other than upon an appeal, a certificate from the Commissioner stating that any amount is due from any person by way of tax, or other liability under this Act, shall be conclusive evidence that the amount is due and payable from that person; (b) the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax; and (c) a statement by the Commissioner that a person is registered or is not registered under this Act, shall be conclusive evidence of the fact unless that person proves the contrary.”

67. Section 62 of the Value Added Tax Act, No. 35 of 2013 provides that;“In any civil proceedings under this Act, the burden of proving that any tax has been paid or that any goods or services are exempt from payment of tax shall lie on the person liable to pay the tax or claiming that the tax has been paid or that the goods or services are exempt from payment of tax.”

68. Additionally, Section 56 of the Tax Procedures Act states as follows:-“(1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

69. A perusal of the parties’ pleadings and evidence attached shows that the appellant at one point was in communication via its letter dated June 3, 2021 with the respondent where it attached documents as follows: purchase invoices, statements of accounts from the National Bank of Kenya for the years 2017 and 2018; cash books, ledger books, and journals for the years 2017 and 2018.

70. However, the said documents were not filed nor tabled before the Tribunal, and the Tribunal has not had the opportunity to interrogate these documents. Therefore, given this circumstance, the Tribunal has no actual proof of the appellant’s true turnover, vatable and non-vatable sales, or even the date when the appellant was -registered for a VAT obligation, in order to determine issues before it.

71. The Tribunal is therefore inclined to concur with the respondent in its argument that the appellant has not proved its case before the Tribunal as there was insufficient documentation provided by the appellant to prove its case.

72. Having concluded thus, the Tribunal finds no use to delve into the other issues that fell for its determination as they have been rendered moot.

FINAL DECISION 73. The upshot to the foregoing analysis is that the appeal lacks merit and the Tribunal consequently makes the following orders; -i.The appeal be and is hereby dismissed;ii.The objection decision dated November 19, 2021 be and is hereby upheld;iii.Each party to bear its own costs.

74. It is so ordered

DATED AND DELIVERED AT NAIROBI ON THIS 10TH DAY OF FEBRUARY, 2023ROBERT M. MUTUMACHAIRPERSONRODNEY O. OLUOCHMEMBERELISHAH NJERUMEMBER