Cool Rivers Pure Water Limited v Commissioner of Domestic Taxes [2024] KETAT 35 (KLR)

Cool Rivers Pure Water Limited v Commissioner of Domestic Taxes (Tax Appeal 762 of 2022) [2024] KETAT 35 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 35 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 762 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

January 26, 2024

Between

Cool Rivers Pure Water 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 main principal activity is water processing and sale in Nakuru.

2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, cap 469 Laws of Kenya. Under section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part I & II 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 of the appellant and in the process performed in the iTax system an analysis of purchases claimed by purchasers and sales declared by suppliers for the year 2021, and noticed inconsistencies between excise duty returns filed by the appellant for VAT sales of Kshs. 6,541,376. 00.

4. The respondent carried out investigations and established that there existed a difference of Kshs. 6,541,376. 00, being the difference between Kshs. 8,401,405 for activated stamps and sales of Kshs. 1,860,029. 00. This difference had not been accounted for.

5. Based on the inconsistencies, the Respondent raised additional assessments on 11th April 2022 for VAT for the year 2021 totalling to Kshs. 1,046,620. 16 including penalty and interest.

6. The appellant lodged an objection to the additional assessments on April 27, 2022 vide the iTax platform.

7. The Respondent rendered its objection decision on 20th June 2022.

8. Aggrieved by the objection decision, the Appellant filed its Notice of Appeal on July 12, 2022.

The Appeal 9. In its Memorandum of Appeal filed on 22nd July 2022, the Appellant premised its Appeal on the following grounds: -i.That the respondent’s station manager in Nakuru occasioned raising of the confirmed additional assessments and was not prepared to amend the assessment despite objection from the appellant.ii.That the additional confirmed assessment of Kshs. 1,046,620. 00 was disputed.

The Appellant’s Case 10. The Appellant premised its case on the following documents before the Tribunal:-a.The appellant’s statement of facts filed on July 22, 2022, and annexures thereto.

11. The Appellant averred that it maintained and has ETR receipts in support of all sales made by the company.

12. The Appellant further averred that sales ledger are held based on sales invoices issued to customers, and that price lists are also maintained.

13. The Appellant averred that it purchased Excise stamps as follows: June 2020 – 50,000 pieces; and August 2020 – 210,000 pieces.

14. It is the Appellant’s case that the Excise stamps were to be used to produce water from July 2020 to November 2021.

15. That although the Appellant purchased Excise stamps during the financial years 2020, 2021 and 2022, the Respondent without regard to any slit of gross sales that could have been made in 2020, 2021 and 2022 made generalised assumption that the said Excise stamps generated gross turnover of Kshs. 8,401,405. 00 for 2021, and that this is a fallacy.

16. That based on records and banking test performed, the gross turnover was Kshs. 2,794,884. 00 and not what the Respondent asserted of Kshs. 8,401,405. 00, which has culminated in apparent variance and additional assessment of Kshs. 1,046,620. 00.

17. That the additional assessment is punitive, unreasonable, and incorrect.

The Appellant’s Prayers 18. The Appellant prays to the Tribunal for the following orders: -a.That the additional assessments by the Respondent be amended.b.That the Respondent’s additional confirmed assessment on the Appellant be suspended including any penalties and interests thereto.

The Respondent’s Case 19. The Respondent premised its case on the following documents before the Tribunal:-a.The Respondent’s Statement of Facts filed on 1st August 2022. b.The Respondent’s Written Submissions filed on 6th February 2023.

20. The Respondent averred that the additional assessments were correctly issued and conform to VAT Act as the Appellant did not provide any evidence that would have altered the assessment.

21. The Respondent further averred that section 56(1) of Tax Procedures Act places the onus of proof in tax objections on the taxpayer.

22. The Respondent averred that the Appellant lodged objection on iTax platform, which was received and acknowledged but was treated as invalidly lodged as it did not have grounds of objection, and the same was notified on the Appellant.

23. That the Appellant filed all returns and paid what they had self-assessed, but that the Appellant was uncooperative in providing documents requested for by the Respondent, thus no documents were provided to support the objection by the Appellant.

24. That in-depth examination of the Appellant’s records established inconsistencies in the returns filed by suppliers and invoices claimed by the Appellant, and this indicated variance as per returns filed, excise records and income tax returns.

25. That the Appellant did not provide explanation for the variances as requested hence the same was disallowed and additional assessments confirmed.

26. That the Respondent disallowed direct purchase amount on the Appellant’s income tax return and instead relied on the invoice value as used in the determination of VAT payable as the true cost of direct purchase. Thus, the objection decision provides a precise and clear breakdown of workings used to reach at the assessments.

27. That the Appellant failed to provide the documents requested in support of its objection hence input VAT was disallowed.

28. That a review of the Appellant’s records was carried out due to inconsistencies in the returns of VAT and Excise duty, indicating that not all income earned by the Appellant was declared.

29. That an examination of the Appellant’s records established that the Appellant earned income from sale of water in the period under audit, which were not declared for tax purposes in the year earned.

30. That the Appellant has not paid all its taxes due and owes Kshs. 1,046,620. 16.

31. To buttress its case, the Respondent relied on the authorities established in Cape Brandy Syndicate v Inland Revenue Commissioner [1921] 1KB 64; TAT No. 67/2017 Monaco Engineering Limited v Commissioner of Domestic Taxes; and TAT 101/2018 John Githua Njogu vs Commissioner Investigations and Enforcement.

Respondent’s Prayers 32. The Respondent prays to the Tribunal for the following orders: -a.That the objection decision be upheld.b.That the Appeal be dismissed for lack of merit.c.That the Respondent be awarded costs.

Issue for Determination 33. Having reviewed the Memorandum of Appeal, Statements of Facts and Written Submissions filed by both parties, the Tribunal identified the following issue for determination:Whether the Respondent’s Objection Decision dated 20th June 2022 was justified.

Analysis And Findings 34. Having established the issue for determination, the Tribunal will proceed to analyse it as hereunder.

35. The Tribunal noted that from the pleadings and documents before it, the gist of the dispute between the parties is whether the respondent erred in confirming additional assessment against the respondent, and if so, what remedies should the Tribunal proffer.

36. The Tribunal noted that the gist of dispute between the parties relates to additional tax assessment conducted by the Respondent on the Appellant for income period 2021, and which disclosed a variance of Kshs. 6,541, 376. 00, and leading to additional assessment of tax due of Kshs. 1,046,620. 00 including interest and penalty.

37. The Tribunal further notes that both the Appellant and the Respondent do not dispute chronology of events and dates leading to the Respondent’s objection decision of 20th June 2022, and subsequent filing of the instant Appeal.

38. Therefore, the main contestation is whether the Appellant provided sufficient evidence to support its objection application.

39. The Tribunal notes that this raises the question of burden of proof in tax disputes as envisaged under section 56(1) of the Tax Procedures Act 2015, which provides as follows:“In any proceedings under this Part, the burden shall be on the tax payer to prove that a tax decision is incorrect”

40. The logical import of this provision is that the taxpayer or Appellant herein has an obligation to provide necessary documents to challenge the Respondent’s assessment.

41. The Appellant submitted that it did submit all records required and its Statement of Facts filed on 22nd July 2022 refer to annexures. However, the said annexures are not on record before the Tribunal.

42. On the other hand, the Respondent submitted that the Appellant was uncooperative and did not provide documents and evidence requested and therefore the Respondent had no option but to confirm the assessment.

43. To support its case, the respondent relied extensively on sections 23 (1)(b), 24 (1) & (2), 29 (1), 56(1), 51(4), 97 of the TPA and sections 54 A (1) and 55(2) of the Income Tax Act.

44. The Tribunal reiterates its holdings regarding burden of proof in TAT No. 67 of 2017 Monaco Engineering Ltd vs Commissioner of Domestic Taxes, where it was held as follows:“Accordingly, in the absence of proper arguments supported by evidence against the Respondent’s allegation that the Appellant under-declared its self-assessed returns, the Tribunal finds that the Respondent assessed the Appellant appropriately and provided reasons for his decision to bring to charge the variances established.”

45. The Tribunal accordingly finds that the Appellant has not discharged its burden of proof to disprove the Respondent’s assessment as incorrect as envisaged in Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act.

46. Consequently, this Appeal is without merit and therefore fails.

Final Decision 47. The Tribunal proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 20th June 2022 be and is hereby upheld.c.Each party to bear its own costs.

48. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA OGAGA - MEMBER