Papyrus (Africa) Limited v Commissioner of Domestic Taxes (Tax Appeal E877 of 2023) [2024] KETAT 1648 (KLR) (Commercial and Tax) (21 November 2024) (Judgment)
Neutral citation:
[2024] KETAT 1648 (KLR)
Republic of Kenya
Tax Appeal E877 of 2023
CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members
November 21, 2024
Between
Papyrus (Africa) Limited
Appellant
and
Commissioner Of Domestic Taxes
Respondent
Judgment
Background
1.The Appellant is a limited company registered in Kenya under the Companies Act. Its principal activity is that of distribution of graphics, weighing, baking and butchery equipment and consumable products.
2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the 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 conducted a returns review on the Appellant’s tax affairs for the years 2017 to 2021 and established various variances in the Appellant’s declarations. Consequently, the Respondent issued an assessment vide a letter dated 10th July, 2023 which were subsequently lodged on itax on 12th July, 2023.
4.The Appellant lodged its objection with the Respondent through a letter dated 9th August 2023 and served upon the Respondent on 10th August, 2023 and a further objection dated 22nd August 2023 lodged on iTax, which objection was late. The Respondent allowed the Appellant’s late objection on 8th September 2023.
5.Upon review of the Appellant’s objection, the Respondent issued an objection decision through a letter dated 3rd November 2023 partially allowing the objection and consequently, demanding taxes amounting to Kshs 16,463,880.69.
6.The Appellant being aggrieved with the objection decision lodged the Appeal herein vide a Notice of Appeal and memorandum of appeal dated and filed on 1st December 2023.
The Appeal
7.The Appeal is based on the memorandum of appeal dated and filed on 1st December 2023 wherein the Appellant raised the following grounds of appeal:a.That the Respondent erred by issuing the Additional Assessments reflected on iTax for VAT and Income Tax which differ with the Respondent's Objection Decision from the Legal Service and Board Co-ordination Department Tax Dispute Resolution dated 3rd November 2023.b.That the Respondent failed to explain the difference between the Assessments raised on iTax and the Additional Assessments as indicated in the Respondent's objection decision dated 3rd November 2023.c.That the Respondent as indicated in the objection decision did not properly review the various documents and explanations provided by the Appellant between the basis of assessment pursuant to the Respondent's letter of 10th July 2023 and the objection decision as indicated in the Respondent's letter of 3rd November 2023.d.That the Respondent in Paragraph 17 of the objection decision failed to recognize that in respect of the reimbursement of rents, the amounts in the bank statements comprised of payments made which included other reimbursements and other transactions and that these were not booked as a single entry to be shown as a stand-alone entry in the bank statements as explained by the Appellant in the meeting of 2nd November 2023. Reimbursement of rents are invoiced to parties who occupy part of the premises leased by the Appellant and these parties pay on account to the Appellant for rents and other transactions. The Appellant leases its premises from a lessor under a lease and part of the premises are occupied by Dreamcoat Automotive Refinishing Products Limited and Puratos (EA) Limited and the lessor did not wish to have separate leases and hence Appellant raised invoices for the rents to the two parties and the amounts reimbursed offset against rents payable by the Appellant to the lessor in the financial statements and hence these amounts should not be taxed as a separate source of income pursuant to the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”).e.That the Respondent erred in Paragraph 18 of the objection decision by not recognizing sales exported outside Kenya which were booked in the VAT returns as export sales which are zero-rated for VAT. All relevant documents pertaining to these exports such as invoices, proof of payments, bills of lading, road manifests, exports certified by a proper officer of customs at the point of exit and certificates of export and evidence that goods landed outside Kenya were provided. The goods exported to the customers outside Kenya are exports since the sales invoices were raised by the Appellant and in some cases, goods are sent directly by the suppliers to customers outside Kenya which are exports as defined in the VAT Act. The variances between exports as per VAT returns and Customs Data as indicated in Paragraph 28 of the objection decision dated 3rd November 2023 of KShs. 30,562,904.00 for 2018, KShs. 17,195,999.00 for 2019, KShs. 5,478,483.00 for 2020 and KShs. 8,475,574.00 for 2021 have not been explained by the Respondent and has not provided the Customs Data entries to enable the Appellant to determine the variances.f.That the Respondent erred in Paragraph 20 and 21 of the objection decision by only recognizing sales to exempt bodies (British Embassy & American Embassy) and did not recognize stamping fees for weighbridges as exempt sales and reclassified these as vatable sales amounting to KShs 8,544,768.00 for 2020 and KShs. 7,681,856.00 for 2021. The stamping fees included in the sales invoices on sales of weighbridges as required by the VAT Act are exempt sales and not vatable sales and hence should not be classified as vatable sales.g.That the Respondent in Paragraphs 22 and 23 of the objection decision failed to recognise that differences between purchases reported in the income tax returns and VAT returns for 2019 and 2020 which was due to Appellant incorrectly fling the VAT returns and excluding exempt purchases in the VAT returns. Hence the undeclared gross profit of KShs 1,402,108.00 for 2019 and KShs 9,702,675.00 for 2021 is not valid and tax loss should not be reduced.h.That the Respondent as per Paragraph 24 of objection decision failed to share with the Appellant the workings of disallowed inputs tax apportionment amounting to KShs 122,799.00 for 2018, KShs 508,972.00 for 2019, KShs 297,896.00 for 2020, KShs 21,211.00 for 2021. The Appellant requested for the details in the meeting held on 8th November 2023 with the Respondent via an electronic mail sent on 11th November 2023 via the tax agent and no response was received from the Respondent.i.That the Respondent in Paragraphs 25 and 26 of the objection decision dated 3rd November 2023 erred by disallowing the expense of obsolete stocks amounting to Kshs 46,511,151.00 for 2019 which were muffin cups that were not sealable. The Appellant provided a Certificate of Disposal as requested. The Appellant also provided details of the entities in the books of accounts. The Appellant operates an accounting system where stocks are interfaced in the general ledger and expensing the obsolete stocks to the profit and loss account does not imply that the expense for obsolete stocks is double counted as stocks removed from the stocks ledger and stock account are expensed in the profit and loss account and as such the expense of obsolete stocks should not reduce the losses as the Respondent failed to understand the accounting system and entries passed.j.That the Respondent in Paragraph 27 of the objection decision failed to recognize the Kshs 1,099,173.00 which were reimbursements of medical insurances paid for by the Respondent on behalf of Drearncoat Automotive Refinishing Limited which were reimbursed via the raising of sales invoices by the Appellant and the amount was declared in the VAT returns filed by the Appellant and for disclosure purposes in the financial statements and IT2C, included in other income and hence the amount should not reduce the tax losses.k.That the Respondent in Paragraph 27 of the objection decision failed to recognize losses brought forward of Kshs 86,583,916.00 for 2018, and used Kshs. 17,400,611.00 instead in arriving at the adjustments to tax losses.l.That the Respondent in Paragraph 28 of the objection decision failed to provide details of the disallowed input tax apportionment of Kshs 122,799.00 for 2018, Kshs 508,972.00 for 2019, Kshs 896.00 for 2020 and Kshs 21,211.00 for 2021.m.That the Respondent in Paragraph 28 of the objection decision failed to share with the Appellant the VAT disallowed on the duplicated invoices that were double claimed by the Appellant amounting to Kshs 30,224.00 for 2019, Kshs 17,960.00, Kshs 35,034.00 for 2021.
Appellant’s Case
8.The Appellant relied on its statement of facts dated and filed on 1st day of December 2023. The Appellant also filed its written submissions dated 19th July 2024 and filed on 22nd July, 2024 which were adopted by the Tribunal on 11th September, 2024.
9.The Appellant stated that the Respondent carried out a review validation exercise on the Appellant's VAT returns and identified findings pertaining to VAT for the period 2017 to 2021 on 21st October 2022. The Appellant via the tax agent responded to the findings raised by the Respondent on 9th November 2022 and that the appellant provided the reconciliations of the VAT variances raised by the Respondent.
10.The Respondent indicated that it wanted to understand the nature of the business of the Appellant and visited the Appellant's offices on 14th February 2023. The Appellant stated that its accountant provided the details of the nature of business and the Respondent requested for additional documents during the visit which were provided by the Appellant via electronic mails and hard copies soon after the meeting.
11.The Appellant stated that the Respondent upon further review of the documents provided by the Appellant, the Appellant submitted additional findings, which were sent to the Respondent via an electronic mail of 15th February 2023, highlighting variances in export sales as per VAT returns filed by the Appellant and export sales as per the Customs Data and other matters to include purchase variances, obsolete stocks, reimbursement of rents and bad debts against others. The appellant provided all the necessary documents including the Certificate of Disposal, schedule of obsolete stocks and bank statements for rent reimbursement.
12.The Appellant averred that it provided all the information and explanations pertaining to the Respondent's additional findings. It added that it provided exempt sale ledger, sample invoices and stamping fees.
13.The Respondent subsequently issued a letter of Preliminary Findings dated 9th May 2023, which highlighted the variances identified which was received by the Appellant via electronic mail on 10th May 2023. Upon review of the Respondent's Preliminary Findings the Appellant responded to the letter via electronic mail of 30th May 2023 and alleged that it provided explanations and all necessary and available documents.
14.According to the Appellant, the Respondent sent a letter of Notice of Tax Assessment under Section 31 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) for the returns years 2017 to 2021 to the Appellant via a letter dated 10th July 2023 highlighting variances as indicated. However, no assessments were issued by the Respondent as indicated in the letter of Notice of Assessment and only after the Appellant's Accountant met with the Accounts Manager at the Medium Taxpayer Office, the Assessments were uploaded on the iTax portal by the Respondent.
15.The Appellant noted that the additional assessments on iTax for Income Tax were uploaded on iTax on 12th July 2023 and for VAT on iTax on 24th July 2023 but differ from the Notice of Assessment communicated of 10th July 2023. The Appellant lodged an objection to the Notice of Tax Assessment of 10th July 2023 on 9th August 2023.
16.The Respondent through an electronic mail sent to the Appellant requested the Appellant to file a notice of objection to the Assessments on ITax as prescribed under Section 51 of the TPA. The Appellant stated that its tax agent was not able to file the objection notice via iTax since the Assessment Numbers for VAT were not shown in the iTax ledger. The Appellant's accountant and the tax agent visited the Respondent's Medium Taxpayers Office to be provided with the Assessment Numbers to lodge the objection. The Appellant's tax agent thereafter lodged the objection on iTax on 22nd August 2023.
17.According to the Appellant, despite the submission of all documents and explanations by the Appellant and the Appellant's tax agent, the Respondent erred by raising the Additional Assessments for Corporation Tax and VAT and also failed to explain the differences between the Assessments raised on iTax and the Notice of Assessment dated 10th July 2023.
18.The Appellant alleged that the Respondent failed to review all the documents and explanations provided by the Appellant and the Appellant's tax agent in response to the Respondent's Notice of Assessment as the Respondent indicated that this was due to time constraints. According to the Appellant, the objection decision amended the additional assessments since the amendment was not effected on iTax as well as tax losses for 2017 to 2021. It alleged that the Respondent has to date not revised the Assessments on iTax.
19.The Appellant asserted that the Respondent in issuing the objection decision failed to review all the explanations and documents submitted with due care and spent insufficient time as well as failed to interpret the relevant sections of the ITA and the Value Added Tax Act CAP 476 of the Laws of Kenya (hereinafter “the VAT Act”) as applicable.
20.In addition to statement of facts, the Appellant relied on its written submissions wherein the Appellant submitted that the Respondent failed to submit the Respondent’s Submissions and Statement of Facts to the Tribunal as required under Section 15 of the Tax Appeals Tribunal Act, CAP 69A of the Laws of Kenya (hereinafter “TATA”) and contrary to the Tribunal’s directives
Appellant’s Prayers
21.the Appellant prayed for the following reliefs:a.That the additional assessments be set aside;b.The Respondent's decision dated 3rd November 2023 be set aside; andc.This Appeal be allowed.
The Respondent’s Case
22.In response to the appeal, the Respondent relied on its Statement of facts dated 9th February 2024. The Respondent also filed its written submissions dated 10th July 2024 which were adopted by the Tribunal on 11th September, 2024.
23.The Respondent stated that it conducted a returns Review on the Appellant’s Tax Affairs for the years 2017 to 2021 and established various variances in the Appellant’s declarations. It also reviewed the Appellant’s invoices and found that it had claimed more than once some purchase invoices for the years 2017-2018 amounting Kshs 1,468,371.00. These findings of the review of the returns were communicated to the Appellant on 21st October 2022.
24.After various correspondence the Respondent issued the Appellant with Preliminary findings dated 9th May 2023 and requested the Appellant to respond with evidence to support the issues.
25.According to the Respondent, ten Input VAT claimed on inputs which the Respondent identified as either not traced in customs data or whose VAT differed from the VAT paid upon importation. Other noted areas of variances included:a.inappropriately apportioned common inputs which the Respondent apportioned accordingly;b.Disallowed obsolete stock amounting to Kshs. 46,511,151.00 since the same stocks were already removed from the closing stock thus resulting in double claim.c.Disallowed Bad Debts amounting to 7,281,198.00.
26.The outcome of the review was communicated to the Appellant with the Respondent’s preliminary findings dated 9th May 2023. The Respondent argued that the Appellant did not address the variances established and therefore the Respondent issued an assessment to the Appellant on 10th July, 2023 which were subsequently lodged on itax on 12th July, 2023.
27.According to the Respondent, the Appellant lodged its objection with the Respondent through a letter dated 9th August 2023 and served upon the Respondent on 10th August, 2023 and a further objection dated 22nd August 2023 lodged on iTax, which objection was late. The Respondent also stated that following to correspondence between the Appellant and the Respondent, the Appellant abandoned its objection of 9th August 2023 and parties agreed that the objection to be reviewed is the one lodged on iTax on 22nd August 2023. Consequently, the Respondent allowed the Appellant’s late objection on 8th September 2023 and thereafter requested the Appellant to validate the objection by providing various documents.
28.Consequently, the Respondent issued an objection decision through a letter dated 3rd November, 2023 partially allowing the objection and demanded taxes amounting to Kshs. 16,463,880.69. The Respondent stated that the Appellant did not lodge a valid objection and failed to satisfy the burden of proof to demonstrate that the assessment as issued is erroneous or anyway excessive as required by law.
29.In response to the grounds to (a) and (b) of the memorandum of appeal, the Respondent stated that it reviewed the case based on the figures provided on the Notice of Assessment dated 10th July 2023 and the excel workings provided by the assessing team.
30.In response to grounds (c) of the appeal, the Respondent stated that the objection was properly review in light of the information provided.
31.In response to ground (d) of the appeal, the Respondent stated that in an electronic mail dated 19th October 2023, the Appellant was requested to provide bank statements showing rent reimbursements from its tenants since the Appellant had already mentioned that it did not have any lease agreement. The Respondent maintained that the Appellant was unable to do so.
32.In response to ground (e) of the appeal, the Respondent state that on 17th October 2023, upon review of customs date, it was noted there exists huge variances form what was declared by the Appellant. The Appellant explained during the physical meeting that the exports were goods sent directly to the clients and did not find their way into Kenya. The Appellant had explained to the Respondent during audit that they were goods that the clients picked directly from the Appellant’s premises. Therefore, the Respondent averred that the goods could cannot be classified as exports.
33.In response to ground (f) of the memorandum of appeal, the Respondent stated that on 19th October 2023, the Appellant was requested to provide a breakdown of the exempt sales to British & American Embassy. Upon review, it was established that there were other companies that were not exempt entities and thus the Respondent only allowed sales to the 2 exempt bodies. Therefore. the variance was disallowed.
34.In response to ground (g) of the memorandum of appeal, the Respondent stated that the Appellant claimed that the variance was due to exempt purchases but was unable to provide a schedule reconciling the variances.
35.In response to ground (h) and (l), the Respondent averred that during engagement with the Appellant, it conceded to this item. According to the Respondent, the Appellant was requested to do its own apportionment and share with the Respondent its own final workings but the Appellant allegedly failed to do so.
36.In response to ground (i), the Respondent averred that whereas the Appellant provided the Certificate of Disposal, it was however unable to avail inventory listing that would have depicted muffin cups opening stock disposals of the same and closing stock balance of the same for the affected period. The Respondent maintained that the Appellant was unable to demonstrate there was no double claim on this item.
37.In response to ground (j) the Respondent maintained that the Appellant could not explain why it was taking up medical insurances for persons who were not its staff/ directly employed by the Appellant. The Respondent questioned why the Appellant paid medical insurance on behalf of Dreamcoat who they are subletting their premises to.
38.In response to ground (k), the Respondent stated that the losses were not a reconciling item as it was never in Appellant’s grounds of objection before the Respondent. In response to ground (m) of the Appeal, the Respondent asserted that the duplicate invoices were shared vide an electronic mail dated 18th October 2023 to John Nyamiaka and copied Sabine Martens and Joel Efesa.
39.The Respondent cited the provisions of section 51(3) of the TPA which provides as follows:‘(1)A notice of objection shall be treated as validly lodged by a Appellant under subsection (2) if —(c)all the relevant documents relating to the objection have been submitted.’
40.It relied on section 59 of the TPA empowers the Respondent to require production of such documents upon issuance of notice as deemed necessary in determination of tax liability and if the taxpayer defaults then the Respondent can use the best judgment to make a determination.
41.Further, the Respondent relied upon section 56(1) of the TPA to buttress the position that a taxpayer has the burden of proving that the Respondent’s decision is incorrect and that the Appellant failed to discharge this duty. Therefore, the Appellant maintained that the appeal lack merit and the Appellant has not demonstrated any error made by the Respondent arising from the invalidation decision.
Respondent’s prayers
42.The Appellant urged this Tribunal to uphold the Respondent’s objection decision as proper and in conformity with the provisions of the Law and that this Appeal be dismissed with costs to the Respondent.
Issues For Determination
43.The Tribunal having considered the parties’ pleadings, documents and written puts forth the following two issues for determination:a.Whether the Respondent filed statement of facts contrary to section 15(1) of the TATA.b.Whether the Respondent erred in partially disallowing the notice of objection.
Analysis And Findings
44.The Tribunal wishes to analyse the issues as hereunder.
Whether the Respondent filed statement of facts contrary to section 15(1) of the TATA.
45.The Appellant stated that the Respondent statement of facts was filed beyond the statutory time limits. In particular, the Appellant alleged that the Respondent’s statement of facts offends section 15(1) of the TATA. The said section provides as follows:‘‘(1).The Commissioner shall, within thirty days after being served with a copy of an appeal to the Tribunal, submit to the Tribunal enough copies as may be advised by the Tribunal, of—(a)A statement of facts including the reasons for the tax decision; and(b)Any other document which may be necessary for review of the decision by the Tribunal.’’
46.Section 15(1) of the TATA envisions that the Respondent has to be served first for the time to start running out. The Appellant did not demonstrate when how it served appeal documents upon the Respondent. The Appellant did not file affidavit of service therefore, the Tribunal is unable to rule in favour of the Appellant on this issue. This issue rests here.
Whether the Respondent erred in partially disallowing the notice of objection
47.The Appellant asserted that the Respondent erred by only recognizing sales to exempt bodies (British Embassy & American Embassy) and did not recognize stamping fees for weighbridges as exempt sales and reclassified these as vatable sales amounting to KShs 8,544,768 .00 for 2020 and KShs 7,681,856.00 for 2021. The Appellant maintained that stamping fees included in the sales invoices on sales of weighbridges as required by the VAT Act are exempt sales and not vatable sales and hence should not be classified as vatable sales. The Appellant also submitted that it provided exempt sale ledger, sample invoices and stamping fees.
48.The Tribunal examined the documentary evidence that the Appellant provided and noted that the schedules that the Appellant filed includes entities that are not exempt from VAT. On this basis, the Tribunal is unable to fault the Respondent’s action.
49.The Appellant asserted that the Respondent failed to recognize that differences between purchases reported in the Income Tax Returns and VAT returns for 2019 and 2020 was due to Appellant incorrectly fling the VAT returns and excluding exempt purchases in the VAT returns. The Appellant therefore argued that the undeclared gross profit of Kshs 1,402,108 for 2019 and KShs 9,702,675 for 2021 is not valid and tax loss should not be reduced.
50.The Tribunal is of the view that if the Appellant made a mistake in its returns, the Appellant ought to have utilised the avenue under section 31(2) of the TPA to correct the mistake. Section 31(2) of the TPA provides as follows:‘‘(2)A taxpayer who has made a self-assessment may apply to the Commissioner, within the period specified in subsection (4) (b)(i), to make an amendment to the taxpayer's self-assessment.’’
51.The Tribunal’s further view is that since the Appellant did not opt for the mechanism under Section 31(2) of the TPA, the Appellant ought to have provided documentary evidence to the Respondent to support its claim on this issue.
52.The Tribunal notes that whereas the Appellant filed an elaborate bundle of documentary evidence, the Appellant made a fundamental error in failing to connect the statement of facts to each documentary evidence produced. For instance, whereas the Appellant referred to reimbursement of rents and that the amounts in the bank statements comprised of payments made that were not booked as a single entry to be shown as a stand-alone entry in the bank statements, the Appellant did not attempt to isolate amounts in the bank account that needed to be reviewed. As such, whereas bank statements are on record, the Appellant failed to make good use of the same to aid the Tribunal in isolating transactions that needs review. The Appellant failed to do analysis of its bank statement. The Appellant ought to have pointed out in statement of facts areas of contention in that needed attention.
53.The Tribunal also notes that the Appellant simply lumped documents together without any analysis and filed them. Lumping documentary evidence together without reference to those documents in statement of fact is detrimental. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 has provisions regarding how a taxpayer is supposed to deal with an appeal before this Tribunal as far as documentary evidence is concerned. The said Rule provides as hereunder:‘‘(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.(2)The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’
54.The Tribunal’s view is that filing a bundle of documentary evidence without reference to specific documents therein is akin to filing documents and letting the Tribunal pick what is relevant and suitable to the statement of facts. If the Tribunal does this, it would be akin to prosecuting the appeal for a litigant. It should be recalled that Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 places burden of proof on the taxpayer. This is in addition to the provisions of section 30 of TATA and section 56(1) of the TPA.
55.The High Court in Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR emphasised that the tax payer has the burden to prove that the tax decision is wrong. Further, in Singapore Motors Limited v Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR) the High Court held as follows:
56.Due to the foregoing, the Appellant failed to discharge its burden of proof. Consequently, the Tribunal finds and holds that the Appellant failed to demonstrate that the Respondent erred in partially disallowing the notice of objection.
Final Decision
57.The upshot to the foregoing is that the Appeal lacks merit and the Tribunal proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 3rd November 2023 be and is hereby upheld.c.Each party to bear its own cost.
58.It is so Ordered.
DATED AND DELIVERED AT NAIROBI ON THIS 21ST DAY OF NOVEMBER, 2024.CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBER ELISHAH N. NJERU - MEMMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER