Rongai Furniture Centre Limited v Commissioner of Domestic Taxes (Appeal 329 of 2020) [2023] KETAT 138 (KLR) (Civ) (17 March 2023) (Judgment)
Neutral citation:
[2023] KETAT 138 (KLR)
Republic of Kenya
Appeal 329 of 2020
E.N Wafula, Chair, RM Mutuma, EK Cheluget & RO Oluoch, Members
March 17, 2023
Between
Rongai Furniture Centre Limited
Appellant
and
Commissioner of Domestic Taxes
Respondent
Judgment
Background
1.The Appellant is a private limited company incorporated in Kenya under the Companies Act.
2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 Laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority (the 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 & 2 of the First Schedule to the Act for the purposes of assessing, collection and accounting for all tax revenue in accordance with those laws.
3.The Respondent conducted investigations into the Appellant’s tax affairs for the years 2014 and 2015 and established that the Appellant had under- declared VAT and Corporation tax.
4.The Appellant was subsequently issued with a notice of default assessment on 14th June, 2017 for Kshs. 10,311,620.00 for both Corporation tax and VAT inclusive of penalties and interest.
5.Being aggrieved by the Respondent’s decision to confirm the assessment the Appellant filed an Appeal to the Tribunal, Appeal No. 164 of 2017.By a judgement rendered on 30th March, 2020 on the said Appeal, the Tribunal directed that the Appellant lodges a fresh notice of objection within 30 days from the Judgement date and that in default of lodging of the notice of objection within the time provided by the Tribunal, the appropriate provisions of the law would apply.
6.Pursuant to the Tribunal’s decision the Appellant lodged a fresh Notice of Objection on 29th April 2020. Several meetings were held between the parties where the Appellant’s Tax Agent sought, and was furnished with documentation by the Respondent via an email correspondence of 18th May, 2020. On 25th June, 2020 the Respondent confirmed the assessment raised on 14th June, 2017.
7.Being aggrieved by the Respondent’s decision, the Appellant filed a Notice of Appeal on 23rd July, 2020 and proceeded to lodge its appeal on 4th August, 2020.
The Appeal
8.The Appeal is premised on the grounds of appeal as set out in the Memorandum of Appeal dated 4th August, 2020 as follows: -a.That Section 3(2) ( a) (i) of the Income Tax Act defines Income Tax in relation to a business as any gains or profits from a business, for whatever period of time carried out and that Income Tax Act under the Third Schedule Head B-Rates of Tax, Section 2 stipulates the rates of tax chargeable as Corporation Tax on the Income of a company resident and incorporated in Kenya, such as the Appellant herein.b.That Section 15 of the Income Tax Act provides a list of deductions that qualify for deduction before assessment of tax payable on the income of a taxpayer and that Section 29 of the Tax Procedures Act (TPA) No.29 of 2015 provides for the Default Assessment of tax by the Respondent, where a taxpayer has failed to file a return for a reporting period.c.That Section 17 of the Value Added Tax Act No. 35 of 2013, provides for the deduction of input VAT against output VAT for taxable supplies and imports.d.That the Respondent erred in fact and law by assessing Default Tax based on Banking Method and using the total credits records in the Appellant’s Bank accounts at Rafiki Microfinance bank and I & M bank as the Income of the company for purposes of the default assessment of tax, in violation of the express provisions of Section 3 (2)(a)(i) of the Income Tax Act which describes taxable income for a business as other gains or profits.e.That the Respondent erred in law and fact by assessing Default Tax based on the total credits recorded in the Appellant’s bank accounts at Rafiki Microfinance and I& M banks, without taking into account the pre-tax deductions provided for under Section 15 of the Income Tax Act.f.That the Respondent erred in law and fact by failing to use all available information at its disposal in the Default Assessment of tax provided for under Section 29 of the Tax Procedures Act, but instead selectively used information that would impose the biggest tax burden on the Appellant, instead of giving an objective assessment.g.That the Respondent erred in law and fact by failing to take into account the input VAT as a credit on the part of the Appellant, before giving a Default Assessment of VAT.h.That the Respondent erred in fact, when they failed to take into account the proposal on alternative methods of estimating the income of the Appellant during the tax periods in contention by the Appellant in its Notice of Objection dated 28th April, 2020 which was received by the Respondent on 29th April, 2020.i.That the Respondent erred in fact when they assessed the undeclared income for 2014 and 2015 for the Appellant to be Kshs 18,900,732.00 while using bank credits of the Appellant’s accounts at Rafiki Microfinance and I & M banks as the income for the period while the total credits recorded in the said Appellant’s accounts for the period was Kshs 15,602,525.00j.That the Respondent erred in fact by assessing the Default Tax without taking into account, the revenue expenditure incurred by the Appellant through the purchase of stock for trading in the period subject to the Default Assessment of tax, which is year 2014 and 2015.k.That the categorization of expenditure as being of capital or revenue in nature is not just a factual inquiry but also an integrated one whereby the applicable legal rules and principles are applied to the facts at hand, an approach the Appellant would urge the Tribunal to adopt.l.That the gist of this approach seems to be that while the approach is integrated in that various facts are taken into account, the primal inquiry is the purpose of expenditure so as to ascertain whether the expenditure created a new asset, strengthened an existing asset or opened new fields of business for the taxpayers. Needless to say, the inquiry as to purpose must be objective as the tax collector and the taxpayer may take subjective but opposed positions.m.That the Default Assessment of tax against the Appellant by the Respondent seems to classify the revenue expenditure on stock as capital, which has occasioned a great disadvantage against the Appellant because the expenditure was integral to the core operations and revenue generating activities of the Appellant , and not the acquisition of assets.n.That the main director of the Appellant passed away in March 2020, therefore leaving the Appellant at a disadvantage with regards to information on the operations and finances of the Appellant during the tax periods in contention.o.That the accounting profession recognizes the use of incomplete records, in the preparation of various financial statements.p.That a statement of income and expenditure thus prepared based on the information relied upon by the Respondent in the Default Assessment of tax has shown that the Appellant was operating at a loss in year 2014 and 2015, which ultimately led to the closure of the business in June, 2015.q.That under the provisions of Section 3 (2)(a)(i) of the Income Tax Act, and taking into account the allowable deductions under Section 15 of the Income Tax Act, the Appellant did not make any gains or profit in the period(s) in question.r.That in VAT analysis prepared on the information used by the Respondent in the Default Assessment of tax has shown that the Appellant incurred input VAT which was not taken into account in the Default Assessment given by the Respondent and the same is deductible by statute irrespective of whether a taxpayer has filed monthly VAT returns.s.That the Respondent erred in law and in fact by issuing a Default Assessment of tax using a method that contravenes the applicable sections of the Income Tax Act and the Value Added Tax as cited above and as per International Standards and best practices and acceptable accounting principles.
9.The Appellant prays:a.That the Appeal be allowed.b.That the allowable deductions incurred by the Appellant over the reporting periods of the 2014 calendar year, and those incurred between the months of January and June 2015 be declared to be of revenue in nature and hence deductible expense.c.That the input VAT apparent from the information and documents relied upon by the Respondent in assessing the Default Tax due between the months of January and June 2015 be declared deductible.d.That the Respondent’s Default Assessment of tax for year 2014 and 2015 be set aside.e.That the Respondent be stopped from demanding the tax, interest and penalties in respect of any issues relating to this matter; andf.That the Appellant be awarded costs for this Appeal.
The Responden’t Case
10.In response to the Appellant’s grounds of Appeal, the Respondent has outlined its case through its Statement of Facts filed on 26th August, 2020 and the witness statement of Eugene Wanende dated 18th May, 2021 that was admitted in evidence on oath on the 19th October, 2022.
11.The Appellant stated that :a.That having failed to provide the documents requested, the Respondent duly proceeded in law in basing its tax assessment on banking method and using total credits recorded in the Appellant’s bank accounts at Rafiki Microfinance and I & M banksb.That it relied on Section 56(1) of the TPA which provided that the burden of proving that the tax assessment is wrong lies with taxpayer and the Appellant herein having failed to prove to the satisfaction of the Commissioner that information received from third parties should not be relied upon to ascertain the Appellant’s tax liability, the Respondent proceeded to rely on the same.c.That in proceeding with the assessment as it did, the Respondent invoked the provisions of Section 17(2) of the VAT Act which provided that input tax is only deductible when a registered person is in possession of valid documentation.d.That the Appellant having failed to provide sufficient documentation as requested, it ought not fault the Respondent for failing to take into account the revenue, expenditure and input VAT as credit on the part of the Appellant and assessed the undeclared income using bank credits to the Appellant’s accounts.e.That the Appellant failed to provide proof of payment of purchases to establish that expenses allegedly incurred were incurred wholly and exclusively in the production of income.f.That it duly took into account the express provisions of the Income Tax Act and international accounting Standards, particularly Section 15 of the Income Tax Act and Section 29 of the TPA.g.That Section 15 of the Income Tax Act specifically provides that one can deduct all expenditure wholly and exclusively incurred in the production of income. The Appellant failed to provide sufficient documentation on purchases to enable the Respondent to reconcile the figures.h.That in light of the foregoing, the Respondent made an Objection Decision as provided by Section 51(8) of TPA, which was duly communicated in writing to the Appellant.i.That it reiterates that the assessment is factual and issued in line with the law having relied on the Appellant’s bank statements and Financial Statements and import documents to issue the same as hereunder;Tax HeadPrincipal taxPenaltyInterestTotalCorp Tax5,670,2201,134,0441,431,9178,236,180VAT1,696,701378,7382,075,439Total7,366,9211,134,0441,810,65510,311,619
12.The Respondent prays: -a.That its decision dated 25th June, 2020 confirming the assessment was duly issued and the same be upheld.b.That the Appeal be dismissed with costs to the Respondent.
Submissions of the Parties
13.In its Written Submissions filed on 4th November, 2022, the Appellant has submitted on three issues.a.Whether the Respondent was justified in assessing default tax on the Banking Method and using the total/gross deposits recorded in the Appellant’s bank account and gross sales as recorded in the impugned daily sales book as the income of the company for purposes of the default assessment of tax.b.Did the Respondent carryout any investigation into the tax affairs of the Appellant and does the Respondent’s Witness Statement amount to any investigation findings?c.Does the data provided by the Respondent in their witness statement and relied upon by the Respondent in arriving at the default assessment per Paragraph 11 of the Witness Statement carry material errors that fatally affect the default tax assessed?
14.The Appellant has chosen to list the issues, however, it has submitted on them in general.
15.The Appellant submitted that the Respondent relied on a purported daily sales book which its witness testified that it was a diary with purported daily entries of the Appellant. The Appellant submitted that the alleged daily sales book does not reflect the details of the Appellant nor does it have anything to link it with its business as the entries in the alleged daily sales book cannot be verified or used as the Appellant’s records.
16.The Appellant submitted further that it is in the business of sale of furniture and that nowhere in the impugned daily sales book does it indicate a sale of furniture, thus the records therein could have related to anything. The Appellant therefore contends that the Respondent failed to prove on a balance of probability that the said impugned daily sales book belongs to the Appellant. That the use of the said sales book violates Article 50(4) of the Constitution which provides:
17.The Appellant has relied on the case of Okiya Omtatah Okoiti & 2others v Attorney General & 4 others [2020] eKLR where the court held that:
18.The Appellant submitted that the credits/deposits in the bank statement used to determine turnover/sales were erroneous as the Respondent failed to adjust for VAT in the gross sales.
19.It was the Appellant’s submission that being an investigation as the Respondent termed it, there ought to be an investigation finding report before an assessment is done which the Respondent did not adhere to as there was no such report shared with either the Appellant or the Tribunal.
20.The Appellant averred that the Respondent’s calculations were in coming up with the default assessment arithmetically inaccurate and cannot therefore be arithmetically sound. The banking amounts relied on by the Respondent did not adjust other non-revenue entries such as errors and reversals. Further that without the investigation report it can only be assumed that there was no sampling.
21.The Appellant submitted that the law places an obligation upon the Respondent to use available information and best judgement, however, while the Respondent had the additional information on the Appellant’s operations, it chose to ignore it as an expense in arriving at the default assessment. Further that in considering the Appellant’s VAT returns, the Respondent chose only to selectively look at the output VAT while completely ignoring expenditures contained in the VAT returns for VAT3.
22.On the issue of rent, the Appellant submitted that before it was incorporated, a contract was entered between its related company and the landlady. The Appellant argues that rent paid ought to be admissible as an expense thus qualifying for a deductible expense for the purposes of determining the taxable income to be subjected to income tax.
23.The Appellant submitted that it incurred input VAT which was not taken into account in the default assessment by the Respondent that is deductible by statute irrespective of whether a taxpayer has filed the monthly VAT returns. The Appellant has cited the case of Skyline Towers Investment v Commissioner of Domestic Taxes (TAT Appeal No 256 of 2018) at paragraph 28 where the Tribunal held: -
24.The Appellant submitted that the Respondent did not properly exercise its discretion judicially and /or acted on a wrong principle and that taxes are imposed on subjects by Parliament. It should therefore not be taxed unless it’s designated in clear terms by a taxing Act as taxation can only be done on clear words and cannot be on intendment.
25.The Appellant cited the case of Republic v Kenya Revenue Authority Ex- Parte Cooper K-Brands Limited [2016] eKLR where the Court held that:
26.The Appellant submitted further that there ought to be a balance between the tax collectors and the taxpayer whereby the process of tax collection becomes inclusive as opposed to being unilateral.
27.Through its Written Submissions filed on 4th November 2022, the Respondent has raised four (4) issues for determination.
a. Whether there is a valid Notice of Objection under the circumstances
28.The Respondent submitted that there is no valid notice of objection as the Appellant has not paid the entire amount of tax due under the assessment that is not in dispute contrary to Section 51(3) of the Tax Procedures Act. This is because at paragraph 46 of its Written Submissions, the Appellant admitted to a tax liability of Kshs 194,826 albeit at the late stage of submissions however the same remains unpaid hence the notice of objection is invalidated.
b. Whether the Respondent was justified in assessing Default Tax based on the Banking Method as it did in this case
29.The Respondent submitted that it relied on the following documents in coming up with the assessment;-a.Bank Statements (Rafiki Micro Finance and I & M Bank) which were obtained independently by the Respondent.b.Daily sales book, which was provided by the Appellant at the beginning of the investigations in the year 2017.
30.It submitted further that a meeting between the parties was held on 14th May, 2020 where the Appellant asked to be furnished with the documents that were used by the Respondent to assess the taxes in question. The Respondent availed the said documents to the Appellant. The Appellant was then requested to furnish the Respondent with documents that were in support of the Notice of Objection, which it failed to provide hence the confirmation of the Default Assessment.
31.On the Appellant’s contention that the money in its bank accounts was not all income, the Respondent submitted that the Appellant never provided any explanation in the Objection or Appeal as to what the money was meant for and that no evidence was adduced to show the source of funds and how the funds were used hence the Respondent’s assumption that this was all income.
32.The Respondent has relied on the case of Pili Management Consultant Ltd v Commissioner of Income Tax, Kenya Revenue Authority [2010] Eklr where the Court stated that:-
33.The Respondent submitted that other than the Appellant stating that the cost wholly and substantially incurred by the business was not factored, it did not render any other explanation. The documents it alludes to providing are documents provided in support of this Appeal and not at the Objection stage for the Respondent to consider before arriving at the final determination.
34.The Respondent submitted that unless an explanation is rendered as to the source of funds in the bank accounts, the same is considered as income under Section 3 (1) of the Income Tax Act and the same is taxable. It was for the Appellant to show that the funds were not income which burden of proof has not been discharged by the Appellant in this case.
c. Whether the corporation taxes were duly assessed
35.On this issue, the Respondent submitted that it relied on the daily sales book and banking that is, review analysis of bank statements and for income tax to estimate Corporation tax. Further that the daily sales book records analysis approach was relied upon in the year 2014 while the banking method was used for the year of income 2015 where in the two years, an additional Corporation tax of Kshs 8,236,180.00 was estimated.
36.It was the Respondent’s submission that it did not consider the cost of sales because the Appellant did not provide documents to support the expenses. Further, that the Appellant had also not filed a self-assessment return, which is yet to be done to date and as such the Respondent relied on the powers donated to it under Section 29(1) of the Tax Procedures Act to use the information available and its best judgement in issuing the default assessment.
37.The Respondent submitted that as per Section 23 of the Tax Procedures Act, businesses are required under the law to keep proper and updated records and avail them to the Respondent when required to do so. In this instance, the Appellant failed to avail the critical documentation at the Objection stage.
d. Whether the VAT taxes were duly assessed.
38.The Respondent submitted that the Appellant has not been filing the VAT returns from July 2014 todate. Hence, the Respondent analysed the Appellant’s bank Statement and ETR report account and reached the resultant VAT liability of Kshs 1,696,701.00
39.On the issue of supply and open market value, the Respondent submitted that this could not have been availed since for the same to be applied, there must be a return available for consideration, which in this case no return was available for consideration of issues of supply and open market value.
Issues for Determination
40.The Tribunal has considered the pleadings, evidence adduced, documentation availed and the parties’ submissions made and is of the considered view that this Appeal distils into two issues for its determination.a.Whether there is a valid Notice of Objection; andb.Whether the demanded tax is due and payable.
Analysis and Findings
41.Having established the issues for determination, the Tribunal will proceed to analyse them as herein under:
a. Whether there is a valid Notice of Objection.
42.In its written submissions, the Respondent had raised the issue of validity of the Appellant’s notice of objection citing that the Appellant had admitted to a tax payable of Kshs194, 826.00 at page 46 of the Appellant’s submission. The Respondent had relied on Section 51(3) (b) of the Tax Procedures Act. However, the TPA is procedural in how an appeal process progresses and that the same Section 51(3) (b) provides as follows:
43.It is expressly clear from the above statute that the admission and payment of any tax due should take place at the objection stage and definitely before filing the Appeal. The Respondent cannot therefore invalidate a notice of objection for a tax admission after the filing of the Appeal. Consequently, the Tribunal finds that the notice of objection was valid under the circumstances and the Tribunal will therefore proceed to analyse the Appeal on its own merit.
Whether the demanded tax is due and payable
44.The Tribunal notes that this Appeal arose after the Respondent’s investigations established that the Appellant had under-declared VAT and corporation tax. The assessment was for the period 2014 and 2015.The current Appeal follows the first appeal by the Appellant (TAT 164 of 2017) where the Tribunal directed that the Appellant file a fresh notice of objection within thirty (30) days after the Tribunal’s ruling dated 30th March, 2020, which it lodged on 29th April, 2020.
45.The Appellant’s contention in this dispute is that the Respondent used the banking method to assess the tax but did not consider expenses incurred by the Appellant in the course of business.
46.The Tribunal has taken note of a meeting between the Appellant’s Tax Agent and the Respondent which took place on 14th May, 2020. During the said meeting, the Appellant’s agent requested for and was availed the daily sales book and Rafiki Microfinance statements, documents which the Respondent had used to assess the Appellant. According to the Appellant, these documents would assist it determine the taxable amount as assessed.
47.The Tribunal has noted further that the Respondent sent an email dated 24th June 2020 reminding the Appellant to give any feedback in terms of documents to support its notice of objection as statutory timelines were running out. The Tax Agent however responded that he no longer acted for the Appellant. The same email correspondence was copied to one of the Appellant’s directors, however no action was taken by the Appellant in terms of providing documentary evidence in support of its Objection.
48.Section 51(3) of TPA as regards objection to tax assessments provides as follows
49.In its first Appeal, TAT 164 of 2017, the Tribunal directed that the Appellant file a fresh notice of objection. Subsequently the Appellant lodged the fresh notice of objection dated 28th April, 2020. In the said notice, the Appellant, through its tax agent admitted to a VAT tax liability of Kshs 214,801/= and stated at the last paragraph that the Appellant had been advised of the same and was agreeable to pay over a period of twelve months. However, the Tribunal has not seen evidence of payment of the admitted tax. Further that after the parties meeting on 14th May, 2020, the Appellant was granted an opportunity to provide any supporting documents to back its Appeal,however no documents were provided even after being reminded of the statutory timelines. It is the Tribunal’s view that in the circumstances the Respondent cannot be faulted for confirming the assessment and demanding the tax due.
50.It has to be noted that between the first appeal and the current one, the Appellant had ample time to avail the documentary evidence to support its case. During the parties’ meeting on 14th May, 2020, the Appellant asked for the documents the Respondent had used to arrive at the assessment. The said documents were availed granting it the opportunity to controvert the Respondents calculations, which again it failed to do.
51.Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal prescribes the responsibility the Appellant has in discharging the burden of proof. Section 30 of the Tax Appeals Tribunal Act provide as follows:Section 56(1) of the Tax Procedures Act provides as follows:-
52.As regards the burden of proof the Tribunal will rely on the case of Grace Njeri Githua v Commissioner of Investigations and Enforcement (TAT No.102 of 2018) where the Tribunal emphasised the fact that the burden is on the Appellant to prove the assessment was wrong by stating that: -
53.The Tribunal notes that between the Appellant’s first appeal and the current one where the first notice of objection was done on 15th July 2017 which is more than 5 years, the Appellant failed to adduce any documentary evidence then and even during the lodging of the notice of objection during the current Appeal. Its attempt to provide some documents during the Appeal stage is coming too late in the day.
54.The Tribunal is of the considered view that the Appellant had ample time within which it could have availed the supporting documents to support its appeal but failed to do so. In the circumstances the Respondent was justified to demand the tax owed.
55.Consequently, the Tribunal finds that the demanded tax vide the Respondent’s Objection decision dated 25th June, 2020 is due and payable.
Final Decision
56.The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders.a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection Decision dated 25th June, 2020 be and is hereby upheld.c.Each party to bear its own costs
57.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023.ERIC N. WAFULA - CHAIRMANROBERT M. MUTUMA - MEMBEREDWIN K. CHELUGET - MEMBERRODNEY O. OLUOCH - MEMBER