Highrise Commodities Limited v Commissioner of Investigation and Enforcement [2025] KETAT 48 (KLR)

Highrise Commodities Limited v Commissioner of Investigation and Enforcement (Tax Appeal E304 of 2024) [2025] KETAT 48 (KLR) (Commercial and Tax) (31 January 2025) (Judgment)

Neutral citation: [2025] KETAT 48 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E304 of 2024

RO Oluoch, Chair, G Ogaga & AK Kiprotich, Members

January 31, 2025

Between

Highrise Commodities Limited

Appellant

and

Commissioner of Investigation and Enforcement

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated within the Republic of Kenya. It is engaged in the business of wholesale and retail trade.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted tax investigations covering the period 2017 to 2023. Subsequently, it issued additional assessments orders dated 5th December, 2023 for Income tax, VAT and WHVAT amounting to Kshs. 369,072,384. 00.

4. The Appellant objected to the assessments on 29th December 2023. The Respondent reviewed the objection and issued an Objection decision on 27th February 2024 partially allowing the objection and amending the additional assessments from Kshs 369,072,384. 00 to Kshs 309,189,652. 00.

5. The Appellant being dissatisfied with the Respondent’s Objection decision, filed a Notice of Appeal on 14th March 2024.

The Appeal 6. The Appellant lodged a Memorandum of Appeal dated 12th March 2024 and filed on 14th March 2024 whose grounds of Appeal were as follows, that:a.The Respondent erred in law and fact by disallowing the genuine and legal purchases made by the Appellant and as a result denying the Appellant the liberty of claiming the input VAT on the same, contrary to the legal provisions of Section 17 of the VAT Act, 2013 (VATA).b.The Respondent extraneously disallowed vatable purchases claimed in its VAT returns for the years 2017, 2019, 2020 and 2023 amounting to Kshs 233,100,596. 00 on the grounds that the same had been declared as exempted purchases instead of vatable purchases. The disallowed purchases had been clearly declared as general rated purchases and that the Appellant rightfully claimed input VAT on the same in accordance to the law and therefore the same ought not to be disallowed.c.The Respondent erroneously disallowed genuine purchases from related party (Quick Point Limited) to the tune of Kshs 47,813,000. 00, being exempted purchases that falls under the Second Schedule of the VAT Act, 2013 and that the disallowed purchases were erroneously subjected to VAT at the general rate without considering the nature of goods traded in between the Appellant and its related party.d.The Respondent did not act in good faith by disallowing the purchases and considering to retain the sales that resulted from those purchases.e.The Respondent disallowed purchases to the tune of Kshs 141,802,735. 00 on the grounds that the value of purchases was as a result of variance between VAT purchases and Income Tax purchases.f.The decision of the Respondent to subject all the bank deposits to assessment without performing adjustment to related party transactions is both erroneous and unjust.g.The Respondent overreliance on the bank statements in coming up with the additional assessment also makes the assessment itself to lack credibility as it only brings out estimated taxes and does not tell the true and fair state of financial position of the Appellant.h.The Respondent ought to have examined the Appellant books of accounts which has been audited by professional and independent auditors and that coming up with estimated revenue and resultant taxes do not guarantee that the Respondent's assessments are paramount, ultimately correct and should not be quashed nor questioned.

The Appellant’s Case 7. In support of the Appeal, the Appellant relied on its Statement of Facts dated 12th March 2024 and filed on 14th March 2024 and the written submissions dated 23rd November, 2024 and filed on the 25th November, 2024.

8. The Appellant stated that the genesis of the dispute commenced on 27th September 2023 when the Appellant was issued with the notice of tax demand on VAT, Income Tax Company and Withholding VAT. The Appellant was later issued with additional orders via iTax portal for both VAT and Income Tax.

9. The Appellant averred that upon examining both the demand notice and the assessment orders communicated by the Respondent, it established various errors, mistakes and assumptions that could not guarantee a credible and competent assessment.

10. The Appellant argued that it established that the adjusted revenue subjected to tax had been erroneously computed and several items had not been adjusted for. That as a result, the Appellant was totally in disagreement with the Respondent's assessment and could not agree to either pay partly or wholly the assessed tax but to go ahead and object the assessment in entirety.

11. That it subsequently, objected to the assessment order on 29th December 2023. It alleged that the Respondent's assessment was inconsiderate in nature as it subjected all the bank deposits to tax without adjusting for the Related Party transactions before charging tax on the variance.

12. The Appellant stated that not all banking were sales as some of the banking related to sister companies’ transactions and ought not to be subjected to tax.

13. In response to the issue that the Respondent had requested it to provide more documents in order to review the objection, the Appellant alleged that the requested documents were later shared with the Respondent via email and the same were acknowledged by the Respondent vide letter dated 22nd January 2024.

14. That upon review of the Appellant's objection and the documents submitted, the Respondent requested the Appellant to provide various purchase invoices for various tax periods as well as explanations to the variances that existed in the initial tax demand notice. The Appellant stated that it submitted and provided necessary explanations and information to the Respondent on various dates.

15. According to the Appellant, there were several engagements and conversations in addressing the issues pertaining the matters in the assessment with the aim of solving the dispute in an amicable manner.

16. The Appellant alleged that it provided necessary supporting documents and explanations on need basis. That the Respondent did not consider the information availed to it but made very minimal adjustment to its assessment.

17. The Appellant argued that the manner in which the Respondent issued its decision amounted to violation of Section 17 of the VAT Act and the Second Schedule of the said Act, whereby the Respondent disallowed the genuinely claimed purchases claimed in the Appellant's VAT returns and also subjected the exempt purchases made by the Appellant to VAT at the general rate. The Appellant maintained that such decision should be set aside as it amounts to violation of the law.

18. The Appellant averred that it has an arguable case and that the Respondent's assessment is excessive, inconsiderate and erroneous in nature and the same should be set aside by this Tribunal.

19. The Appellant expressed its desire and requested to have the matter referred to the Alternative Dispute Resolution (ADR) to enable resolving the additional assessment issues.

Appellant’s Prayers 20. The Appellant urged this Tribunal to annul the assessment by the Respondent.

The Respondent’s Case 21. In response to the Appeal, the Respondent lodged a Statement of Facts dated and filed on 19th April 2024 which was admitted in evidence under oath on the 12th November, 2024, written submissions dated 22nd November, 2024 and filed on the 25th November, 2025 and the Witness Statement by Phebine Ochieng dated and filed on 2nd October 2024.

22. The Respondent stated that it conducted tax investigations covering the period 2017 to 2023 and informed the Appellant through Notice of Preliminary Tax Investigation Findings dated 20th June, 2023 that there were ongoing investigations.

23. The Respondent averred that the investigations established as follows:a.The Appellant's established that the Appellant claimed more purchases in income tax returns. The purchases were overstated by Kshs 469,013,995. 00. b.The Appellant operated five bank accounts at Equity Bank, Gulf African Bank, Diamond Trust Bank, National Bank and KCB Bank. The Respondent obtained the bank statements of the bank account and established total credits for the period 2017 to 2023 of amounting to Kshs. 7,657,675,565. 00. c.The Respondent established there were variance between expected income tax and VAT declarations.d.The Respondent compared the purchases claimed in the VAT returns and sales declared by the Appellant's alleged suppliers which unveiled that it had over claimed purchases from several traders as follows: Mvita Oils Limited; Jambo Commodities; Seeta Mool International; Karibu Commodities; Qamar and Mahid Enterprises Limited; DM Commodities; Indus Impex Limited; Jilao Company Ltd; Totiyas Enterprises; Fanaa Investments; Moto Commodities; Remington Agency; Star Africa Limited; Welcome Commodities; Classic Commodities; and Taam Trading.e.The Appellant declared purchases from the above suppliers as exempt purchases which have no VAT implication. However, upon further analysis, the Respondent established that a total purchase amounting to Kshs 233,100,595. 00 were relating to general rated and zero-rated sales and not exempt.f.The Respondent established that the Appellant had claimed fictitious purchases from a related company - Quick point Limited amounting of Kshs 47,813, 000. 00;g.The Respondent noted that the Appellant was appointed as a WHVAT agent in October 2022. That as an appointed agent, the payment for the supplies by the Appellant were to be made less withholding VAT.h.That the Appellant failed to withhold VAT amounting to Kshs 14,411,385. 00 between the period 2017- 2023 which is an offence that is liable to a penalty of Kshs 10,000. 00 or 10% of the tax due, whichever is higher. That the Appellant was liable to pay penalty on withholding VAT amounting to Kshs 1,451,117. 00;i.In computing Income tax, the Respondent adopted Average Gross Profit Margin of 12% from profits of five (5) companies in the same economic sector of wholesale and retail trade; andj.In computing VAT, the Respondent observed that the Appellant deals in general rated, zero rated and exempt goods. The Respondent established that the Appellant supplied 49% of general rated goods as at 2nd September, 2023. That the percentage was adopted to determine the supplied vatable goods.

24. Upon issuing additional assessments to the Appellant on 5th December 2023, the Appellant objected on 29th December 2023 followed by an Objection decision issued on 27th February 2024.

25. The Respondent stated that it relied on Section 3 of Income Tax Act, CAP 482 (ITA), Section 17 of VAT Act and Sections 31 and 51 of TPA in its assessment.

26. The Respondent averred that it disallowed purchases based on the variance between purchases as claimed in the Income tax returns and purchases as claimed in the VAT returns. That the Appellant did not supply those respective invoices of the exempt supplies that were not included in the VAT returns to support their argument, as such, the same remained disallowed.

27. That it disallowed the Appellant's purchases due to none corresponding sales by the respective suppliers, specifically claims amounting to Kshs 233,100,595, as it was found that the Appellant had declared exempt purchases when they were general rated and zero-rated purchases.

28. Further, the Respondent averred that the Appellant claimed fictitious purchases from a company; Quick point Limited, but did not avail any invoices, ETR receipts or proof of payment.

29. The Respondent stated that the Appellant did not submit any reconciliations or a schedule of entries they deemed were transfers or non-sale transactions to enable review. Pursuant to the provisions of Section 24(2) of the TPA, it submitted that it is empowered to assess any taxpayer based on information available to it.

30. The Respondent posited that it applied a banking test and conducted analysis based on its banking information and that this method is appropriate and it yielded correct decision.

31. The Respondent stated that it re-analyzed the Appellant’s bank statements from the following banks; Gulf African Bank, Diamond Trust Bank, KCB, Equity Bank and National Bank and established the non-sale transactions from where it made adjustments based on the evidence provided.

32. That the Appellant's failure to avail documents and reconciliations placed it in a position where it was unable to verify the claims made.

33. The Respondent averred that in the absence of documents it was left with no option but to rely on information available to it.

34. The Respondent cited Section 51(3) of the TPA which require the Appellant to support its Objection with all relevant documents. It argued that the burden of proof that an assessment is excessive and/or erroneous lay with the Appellant who has failed to discharge the burden.

35. It relied on the provisions of Section 24(2) of the TPA to state that it is empowered to assess any taxpayer based on information available.

36. The Respondent further cited Section 43 of the VAT Act, Section 54A of the ITA as read together with Section 23 of the TPA to argue that the law provides for the requirement that a taxpayer has to maintain records.

37. Further, the Respondent relied on Section 59(1) of the TPA which provides that a taxpayer shall produce records when required to do so by the Commissioner but in this instance, it failed to do so.

Respondent’s prayers 38. The Respondent prayed that:i.The Appellant's Appeal be dismissed with costs,ii.The assessment raised by the Respondent amounting to Kshs 309,189,652. 00 be confirmed and the principal taxes and interest be found due and payable as per the Objection decision rendered by the Respondent.

Issues For Determination 39. Having gone through the party’s pleadings, documents, Written Submissions and the Respondent’s witness statement by Phebine Ochieng dated 2nd October 2024, the Tribunal is of the view that the following are the issues for its determination:a.Whether the assessment was time barred; andb.Whether the Respondent erred in confirming the assessments.

Analysis And Findings 40. Having ascertained the issues that fall for its determination, the Tribunal shall proceed to analyze the same as hereunder.

Whether the Assessments was time barred 41. The Respondent in its Statement of Facts stated that it issued the assessment dated 5th December 2023 covering the tax period 2017 to 2023. Its Objection decision indicated that the assessments for the same period were issued in a letter dated 27th September 2023.

42. The Tribunal has sighted several assessment orders issued in December 2023 which were also objected to in December 2023. It has also taken the position that the letter dated 27th September 2023 is not an assessment. It was a demand notice issued by the Respondent when it sought to recover taxes for the period 2017 to 2023 through the assessment orders issued in December 2023 and prior to the Objection validation dated 22nd January 2024.

43. The issue for determination is thus whether these additional assessment orders by the Respondent were time barred under Section 31(4) of the TPA which provides as follows regarding time limits in relation to assessments:“(4)The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment.”

44. Section 52B of the Income Tax Act deals with time frames and final return with self-assessment. It provides as follows:“52B. Final return with self-assessment(1)Notwithstanding any other provision of this Act—(a)every individual chargeable to tax under this Act shall for any year of income commencing with the year of income 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax from all sources of income, not later than the last day of the sixth month following the end of his year of income.’’

45. The assessment for Income tax in this Appeal was dated 31st December 2023. The assessment for 2023 was thus due on 30th June 2024. Meaning that that it would not be factored in computing time to determine whether the assessment was time barred. The computation of the time backwards thus brings the year 2017 outside the limit period of the 5 years prescribed under Section 31(6) of the TPA.

46. The Respondent could thus only issue additional assessments beyond five years if the elements under Section 31(4) (a) of the TPA are pleaded and proven. The said elements are gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer. In this regard, the High Court in the case of Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) stated as follows regarding the issue on timeframe:‘‘In this regard, under section 31(4) of the Tax Procedures Act, an amendment outside the 5-year period can only be permitted if there is evidence of willful neglect, evasion, or fraud by or on behalf of the tax payer…The legal position is that, all assessments ought to be made within 5 years except when there is evidence of gross or willful neglect, evasion or fraud on the part of the taxpayer. This also goes hand in hand with the provisions of section 23 of the Tax Procedures Act, which requires a taxpayer to retain documents for the same period. The implication is that, after 5 years, since no assessment can be made, the taxpayer is absolved of his burden of maintaining such records.’’

47. Considering that these elements of fraud and wilful neglect were not pleaded and proven in this case, it thus follows that the assessment for the year 2017 was unlawful.

48. Regarding penalties on WHVAT that was charged at Kshs 1,451,117. 00. The Tribunal refers to Section 42A(4C) and (4D) of the Tax Procedures Act which provides as follows regarding failure of a withholding agent to withhold VAT: -“(4C)A person who is required under this section to withhold tax commits an offence if the person —(a)fails to withhold the whole amount of the tax which should have been withheld; or(b)fails to remit the amount of the withheld tax to the Commissioner by the twentieth day of the month following that in which the deduction was made.(4D)A person who commits an offence under subsection (4C) is liable on conviction to a penalty of ten per cent of the amount involved.”

49. The provision of Section 42A(4D) of TPA under which the Respondent assessed the 10% penalty on Withholding VAT makes it clear that the said penalty is only applicable upon conviction of a taxpayer for an offence under Section 42A(4C) of the TPA. The Tribunal also notes that the amendments to Section 42A(4C) of the TPA which was effected vide Kenya Gazette Supplement No. 224 of 2024 which came into effect on 27th December 2024 was not applicable to this Appeal.

50. Accordingly considering that no evidence was presented before the Tribunal of the Appellant’s trial and conviction the Tribunal finds that the Respondent erred in assessing penalty on Withholding VAT.

51. Regarding VAT, it is settled that VAT returns are filed on a monthly basis by the 20th of the subsequent month. The dates for the assessment would thus run from the date when the last VAT returns were due.

52. The VAT assessment in this Appeal were assessed on 31st October 2023. The due filing date for this VAT assessment was on the 20th November 2023. This filing was not due and it shall thus be excluded from the computation of the limit period. The limit period will thus run from the 20th October 2023 regrading assessment of between 21st September and 20th October 2023. Accordingly, the VAT assessments for the period beyond 20th September 2018 running backwards to 2017 are time barred and thus unlawful.

53. The Tribunal’s position that the assessments issued beyond five years are unlawful and time barred was affirmed in Tax Appeal No. E021 of 2023; Heineken East Africa Import Company Ltd-Vs-Commissioner of Investigation & Enforcement where the Tribunal stated thus:“Based on the foregoing the Tribunal therefore finds that the Respondent could not use the two Sections of TPA as grounds for assessing taxes beyond the prescribed period of five years because the Respondent did not prove either fraud or evasion in this case.”

54. Consequently, the Tribunal finds that the Respondent was not justified in assessing any VAT and Income tax beyond the five-year limit.

Whether the Respondent erred in in confirming the Assessments 55. The Respondent assessed the Appellant herein for Income tax and VAT based on the banking method. The Appellant argued that this was unlawful and contrary to the legal provisions of Section 17 of VAT Act because its bank deposits were assessed without any adjustment. It was also its position that the Respondent failed to consider the documents it had provided.

56. On the other hand, the Respondent argued that it confirmed the assessment because the Appellant failed to avail documentary evidence that would have determined the outcome that the Appellant desired.

57. The Tribunal examined the Appellant’s documentary evidence in support of this Appeal and noted that the documents that the Appellant filed to support its Appeal were as follows:i.Objection decision dated 27th February 2024,ii.Multiple objection application acknowledgment receipts,iii.Objection validation dated 22nd January 2024iv.Multiple assessment orders issued in December 2023,v.Demand notice dated 27th September 2023.

58. The Appellant did not file documents such as invoices, bank statements, receipts or provide any evidence showing commercial transaction that took place during the period under review.

59. To prove matters of fact, an Appellant has to adduce positive documentary evidence to support its arguments and also discharge its burden of proof under Section 56(1) of TPA and Section 30 of the Tax Tribunal’s Act (TATA).

60. Section 56 (1) of the TPA which provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

61. On the other hand, Section 30 of the TATA provides that:“In a proceeding before the Tribunal, the appellant has the burden of proving –(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

62. It thus follows that failure to adduce documentary evidence means that the Appellant has not succeeded in discharging its burden of proof as was laid down in the case of Singapore Motors Limited v Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR) where the High Court held that:“This Court has remained emphatic that under section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the Tax Procedures Act (TPA), the burden of proving that an assessment is wrong or excessive remains upon the taxpayer.”

63. The Appellant’s failure to provide documents or any evidence to prove on a balance of probability that the Respondent’s assessment was erroneous would mean that the said assessment which often assume a notion of presumptive correctness if it is not successfully challenged has been affirmed.

64. Accordingly, the Tribunal finds and holds that the Respondent was justified in confirming the assessment except for the issue of time barred assessments and penalty on WHVAT

Final Decision 65. The upshot to the foregoing analysis is that the Tribunal finds and holds that the Appeal is partially meritorious and makes the following Orders:-i.The Appeal be and is hereby partially allowed.ii.The Respondent’s Objection decision dated 27th February, 2024 be and is hereby varied in the following terms;a.The Respondent’s Income tax for the year 2017 be and is hereby set aside.b.The Respondent’s confirmed assessment for principal VAT for the period between 1st January 2017 to 20th September 2018 be and is hereby set aside.c.The Respondent’s Withholding Value Added Tax (Withholding VAT) assessments be and are hereby set aside.d.The Respondent’s Income tax assessments for the years 2018 to 2023 be and are hereby upheld.e.The Respondent’s principal VAT assessment for the period 21st September 2018 to 31st October 2023 be and is hereby upheld.i.The Respondent is hereby directed to recompute the Income tax and VAT assessments based on the Tribunal’s findings under Orders (ii) (a) to (e) above within Thirty (30) days from the date of delivery of this Judgment.ii.Each party to bear its own costs.

66. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 31ST DAY OF JANUARY, 2025DR. RODNEY O. OLUOCH - CHAIRPERSONGLORIA A. OGAGA - MEMBERABRAHAM K. KIPROTICH - MEMBER