Mbugua v Commissioner of Domestic Taxes [2025] KETAT 111 (KLR)

Mbugua v Commissioner of Domestic Taxes (Tax Appeal E309 of 2024) [2025] KETAT 111 (KLR) (Commercial and Tax) (7 February 2025) (Judgment)

Neutral citation: [2025] KETAT 111 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E309 of 2024

CA Muga, Chair, BK Terer, EN Njeru & SS Ololchike, Members

February 7, 2025

Between

Samuel Ng'ang'a Mbugua

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a registered taxpayer trading as Sambu Murram Quarry whose principal activity is described as being in the Construction Sector.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 Part 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 undertook an audit of the Appellant's activities covering the period 2016 to 2022 for income tax and value added tax (VAT) tax obligations. The Respondent proceeded to issue additional VAT assessments to the Appellant through assessment orders dated 2nd August 2021, 3rd August 2021, 4th August 2021, 21st September 2022.

4. The Appellant lodged notices of objection dated 17th December 2023 out of time but the Respondent granted leave to the Appellant to lodge an objection out of time on 22nd December 2023.

5. Upon review of the Appellant's objection and documents produced in support, the Respondent issued its objection decision dated 30th January 2024.

6. The Appellant being aggrieved with the objection decision lodged the Appeal herein vide a Notice of Appeal dated and filed 29th February 2024.

The Appeal 7. The Appellant filed his memorandum of Appeal on 14th March 2024 wherein the he raised the following grounds of appeal:a.That Appellant is a Resident individual duly registered under the KRA PIN number A001362993Y carrying business within the Republic of Kenya. His address of service for the purpose of this audit shall be C/O Cga Consult located at The Trio Complex Nairobi.b.That the Respondent is a statutory body established under section 3 of the Act charged with the collection of taxes for and on behalf of the Government of Kenya. Service of summons were effected through the Appellants tax agents office.c.The Appellant received notices to verify tax declarations on 2nd August 2021, 3rd August 2021, 4th August 2021 and 21st September 2022 relating to Dec 2016, December, 2017, December 2018, December 2019, and May 2022 tax periods respectively.d.That the Appellant objected to the additional assessments on 7th December 2023. e.That the the Appellant followed the due process of objection by providing partial supplementary documents including audited accounts pertaining to the business he undertook to the Respondent and requested for additional time to furnish the rest to support the objection.f.That on 30th January, 2024, the Respondent rejected the objection citing that the taxpayer didn’t provide sufficient proof on time to support the grounds the Appellant had stated.g.That the decision has denied the taxpayer to claim Input VAT not exceeding 6 months after the end of the tax period on the additional sales as per section 17 (1) & (2) of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).h.The Respondent will not suffer irreparable prejudice on allowing deduction of the substantive Input VAT that he is seeking since they are already declared as sales by the suppliers.i.That the Appellant can only get justice from the Tax Appeals Tribunal or Alternative Dispute Resolution mechanism.

Appellant’s Case 8. The Appellant filed its statement of facts on 14th March 2024. The Appellant did not file written submissions.

9. The Appellant stated that his principal activity is general trading, construction and related works. He asserted that the Respondent assessed the Appellant for the periods December 2016, December 2017, December 2018, December 2019, and May 2022 and disputed the Value added Tax (VAT) declarations by the Appellant for the tax periods aforementioned.

10. The Appellant having objected to the assessments, the Respondent confirmed its assessment through a letter dated 30th January 2024.

11. The Appellant averred that the commissioner disputed the Appellant’s claim in the objection letter where the Appellant had highlighted that the disputed Input VAT the appellant was seek to be allowed arose from expenses that were actually incurred and were used to generate income.

12. The Appellant admitted that he partially provided supporting documents, including copies of audited reports pertaining to the business he undertook to the Respondent, and requested for additional time to furnish the rest but the Respondent still chose to issue an objection decision.

13. According to the Appellant, the Appellant's bank statement supports the payments made to the suppliers in full and the purchase input VAT amount involved is substantive as the Appellant’s suppliers confirmed in writing to the commissioner that they made those sales to the Appellant as well as filed them in their VAT returns.

14. Finally, the Appellant contended that the assessments were uncalled for and that the Appellant having shown goodwill to provide more supporting documents as requested, the Respondent ought to have thoroughly assessed their reasonable grounds before issuing the decision.

Appellant’s Prayers 15. The Appellant prayed that the Appeal be allowed.

Respondent’s Case 16. In response to the appeal, the Respondent filed its statement of facts dated 12th June 2024 , a preliminary objection dated 29th July 2024 and written submissions on 30th July 2024.

17. The Respondent stated that it undertook an audit of the Appellant's activities. The audit checks covered the period 2016 to 2022 for income tax and value added tax (VAT) tax obligations. The desktop audit sought to establish whether all income earned was declared for the period under review; to ascertain the Appellant's tax compliance status; and to assess, demand and collect outstanding taxes if any.

18. The Respondent stated that the review disclosed there were variances between the sales and purchases declared in the Appellant's VAT and income tax returns for the period under review; that a comparison revealed that the Appellant under declared his sales for the years 2016 to 2022; That the variance of Kshs. 75,204,272. 00 arose from the comparison of purchases declared under/claimed from the Appellant's PIN by the Appellant' clients and the sales declared by the Appellant in his income tax and VAT returns for the years 2016 to 2022 and that the Respondent thus considered the variance of KShs. 75,204,272. 00 as undeclared sales which the Appellant ought to have declared for the purposes of VAT and charged taxes on the same.

19. The Respondent stated that it proceeded to issue additional VAT assessments to the Appellant between 2nd August 2021 and 21st September 2022 the Appellant lodged notices of objection dated 17th December 2023 through the iTax, which were outside the statutory period of thirty (30) days. The Respondent then informed the Appellant of the invalidity of its notice of objection.

20. The Respondent stated that the Appellant provided medical documents showing that he was unable to lodge an objection on time due to illness. Therefore, the Respondent granted leave to the Appellant to lodge an objection out of time on 22nd December 2023. The Respondent upon accepting the late application requested the Appellant to avail documents to support their grounds of objection. However, the Respondent asserted that the Appellant only provided audited accounts on 29th December 2023 and no further documents were submitted by the Appellant.

21. The Respondent upon conclusion of its objection review confirmed the Appellant's tax liability at KShs. 20,806,504. 00 inclusive of penalties and interest through the objection decision issued to the Appellant on 30th January 2024.

22. In response to grounds set out in paragraph no. (d), (e) and (f) of the Appellant's Memorandum of Appeal, the Respondent stated as follows:a.Kenya is a self-assessment tax regime where a taxpayer (the Appellant herein) determines what it considers to be the correct income, assesses self and pays the taxes therefrom;b.This self-reporting system is based on the fact that the taxpayer/the Appellant herein possesses the objective evidence documents/information and relevant knowledge relating to his tax liability;c.The Respondent is in a poor/disadvantaged position to establish an affirmative case and it is for the reason that the laws place the burden of proof on the Appellant to prove that the Respondent's assessment is wrong;d.Indeed, the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) under Section 23 requires the taxpayer to keep records relating to its business and financial transactions. Further, section 29 of the TPA requires the Appellant to declare the correct income and pay taxes therefrom whereas section 59 of the TPA requires the Appellant to produce records and information whenever requested by the Respondent;e.The system of self-reporting depends on the good will and the honesty of the taxpayer to disclose all the relevant facts and income to the Respondent;f.The tax laws recognize that not all taxpayers are truthful and honest and thus has given the Respondent the mandate to determine the Taxpayer's tax liability using his best judgment and the information available notwithstanding that the taxpayer has filed returns and declared what the taxpayer considers to be due to the government as taxes;g.The Respondent's mandate to determine the taxpayer's tax liability is derived from section 24(2), 31(1) and 59 of the TPA;h.The Respondent is clothed with the requisite powers to audit a self-assessment or declaration and issue amended assessment where it is established that a taxpayer has failed to make complete and accurate declarations;i.The Respondent reserves the right to audit the accounts of the taxpayer and the returns as well as demanding for documents and where applicable, employ the available methods in arriving at the tax due. In this case, the Respondent used the comparative analysis of the Appellant's filed tax returns;j.The use of this method was necessitated by the Appellant's failure to provide sufficient, credible and reliable information to enable the Respondent assess or determine the Appellant's tax liability through other means other than comparing the Appellant's tax decorations (VAT and Income Tax Declarations) with other information in his possession (purchases claimed from the Appellant by other taxpayers in the tax declarations);k.A comparison of Vatable' sales and purchases claimed by the Appellant's Customers/Clients from the Appellant vis a vis the sales declared by the Appellant in his VAT tax returns for the period covering 2016 to 2022 showed huge variances;l.To challenge the use of the above method, the Appellant not only has to provide all the documents in support of its allegations to the satisfaction of the Respondent but also to provide a reconciliation to explain the variances in order to dispense with his burden of proof. This was not done in this case;m.Further, the Appellant has to demonstrate that the Respondent's method was erroneous and that there were other viable and accurate methods which the Respondent failed or neglected to use;n.The Respondent averred that it demonstrated that there was a basis for using the method and that he exercised his best judgment in raising the assessment. In this case, the Respondent has demonstrated exactly that by showing that there was material and information which he considered before rendering the decision which confirmed the assessment;o.The Respondent stated that assessment and the objection decision is based on the undeclared VAT sales and purchases established from the Appellant's tax declarations as compared with tax declarations of his business partners;p.The Respondent averred that in the objection decision has further given the findings on each of the documentation and information provided by the Appellant outlining the credibility, reliability and the sufficiency of the records provided;q.That the summary of the Respondent's findings was that the Appellant failed to sufficiently support the grounds of objection by way of provision of documents. Specifically, the Appellant failed to provide the documents requested by the Respondent on 22nd December 2023. The documents requested by the Respondent but not provided includes: Bank statements for the years 2016 and 2022; certified copies of contract documents for the years 2016 to 2022; copies of all certificates of work done issued during the years 2016 to 2022; Sales ledger for the years 2016 to 2022; invoices issued for the years 2016 to 2022; audited accounts for the years 2016 to 2022 and explanation for the variances;r.That at paragraph No. (e) of his memorandum of appeal, the Appellant admits by stating that he only provided partial documents. The Respondents averred that section 51(3)(b) of the TPA provides that, "(3) A notice of objection shall be treated as validly lodged by a tax payer under subsection(2) i-... all the relevant documents relating to the objection have been submitted.’;s.Section 56(1) of the TPA provides that the burden of proof lies on the Appellant since Kenya is based on a system of self-assessment regime. The Respondent stated that the Appellant failed to provide sufficient documents to support its alleged grounds of objection and/or input VAT it sought to claim. Therefore, having provided partial and insufficient documents, the Appellant cannot be said to have discharged the burden of proof; andt.In response to the grounds no. (g), (h) and (i) of the Appellant's Memorandum of Appeal, the Respondent stated that the deduction of input tax is governed by VAT Act. The Respondent cited section 17 of the VAT Act provides for conditions which the Appellant or taxpayer must comply with to qualify for input VAT. These conditions are as follows:i.That the input tax was incurred on a taxable supply made to or on importation made by a taxpayer at the end of the tax period;ii.That the input tax is deducted by a registered person on taxable supplies made by him;iii.That the input tax is to be allowable for deduction within six months after the end of the tax period in which the supply or importation occurred;iv.That person holds a valid tax invoice for the supply; andv.That the registered supplier has declared the sales invoice in a return.

23. The Respondent further averred that the grounds set out in the Appellant's statement of facts were unfounded and not supported by any evidence. The Respondent stated that the Appellant has not discharged its burden of proof as per section 56(1) of the TPA, and section 30 of the Tax Appeals Tribunal Act, Cap. 469A of the Laws of Kenya (hereinafter “TATA”) and section 107 of the Evidence Act, Cap. 80 Laws of Kenya (hereinafter “Evidence Act”). Therefore, the Respondent's objection decision was valid in law, as the Appellant failed to prove that the same is incorrect, excessive or erroneous.

24. In addition to the statement of facts, the Respondent filed written submissions wherein it submitted that the Appeal is not competent on the basis that the Appellant did not serve the appeal documents upon it within the statutory timelines. It submitted that the notice of appeal was filed on 29th February 2024 but that the Appellant served the Respondent with the said Notice of Appeal on 29th May 2024. The Respondent submitted that the delay in serving the notice of Appeal is contrary to provisions of section 13(5) of the TATA which requires an Appellant to serve a copy of the appeal on the Commissioner within two days after giving notice of appeal to the Tribunal.

25. The Respondent relied on the case of Commissioner of Domestic Taxes v Scania East Africa Limited [2020] eKLR to submit that the right of appeal cannot be said to have been duly exercised because the Appellant failed to serve the notice of appeal within the prescribed timelines.

26. The Respondent also submitted that the Appellant did not sign his pleadings which is contrary to the strict requirements of Rules 4(1) (a) and 5(1) of the Tax Appeals Tribunals (Procedure) Rules, 2015. It relied on the case of Jarika County Lodge Limited vs Commissioner of Domestic Taxes, Nairobi TAT Appeal No.1529 of 2022 to support its position that unsigned pleading is in null and void. The Respondent also cited the case of George Kirimi Ringera v Board of Trustee Diocese of Meru Iruma Parish & 2 others [2020] eKLR where the Court held as follows:“In Regina Kavenya Mutuku & 3 Others v United Insurance Company Limited Nairobi (Milimani) HCCC No. 1994 of 2000(20021 1 KLR 250 Ringera, J (as he then was) held that: "An unsigned pleading has no validity in law as it is the signature of the appropriate person on the pleading which authenticates the same and an unauthenticated document is not a pleading of anybody It is nullity."

27. On whether the Appellant is entitled to claim for Input VAT, the Respondent relied on section 17 of the VAT Act, to submit that for the Appellant to be allowed to claim input VAT, the taxpayer must satisfy several conditions including that the input tax deduction is claimed within six months after the end of the tax period in which the supply or importation occurred and the person should hold valid tax invoice for the supply. The Respondent submitted that the Appellant is claiming input tax in 2023 for the supplies made in the years 2016 to 2022 therefore these claims are time barred.

28. The Respondent also submitted that whereas it requested for documents to support the notice of objection but the Appellant to do so as the Appellant only provided the audited financial statements.

29. The Respondent relied on the case of Gracan Construction LimitedV Commissioner of Domestic Taxes (Tax Appeal E162 of 2020) (2022] KEHC 14614 (KLR) wherein the Court found that the Respondent was justified in rejecting application because the claim was statute time barred.

30. On whether the Respondent's objection decision is valid, the Respondent submitted that it has the mandate to determine the Appellant's tax liability which is derived from section 24(2), 31(1) and 59 of the TPA. The Respondent also submitted that the Appellant failed to provide documents to support the notice of objection. It therefore submitted that the objection decision was issued in accordance to the provisions of the law.

Respondent’s prayers 31. The Respondent urged this Tribunal to strike out the appeal or dismiss it for want of merit. The Respondent therefore, urged the Tribunal to affirm the objection decision.

Prelimnary Objection 32. The Respondent’s preliminary objection dated 29th July, 2024 and filed on 30th August, 2024 was premised on the following grounds:a.That the Tribunal lacks jurisdiction to entertain the Appeal herein since the Appellant has not invoked its jurisdiction through filing and service of a valid Notice of Appeal pursuant to sections 12 and 13 of the TATA.b.That the Appellant's undated Memorandum of Appeal and the Statement of Facts does not conform to the strict requirements of Rules 4(1) (a) and 5(1) of the Tax Appeals Tribunals (Procedure) Rules, 2015 and is thus incompetent.c.The Appellant's Notice of Appeal dated 29th February 2024 and the undated Appeal documents served on the Respondent on 29th May 2024 does not conform to the requirements of section 13(5) of the TATA and Rule 11 of the Tax Appeals Tribunals (Procedure) Rules, 2015. d.These are statutory violations and not procedural technicalities/issues that cured under Article 159(2) (d) of the Constitution of Kenya, 2010 (hereinafter “the Constitution”).e.The Appeal herein is bad in law and an abuse of the judicial process and thus should be struck out in the first instance with costs to the Respondent.

33. The dual issues raised in preliminary objection were that the Appellant delayed in serving the appeal documents and that the pleadings are not signed.

34. With regard to the issue of the non-signing of the pleadings, the Respondnet objected to the fact that the Appellant did not sign his pleadings. This is contrary to the strict requirements of Rules 4(1)(a) and 5(1) of the Tax Appeals Tribunals (Procedure) Rules, 2015. Rule 4 4(1)(a) provides as follows:‘‘Memorandum of appeal(1)A memorandum of appeal referred in rule 3(2) shall—(a)be signed by the appellant’’

35. On the other hand, 5(1) provides as follows:“Statement of facts of appellant(1)Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.”

36. The Tribunal notes that pleadings must be signed and an unsigned pleading is void. The Tribunal adds that the pleading can be signed by an Appellant or the Appellant’s representative. In this regard, section 25(1) of the TATA provides as follows:‘‘25. Representation before the Tribunal(1)For the hearing of proceedings before the Tribunal, the appellant may appear in person or be represented by a tax agent or by an advocate.’’

37. In this case, the pleadings indicate that the Appellant was represented by an agent. The Tribunal notes that pleadings have the name of the agent and a signature can be anything marked on the document; be it a name, initial, a mark, a stamp, seal or any one of those things as long as it is marked on a document by person who has authority sign required to so to authenticate a document.

38. Having examined the pleadings, the Tribunal notes that the pleadings were in the name of the agent whose stamp only appears in the notice of appeal. The stamp and signature of the Appellant’s agent neither appeared on the memorandum of appeal nor on the statement of facts of the Appellant. Under the circumstances, the Tribunal’s finding is that the pleadings were not signed.

39. The Tribunal finds that the second issue regarding the service of the pleadings is rendered moot by the finding that the pleadings were not signed. This matter is available for striking out.

Final Decision 40. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal fails and proceeds to makes the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own cost.

41. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 7TH DAY OF FEBRUARY 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEROLOLCHIKE S. SPENCER - MEMBER