Creative Consolidated Systems Limited v Commissioner of Domestic Taxes (Tax Appeal E817 of 2023) [2024] KETAT 1783 (KLR) (17 December 2024) (Judgment)
Neutral citation:
[2024] KETAT 1783 (KLR)
Republic of Kenya
Tax Appeal E817 of 2023
RM Mutuma, Chair, M Makau, Jephthah Njagi, D.K Ngala & T Vikiru, Members
December 17, 2024
Between
Creative Consolidated Systems Limited
Appellant
and
Commissioner Of Domestic Taxes
Respondent
Judgment
Background
1.The Appellant is a limited liability company duly incorporated under the Companies Act of the Laws of Kenya, and is engaged in the business of cleaning services and Labour Outsourcing.
2.The Respondent is the principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, which Authority mandated with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out under the schedule to the said Act.
3.The Respondent carried out a compliance check into the tax affairs of the Appellant for the years 2015, 2016, 2017, 2018, 2019, 2020 and 2021 on 31st January 2022 and issued an additional assessment vide a letter dated 31st January 2022 for a total amount of Kshs 376,648,682 being Kshs 130,275,623 for corporation tax, Kshs 245,781,205 for VAT and Kshs 591,584 for Withholding Tax, inclusive of penalties and interest.
4.The Appellant lodged a Notice of Objection dated 28th February 2022 contesting the Respondent’s entire assessment. The Respondent rendered its decision on 14th April 2022 invalidating the Appellant’s Notice of Objection and demanding the entire taxes assessed.
5.Being aggrieved with the Respondent’s decision, the Appellant filed its appeal before the Tribunal on 26th May 2022 being TAT No 537 of 2022.
6.The Tribunal heard and determined the said appeal ,by allowing the said appeal vide a judgement dated 4th August 2023 , whereon the Respondent’s invalidation decision dated 14th April 2022 was set aside, and the Respondent directed to determine the Appellant’s objection Notice on its merit and issue an appropriate objection decision in respect of the Appellant’s notice of objection dated 1st March 2022 within sixty days , pursuant to which it issued an Objection Decision dated 2nd October 2023.
7.Vide the Objection Decision dated 2nd March 2023, the Respondent revised the additional assessment the Appellant as hereunder;
- Income Tax (corporation Tax) - Kshs 122,323,125 .00
- Value Added Tax - Kshs 152,922,512.00
- Total - Kshs 275,245,637.00 for the period 2015 to 2021.
8.The Appellant being dissatisfied with the Respondent ‘s reviewed Objection Decision dated 2nd October 2023 filed its Notice of Appeal 3rd November 2023 with the Tribunal.
The Appeal
9.The Appellant filed its Memorandum of Appeal dated 15th November 2023 on 17th November 2023 and set out the following grounds of appeal;a.That the Respondents indeed wrote an email dated 16th August 2023 detailing the documents required and the format the same was to be sent. The Appellant indeed provided all documentation on 27th September 2023, and therefore the Appellant is now appealing the Objection Decision dated 2nd October 2023, demanding a total sum of Kshs. 275,245,637.00;b.That the Respondents erred in law and fact by assessing taxes and demanding the production of documents in contravention of Section 23 (1) (c) of the Tax Procedures Act NO. 29 of 2015 hereinafter called the “Act”;c.That the Respondents relied on hearsay in estimating alleged rental income, without providing actual evidentiary proof of such fact, even after given all documentary evidence by the Appellant which it ignored yet tax law provides that the taxes paid must be factual and just;d.That the Respondents erred in law and fact in failing to consider the Appellant had made some exempt supplies hence had no tax liabilities within the review period;e.That the Respondents contradicted its own rules and procedure, directions by confirming the assessment without considering all documents;f.That the Respondents erred in law and fact by making an Objection Decision based on extraneous matters and not documents presented by the Appellant;g.The Respondents failed to give strict interpretation of the VAT Act hence violated Article 209 of the Constitution of Kenya 2010;h.That the Respondent confirmed the notice of assessment without due regard to all records, explanations and information provided by the Appellant thereby failing to appreciate all issues presented by the Appellant before confirming the assessment, especially regarding the interest income claimed;i.That the amounts confirmed by the Respondent being principal tax of Kshs. 166,463,969.00 and interest of Kshs. 100,458,469.00, all totaling to Kshs. 275,245,637.00, for the period 2015 – 2021 is therefore wrong in law and fact and should be annulled;j.That the assessment on VAT wherein the Commissioner raised its assessment as a block at the rate of 14 % for the period April December revising the liability to Kshs. 89,804,658 contraries to procedure, that VAT is a month to month assessment; and,k.That the amounts assessed by the Respondent at Kshs. 5,413,448.00 being principal tax and alleged penalty and interest of Kshs. 2,947,099.00 all totaling Kshs. 8,360,547.00 is therefore wrong in law and fact and should be annulled.
The Appellant’s Case
10.The Appellant’s case is set out on its;a.Statement of Facts dated 15th November 2023 and filed on 17th November 2023 together with the documents attached thereto;b.Written Submissions dated 17th July 2014 and filed on 4th August 2024; and,c.Supplementary list of documents filed on 6th November 2024 pursuant to the leave of this Tribunal granted on 7th November 2024.
11.The Appellant stated that it had initially appealed the above matter under TAT 537 of 2022 wherein the appeal was allowed vide a judgement dated 4th August 2023, and the Respondent’s decision of invalidation of the notice of objection dated 14th April 2022 set aside. The Respondent was thereby directed by the Tribunal to determine and issue an appropriate Objection Decision in respect of the Appellants notice of objection dated 1st March 2022 within sixty days, which it did and issued the Objection Decision on 2nd October 2023.
12.The Appellant stated that the Respondent erred in its assessment on the Appellants for the years 2015, 2016 ,2017,2018, 1019, 2020, and 2021 on 31st January 2022, and subsequently issued an assessment notice requiring the Appellant to pay a total of Kshs. 376,648,682.00 based on estimates thus arriving at an erroneous and unjustifiable assessment.
13.The Appellant stated that the Respondent undertook its compliance checks sometime in the year 2021, covering the period 2015 - 2021, and by the time of issuance of the assessment, the five-year period contemplated under the TPA could only cover up to the year 2017, thus the Respondent acted ultra vires in issuing an assessment for the year of income 2015-2016 and the assessment relating to the years 2015-2016 ought to be vacated.
14.The Appellant stated that it was aggrieved by the said assessment, and objected vide a letter dated 1st March 2022, and was particularly aggrieved due to the fact that the Respondent had ignored all the documentation and explanations shared by the Appellant and issued an invalid Objection Decision contrary to the Section 51 (9) of the Tax Procedures Act.
15.The Appellant stated that being dissatisfied by the erroneous Objection Decision it filed the Appeal herein, and upon filing the Appeal the two parties engaged in ADR negotiations which later collapsed.
16.It was stated that following the letter of finding from the Respondent, both parties exchanged correspondences and had several meetings on the Respondent’s investigations in which meetings and correspondences, the Appellant and the director explained the bank deposits.
17.The Appellant stated that the Respondent communicated a request for documents vide an email dated 16th August 2023 and detailed the format the same ought to be sent in. The Respondent averred that it provided the whole of the said documentation as requested on 27th September 2023, and the Respondent issued its objection decision on 2nd October 2023 confirming an assessment and demand for a total of Kshs 275,245,637.00. The Appellant adduced the bundle of documents submitted through the filed supplementary list of documents.
18.It stated that the Respondents erred in law and fact by assessing taxes and demanding the production of documents in contravention of Section 23 (1) (c) of the TPA, which provides;
19.The Appellant also stated that the Respondent relied on hearsay in estimating alleged rental income, without providing evidentially proof of such fact, even after being given all the documentary evidence by the Appellant which it ignored yet tax law provides that the taxes paid must be factual and just.
20.It was further averred that the Respondent erred in law and in fact in failing to consider the Appellant had made some exempt supplies hence had no tax liabilities within the review period. The Respondent also contradicted its own rules and procedure, and directions by confirming the assessment without considering all documents adduced, thus erred in law and fact by making an Objection Decision on extraneous matters and not documents presented by the Appellant.
21.The Appellant also contended that the Respondent failed to give strict interpretation of the VAT Act hence violated Article 209 of the Constitution of Kenya, 2010.
22.It was also stated that the Respondent confirmed the notice of assessment without due regard to all records, explanations and information provided by the Appellant thereby failing to appreciate all issues presented by the Appellant before confirming the assessment, especially regarding the interest income claimed.
23.It was further contended that the amounts confirmed by the Respondent i.e. the principal in the sum of Kshs. 166,463,969.00 and interest of Kshs. 100,458,469.00 all totaling Kshs. 275,245,637.00 for the period 2015 – 2021 is wrong in law and fact and ought to be set aside.
24.It was also contended that the assessment on VAT wherein the Respondent raised its assessments as a block at the rate of 14 % for the period April to December revising the liability to Kshs. 89,804,658.00 is contrary to the procedure that VAT is month to month.
25.It was also contended that the amounts assessed by the Respondent of Kshs. 5,413,448.00 being principal tax and alleged penalty and interest of Kshs. 2,947,099.00 all totaling Kshs. 8,360,547.00 in respect to alleged income tax for the period 2008 to 2014 is therefore wrong in law and fact and should be set aside.
26.In its submissions the Appellant submitted that the Respondent acted ultra vires contrary to Section 23 (1) (c) of the TPA in its assessment of the Appellant. The said sub-section provides;
27.It was further submitted that in spite of the varied correspondence and documentation provided by the Appellant to the Respondent following its assessment and demand for documents, the Respondent proceeded to issue an assessment for the financial years 2015 – 2021 of Kshs. 376,648,682.00 on 31st January 2022, contra statute.
28.The Appellant also submitted that on 1st March 2022, the Appellant filed an objection to the demanded tax as provided for in law, stating the grounds of objection as the Respondent acted ultra vires in its assessment by going beyond the period of five years contrary to the provisions of Section 51 (3), and provided all the relevant documents.
29.The Appellant submitted that the Respondent acted in ultra vires contrary to the provisions of the TPA by raising an additional assessment with regard to the 2015 – 2021 financial years.
30.It was further submitted that Section 29 (5) limits the period within which the Respondent can issue such an assessment as hereunder;It was submitted that subsection (6) only allows the Respondent to undertake an assessment beyond the five-year period in case of willful neglect or fraud.
31.The Appellant further submitted that it is trite law that fraud must be both specifically alleged and specifically proved. It asserted that the Respondent should not be allowed to undertake assessments by merely stating that there was fraud or willful neglect on the part of the Appellant without providing sufficient proof. Without proof, the Respondent’s assessment in respect of the year 2015 – 2016 is without any legal basis. The burden of proving willful neglect or fraud is on the Respondent which in this case, they had not met. The Appellant further submitted.
32.The Appellant buttressed its submission by placing reliance on the case of Kenya Revenue Authority vs. Jimmy Mutuku Kiamba (2015-2026) eKLR, where the court analyzed the provisions of Section 79 of the Income Tax Act, now repealed, which similarly granted the Respondent powers to assess outside the statutory period of seven years in cases of willful neglect or fraud as follows;
33.Flowing from the foregoing, the Appellant submitted that its directors have not at any time been tried and convicted for a criminal offence in relation to fraud and therefore the Respondent cannot purport to rely on the provisions of Section 29 (6) to assess the Appellant or the director outside the five-year statutory period, and any attempt to do so can only be termed contrary to the clear provisions of the law, and an illegality.
34.The Appellant therefore submitted that a sum of Kshs. 189,908,967.00 was attributable to the period outside the five-year period and therefore unlawfully assessed by the Respondent against the Appellant.
35.The Appellant also submitted that by disallowing the VAT component of business expenses which were not claimed as input in VAT monthly returns amounting to Kshs. 99,969,353.00, the expenses were properly expensed were properly expensed in the determination of gain as per Section 15 (1) of the ITA. The expenses were wholly and exclusively used in generation of income. The amounts of VAT claimed on expenses for the entire period was totaling to Kshs. 25,924,439.00.
36.It was submitted that the Respondent disallowed cash expense for fuel and motor vehicle maintenance amounting to Kshs. 51,363,283.00 due to alleged non-supporting documentation. It stated that the Appellant’s business operations are cash in nature and payments for dump sites and repairs are paid to informal groups and thus the only proof of payments was through cash withdrawals from bank accounts by the company’s agents which was provided.
37.As a consequence of the foregoing, all assessments that ought to have been considered between 2017 to 2021 ought to be set aside, and the same should be rendered nugatory, given that the Respondents did not follow the law accordingly as an action that is void ab initio cannot be ratified or validated, the Appellant submitted.
38.The Appellant cited the case of Alfred Kioko Muteti vs. Timothy Miheso & Anor (2015) eKLR, where it was held;
39.The Appellant also submitted that the Evidence Act, Cap 80 of the Laws of Kenya, Section 107 (1) provides thus;
40.It was a further submission of the Appellant that as to what constitutes the burden of proof beyond reasonable doubt, the case of Miller vs. Minister of Pensions (1947) 2 All ER 372, provides as flows in a passage alluded to by Lord Denning, considered the greatest jurist of our time;
41.It was further submitted that Section 29 (5) and 31 (4) of the TPA provides the timeline for assessing a taxpayer is within five years. The only exemption to this rule is when the Respondent is able to demonstrate gross or willful neglect, evasion or fraud by a taxpayer. The Appellant prayed that this Tribunal be guided by the case of Gitere Karuha Investments Ltd vs. Commissioner of Investigations and Enforcement TAT 16 of 2019, where it was stated;
42.In its further submissions the Appellant stated that the relevant sections state as follows;a.Section 29;b.Section 31 (4);
43.It was a submission of the Appellant that the assessed tax for the period demanded are void in the face of the law and no evidence from the Respondent has been presented to demonstrate the guilt of the Appellant for gross or willful neglect, evasion or fraudulent activities concerning taxes as provided for under Section 29 (6) of the Act. That there is nothing in existence to satisfy the provisions of Section 29 (6) or 31 (4) (a) of the TPA to justify assessment out of the statutory timelines.
44.The Appellant submitted that the Tribunal be guided by the case of TAT E287 of 2023 Amply Communications Ltd vs. Commissioner of Domestic Taxes, and find that the Respondent erred in law and fact by assessing and demanding taxes for the years 2015 -2016 as the same is statute time barred, and the assessment thereof is unlawful and ought to be expunged.
45.The Appellant also cited the case of PZ Cussons Est Africa Ltd vs. Kenya Revenue Authority (2012), where the court stated;The case of TAT 246 of 2023 St. Theresa Industries Ltd vs. Commissioner of Domestic Taxes, was also cited in application of the same principle.
46.It was also a submission of the Appellant that in line with the provisions of Section 73 (2) of the ITA, the Respondent was required to act reasonably and to the best of his judgement. The Appellant urged the Honourable Tribunal to adopt the case of TAT 947 of 2022 Holwadhe Investments Ltd vs. Commissioner of Domestic Taxes, where it was stated;
47.In light of the foregoing citation, the Appellant urged the Tribunal to find that the Respondent’s assessment offends the fundamental principle of certainty of tax statues.
48.The Appellant also cited the cases of TAT Avic International Real Estate Kenya Ltd vs. Commissioner of Domestic Taxes, and TAT 136 of 2017 Dominion Petroleum Kenya Ltd vs. Commissioner of Domestic Taxes, where the Tribunal acknowledged the importance of recognizing the nature of a business transaction and held as follows;
49.The Appellant also cited the following cases to buttress its submissions;i.Cape Brandy syndicate vs. Inland Revenue Commissioners (1920) 1 KB64;ii.TAT 450 of 2022 Transnethvi Ltd vs. Commissioner of Domestic Taxes;iii.TAT 449 of 2022 Viraji Development Ltd vs. Commissioner of Investigations and Enforcement;iv.TAT 695 of 2022 Kenya Farmers Association Ltd vs. Commissioner of Domestic Taxes;v.CA 297 of 2015 Mbuthia Macharia vs. Annah Mutua Ndwiga & Anor (2017) eKLR;
50.The Appellant submitted that it discharged its duty in line with the provisions of Section 56 of the TPA, by submitting all the documents, putting forth the relevant facts and circumstances in support of its objections, and the Appeal herein, and as such the burden shifts to the Respondent to rebut the evidence put forward by the Appellant.
51.It was therefore a submission of the Appellant that it provided sufficient evidence in form of documentation in support of its averments that the assessments were wrong. As such, the Appellant urges the Tribunal to find that the Respondent was not justified in confirming the assessments in the objection decision
The Appellant’s Prayers
52.By reason of the foregoing the Appellant prayed that;a.The Appellant’s appeal herein be allowed; and,b.The Respondent’s Objection Decision dated 2nd October 2023 be set aside.
The Respondent’s Case
53.The Respondent’s case is set out on its;a.Statement of Facts dated 20th December 2023 and filed on 22nd December 2023; and,b.The written submissions dated 22nd July 2024 and filed on 25th July 2024.
54.The Respondent stated that it undertook investigations into the business of the Appellant for the period 2015 – 2020 with a view to confirming its tax compliance under Income Tax and VAT obligations. It stated that during the said investigations an audit was conducted by examining their declarations, and upon examining the records, it was established that the Appellant had had underdeclared his business income as per the availed audited accounts.
55.Consequently, the Respondent issued an assessment against the Appellant on 31st January 2022 for Kshs. 376,648,682.00.
56.It was further stated that the matter underwent full trial process under TAT 507/2022 which culminated into a judgement delivered on 4th August 2023 in which the Tribunal set aside the invalidation of the notice of objection dated 14th April 2022 and ordered the Respondent to determine and issue an appropriate Objection Decision in respect of the Appellant’s notice of objection within 60 days of the date of delivery of judgement.
57.The Respondent stated that in light of the foregoing, it issued a request for documents including;i.A detailed breakdown of each professional and management fees showing the sales invoice numbers, amounts per invoice, date of invoice and payment and proof of payment;ii.Copies of invoices to support; and,iii.Proof of payment of any withholding tax.
58.The Respondent further stated that the Appellant provided petty cash schedules for years 2017 and 2018, and cash and Mpesa withdrawals schedule, however some documents such as Mpesa statements, bank statements and withdrawal not mapped in the bank statements were missing.
59.The Respondent stated that it was not able to link this data to any disallowed expenses accordingly and therefore it restricted the assessment to 5 years by vacating the VAT assessment for year 2026 and part of 2015, and revised the assessment as hereunder;
- Income Tax ……………………Kshs. 122,323,125.00
- VAT ……………………………. Kshs. 152,922,512.00
- Total ……………………………Kshs. 275,245,637.00
60.The Respondent stated that in light of the foregoing, and the fact that the Appellant provided only part of the supporting documents for the period under review, the Appellant’s taxes were revised and estimated, as this was the only reasonable basis of assessing the liability due and the Objection Decision issued confirming the said assessments. The Appellant filed a Notice of Appeal against the decision of the Respondent confirming the assessment of Kshs. 166,463,969.00 on 8th November 2023.
61.The Respondent averred that the assessments were correctly issued and conform to the Tax Procedures Act and the Value Added Tax Act. The 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.
62.In further response to the Appellant’s grounds, the assessment was made based only on the on the available information and best judgement by the Respondent. It was stated that the TPA empowers the Respondent to require production of such documents vide issuance of notices as deemed necessary in determination of tax liability as per Section 59 (1) of the TPA.
63.The Respondent further stated that the Appellant filed all necessary returns and paid what they had assessed themselves to be payable. As a result, the assessment was made based only on the available information based on the best judgement by the Respondent as per Section 59 (1) of the TPA.
64.The Respondent also averred that an in-depth examination of the records established that there were inconsistencies in the returns filed by the suppliers and the invoices claimed by the Appellant and this indicated a variance as per the VAT returns filed and income Tax Returns filed. Further it stated that the Appellant did not provide explanations requested on the variance hence the same was disallowed and additional assessments carried out.
65.It was further stated that the Appellant was selected for a returns review following a variance from the analysis of their returns in VAT tax, which were compared.
66.The Respondent averred that the assessment was issued based on the information provided and in light of the inconsistencies within the Appellant’s VAT ledgers. It stated that examination of the Appellant’s records, audited accounts, and Income Tax established that the Appellant failed to declare business income and some of the incomes for years of income under review. It stated that the Respondent is empowered the Income Tax Act to bring to charge income where the same is established due pursuant to the provisions of Section 73(1) & (2).
67.It was further averred by the Respondent that examination of the Appellant’s records established that the Appellant earned income from tailoring services in the period under audit, however, these incomes were not declared for tax purposes for the year earned. The Respondent asserts that the Appellant carried on business in contravention of the TPA which requires such documents maintained and for the purposes of taxation as per Sections 42 (1), 43 (1) and 93 (1) of the TPA.
68.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. 166,463,969.00.
69.In its submissions, the Respondent submitted that the assessments were correctly issued and conform to the TPA. It submitted that the Appellant lodged the objection on iTax and the same was received and acknowledged. The Respondent submitted that the TPA empowers the Respondent to notify a party where an objection as lodged is invalid and the Appellant was notified via email and requested to provide documents. However, no evidence was provided to address issues raised hence the said assessment was confirmed vide Objection Decision pursuant to Section 51 (9) of the TPA.
70.The Respondent submitted that the Appellant had underdeclared income earned by not disclosing all the income earned. The Respondent insists that the Appellant filed all necessary returns and paid what they had assessed themselves to be payable. As a result, the assessment was made on the only available information based on the best judgement by the Respondent. It was submitted that the TPA empowers the Respondent to require the production of such documents vide issuance of notice as deemed necessary in determination of tax liability pursuant to Section 59 (1) (a) of the TPA.
71.It was also a submission of the Respondent that the assessment was adjusted and issued based on the information provided and in light of the inconsistencies within the Appellant ‘s income returns. The TPA empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the best judgement as per Section 29 (1) and 31 of the TPA.
72.It was further submitted that the Appellant underdeclared the income for the period under review contrary to the provisions of the Income Tax Act. The Respondent stated that according to the Income Tax Act, it is the responsibility of any person carrying on business to maintain records of all transactions, pursuant to the provisions of Sections 54 A (1) and 55 (2) of the Act.
73.The Respondent also submitted that examination of the Appellant’s records. audited accounts, and Income Tax returns established that the Appellant failed to declare rental income and all their incomes for years of income 2014 -2018 respectively. It stated that the Respondent is empowered under the Income Tax Act to bring to charge income where the same is established due.Section 73(1);
74.The Respondent cited the cases of TAT E072 OF 2023 Joyce Mwende Titus vs. Commissioner of Domestic Taxes, and Commissioner of Investigations and Enforcement vs. Evans Kidero ITA O28 OF 2020 eKLR.
75.The Respondent also submitted that examination of the Appellant’s records established 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 contrary to Sections 42 (1), 43 (1) and 93 (1).
76.It was a further submission of the Respondent that the Appellant failed to provide signed financial statements and books of accounts to support their allegations. The TPA empowers the Respondent to carry out assessment based on the information available. The further submitted that the assessment was issued on information provided in line with the provisions of Section 24 (1) & (2).
77.It was submitted that the Appellant knowingly and recklessly committed an offence according to Section 94 and 95 of the TPA.
78.The Respondent asserted that the Appellant supplied insufficient documents and the Respondent has embraced the self-assessment regime through trust and facilitation and only verifies information when in doubt of the declarations made in the tax returns. The Respondent deals with each taxpayer matter independently and based on available information as per Sections 15 and 16 of the Income Tax Act.
79.The Respondent urged the Tribunal to be guided by the following considerations;i.Were any documents provided to justify the Appellant’s objection?ii.Were the annual tax returns of income as done by the Appellant from time to time correct and complete?iii.Were any transactions been omitted from or incorrectly recorded in the Appellant’s books of accounts /banking?
80.The Respondent asserted 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 to buttress the submission cited the case of TAT 1400 of 2023 Julie Migwi Njue vs. Commissioner of Domestic Taxes.
81.The Respondent also urged the Tribunal to be guided by the following case laws and find that the Appellant failed to discharge the burden of proof placed upon it in demonstrating that the Respondent erred in confirming the assessments. It cited the cases of Monaco Engineering Ltd vs. Commissioner of Domestic Taxes TAT No. 67 of 2017, Osho Drapers Ltd vs. Commissioner of Domestic Taxes TAT 159 of 2019, Miao Yi vs. Commissioner of Investigations & Enforcement TAT 441 of 2019 , and Ritz Enterprises Ltd vs. Commissioner of Investigations & Enforcement TAT 227 of 2018 ,Kenya Revenue Authority vs. Mann DIESEL & Turbo Se Kenya (2021) eKLR ,Janet Kaphiphe Ouma & Anor vs. Marie Stoppes International (K) HCC No.68 of 2007 ,Dyer & Dyer Ltd vs. Commissioner of Domestic Taxes TAT No,139 of 2020, Commissioner of Domestic Taxes vs. Metoxide Ltd (2020).
82.It was a submission of the Respondent that from the foregoing myriad of cases on the burden of proof, it is evident that the Respondent did not err in invalidating the Appellant ‘s objection and issuing a decision as the Appellant has failed to discharge its burden of proof and challenge the Respondent’s assessment with unchallenged and uncontradicted evidence to prove the incorrectness of the tax assessments.
83.The Respondent in conclusion submitted that under Section 59 of the TPA and Section 43 of the VAT Act, the Respondent had power to request for documents. Failing to provide the requested documents, the burden still lay with the Appellant and did not shift to the Respondent. The Appellant was therefore unable to prove that it had indeed made purchase and actual goods were in fact supplied by the traders.
The Respondent’s Prayers
84.By reason of the foregoing the Respondent prayed that:a.That the Respondent’s Objection Decision dated 2nd October 2023 be upheld;b.That the outstanding tax arrears of Kshs 166,463,969 be found due and payable by the Appellant;c.The confirmed assessments dated 2nd October 2023 be found proper in law;d.The Appellant’s appeal be dismissed; and,e.Costs be awarded to the Respondent.
Issues For Determination
85.The Tribunal having considered the pleadings filed, documents adduced, and submissions by the parties is of the considered view that the appeal herein distils into two issues that commend for determination as follows;i.Whether the Respondent assessed the Appellant beyond the statutory period of five years by raising an additional assessment for the period 2015 – 2016 year of income; and,ii.Whether the Respondent’s assessment and confirmation of assessment in its Objection Decision was justified for the period 2015 to 2021.
Analysis And Determination
86.The Tribunal having laid down the issues for determination will proceed to analyze and determine the issues as hereunder:
i. Whether the Respondent assessed the Appellant beyond the statutory period of five years by raising an additional assessment for the period 2015-2016 year of income;
87.The dispute herein arose following the selection of the Appellant for a return review in view of alleged variances from the analysis of their returns in VAT iTax which were compared, and the review into the Appellant’s returns for tax compliance under Income Tax and VAT was extended and undertaken for the period 2015 -2021.
88.Following the compliance audit, the Respondent issued its findings to the Appellant indicating that the Appellant had underdeclared its business income as per the availed audited accounts.
89.Consequently, the Respondent issued its assessment for Kshs. 376,648,682.00 on 31st January 2022. The Appellant objected to the assessment, and the Respondent invalidated the objection. The Appellant appealed vide TAT 507 of 2022, which went through full trial and was determined on 4th August 2023, in which the Tribunal set aside the invalidation of the objection dated 14th August 2022, and ordered the Respondent to determine and issue an appropriate Objection Decision in respect of the Appellant’s notice of objection within sixty days of the delivery of the judgement.
90.The Respondent subsequently requested the Appellant for documents for review, and issued the reviewed Objection Decision on 8th November 2023 with an assessment of Kshs. 166,463,969.00 which is the subject of the appeal herein.
91.The Appellant has contended that part of the assessment in the period under review i.e., 2015 -2021 covers a period which is beyond the statutory five years allowed by law and therefore unlawful. The Appellant has consequently raised a ground of appeal in that regard, stating that, the Respondent erred in demanding the production of documents and assessing taxes in contravention of Section 23 (1) (c) of the Tax Procedures Act, which states;
92.The Appellant has submitted that in spite of the correspondences and provision of all documentation pursuant to the Respondent’s request, the Respondent went ahead and issued an assessment for the period 2015 to 2021 contrary to statute.
93.The Appellant further averred that the Respondent acted ultra vires the provisions of the TPA by raising additional assessments in regard to the period 2015-2016 years of income which was a period beyond the statutory five years allowed by statute. In so doing the Respondent invoked the provisions of Section 29 of the TPA that enables the Respondent power to raise default assessments.
94.The Appellant also averred that the Respondent’s compliance audit commenced sometime in 2021, and the Respondent issued its assessment on 31st January 2022 covering the period 2015 – 2021.It stated that by the time of issuance of the said assessment, the five-year period contemplated under the TPA applied to the year 2015 and 2016, thus the Respondent could only legally cover the period from year 2017 onwards. The Respondent thus acted ultra vires in issuing the assessment for the year of income 2025-2026, and the assessment relating to that period ought to be set aside in entirety.
95.It was further averred that Section 29 (5) of the TPA limits the period within which the Respondent can issue such assessments, as hereunder;It was added that Section 29 (6) only allows the Respondent to raise an assessment beyond the statutory period of five years only in the case of willful neglect or fraud, which was not raised as an issue in the instant case.
96.On the other hand, the Respondent only stated that the Appellant provided petty cash schedules, cash and Mpesa withdrawals schedules but the withdrawals and payments were not mapped on the bank statements and the Mpesa statements were missing. As such the Respondent stated that it was not able to link the data to any disallowed expenses and it therefore vacated VAT assessments for year 2016 and part of 2015, and revised the VAT principal amount from Kshs. 147,408,452.00 to Kshs. 89,804,648.00, hence the total Principal tax was revised to Kshs. 166,463,969.00, and inclusive of penalties and interest to Kshs. 275,245,637.00. An amount of Kshs. 43,538,731.00 in VAT for year 2015, and an amount of Kshs. 33,266,461.00 in Corporation tax was carried on insitu in the revised assessment which included the years in question.
97.The Tribunal notes that from the foregoing averment by the Respondent, it concedes to having revised that VAT amount for the year 2016 and part of 2015, but is non-committal in its statement of facts or submissions as regards to the balance of VAT for 2015, and corporation tax for years 2015 – 2016.
98.The Respondent has also not addressed or controverted the contention by the Appellant that it raised assessments covering the period 2015 -2016 in violation of Sections 23 (1) (c) and 29 (5) & (6).
99.The Tribunal notes that Section 29 (5) of the TPA provides that;
100.On the other hand, Section 29 (6) of the said Act provides;
101.The TPA Section 31 (4) also provides;
102.Therefore, under Sections 29 and 31 of the TPA, the timeline for the Respondent to assess a taxpayer is five years. The only exception to this rule is when the Respondent is able to demonstrate gross or willful neglect, evasion or fraud by a taxpayer.
103.The Tribunal in the case of TAT 16 of 2019 Gitere Kahura Investments vs. The Commissioner of Investigations & Enforcement, stated as follows;
104.Flowing from the foregoing, this Tribunal has, gleaning from the pleadings and submissions of the parties noted there is no evidence therein to satisfy the provisions of Sections 29 (6) or 31 (4) (a) of the TPA to justify the Respondent’s assessment for the years 2015 – 2016 in the year 2022.
105.Accordingly, and in light of the foregoing, the Tribunal finds and holds that the Respondent erred in law and fact by assessing and demanding corporation and VAT taxes for the years 2015 and 2016 as the same is statute time barred. Therefore, the Tribunal further finds and holds that the assessment and tax demand for the years 2015 and 2016 is unlawful, and the same is hereby set aside.
ii. Whether the Respondent’s assessment and confirmation of assessment in its Objection Decision was justified for the period 2015 to 2021.
106.The Appellant has averred that the Respondent confirmed the assessment without due regard to the records, documents, information and explanations provided by the Appellant, thereby failing to appreciate all issues presented. The amounts confirmed by the Respondent were stated to be Principal tax of Kshs. 166,463,969.00, interest of Kshs. 100,458,469.00 and penalty of Kshs. 8,323,198.00, all totaling Kshs. 275,245,637.00, which the Appellant submitted is wrong in law and fact and ought to be set aside.
107.The Appellant further averred that the Respondent erred in disallowing VAT component of the business expenses which were not claimed as input in VAT monthly returns amounting to Kshs. 99,969,353.00, which expenses were properly expensed in the determination of gains as per Section 15 (1) of the ITA, as the expenses were wholly and exclusively used in generation of income.
108.It was further submitted that the Respondent disallowed cash expense for fuel, and motor vehicle maintenance amounting to Kshs. 51,363,283.00 as the proof of payments was cash withdrawals from the bank by the company agents which expenses were not mapped on the Appellant’s bank statements.
109.The Appellant averred that its business operations is by its very nature undertaken on cash basis, as payments for dump sites and repairs are paid to informal groups, and thus proof of payment was through the demonstrated cash withdrawals and expenses.
110.The Appellant submitted that the Respondent failed to recognize the nature of the Appellant unique business structure and transactions, and the nature of the records maintained to fit the nature of such transactions.
111.To buttress its submission, the Appellant cited the case of TAT 236 of 2017 Dominion Petroleum Kenya Ltd vs. Commissioner of Domestic Taxes, where the Tribunal acknowledged the importance of recognizing the nature of a business transaction, and held as follows;The Appellant also cited the TAT case of Avic International Real Estate Kenya Ltd vs. Commissioner of Domestic Taxes.
112.The Appellant submitted that in view of the foregoing, it submitted all the requisite documents, records and information maintained in line with the nature of its business, and thus by putting forth all the relevant facts and circumstances in support of its grounds of objection, and the Appeal herein, it provided sufficient evidence in support of its averments that the Respondent’s assessment was wrong and not justified in law. and therefore, discharged its burden of proof in line with the provisions of Section 56 of the TPA.
113.On its part, the Respondent has averred that it issued a demand for documents, and the Appellant provided audited accounts, invoices, petty cash schedules, cash withdrawal schedules, Mpesa withdrawal schedules, receipts, expense schedules and Mpesa statements. It stated that some documents like bank statements were missing, and withdrawals were not mapped on the bank statement.
114.It was therefore averred that the Appellant provided only part of the relevant supporting documents for the period under review in support of their objection. Further the Respondent stated that the Appellant failed to provide signed financial statements and books of account to support their objections, thus enjoining the Respondent to carry out the assessment based on the information available.
115.The Respondent stated that an examination of the Appellant’s records, audited accounts and income tax returns established that the Appellant failed to declare all their income for the years of income 2014 – 2028 respectively, and carried on business in contravention of the TPA which requires documents to be maintained for purpose of taxation.
116.It was submitted that the Appellant’s objection was devoid of substance and thus left the Respondent no option but to issue an Objection Decision confirming the assessment pursuant to Section 51 (9) of the TPA in order to comply with the timelines.
117.The Respondent in view of the foregoing urged the Tribunal to find that the Appellant failed to discharge the burden of proof placed upon it in demonstrating that the Respondent erred in confirming the assessments.
118.The Tribunal having made a finding that the assessment on the Appellant by the Respondent for the period 2015 -2016 was made outside the allowed statutory period of five years, without justification of the allowed exemptions, and hence unlawful and set the same aside. It behoves the Tribunal to make a determination whether in arriving at the confirmation of assessment for the period 2017 -2021, the Respondent took into consideration all the additional records, documents, information and explations adduced by the Appellant.
119.The Appellant has adduced to this Tribunal additional bundles of records and documents as submitted to the Respondent in support of its grounds of objection.
120.Further the Respondent has averred and submitted to this Tribunal that by the very nature of its business in cleaning services , whereby the dump sites and motor repair services are informally made to informal groups in nature and the bulk of payments are made in cash , it has structured its transactions in such a way that , it maintains the records and information aligned to the nature and format of its business , whereon the proof of payments is withdrawals from bank account and mpesa payments maintained in cash books , registers and schedules , which were availed to the Respondent .
121.Whereas the Respondent has averred that it sent the Appellant a request for specified documentation, it acknowledged that the Appellant submitted some of the records and documentation such as audited accounts, Mpesa statements, cash payment schedules, Mpesa withdrawals schedules, and the bundle of documents consisting of invoices, payment receipts, job cards, purchase orders, delivery notes, fuel vouchers etc.
122.The Respondent however in spite of the submission of the foregoing documentation, which the Tribunal has had the occasion to peruse, contended that the payments were not mapped on the bank statements, and that the Appellant failed to provide books of accounts and signed statement of accounts.
123.It is noteworthy that the Respondent has acknowledged the documents and records submitted by the Appellant on the one hand, and on the other hand denied submission of the same while considering the records, thus stating that consideration was made to other available information, thus implying disregard of the records and information availed.
124.The Tribunal takes cognizance of the Appellant’s explanation that its business model is such that it operates in an informal set up whereby its transactions are structured to be made in cash to its service providers such as dump sites, fueling and motor repairs, hence proof of payments may be through cash/Mpesa withdrawals. However, the Appellant has adduced evidence of the records maintained commensurate with its structure of business and operations which were submitted to the Respondent.
125.In the case of TAT 136 of 2017 Dominion Petroleum Ltd vs. Commissioner of Domestic Taxes (supra), the Tribunal acknowledged the importance of recognizing the nature of business transactions. By extension the unique nature of business structures, and the particular records maintained to fit the modus operandi of such business ought to be taken account of and considered in support of the transactions in question.
126.In addition to the foregoing , the Tribunal having perused through the documentation presented by the Appellant, notes that in addition the Appellant had presented its bank statements , petty cash schedules and its VAT analysis schedules , and therefore is persuaded that the Appellant submitted adequate documentation in support of its objection to enable the Respondent make a determination thereto, and the Respondent therefore ought to have considered the same as a reasonable basis for assessing the tax liability , without resorting to other available information and its best judgement, in estimating the Appellant’s contentious tax assessment.
127.It is also worth noting that the Respondent contended that because the Appellant’s objection was devoid of substance and was not supported by any documents, it was left with no option but to issue an objection decision confirming the assessment in order to comply with the statutory timelines. Hardly the kind of argument expected to be used to justify a decision, and failure to consider documentation, information, and explations given by an objecting taxpayer just to ensure compliance with timelines, thus putting in question the decision so arrived at.
128.In view of this, the Tribunal is persuaded that that the Respondent erred in failing to consider all the documents, records, information and explanations submitted by the Appellant in support of its transactions given the cash nature of its operations, and by extension relying on other extraneous information available to its to arrive at its decision to confirm the subject assessment.
129.In light of the foregoing, the Tribunal finds and holds that the Respondent erred and was not justified in confirming its assessment and demand vide its Objection Decision dated 2nd October 2023.
130.The upshot of the foregoing is that the Appellant’s Appeal is meritorious and hereby succeeds.
Final Determination
131.The Appellant’s Appeal having succeeded, the Tribunal makes the following orders;a.The Appellant’s appeal be and is hereby allowed;b.The Respondent’s Objection Decision dated October 2, 2023 be and is hereby set aside; and,c.The parties to bear their own costs.
132.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF DECEMBER 2024ROBERT M. MUTUMA -- CHAIRPERSONMUTISO MAKAU - MEMBERJEPHTHAH NJAGI - MEMBERDELILAH K. NGALA- MEMBERDR TIMOTHY B. VIKIRU- MEMBER