Mugwetwa v Commissioner of Investigations & Enforcement [2025] KETAT 213 (KLR)

Mugwetwa v Commissioner of Investigations & Enforcement (Tax Appeal E416 of 2024) [2025] KETAT 213 (KLR) (11 April 2025) (Judgment)

Neutral citation: [2025] KETAT 213 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E416 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

April 11, 2025

Between

Mutegi Mugwetwa

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a Kenyan citizen and a registered taxpayer for Income tax and VAT obligation.

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 issued income tax, Value Added Tax (hereinafter “VAT”) and monthly rental income (hereinafter “MRI”) additional assessments vide a letter dated 11th December 2023 for the period from 2017 to 2021. The Appellant disputed the Respondent's finding and objected through its letter dated 19th December 2023 which was received by the Respondent on 21st December 2023.

4. The Respondent having considered the grounds raised in the Notice of Objection, the documentations and further information provided in support and issued its Objection Decision dated 19th February 2024 partially accepting the objection and adjusted taxes to Kshs 12,667,116. 00 as due and payable.

5. The Appellant being dissatisfied with the objection decision, and having obtained leave to file his appeal out of time, filed this appeal vide Notice of Appeal dated 20th March 2024.

The Appeal 6. On 25th April 2024, the Tribunal deemed the Memorandum of Appeal dated 15th April 2024 and filed on 17th April 2024 as having been duly filed. The Memorandum of Appeal raised the following grounds of appeal:a.That the Respondent erred in the law and fact while assessing additional income tax. Income Tax Act CAP 470 of the Laws of Kenya (hereinafter “ITA”) provides for tax payer to claim of relevant cost of Income and expenses incurred while generating income. The Respondent disregarded expenses which are tax allowable expenses in total disregard of the law hence arriving to wrong decision of income tax in respect of the Appellant.b.That while computing income, the Respondent based [its assessment] on banking. However, part of deposits constituted proceeds from sale of properties hence arriving to wrong VAT and Income tax decision.c.That the Respondent subjected all the purported undeclared income to 16% VAT, however, part of income was generated from hobby farming hence exempted from tax pursuant to Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).d.That while computing for income, the Respondent summed up all the credits. However, Kshs 7,543,006. 00 was erroneously credited to Appellant Equity Bank account hence arriving to wrong VAT and Income tax decision in respect of the Appellant.e.That while assessing for MRI, the Respondent erred in fact by assuming 100% occupancy of both commercial and residential units. However, in the year 2020 and 2021 for instance the units was under renovations and were not occupied hence arriving at wrong decision of MRI in respect of the Appellant.f.That the Respondent assessed Appellant under an additional line item "other businesses". Apart from hobby farming, the Appellant is not involved in any other business whatsoever.g.That the Respondent erred both in law and facts by computing Commercial Rental Income Tax of Mwoga Mining Company Limited which is a distinct limited Company with its own PIN Certificate and separate from that of Appellant as one entity and thus, Appellant Income tax should be computed separate from that of Mwoga Mining Company Limited.h.That the Respondent erred in law and facts by failure to appreciate that the Appellant is a Senior Citizen of 82 years in assessment and computation of both Rental Income Tax and VAT and does not work for gain.

Appellant’s Case 7. The Appellant’s Statement of Facts dated 15th April 2024 and filed on 17th April 2024 were deemed as having been duly filed and served on 25th April 2024. The Appellant failed to file written submissions and only relied on his pleadings.

8. The Appellant stated that he is a sole proprietor and owns rental property in Tharaka-Nithi County, Chuka township. He asserted that he is a retired senior citizen of 82 years.

9. According to the Appellant, if the Respondent reviewed records/documents that were tendered during the objection application, this matter would not have been filed at the Tribunal.

10. The Appellant stated that sickness derailed the documents sharing during review and objection application. He averred that he is a law abiding citizen and has religiously been filing his tax returns and paid due taxes in timely fashion.

11. To prove his tax compliance status, the Appellant stated that he holds tax compliance certificates against all the years under review and further asserted that he is very committed to the Respondent’s mission of "tulipe ushuru tujitegemee" and that in view of the fact that he is a senior citizen who has paid taxes over decades, this Tribunal should grant prayers sought in the Appeal.

12. Consequently, the Appellant prayed for the following reliefs:a.That income tax, VAT and MRI decision contained in the objection decision notices dated 19th February 2024 rejecting application for objection against additional Income Tax, VAT and MRI assessment against the years 2018, 2019, 2020 and 2021 which was further confirmed vide the notice dated 19th February 2024 be set aside.b.That additional Income tax, VAT and MRI assessments should not be charged against Appellant.c.That the assessed principal taxes in the sum of Kshs 12,667,116. 00 in the decision dated 19th February 2024 be set aside.d.A clearance certificate be issued to the Appellant for the year 2018,2019,2020 and 2021. e.Respondents pay the cost of this Appeal if any.

Respondent’s Case 13. In response to the appeal, the Respondent lodged its Statement of Facts dated and filed on 24th May 2024. The Respondent also filed supplementary Statement of Facts dated and filed on 31st May 2024 without leave to do so from the Tribunal.

14. Pursuant to the provisions of Section 15 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) the Respondent is required to file a Statement of Facts within 30 days of being served with a copy of an appeal to the Tribunal. Without leave the supplementary Statement of Facts cannot be considered by the Tribunal and have been expunged from the record. The Respondent also filed written submissions dated 30th December 2024 on even date.

15. The Respondent stated that it commenced investigations against the Appellant covering the period 2017 to 2021 resulting to a report dated 18th October 2023.

16. The Respondent carried out an analysis of the Appellant's bankings and from the deposits established the Respondent adjusted loans, fixed deposits, deposits for loan repayment related account deposit, interest income, reversals, insurance premiums and closure proceeds to arrive at the gross taxable income. The Respondent also computed rental income from the established income.

17. On 11th December 2023, the Respondent issued additional assessments to which the Appellant disputed the Respondent's finding and lodged its Notice of Objection dated 19th December 2023 which was received on 21st December 2023. Further the Respondent noted that the Appellant through a letter received by the Respondent on 24th January 2024 provided documents in support of the objection.

18. Upon considering the objection and the supporting documents, the Respondent issued its objection decision dated 19th February 2024 partially accepting the objection and adjusted taxes to Kshs 12,667,116. 00 as due and payable. The Appellant was aggrieved hence he appealed against the objection decision.

19. In response to the appeal, the Respondent relied on Section 31 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) which allows the Commissioner to amend an assessment based on available documents and best judgement.

20. In response to grounds (a),(c) 3, (e) and (f) of the Appeal, the Respondent stated that whereas Section 56 of the TPA places the onus of proving that a tax assessment is incorrect on the Appellant, he failed to provide evidence to substantiate his assertion hence adjustment for the incurred expenses was justified. The Respondent also stated that the Appellant failed to show the part of his income which was proceeds of hobby farming and were exempt from VAT.

21. In response to ground (b) and (d) of the Appeal, the Respondent asserted that section 29 and 31 of the TPA allows it to issue an assessment based on best judgement relying on all the information that is at its disposal. The Respondent averred that the decision to use the indirect method of using banking deposit, was guided by the facts that the Appellant failed to demonstrate loan items and inter-bank transfers.

22. The Respondent further stated that a tax investigation program must embrace a range of methods and techniques for determining and verifying a taxpayer's income if it is to be an effective component of a balanced compliance management strategy. It averred that detecting and deterring non-compliance requires more than a mere examination of a taxpayer's books and records and necessitates an analysis of the taxpayer's financial affairs to correctly assess tax liabilities.

23. According to the Respondent, bank deposits method is based on the premise that money received must either be deposited or spent. It argued that this approach is particularly useful if an analysis of bank accounts and a taxpayer's cash expenditure indicates a likelihood of undeclared income and the taxpayer makes regular payments into bank accounts that appear to be from a taxable source.

24. The Respondent contended that having used the banking analysis to raise the assessment, the burden of proof now shifted to the Appellant to explain which of the deposits that had been included in the assessments was not from a taxable source, was already taxed or was not income.

25. It asserted that the taxes from commercial rent was computed by comparing the rent received and declarations for Income Tax and VAT. The MRI was computed from the average number of residential units occupied at any given time. The units are located within Chuka town. The MRI was computed as Kshs 720,000. 00.

26. The Respondent further submitted that it was justified in assessing bank deposits in determining taxable income on the basis that the Appellant had failed to account for in the tax returns. The Respondent submitted that the decision to use the indirect method by using banking deposit, was guided by the fact that the Appellant failed to demonstrate loan items and inter-bank transfers.

27. The Respondent relied on the case of Commissioner of Domestic Services v Galaxy Tools Limited [2021] eKLR; and Commissioner Investigations and Enforcement v Kidero (Income Tax Appeal Eo28 of 2020) [2022] KEHC 52 (KLR) (Commercial and Tax) to assert that the Appellant has a duty to prove that its decision is incorrect. The Respondent therefore, submitted that the Appellant failed to discharge his burden of proof when he failed to explain the cause of the variance.

28. The Respondent submitted that it was justified in disallowing expenses incurred by the Appellant during the assessment period. That whereas Section 15 of the ITA provides for deductions allowed in ascertainment of total income, the deductions ought to be supported by relevant expense documents.

29. The Respondent posited that whereas Section 54A (1) of ITA and Section 23 of TPA requires taxpayers to keep records, the Appellant did not avail the documents to support the expenses.

30. The Respondent relied on the case of Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] ELR; and Atronix Limited v Comm DTD TAT 551 of 2021 where it was held that the Appellant ought to have availed relevant documents to support the notice of objection.

31. Consequently, the Respondent urged the Tribunal to uphold the decision dated 19th February 2024 and this Appeal be dismissed with costs.

Issues for Determination 32. The Tribunal having carefully evaluated parties’ pleadings is of the view that two issues call for its determination:a.Whether the assessments in respect of the period 2017 to 2018 were time barred.b.Whether the Respondent’s objection decision dated 19th February, 2024 was justified.

Analysis and Findings 33. The Tribunal having established two issues for determination will proceed to analyse them as hereinunder:

a. Whether the assessments in respect of the period 2017 to 2018 were time barred. 34. The Respondent issued assessment dated 11th December 2023 seeking to recover taxes from the period 2017 to 2021. The question then is whether the assessments were time barred.

35. The Tribunal notes that timelines for filing tax returns, keeping tax records, assessments of the returns, objecting to the assessments, issuing of the objection decision, appealing against the objection decision are outlined and provided for in the law. Section 23 of the TPA provides for timelines for keeping records. Section 23(1) (c) requires documents to be kept for five years or lesser period. The said section provides as follows:‘‘1)A person shall—(a)Maintain any document required under a tax law, in either of the official languages;(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

36. It then follows that under Section 23 of the TPA, the Respondent has no basis in law to request a taxpayer to adduce documents that are beyond the five-year period. In relation to additional assessments, Section 31(4) (b) of the TPA requires assessments to be issued within five years. It provides as follows:‘‘The Commissioner may amend an assessment——(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.’’

37. The Tribunal notes that upon the filing of returns the time within which an assessment can be made by the Commissioner, pursuant to the cited provisions of Section 31 (4) (b), is calculated as effective from 1st July of the year of filing a return on or before 30th day of June of the year. In this regard Section 52B (1) (a) of the ITA 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.’’

38. Pursuant to the provisions of 52B (1) (a) of the ITA and in absence of any other date when the Appellant may have filed his returns, the Appellant ought to have filed his returns not later than 30th June 2017 and 2018 in respect of the 2017 and 2018 years of income. It follows then, that the Respondent ought to have issued assessments within five years from 30th June 2017. However, the Respondent issued its assessment on 11th December 2023, a delay of 6 years and 5 months or thereabouts.

39. The Tribunal finds, based on the preceding paragraphs that the income tax and MRI assessments in respect of the period 2017 to 10th December 2018 were time barred and should be expunged from the assessment. The Respondent did not demonstrate that it went beyond the stipulated statutory period on the basis of gross or wilful neglect, evasion or fraud by the Appellant pursuant to the provisions of Section 31(4)(a) of the TPA.

40. The Tribunal notes on the other hand, that VAT is due on or before the 20th day of the following month. This includes both the return and payment. Section 19 of the VAT Act provides as follows:‘‘19. When tax is due(1)Tax shall be due and payable at the time of supply.(2)Notwithstanding the provision of subsection (1), a person may defer payment of tax due to a date not later than the twentieth day of the month succeeding that in which the tax became due.’’

41. The Tribunal finds, in view of the provisions of Section 19 of the VAT act that the VAT assessments in respect of the period from 2017 to 20th November 2018 are time barred and should be expunged from the assessment because the Respondent did not demonstrate, that there was gross or wilful neglect, evasion or fraud by the Appellant pursuant to the provisions of Section 31(4)(a) of the TPA.

42. In the case of Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) the High Court stated as follows regarding the issue of statutory timelines pursuant to the provisions of Section 31(4) of the TPA:‘‘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.’’

43. The Tribunal notes that the Respondent did not demonstrate the reasons for its issuance of assessments beyond the 5-year statutory timeline pursuant to the provisions of Section 31 (4) of the TPA. Consequently, the Tribunal finds that the income tax assessments and MRI from 2017 to December 2018, and VAT assessments from 2017 up to January 2018 as assessed on 11th December 2023 are beyond the statutory 5 years are time barred.

b. Whether the Respondent’s objection decision dated 19th February, 2024 is justified. 44. The Tribunal having found that part of the assessments is time barred, will proceed to analyse whether the Appellant discharged his burden of proof in relation to the assessments for the periods 2019, 2020 and 2021.

45. The Appellant stated that the Respondent’s objection decision was erroneous because the Respondent ignored documentary evidence and the reasons that the Appellant provided in support of the notice of objection. On the other hand, the Respondent submitted that the Appellant provided documents but were not enough to justify vacation of the entire assessments. The Appellant in its grounds for the Appeal averred the Respondent assessed taxes from Mwoga Mining Company Limited which is a distinct limited Company but failed to substantiate this assertion through evidence.

46. The Tribunal is of the view that for any taxpayer must adduce documentary evidence before it to demonstrate that the Respondent’s decision is incorrect. A taxpayer ought to discharge its burden of proving that the decision of the Commissioner is incorrect pursuant to the following provisions of Section 56(1) of the TPA and Section 30 of the TATA:“Section 56 (1) of TPA: in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect’”“Section 30 of TATA:“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.’’

47. In the case of Katambo v Attorney General & another (Petition E532 of 2022) [2023] KEHC 19949 (KLR) the High Court held as follows:‘‘Section 56(1) falls within Part VIII which provides for Tax Decisions, Objections and Appeals. The provision is applicable in proceedings where a decision has been made and the taxpayer objects to, or appeals against such decision. This being the case, it then falls upon the tax payer challenging a decision or assessment to provide proof that the assessment is not correct. It cannot therefore be argued that placing the burden of proof contravenes the provisions of Articles 49(1) (b) and (d) and 50(2)(a) and (l) of the Constitution.’’

48. Section 13(2) (d) of TATA provides as follows:‘‘13(2)The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)A memorandum of appeal;(b)Statements of facts;(c)The appealable decision; and(d)Such other documents as may be necessary to enable the Tribunal to make a decision on the appeal.’’

49. The view of the Tribunal is that pursuant to Section 13(2)(d) of TATA, the documents that a taxpayer files enables the Tribunal to make a decision. Conversely, if a taxpayer fails to file documentary evidence in support of his/her/its appeal, then it/her/he does not discharge its burden of proving that the decision of the Commissioner is incorrect.

50. The Tribunal is of the further view that in order to comply with the provisions of Section 15 of ITA, the Appellant ought to have adduced evidence to demonstrate that it incurred expenses in production of its taxable income. Further the provisions of Section 17 (3) of VAT Act, require that as part of its record of business, a taxpayer ought to have invoices, credit notes, bank statements among other documents to prove that it has made purchases.

51. The High Court in the case of Commissioner of Domestic Taxes v Altech Stream (Ea) Limited [2021] KEHC 5755 (KLR) emphasised that a Statement of Facts should be backed by documentary evidence in holding as follows:‘‘It is for the tax payer in any proceeding to prove that the tax decision is incorrect or assessment is excessive. The record would show that the respondent not only produced a detailed statement of facts, well supported by documentary evidence, but that it presented a witness at the trial who clarified the issues to the satisfaction of the Tribunal.’’

52. The Tribunal finds that the Appellant did not support his case with relevant and sufficient documents and therefore he failed to discharge his burden of proving that the Respondent’s assessments issued in respect of the period 2019, 2020 and 2021 were incorrect. Accordingly, the Respondent’s objection decision dated 19th February, 2024 was partially justified.

Final Decision 53. The upshot of the foregoing is that the Tribunal finds and holds that the Appeal partially succeeds and proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 19th February 2024 be and is hereby varied in the following terms:i.The income tax and MRI assessments in respect of the period 2017 to 10th December 2018 be and are hereby set aside;ii.The VAT assessments in respect of the period 2017 to January 20th 2018 be and are hereby set aside; andiii.The assessments in respect income tax, MRI and VAT for the 2019, 2020 and 2021 years of income be and are hereby upheld.c.Each party to bear its own cost.

54. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 11TH DAY OF APRIL 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER