Mwangi v Commissioner of Domestic Taxes (Tax Appeal E428 of 2024) [2025] KETAT 197 (KLR) (14 March 2025) (Judgment)
Neutral citation:
[2025] KETAT 197 (KLR)
Republic of Kenya
Tax Appeal E428 of 2024
E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members
March 14, 2025
Between
Lucy Waitherero Mwangi
Appellant
and
Commissioner of Domestic Taxes
Respondent
Judgment
Background
1.The Appellant is a sole proprietor based in Thika Town and trades under three (3) business names: Wildrose Suppliers, Kanyiri General Suppliers and Lucy General Suppliers.
2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, and the Authority is charged with the responsibility of among others, assessment, collection, receipting and accounting for all tax revenues as an agency of the Government of Kenya, and the administration and enforcement of the statutes set out under the schedule to the Act.
3.The Respondent issued the Appellant with additional assessments vide various assessment orders on iTax on 22nd December, 2023, 23rd January, 2024 and 24th January, 2024.
4.The Appellant objected on iTax on 22nd January, 2024, 25th January, 2024 and 1st February, 2024.
5.The Respondent issued an objection decision to the Appellant on 20th March, 2024 amounting to Kshs. 73,022,921.00.
6.The Appellant aggrieved by the Respondent‘s objection decision lodged a Notice of Appeal to the Tribunal dated 17th April, 2024 and filed on 18th April, 2024.
The Appeal
7.The Appellant lodged its Memorandum of Appeal on 18th April, 2024 setting out the following grounds of Appeal;i.That she provided all documents supporting 100% of her objection.ii.That the Respondent, without any justification, ignored documents availed.iii.That the Respondent groused all withholding remitted in the respective years of income and treated the same as income while sales were made in different years earlier.iv.That the Respondent fell in error and fact in credit control formula by adding back the entire creditors as income for the year in question.v.That the Respondent erred in fact and law in adding back to sales amount withdrawn by self from the bank while the same have not been claimed in the PnL account.
Appellant’s Case
8.The Appellant set out its case based on the following documents:i.Its Statement of Facts dated 17th April, 2024 and filed on 18th April, 2024.ii.Its written submissions dated 28th October, 2024 and filed on the same date.
9.That the Appellant filed self-assessment returns for ITR, VAT and MRI for the period 2018, 2019, 2020, 2021 and 2022.
10.That she provided all the required documents namely: sales invoices, bank statements, all creditors (pending bills) as per income returns, withholding certificates attached to the relevant invoices, banking and withdrawals analysis (through email) and Local Purchase Orders.
11.That all the sales income was declared and filed in their respective months and years on KRA system and taxes due paid.
12.That the Respondent viewed the objection and asked the Appellant to provide the supporting documents, which she provided. That the Respondent ignored some documents and went ahead and issued an assessment.
13.That from the above detailed explanation, the Appellant clearly observed that the Respondent ignored the documents she provided and denied her a fair hearing.
14.That based on the analysis above, the Appellant submitted that the Respondent’s demand for Income tax, VAT and MRI was not justified.
Year 2018
15.That in relation to income in 2018, the amount was arrived at after the Respondent used pending bills amounting Kshs 35,223,174.00 claimed as debtors of the year as opposed to the debtors of Kshs 7,971,380.00 which came from sales of the year in the banking test.
16.That the Respondent also went ahead and grossed up withheld tax of Kshs 164,095.00 as sales for the year in place of Kshs 24,590.00. That the amount to be amended is Kshs. 19,393,510.00.
17.That after the Respondent got the figure of Kshs. 66,121,204.80.00 as the taxable amount, both in income and VAT, the Respondent turned to the invoices issued/ sales in the year to determine vatable sales and non-vatable sales and made a calculation error of Kshs. 59,937,369.00 instead of Kshs. 50,479,673.00.
18.That invoice numbers 231, 233, 331, 491, 494, 310 and 313 amounting to Kshs. 10,519,800.00 were re-written after the recipient of the same claimed in different dates that they were lost and requested that, they be re-written. That carbon copies would not be accepted as replacement.
19.That if one goes by the Respondent’s argument of using the banking test as the only determinant of actual sales and using the correct debtors of the year, this would give a negative tax, hence the Appellant’s request to vacate the additional assessment.
20.That the Appellant attached a list of all the pending bills which formed part of the debtors in the year to its pleadings as well as a list of all the canceled and re-written invoices sold /issued in the year in question.
21.That the sales variance came about as a result of the banking test which the Appellant proved to have been wrongly used.
22.That the Respondent took Kshs. 66,121,204.80 in place Kshs. 30,758,526.06 minus amount declared in the Income Tax return which is Kshs. 39,903,404.00 to get the adjustment no. (i.e. 66,121,204.80-39,903,404=26,2017,801).
23.That regarding under declared rent, the Respondent opted to use bank statements to determine the rent collected. That the bank statements had entries amounting to Kshs. 15,815,553.15 which includes a loan amounting to Kshs. 2,000,000.00, a refundable deposit amounting to Kshs. 663,450.00, rent amounting to Kshs. 7,495,600.00, deposit from other sources to support loan repayment amounting to Kshs. 5,039,533.00 and rent collected on behalf of siblings amounting to Kshs. 716,970.00. That based on this reason, the Appellant requested for amendment in line with the filed return.
24.That unreconciled drawing is an amount withdrawn from the Appellant's bank account to either bank in rent account to enable loan repayment or pay commission to the middle men who source goods for the Appellant. That charging this unreconciled drawing to tax will amount to double taxation.
25.That unrelated and unsupported purchases of Kshs 4,054,245.00 is formed by commission paid to the middle men who go out to source for goods in farms or in the market place amounting to Kshs. 1,700,000.00 and these people don't have any formal offices; they use their cell phones and they don't issue receipts thereof.
26.That the other part amounting to Kshs. 2,354,245.00 is an amount relating to repair for the buildings of which, in year 2018, the Appellant filed an annual return, and in this case repair of building is acceptable.
27.That for VAT in 2018, the amount in contention of Kshs. 5,509,669.00 was arrived at after the Respondent used pending bills amounting Kshs 35,223,174.00 claimed as debtors of the year as opposed to the debtors of year of Kshs. 1,322,715.00. That the same formula and same mistakes were repeated in the year 2019 and 2020 to ascertain the correct/actual income in Income and VAT.
28.That the Respondent also assumed every withheld VAT remitted in the account that year was sales for the year. That remitted W/H VAT is not necessarily sales of the month or the year but payment made at that particular time of month regardless of when sales were made.
29.That in regard to the remitted W/H VAT of Kshs, 257,042.00, a large chunk of the W/H Tax remittance was of the previous year and only Kshs. 8,767.00 was remittance for the sale year 2019. That the Respondent applied a wrong formula for banking test/debtors control and the Appellant recomputed the same.
Year 2019
30.That in regard to 2019 Income tax, and the variance in dispute of Kshs. 10,092,341.00, the Respondent erred by ignoring the primary document (invoices) and opted for the banking test to determine the actual sales. That the Respondent added the debtors at the close of the year as sales of the year in question while debtors amounting to Kshs, 35,223,174.00 constituted pending bills and debtors raised from sales for the year amounted to Kshs. 1,322,715.00.
31.That un-reconciled drawings of Kshs. 5,557,977.00 were withdrawn from the account by the Appellant. That the amount having not been claimed as an expense in the return, and since all bankings were brought to charge, there is no justification of charging the amount again.
32.That the rent income disputed variance of Kshs 726,828.00 constitutes the deposits paid by tenants as a security in case the tenant causes damage to the rented unit or fails to pay any due payment at the time of stay. That the the same is returnable at the time of terminating the tenancy if the tenant is cleared of all items the stated earlier.
33.That for the alleged unsupported purchases of Kshs. 5,184,739.00, the Appellant produced Local Purchase Orders from Ruiru Prison Training Collage of ceremonial carpets and remitted the same to the Respondent.
34.That the commission of Kshs 1,200,000.00 in 2019 is the amount payable to the middlemen who source goods in the markets and from the farms and ordinarily, it is common knowledge that they don't issue receipts
35.That the repair and renewals amount of Kshs. 4,968,350.00 in 2019 is due to the reason that in the years 2018 and 2019, the Appellant had requested, due to higher payment of loan installment, to be excused from filing MRI and file the annual return so as to be able to pay the loan monthly installment hence the claim of all the VAT on repairs and the construction of the building which in fact was initially intended to be a commercial building.
36.That for 2019 VAT, the Respondent applied the banking test to arrive at the variance by adding back to sales income amounting to Kshs 36,545,889.00 in place of Kshs. 1,322,715.00 to arrive at a variance Kshs. 17,157,059.00.
37.That for unsupported purchases of Kshs 5,184,739.00.00, the Appellant produced Local Purchase Order from Ruiru Prison Training Collage and purchase invoices of the same.
Year 2020
38.That in relation to unrelated and unsupported purchases of Kshs. 2,653,213.00, the Appellant was all along operating from home or from the car. That the Appellant resolved to establish an office, renovated one of the rooms of one of the buildings and furnished it at the said cost. That the agent of the Appellant invited the Respondent to visit the renovated office but the Respondent declined.
39.That in relation to un-reconciled drawings of Kshs. 1,893,214.00, the Appellant being a sole proprietor, withdrew this amount which was not directly claimed as an expense and since the bankings were brought to charge, charging this amount would amount to double taxation.
40.That the commissions amounting to Kshs. 760,000.00 constitute the commissions paid to persons that source goods for the Appellant who do not issue receipts for the paid work.
Year 2020
41.That for VAT in 2020, the Respondent used invoices to determine the actual sales and brought to charge farm produce which is either zero rated or non-VATable.
Year 2021
42.That the Respondent grossed up all the withholdings remitted to the accounts to arrive at the chargeable amount of Kshs. 11,487,695.00 and rejected office repair of Kshs. 102,586.00.
43.That the Appellant provided a list of pending bills, paid up pending bills and their respective dates.
Year 2022
44.That the VAT variance of Kshs 21,504,813.00 was due to the Respondent stating that Kshs 15,160.450.00 was understated. That the alleged under declaration was either zero rated or non-VATable sales.
45.That the un-supported purchases amount of Kshs 6,344,363.00 was a result of claimed VAT from the receipt of building materials which was initially a commercial building until the need of residential superseded the need of the offices.
Appellant’s Prayers
46.The Appellant prayed that:i.The Tribunal annuls the Respondent’s assessment and goes by the filed return based on the information contained in the Statements of Fact attached.ii.Awards cost of this Appeal to the Appellant/Applicant.
Respondent’s Case
47.The Respondent’s case is premised on the following documents:i.The Respondent’s Statement of Facts dated 15th May, 2024 and filed on 16th May, 2024.ii.Its Written Submissions dated 31st October, 2024 and filed on the same date.
48.That the Respondent carried out a review of the Appellant's tax returns for the period between 2018/2019 to 2020-2022 in relation to VAT, Income Tax Resident Individual and Rental Income.
49.That it issued the Appellant with the review findings on 24th January, 2024 and various correspondences requesting the Appellant to provide supporting documents to her objection i.e. detailed rent schedules for years under assessment, the geographical locations of the rental units, full bank statement for FY. 2021, runs from pg 1/136 to pg 101/136 for A/C number 7564840013 NCBA, certified bank statements for A/C number 7564840013 of NCBA for FY 2019 and 2018, loan agreements for all years and bank A/C 1102175846 which had pg 17/18 missing to be provided and certified.
50.That the Respondent compared VAT turnovers to sales established from Income returns, invoices, grossed up WHVAT and applied the banking test.
51.That the Respondent picked the highest unsupported variances and charged them to VAT. That the unreconciled sales variances amounted to Kshs. 174,960,799.00.
52.The Respondent stated that it further scrutinized the purchase VAT input claims based on the type of cost claimed, and it was established that some invoices did not match with the Appellant's business or sales. That they included residential house building materials and personal clads from Woolworths Ltd. That the totals of the invoices disallowed amounted to Kshs. 23,110,924.00.
53.That the Respondent summarized the VAT additional assessments to an amount of Kshs. 52,782,844.32 based on a total adjustment of Kshs. 198,071,724.00. That the amount of Kshs. 52,782,844.32 included penalties and interest.
54.That the Respondent compared Income Tax Residential turnovers to sales established from invoices, grossed up WHVAT and applied the banking test.
55.That it further analyzed purchases claimed in the VAT returns and those claimed in the Income Tax returns. That the Respondent observed that some purchase invoices were unrelated/unmatched to the Appellant's business line and the invoices were also unsupported. That these disallowed invoices/expenses amounted to Kshs. 18,166,134.00.
56.That the Respondent analyzed the withdrawals done and compared these to the purchases and expenses for the years 2018, 2019 and 2020. That the excess drawings neither reconciled nor supported amounted to Kshs. 36,392,787.00.
57.The Respondent averred that it computed Income Tax additional assessments amounting to Kshs. 48,524,751.00.
58.The Respondent further averred that it analyzed the Appellant's NCBA bank account credits for rental income and adjusted the bank credits against property development loans acquired by the Appellant. That the established rental income was compared with declared monthly rental income resulting in total tax payable of Kshs. 2,534,489.20.
59.That the total additional assessments amounted to Kshs. 97,415,809.70.
60.That the Appellant availed the following records: KCB and NCBA bank statements, audited financial statements, delivery notes, sales invoices, expense records, LPOs, tender awards records and cheque book stubs.
61.That the Appellant objected to the additional assessments on 27th December, 2023 on the grounds that:i.the assessment was estimated assessments;ii.the assessment was far excessive;iii.the Appellant was then admitted in Hospital outside the country. That when she came back she was not in a position to attend to the matter as she was advised by the doctor be on bed rest awaiting open heart surgery;iv.on humanitarian ground, the Respondent to allow her to go through the operation and suspend the estimated assessment until recovery and back to her normal health to attend to the matter.
62.That the Respondent proceeded to give its objection decision vide a letter dated 20th March, 2024 confirming the assessment of principal tax of Kshs. 51,522,455.00.
63.That the law allows the Respondent to use the information within its reach to compute the tax liability of taxpayers as per Section 31 of the TPA.
64.The Respondent contended that it used the information it had in its possession to determine the assessments in issue and in the circumstances, it was in order. Section 31 of Tax Procedures Act (TPA) (provides as follows:
65.That the Appellant faulted the Respondent's use of the banking method in computing the variance from bank credits adjustment. That the Respondent used the methodology as it took into account the said pending bills as opening and closing accounts receivables, and therefore, the Appellant's argument were not sustainable.
66.That for financial year 2022, the variance of Kshs. 59,755,100.00 arose from availed physical invoice books analysis in comparison with declared VAT turnover of nil.
67.That for the financial year 2021, the Respondent established the vatable amount which was added to the grossed up withholding VAT credits.
68.That the Respondent relied on the legal provisions of Sections 56 of the TPA and 30 of the Tax Appeals Tribunal Act which state very clearly that in all circumstances the burden of proof lies on the Appellant to demonstrate that they have discharged their tax liability.
69.The Respondent averred that the Appellant did not give credible alternative nor sound approach to adjust the banking credits. That nonetheless, the Appellant was asked to avail detailed listings of debtors running over the years 2014 - 2022 but she failed to comply.
70.That the variance for the year 2021 of Kshs. 19,870,800.00 was derived from the grossed up withholding VAT credits. That the Appellant argued that some withholding certificates related to invoices for the year 2020 while others related to the pending bills. That this statement was not backed with a reconciliation of invoice declarations in a VAT tax period to specific withholding certificates. That, in this regard, the Respondent could, therefore, not come to a different conclusion with regard to the assessments.
71.The Appellant averred that the Respondent charged the whole invoice sales values to VAT yet the invoices contained items subject to VAT (cooking fat, firewood, sugar, powdered milk and salt) and others not subject to VAT which were mainly farm produce (potatoes, vegetables, tomatoes milk and cereals).
72.That the Appellant availed own sales ledgers with wrongly classified items e.g. only cooking fat, salt and sugar were the considered vatable items leaving out firewood and powdered milk. That the misclassification was adjusted accordingly.
73.That for the variance arising from unmatched purchases (residential building and clads from Woolworths Ltd), the Appellant advanced a new explanation that the building was meant for business offices which was later converted to residential rental units while the purchases from Woolworths Ltd were carpets supplied to Ruiru Prisons Offices. That no documentary evidence was availed to back up the new statements.
74.That based on the above observations, the VAT additional assessment was amended such that the initially assessed sales variances were adjusted to expunge the established non-VATable items from being subjected to VAT.
75.That for the Income tax assessments the Appellant faulted the banking analysis methodology without providing her own reconciliations to point out bank receipts which were erroneously charged.
76.That the unmatched and unrelated purchases which were disallowed comprised unsupported purchases, commission and repairs and renewals.
77.The Respondent averred that the Appellant did not provide documentary evidence nor explanations to back up such expenses thus they were disallowed.
78.The Respondent noted that the Appellant's tenants channeled the rental income through the NCBA bank account. That conspicuous bank loan disbursements were adjusted against the total bank receipts/credits and the balance presumed rental income since the Appellant did not avail her own reconciliation on the same.
79.That the Appellant argued that the Respondent failed to consider rental deposits, closing debtors and inter-account transfers. That this argument was not sustained since the Appellant did not provide schedules and bank trails to support the inter-bank transfers.
80.That in light of the above, the Respondent proceeded to confirm the assessment on income tax resident individual and rent.
81.The Respondent further relied on Section 107 of the Evidence Act which states as follows:
82.The Respondent contended that based on the above gaps, the Appellant failed to discharge its burden of proof and therefore proceeded to confirm the assessments.
83.The Respondent averred that the Appellant ought to provide all relevant documents to support its objection or to demonstrate that the assessment given by the Respondent was wrong or excessive.
84.That the Appellant ought to keep records to ensure that her objection meets the conditions set out in the law on supporting an objection to an assessment.
85.The Respondent relied on Section 23 of the TPA provides that:
86.The Respondent further relied on Section 54A of the Income Tax Act, that provides that:
87.That the Respondent additionally relied on Section 51(3) of the TPA which stipulates the threshold of a valid notice of objection and provides as follows;
88.That the Respondent did not breach any right to legitimate expectation by issuing additional assessments to the Appellant.
89.That as per Section 24(2) of the TPA, the Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.
90.That the Respondent established that some invoices did not match with the Appellant's business or sales. That the input claims (supplies) did not comprise the Appellant's output supplies in contravention of Section 17 of the VAT Act. That these supplies included residential house building materials and personal clads from Woolworths Ltd. That the Respondent therefore disallowed the invoices.
91.That the Appellant’s objection application was accepted partially. That only the VAT additional assessment was adjusted to expunge erroneously charged exempt items while income resident individual and rental income additional assessments were confirmed as assessed.
92.That the objection decision was limited to the documents availed by the Appellant which were examined and conclusions drawn from them.
93.The Respondent averred that it considered the Appellant’s arguments, which were supported by documentary evidence, and appropriate adjustments effected on the final confirmed assessments as indicated in the objection decision.
94.That the Appellant is undeserving of the prayers sought due to the aforetasted reasons.
95.The Respondent relied on the following authorities to buttress its arguments:i.Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020)[2022] KEHC 9927 (KLR)ii.Tax Appeal No. 1296 Of 2022 James Finlay Kenya)Limited V Commissioner Legal Services & Board Coordination.iii.TAT No. 28 OF 2018- Joycott General Contractors Limited-VS-Kenya Revenue Authority.
Respondent’s Prayers
96.The Respondent prayed that the Tribunal:i.Upholds the Respondent's Objection decision dated 20th March, 2024 as proper and in conformity with the provisions of the law; andii.Dismisses the Appeal with costs to the Respondent.
Issues for Determination
97.The Tribunal, having considered the pleadings and evidence adduced by the parties was of the considered view that the issue that crystalized for its determination is: Whether the assessments by the Respondent were justified.
Analysis and Determination
98.The Tribunal, having identified the issue that falls for its determination, proceeds to analyse it as hereunder.
99.This dispute arose from the assessment of VAT, Income Tax Resident Individual and Rental Income taxes on the Appellant’s transactions by the Respondent.
100.The Appellant averred that it provided conclusive documents to enable the Respondent arrive at a different decision.
101.The Respondent, on its part, argued that it adjusted its assessments based on the arguments by the Appellant that were backed by evidence and documents while it confirmed unsupported objection grounds by the Appellant.
102.The Tribunal having reviewed the parties’ pleadings observes that the Respondent amended its initial assessment based on documents provided by the Appellant ahead of the issuance of its objection decision.
103.The Tribunal further observes that in its objection decision, the Respondent stated that the objection decision was limited to documents examined and conclusions drawn from them. That this was based on documentary evidence availed by the Appellant.
104.The Tribunal has further perused the Appellant’s pleadings and noted that it provided substantial invoices to various institutions that were all not backed by ETR receipts. Further, the Appellant provided withholding tax certificates to various institutions showing details of VAT withheld for the months of February 2021, March 2021, April 2021, May 2021 and July 2021.
105.The Tribunal has checked the Appellant’s pleadings for any evidence to confirm the documents that it supplied to the Respondent that were supposedly ignored by the Respondent but found none. The Tribunal could therefore not ascertain the veracity of the Appellant’s averments that it provided all the documents that it stated to have provided to the Respondent.
106.It is trite law that once the Respondent has made a tax assessment or decision, the burden is on the Appellant to prove that the said assessment or decision is erroneous. This is supported by Section 56(1) of the TPA which provides thus;
107.Further, Section 30 of the TAT Act provides as follows regarding the burden of proof in tax cases:
108.The burden was thus on the Appellant to prove that the Respondent’s assessment was erroneous. The easiest way to discharge this burden would have been by sharing, with the Tribunal, the documents that it supplied to the Respondent to prove that the Respondent’s assessments were inaccurate, excessive or should have been made in a different way.
109.Without the supporting documents, the Appellant’s contentions remained mere averments. The Tribunal finds guidance in the case of Samuel Mwangi Mathu vs. Commissioner of Domestic Taxes, TAT No. 369 of 2020 where it was stated that:-
110.The fact that the burden of proof that the Respondent’s tax decision was wrong rests on the Appellant has been affirmed by this Tribunal in Tumaini Distributors [K] Ltd vs. Commissioner of Domestic Taxes [2020] eKLR, where the court held that the taxpayer has the burden to prove that the tax decision is wrong.
111.Guided by the foregoing analysis, authorities, Section 56 (1) of the TPA and Section 30 of the TAT Act, the Tribunal thus finds and determines that the Appellant failed in fully discharging its burden of proof to show that the Respondent’s assessments were not justified.
Final Decision
112.The Tribunal on the basis of the foregoing analysis finds that this Appeal is partially merited and makes the following Orders: -a.The Appeal be and is hereby partially allowed.b.The Respondent’s Objection decision dated 25th January, 2024 be and is hereby varied under the following terms:-i.The VAT assessment be and is hereby varied to the extent of the Withholding VAT certificates provided by the Appellant.ii.The Income tax confirmed assessment be and is hereby upheld.iii.The Monthly Rental Income assessment be and is hereby upheld.c.The Respondent is hereby directed to recompute the tax assessment based on the Tribunal’s findings under (b) above within Thirty (30) days of the date of delivery of this Judgment.d.Each Party to bear its own costs.
113.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 14TH DAY OF MARCH, 2025ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBER