China Huaxi Enterprises Limited v Commissioner of Domestic Taxes [2023] KETAT 112 (KLR)

China Huaxi Enterprises Limited v Commissioner of Domestic Taxes (Tribunal Appeal 582 of 2021) [2023] KETAT 112 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 112 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 582 of 2021

E.N Wafula, Chair, RM Mutuma, RO Oluoch & EK Cheluget, Members

March 17, 2023

Between

China Huaxi Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly registered under the Companies Act and is a registered taxpayer. Its principal business is selling hardware material, paint, and glass.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act. In the Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent carried out a review of the Appellant’s tax affairs for January 2018, February 2018, April 2018, and May 2018 in its iTax system.

4. The Respondent later issued the Appellant and its suppliers notices of inconsistencies found in the Appellant’s iTax returns, informing them of the need to amend the VAT returns. The Respondent subsequently served the Appellant with Value Added Tax Automated Assessments on 15th November 2019 for taxes totaling ksh 38,155,664. 07.

5. In response, the Appellant lodged an objection to the assessments on 8th December 2019. The Respondent vide a letter dated 10th January 2020 requested documents from the Appellant in support of its Objection.

6. Upon receipt of documents from the Appellant, the Respondent issued its Objection decision on 21st June 2021 partially disallowing the Objection with the new amount of tax due being ksh 32,032,493. 80.

7. On receiving the Objection decision, the Appellant filed a Notice of Appeal dated 15th September 2021 and filed before the Tribunal on the 17th September, 2021.

The Appeal 8. In its Memorandum of Appeal dated 15th September 2021 and filed on 17th September 2021, the Appellant premised its Appeal on the following grounds;-a.The Respondent erred in fact and law by disallowing the business costs which were entirely incurred and paid off by the company.b.The Respondent erred in fact and law by failing to consider the submissions of the Appellant during the verification process.c.The Respondent erred in fact and law by not giving a fair hearing to the taxpayer before making the decision of the objection.

The Appellant’s Case 9. The Appellant’s case is premised on its Statement of Facts dated 15th September 2021 and filed on 17th September 2021.

10. The Appellant stated that the Respondent completely ignored documents provided to support the operations of the Appellant even though the documents and reconciliation were availed to the Respondent.

11. It averred that there was a failure to give the Appellant a chance to defend itself and issued an objection decision and a demand without a fair hearing of the Appellant’s position.

12. It added that it was very cooperative since it obtained the email from the Respondent on the VAA report. It added that it provided documents, records, and explanations and availed itself for meetings as and when required to do so.

The Appellant’s Prayers 13. Given that the Appellant did not specifically pray for any reliefs and the fact that an Appeal before the Tribunal is an appeal against the Respondent’s Objection decision, the Tribunal surmises the Appellant’s prayer to be the vacation of the said Objection decision.

The Respondent’s Case 14. The Respondent’s case is premised on its Statement of Facts dated and filed on 27th October 2021 and the written submissions dated and filed on 2nd November, 2023.

15. The Respondent stated that the Appellant failed to provide proper records to demonstrate the incurred expenses for a claim of input VAT despite being given the opportunity to do so.

16. It contended that the disallowed inputs were as a result of failure by the Appellant to demonstrate how the goods were purchased despite several reminders to provide proof of purchase.

17. It asserted that it confirmed the assessments as no documents had been availed by the Appellant to support its Objection.

18. The Respondent submitted that it conducted a review of the Appellant’s records and iTax returns that revealed the following inconsistencies:a.Most of the invoices affected were due to the suppliers lumping sales in their VAT returns while the Appellant declared each invoice.b.The Appellant did not provide proof of payment for all the lumped up sales.c.The Appellant’s suppliers did not declare any invoices.d.The Appellant did not provide any proof of payment for all invoices declared.e.The Appellant was requested to provide Bank Statements and proof of payment which it did not provide.

19. The Respondent submitted that the Appellant failed to provide proper records to demonstrate the expenses for input VAT, despite being given the opportunity to do so.

20. It argued that the Appellant is required to keep proper records as per Section 23(1)(b) of the Tax Procedures Act which requires a taxpayer to maintain any document required under a tax law for their tax liability to be ascertained.

21. It maintained that the disallowed inputs were a result of the Appellant’s failure to demonstrate its purchases and mode of payment for the goods despite several reminders to do so which the Appellant failed to do.

22. It asserted that the onus of proving that a tax decision is incorrect is on the Appellant according to Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

23. It cited the case of Digital Box Limited v Commissioner of Domestic Taxes (TAT no. 115 of 2017) and relied on the case of Alfred Kioko Muteti v Timothy Miheso & Another [2015] eKLR where the court held that:- “thus, the burden of proof lies on the party who would fall if no evidence at all were given by either party…”

24. It further relied on the case of Commissioner of Domestic Taxes v Golden Acre Limited [2021] eKLR, where Justice Majanja J approvingly quoted the case of Mulherin v Commissioner of Taxation [2013] FCAFC 115 where it was held that:-“A taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The PFC held that it is not enough for a taxpayer to simply demonstrate that the assessment issued by the Commissioner is incorrect. Rather, the onus is on the taxpayer in proving that an assessment issued by the Commissioner is excessive and can only be discharged by the taxpayer by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied. That onus requires the taxpayer to positively prove his or her 'actual taxable income' and in doing so, must show that the amount of money for which tax is levied by the assessment exceeds the actual substantive liability of the taxpayer.”

The Respondent’s prayers 25. The Respondent, therefore, prayed for the Tribunal to make a judgment against the Appellant for orders that:a.This Appeal lacks merit and the same be dismissed with costs.b.The Objection decision dated 21st June 2021 was issued within the confines of the law and the same be upheld.

Issues for Determination 26. Gleaning through the pleadings and the Respondent’s submissions the Tribunal put forth the following issue as arising for determination:a.Whether the Respondent was justified in its Objection Decision dated 21st June 2021.

Analysis and Findings 27. The Tribunal wishes to analyse the issue identified as hereunder:-

a. Whether the Respondent was Justified in its Objection Decision Dated 21st June 2021. 28. The Appellant contended that the Respondent disregarded documents provided to support its operation even though it provided documents including: original copies of the suppliers’ invoices, proof of payment to the suppliers, bank statements, checkbook counterfoils, Schedule summarising the payment of the suppliers. 29. The Respondent reiterated that the Appellant filed an objection with insufficient documentary evidence to support its position and after numerous requests, it never provided the documents requested prompting the Respondent to partially allow the Objection with the unproven parts of the objection upheld.

30. Section 43 of the VATAct 2013 requires a taxpayer to keep transactional records for a period of five years. The Section provides as follows: -“Every registered person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.”

31. This Section receives life in practice in the case of Mart v Commissioner of Domestic Taxes (Income Tax Appeal E017 of 2020) [2022] KEHC 108 (KLR) (Commercial and Tax) (18 February 2022) (Judgment) Mabeya J. quoted the case of Malindi Judicial Review no 2 of 2016 Silver Chain Limited v Commissioner of Income Tax and 3 others[2016] eKLR where the court stated that: -“The above section elaborates the specific records to be kept under section 43 (2). Such records include tax invoices, credit and debit notes, purchase invoices, custom entries, receipts for customs duty tax among other documents.”

32. The impugned Objection decision of the Respondent was arrived at after considering the information provided by the Appellant and could only make a decision to the best of its judgment based on the documents provided. To wit the Respondent amended its assessment downward.

33. The Tribunal observes that the Appellant has not adduced any evidence before it to show that the Respondent did not take due regard of all its documents to prove that the Respondent’s Objection decision was excessive or should have been made otherwise as provided for under Section 30 of the Tax Appeals Tribunal Act, which states that:-“The appellant has the burden of proving—(a) where an appeal relates to an assessment, that the assessment is excessive; or in any other case, that the tax decision should not have been made or should have been made differently.”

34. The Tribunal, therefore, finds that the Respondent’s Objection Decision dated 21st June 2021 was justified.

Final Decision 35. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 21st June 2021 be and is hereby upheld.c.Each party to bear its own costs.

36. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ERIC N. WAFULA CHAIRMANROBERT M.MUTUMA RODNEY O. OLUOCH MEMBER MEMBEREDWIN K. CHELUGET MEMBER