Salwa Kenya Limited v Commissioner of Investigation & Enforcement [2024] KETAT 1027 (KLR)

Salwa Kenya Limited v Commissioner of Investigation & Enforcement (Tax Appeal 416 of 2023) [2024] KETAT 1027 (KLR) (19 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1027 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 416 of 2023

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & T Vikiru, Members

July 19, 2024

Between

Salwa Kenya Limited

Appellant

and

Commissioner of Investigation & Enforcement

Respondent

Judgment

Background 1. The Appellant is a resident company whose principal business is manufacturing of cooking oil.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for collecting and receiving all tax revenue. Further, under Section 5(2) of the Act, concerning 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 & 2 of the First Schedule to the Act to assess, collect and account for all revenues under those laws.

3. The Respondent carried out tax investigations on the Appellant and issued its notice of tax finding vide a letter dated 20th December, 2022.

4. The Respondent further raised assessments in iTax on 15th December 2022, 20th December, 2022, 21st December, 2022 and 22nd December, 2022.

5. The Appellant made objection application in iTax on 13th January 2023 and vide a letter received by the Respondent on 16th January 2023.

6. The Respondent issued its decision vide a letter dated 14th March 2023.

7. The Appellant being dissatisfied with the decision by the Respondent filed a Notice of Appeal at the Tribunal on 13th April 2023.

The Appeal 8. The Appellant’s Memorandum of Appeal filed on the 13th April 2023 was based on the following grounds:a.That the Commissioner erred in law and facts by considering all monies in the bank statements i.e. inter accounts transfers, contra entries, bank loans, borrowings among others as incomes and subjecting all to income tax and VAT without carrying out proper verification, reconciliations and review of company financial records and transactions.b.That the Commissioner erred in law by omitting input VAT and other related manufacturing and direct costs incurred to generate the business incomes before computing the assessments.c.That the Commissioner erred in law and in fact by failing to communicate with the taxpayer to provide and reconcile the accounting records and its intention to assess and demand the taxes as per Section 31(3-8).d.That the Respondent failed to recognize the fact that the company was a newly established manufacturing company that is entitled to claim investment deductions.e.That the Respondent erred in law by computing output VAT on the portion of vatable gross deposits which were estimated based on the ration of the taxpayer general rated purchases to total purchases claimed in VAT returnsf.That the Respondent failed to validate the objection in line with Section 51(3) of the Tax procedure Act after provisions of requested records.g.That the Appellant actually did lodge its objection under Section 51 of Tax Procedure Act.h.That Commissioner is in total breach of Section 51(3, 4, 9) of the Tax Procedure Act of 2015. i.That the assessment on Income tax and Value Added Tax is all erroneous by the fact that the Respondent, never requested for records supporting income and expenses before issuing the objection decision.j.That the Respondent erred in law by failing to take into account and apply Section 17(1) of the VAT Act 2013 which provides for deduction of input tax for taxable supply made by a registered person.k.That further the Respondent erred in law by failing to take into account and apply Section 17(2) and (3) of the VAT Act 2013, which provides for the nature and type of documentation which should be provided by a taxpayer to support deduction of input tax.l.That Respondent is mandated by law to access and take into account the documentary evidence provided by the Appellant to support its case.m.That in view of the foregoing, the Appellant is apprehensive that the demanded tax by the Respondent to be purportedly unpaid tax, if allowed will occasion a grave injustice and harm to the Appellant's business operations due to the misapplication of the income and VAT tax laws.

Appellant’s Case 9. The Appellant's Appeal was premised on the following documents as filed before the Tribunal;i.The Appellant’s Statement of Facts dated 1st August, 2023 and filed on 4th August 2023. ii.The Appellant’s written submissions filed on 5th March, 2024.

10. The Appellant submitted that there was no request to audit the Appellant business for any period, nor any form of communication either in writing or electronic was ever given by the Respondent to either audit or intention to audit.

11. That the Respondent never at any given time did write to the Appellant either formal or verbal, asking about the under declaration of taxes.

12. That without any form of communication to the Appellant by correspondence, the Respondent went ahead and raised an assessment and later followed by an objection decision dated 14th March, 2023, covering Corporation tax and Value Added Tax.

13. That bank statements are not a prove of business or occurrence of transaction.

14. That the Respondent vide a letter dated 26th May,2023 raised a tax demand.

15. That the tax demand made by the Respondent was as per the bank statement, which does not indicate or give clear financial position. That not all credits in the bank are incomes, and not all debits are purchases or expenses.

16. The Appellant contended that the two tax demands were excessive, punitive, unfair and unjust and that the Appellant had no tax liabilities to pay.

17. That the Respondent should by law be allowed to review its findings and vacate the assessments.

Appellant’s Prayers 18. The Appellant’s prayer to the Tribunal was for orders that:a.The Tribunal be pleased to set aside the assessments under review herein.b.Thereafter, the Tribunal be pleased to substitute the tax demand under review herein in line with the Appellant’s computations set out under the Appellant’s Statement of Facts and recognize the allowable deduction from payment source.c.In the alternative to (b) above and further to (a) herein above, the Tribunal be pleased to vary the tax demand herein as per its wisdom.d.The Tribunal be pleased to Order the Respondent to pay costs of this Appeal to the Appellant.e.The Tribunal be pleased to issue any other Order favorable to the Appellant as it may find just and expedient to issue.f.The Respondent considers the documentary evidence provided by the Appellant to support its case.

Respondent’s Case 19. The Respondent relied on its Statement of Facts dated and filed on 1st September 2023.

20. The Respondent stated that it conducted investigations on the Appellant for non-remittance of taxes for the period January 2016 to December 2020.

21. That from the investigations, it was noted that for the period under review, the Appellant was in the business of processing, refining and selling edible oil and fat products from crude palm oil. That the oil was imported from Malaysia and Australia and then repackaged and branded in Kenya as Salwa Fry, Salwa Fats, RBD Palm Stearin, Palm Fatty Acid dilute and Mama Cooking Fats. That the Appellant also sells distilled purified water and juice.

22. The Respondent averred that to establish the accuracy of the Appellant's declarations, the following tests and analysis were carried out:-i.Banking analysis (Credits) for Company and its directors.ii.VAT3 return analysis.iii.Breakdown of sales.iv.PAYE return analysis.v.Import analysis.vi.Customer declarations in VAT3 vs declarations in IT and VAT by the taxpayer.vii.Exempted VAT sales declared.

23. That a review of the Appellant's Directors revealed that the Directors had not complied with the provisions of the Tax Procedures Act, VAT Act and Income Tax Act.

24. Regarding bank deposits analysis it submitted that a variance between the expected income based on taxable deposits and the income declared in the tax returns was noted. That the bank deposits were adjusted for non-income deposits such as loans, contra entries, inter-account transfers and output VAT.

25. On taxable income established based on bank deposits, the Respondent stated that output VAT was computed on the portion of vatable gross deposits which were estimated based on the ratio of the taxpayer general rated purchases to total purchases claimed in the VAT returns.

26. Regarding overstated purchases claimed in the Income tax returns, it averred that there were variances between purchases claimed in VAT returns and those in Income tax returns in 2018 and 2019.

27. That the Respondent issued a notice of tax findings dated 20th December 2022 outlining the determination of taxable income based on bank deposits analysis, overstated purchases claimed in Income tax returns and overstated salaries expenses and established a principaltax liability of Ksh. 868,125,266. 00.

28. That the Respondent also requested the Appellant to provide explanations, supporting documentation and reconciliations for the variances.

29. The Respondent stated that it issued Assessment No. KRA202219994312 for the amount of Kshs 30,830,253. 44 being the principal Value Added Tax for the period 1st September, 2018 to 30th September, 2018 together with interest in the sum of Ksh. 12,213,050. 94. That the Respondent also issued Assessment No. KRA 202219988136 for the principal Value Added Tax of Kshs 7,181,754. 56. 00 for the period 1st August, 2017 to 31st August, 2017 together with interest in the sum of Ksh 4,134,687. 73. That the Respondent also issued Assessment No. KRA 2022219988670 for the amount of Ksh.230,079354. 00 being the principal Value Added Tax for the period 1st September, 2019 to 30th September, 2019 together with interest in the sum of Ksh. 92,029,622. 89. That these assessments were issued on 22nd December 2022.

30. The Respondent added that it also issued Assessment No. KRA202220118223 for the amount of Ksh. 1,632,000. 00 being the principal Value Added Tax for the period 1st September, 2019 to 30th September, 2019 together with interest in the sum of Ksh. 652,800. 00. That this assessment was issued on 30th December 2022.

31. That the Appellant being dissatisfied with the additional assessments lodged an objection application notice on iTax on the 13th January 2023 objecting to the entire assessment

32. That the Respondent reviewed the Appellant's Notice of Objection and vide a letter dated 14th March 2023 informed the Appellant that its notice of objection was invalid having failed to meet the mandatory requirements of Section 51(3) of the Tax Procedures Act. That the Respondent subsequently confirmed its assessment.

33. The Respondent stated that on 26th May 2023, it issued a demand notice requiring the taxpayer to make a payment of Ksh. 868,125,266 being tax due.

34. It was the Respondent’s contention that whereas Section 24 of the Tax Procedures Act allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

35. That similarly Section 73 (2) (b) of the Income Tax Act, allows the Commissioner to use its best judgement to assess a taxpayer where it has reason to believe that a return filed is not true or correct.

36. The Respondent stated that it was therefore within its right to bring forth the assessment against the Appellant and use the information available to it as the basis of the said assessment.

37. That the Respondent relied on Section 15 of the Income Tax Act which provides for deduction allowed with regard to expenses. That the provision emphasizes that deductions allowed ought to have been wholly and exclusively incurred in the production of income and hold the taxpayer to strict proof of the same.

38. That the Appellant, at the objection stage, failed to provide supporting records that the input VAT and other related manufacturing and direct costs incurred were wholly and exclusively used in generating business income and hence the issuance of the assessment.

39. It averred that the taxpayer objected to the assessments on 13th January 2023 and the Respondent confirmed the assessments on the 14th March 2023 which is within the stipulated mandatory timelines.

40. The Respondent further stated that the Appellant did not provide any supporting documents at the objection stage to support its arguments and therefore in the absence of evidence, the Respondent was justified in confirming the assessment.

41. The Respondent maintained that it used the information available to it when arriving at the taxes during investigations. That it was the Appellant's obligation to send the necessary documents when requested to enable the Commissioner to make adjustment before the issuance of assessments.

42. The Respondent further asserted that it extended a courtesy to the Appellant by requesting that the Appellant provide supporting documentation which the Appellant blatantly ignored despite several reminders and hence the confirmed assessment.

43. Regarding the Appellant's contention that the Respondent failed to consider the documents and information provided by the Appellant in its objection, the Respondent stated that the Appellant failed to provide any supporting documents to the Respondent contrary to its assertion.

44. The Respondent further stated that all the documents provided by the Appellant as part of the Appeal are inadmissible as per the provisions of Section 13(6) of the Tax Appeals Tribunal Act which states that an appeal may only relate to information and documents to which a decision relates to.

45. The Respondent averred that the Appellant's actions were in contravention of Section 51(3)(c) of the Tax Procedures Act and that the Appellant is attempting to use the Tribunal to introduce new documents.

46. In response to the Appellant's assertion that not all monies in the bank statements are income, the Respondent stated that the Appellant failed to discharge its burden of proof in proving that the Respondent's tax decision was either erroneous, excessive or incorrect as per the provisions of Section 56(1) of the Tax Procedures Act.

47. The Respondent further contended that the Appellant did not provide any evidence to show or demonstrate that the assessment was erroneous or excessive despite seeking time to do so and being accorded an opportunity to support its position.

48. The Respondent averred that the Appellant was in contravention of Sections 23 and 93 of the Tax Procedures Act which stipulate that failure to keep, retain or maintain business records is an offence evidenced by its failure to provide records when requested.

49. The Respondent stated that its actions were in line with Section 51(3) and 51(4) of the Tax Procedures Act given that the Appellant's objection, although invalid, was considered and consequently invalidated in line with the relevant laws.

50. The Respondent also stated that the Appeal before the Tribunal was not proper given that a confirmation of an assessment is not an appealable decision as defined by Section 2 of the Tax Procedures Act.

51. The Respondent stated that the confirmation of assessment issued on 14th March 2023 was proper and that the Appellant had failed to prove that the Assessment Order or the invalidation were excessive or issued outside the set tax statutes.

52. The Respondent stated that the confirmation of assessment issued was proper and the same should be upheld.

Respondent’s Prayer 53. The Respondent's prayed to the Tribunal to find:a.That the Respondent's confirmation of assessment issued on 14th March 2023 be found to be proper in law and be upheld.b.That this Appeal be dismissed with costs to the Respondent as the same lacks merit.

Issues For Determination 54. The Tribunal has considered the pleadings and documents filed by the parties in this Appeal and it is of the view that the issues that falls for its determination in this Appeal are:a.Whether there is a valid Appeal before the Tribunal.b.Whether the Respondent erred in its assessment of tax on the Appellant.

Analysis And Determination 55. The Tribunal having determined the issues that precipitated for its consideration hereby proceeds to analyze each as hereunder.

a. Whether there is a valid Appeal before the Tribunal. 56. This Appeal was triggered by the Respondent’s invalidation of the Appellant’s objection vide a letter dated 14th March 2023.

57. It was the Appellant’s contention that the Respondent failed to validate the objection in line with Section 51(3) of the Tax Procedures Act after provisions of requested records. That the Appellant actually did lodge its objection under Section 51 of Tax Procedure Act.

58. That the assessment on Income tax and Value Added Tax is all erroneous by the fact that the Respondent, never requested for records supporting income and expenses before issuing the objection decision.

59. The Respondent on its part stated that it reviewed the Appellant's notice of objection and vide the letter dated 14th March 2023 informed the Appellant that its notice of objection was invalid having failed to meet the mandatory requirements of Section 51(3) of the Tax Procedures Act. That the Respondent subsequently confirmed its assessment.

60. From the documents presented to the Tribunal, it is noted that the Appellant lodged objections to the Respondent’s assessments in iTax on 13th January 2023 and vide a letter received by the Respondent 16th January 2023.

61. The Respondent’s reply was through the letter titled ‘CONFIRMATION OF ASSESSMENT’ dated 14th March 2023 where it stated in part as follows;“The Commissioner notes with concern that despite several reminders, you have failed to produce the requested supporting documents required to validate the objection in line with section 51(3) of the Tax Procedures Act.In light of the above, your application is declared invalid at it fails to meet the requirements set out under the provisions of section 51(3) of the same Act which provides that:…”

62. Section 51(3) of the Tax Procedures Act provides as follows regarding validity of objections;“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute, or has applied for an extension of time to pay the tax not in dispute under Section 33(1); and(c)all the relevant documents relating to the objection have been submitted.”(Emphasis added)

63. It is clear from the content of the Respondent’s letter of 13th March 2023 that it had invalidated the Appellant’s objections for failure to provide supporting documents to its notice of objection.

64. The Tribunal also notes that the objections in iTax dated 13th January 2023 did not indicate any supporting documents attached. Further, from the Appellant’s objection letter received by the Respondent on 16th January 2023 it states at the last paragraph as follows;“…Please note that the management of the Company is willing to cooperate and provide sufficient supporting documents to reconcile the banking’s analysis on need basis in support of this objection.Kindly let us know if and when to deliver them.…”

65. Although the Appellant in its pleadings averred that it had provided documents in support of its objection, it did not provide any documentary evidence to show the date or the manner it provided the same to the Respondent. Further, from the above cited Appellant’s objection it is evident that at that point of objection no document had been provided.

66. It is trite law that the burden of proof to discredit a tax decision is upon a taxpayer, challenging the decision. This is well immortalized under Section 56(1) of the Tax Procedures Act which reads as follows;“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

67. In this particular Appeal the Appellant had the burden to discharge in demonstrating to the Tribunal that it indeed provided documents to the Respondent to which the Respondent failed to consider prior to invalidating its objection and confirming the assessments.

68. The Tribunal is guided by Section 30 of the Tax Appeals Tribunal Act in determining the party that bears the burden of proof under this particular circumstance. The Section provides as follows:-“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; orb.In any other case that the tax decision should not have been made or should have been made differently.”

69. From the evidence adduced it was clear that the Appellant failed to discharge the burden placed on it by the law. Accordingly, the Appellant having failed to support its objection leading to invalidation by the Respondent, the Tribunal determines that the Appellant had no decision of the Respondent capable of being appealed against.

70. The Tribunal reiterates its finding in TAT 1288 of 2022 Moto Commodities Limited V Commissioner of Domestic Taxes where it held as follows;“36. In the Circumstances, the Appellant did not have a valid objection on record and it followed that the Respondent’s assessment stood confirmed, in which case there did not exist a decision of the Commissioner on record in this appeal from which the Appellant could lodge an appeal to the Tribunal. The present appeal is thus invalid as it lacks the legs to stand, crawl or walk on.”

71. Flowing from the above analysis the Tribunal finds that this Appeal is invalid.

72. Having held that the Appeal herein is invalid, the Tribunal will not delve into the other issue that fell for determination as it has been rendered moot.

Final Decision 73. On the basis of the foregoing analysis, the Tribunal finds that this Appeal lacks merit and accordingly proceeds to issue the following Orders;a.The Appeal be and is hereby dismissed.b.Each party is to bear its own costs.

74. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF JULY, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBERDR. TIMOTHY B. VIKIRU - MEMBER