Times U Sacco v Commissioner of Domestic Taxes [2024] KETAT 870 (KLR)

Times U Sacco v Commissioner of Domestic Taxes (Tax Appeal E030 of 2023) [2024] KETAT 870 (KLR) (28 June 2024) (Judgment)

Neutral citation: [2024] KETAT 870 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E030 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

June 28, 2024

Between

Times U Sacco

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose principal activity is offering financial services by way of advancing loans to members.

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

3. The Respondent carried out a compliance verification exercise on the Appellant for the period 2019 to 2022 on 21st July 2022 which led to the issuance of additional assessments vide a letter dated 17th November 2022 on Pay as You Earn (PAYE), excise duty, and income tax. The said tax obligations were assessed as follows; PAYE at Kshs. 580,048. 00, Excise Duty at Kshs. 1,742,017. 00, income tax on interest on investment income at Kshs. 3,389,094. 00 and business income at Kshs. 10,510,879. 00.

4. The Appellant accepted the said assessments but objected to the assessment on business income vide a notice of objection dated 28th November 2022. Subsequently, the Respondent vide an objection decision dated 13th January 2023 rejected the Appellant’s objection and confirmed its additional assessment on business income at Kshs. 10,510,879. 00.

5. Being dissatisfied with the Respondent’s objection decision, the Appellant filed a Notice of Appeal on 25th January 2023 against the said decision.

The Appeal 6. The Appellant’s appeal is premised on the following grounds as stated in its Memorandum of Appeal dated 6th February 2023 and filed on 7th February 2023;i.That the Respondent disregarded Section 15(1) of the Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter ‘ITA’) in allocating personal expenses between taxable and exempted income; and(ii)That the Respondent applied a general formula in allocating the personnel expenses instead of the actual deployment of staff undertaken by the Appellant.

The Appellant’s Case 7. The appeal is anchored on the Appellant’s Statement of Facts dated 6th February 2023 and filed on 7th February 2023 wherein it averred as follows:

8. That the Appellant contended that being aggrieved by the Respondent's decision, it lodged an appeal against the assessment on business income on grounds that the Respondent was wrong by not allowing the allocation of personnel expenses as provided for under Section 15(1) of the ITA. The Appellant averred that Section 15(1) of the ITA stipulates that allowable expenses are those that are wholly and exclusively used on production of a specific taxable income.

9. In addition, it demonstrated that 46% of its employees were employed and deployed to produce taxable income and 53% in production of exempted income (income earned from member loans). That by applying a general computed formula, the Respondent only allowed 17% to 20% of personnel expenses to be charged to taxable income resulting in violation of Section 15(1) of the ITA. This resulted into a huge taxable income and resultant additional taxes which is oppressive to the business of the Appellant’s working capital.

10. The Appellant prayed that this Tribunal makes an order to the effect that THE Respondent applies the actual deployment of personnel in production of taxable and exempted income to ensure compliance to section 15(1) of ITA to allocate personnel expenses.

RESPONDENT’S CASE 11. The Respondent opposed the instant appeal vide its Statement of Facts dated 28th February, 2023 and filed on 9th March 2023.

12. The Respondent averred that the Appellant is a financial services provider with its main activity being offering loans to members at a fee. It issued the Appellant with a notice of compliance check for the period 2019 to 2022 on 21st July 2022.

13. Subsequently, it conducted a return review on the Appellant’s returns where it noted that apportionment of expenses was not well done for income tax purposes. This led to issuance of additional income tax assessments on 17th November 2022 vide assessment order numbers KRA202218616374, KRA202218616425 and KRA202218616498.

14. The Appellant dissatisfied with its assessments, lodged online objections vide objection application numbers KRA202219031577, KRA202219031758 and KRA 202219031864 dated 28th November 2022.

15. The Respondent contended that the Appellant failed to support the objection application and the objection application was rejected by the Respondent vide an objection decision dated 13th January, 2023.

16. The Respondent reiterated the position as stated in its return review findings and objection decision and stated that the case arose after a return review was conducted on the company’s tax returns and it was noted that incomes that fell within the ambit of Section 19A (4) (a) and Section 19A (4) (d) of the ITA were not well administered for tax purposes. This led to issuance of income tax additional assessments for the subject period. The above provisions are as follows:“In the case of a designated primary society which is registered and carries on business as a credit and savings co-operative society its total income for any year of income shall, notwithstanding any other provisions of this Act, be deemed to be the aggregate of—a.fifty per centum of its gross income from interest (other than interest from its members);b.its gross income from any right granted for the use or occupation of any property, not being a royalty, ascertained in accordance with the provisions of this Act;c.gains chargeable to tax under section 3(2)(f);d.any other income (excluding royalties) chargeable to tax under this Act not falling within paragraph (a), (b) or (c) ascertained in accordance with the provisions of this Act.”

17. The Respondent relied on the definition of “interest” which is provided for as follows in Section 2 of the ITA:“interest" (other than interest charged on tax) means interest payable in any manner in respect of a loan, deposit, debt, claim or other right or obligation, and includes any premium or discount by way of interest and any commitment or service fee paid in respect of any loan or credit or an Islamic finance return.”

18. The Respondent averred that the Appellant’s income was brought to charge under Section 19A (4) (d) of ITA above for failure to make income tax payment from interest earned by the business. It stated that the Appellant failed to remit income tax due by virtue of the above statutes and it was the Respondent’s statutory obligation to ensure that the Appellant paid the correct amount of taxes. This was premised on Section 31 (1) (c) of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter ‘TPA’) which provides as follows:“(1)Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that-a.in the case of a deficit carried forward under the Income Tax Act (Cap. 470), the taxpayer is assessed in respect of the correct amount of the deficit carried forward for the reporting period;b.in the case of an excess amount of input tax under the Value Added Tax Act, 2013 (No. 35 of 2013), the taxpayer is assessed in respect of the correct amount of the excess input tax carried forward for the reporting period; orc.in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates. ”

19. It was within the above statutory obligation to bring the Appellant to the correct tax charge, which is exactly what it did in issuing its additional assessments and objection decision. It further averred that the reason for the decision herein is in line to the precedence set on formulae for apportionment of expenses as set in the Tax Appeal Tribunal Case No.76 of 2016 of Hazina Sacco Society Limited v Commissioner Domestic where the Tribunal held as follows:“... it is the rightful finding of the Tribunal that the Appellant failed to declare certain income for the stated years of income resulting into understatement of the income tax payable to the Respondent. It agrees with the Respondent that the commission was lawfully brought to charge under the provisions of Section 19 (A) (4) (d) of the Income Tax Act.”

20. The additional assessments as well as the decision were rightfully issued and the Tribunal ought to dismiss the Appeal herein on the above basis.

21. The Appellant, in their Memorandum of Appeal as well as Statement of Facts averred that the Respondent disregarded Section 15 (1) of the ITA in allocating personnel expenses between taxable and exempted income. The Respondent on the other hand averred that after scrutiny of the Appellant’s audited accounts, a re-computation of the Appellant’s tax payable was done on the basis of Section 15 (7) (e) of the ITA which provides as follows:“the specified sources of income are-i.rights granted to other persons for the use or occupation of immovable property;ii.employment (including former employment) of personal services for wages, salary, commissions or similar rewards (not under an independent contract of service), and a self-employed professional vocation;iii.employment the gains or profits from which is wife’s employment income, profession the gains or profits from which is wife’s professional income and wife’s self-employment the gains or profits from which is wife’s self-employment income;iv.agricultural, pastoral, horticultural, forestry or similar activities, not falling within subparagraphs (i) and (ii) of this paragraph;”(ivA)surplus funds withdrawn by or refunded to an employer in respect of registered pension or registered provident unds which are deemed to be the income of the employer under section 8(10);(ivB)income of a licensee from one licence area or a contractor from one contract area as determined in accordance with the Ninth Schedule; andv.other sources of income chargeable to tax under section 3 (2) (a), not falling within subparagraph (i), (ii), (iii) or (iv) of this paragraph”.

22. The Respondent averred that it applied the above provision to ascertain the separation of the Appellant’s established sources of income. It stated that the Appellant failed to support their objection application by providing documentary evidence to ascertain their claims. The Respondent invoked Section 51 (3) (c) of the TPA which provides as follows:“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;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); andc.all the relevant documents relating to the objection have been submitted.”

23. The Appellant failed to comply with the above mandatory statutory provision when lodging their objection, therefore the Appellant’s application was invalid. In addition, the Respondent invoked Section 59 (1) (a) of the TPA which provides as follows:“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-a.produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person’s control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.”

24. The Appellant has a responsibility to maintain records and documents that pertain to the business and avail the same for tax purposes when required to by virtue of Section 23 (1) of the TPA that 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; andc.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.”

25. The above statute is echoed in Section 54A (1) of the ITA as follows;“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

26. In failing to provide the supporting documents, the Appellant failed to discharge their statutory burden of proof as required under section 56 (1) of the TPA to disprove the assessment raised by the Respondent. The Respondent stated that in the absence of the said documentation evidence, it confirmed the assessments and rejected the Appellant’s objection applications.

27. In conclusion, the Respondent prayed that the Tribunal considers the case and finds that:a.Its decision dated 13th January 2023 and tax demand was therefore properly issued as provided under law; andb.This Appeal be dismissed with costs to the Appellant as the same was without merit.

Parties’ Submissions 28. The instant Appeal was canvassed by way of written submissions. The Appellant’s submissions dated 28th June 2023 were filed on 29th June 2023, whereas the Respondents’ submissions dated 6th September 2023 were filed on 27th October,2023.

29. The Appellant submitted that the Respondent conducted a compliance verification exercise on it for the period covering the years 2019, 2020 and 2021 and issued it with an additional assessment covering Pay As You Earn (PAYE), excise duty, income tax on interest on investment and income tax on business income. The Appellant accepted the additional assessment on PAYE, excise duty and income tax on interest on investment income which it has since entered into a payment plan with the Respondent but objected to the assessment on income tax on business income amounting to Kshs. 10,510,879. 00.

30. The Appellant further submitted that it is concerning that the Respondent was of the view that its objection was invalid but failed to inform it as provided for under Section 51(4) of the TPA. It was stated by the Appellant that the Respondent’s objection decision is invalid, illegal and lacks the ingredients of an objection decision as set out in Section 51(10) of the TPA.

31. The Appellant asserted that it generates both taxable (banking) and non-taxable (loaning) income. Thus, due to the shared facilities and amenities within the business premises, the expenses would need to be apportioned between the two streams of income. In this case, the Respondent in allocating the personnel expenses has used the income approach instead of using actual employment cost besides there being a very clear separation of personnel between the two streams of income. It was stated by the Appellant that during the period under review, the average salaries in the banking business were 46% of the total salaries while salaries in the loaning business were 54% of the total salaries as can be seen from the payroll and summary provided by the Appellant.

32. Accordingly, in line with the provisions of Section 15 (1) of the ITA, all personnel expenses should be allocated in the ratio of 46% to 54%. To this end, the Appellant relied on the cases of Ten Hos Sacco Society Limited v Commissioner of Domestic Taxes TAT 413 of 2019, and Ergo Enterprises and Ergo Car Hire & Leasingv Commissioner of Investigations & Enforcement TAT No. 62 of 2021 and asserted that the Respondent’s assessment was erroneous and flawed for using an incorrect formula in allocating expenses between the two streams of income. From the foregoing, the Appellant submitted that the Respondent was in blatant breach and/or violation of Section 15 of the ITA thus amounting to unfair administrative action contrary to Article 47 of the Constitution of Kenya 2010 (hereinafter ‘the Constitution’).

33. It further submitted that in violating the doctrine of legitimate expectation, the Respondent denied it its right to appropriately claim expenses incurred wholly and exclusively in the generation of income as provided for under Section 15(1) of the ITA. The Appellant cited the case of Diana Kethi Kilonzo & another v Independent Electoral & Boundaries Commission & 10 others [20131 eKLR and stated that it had a right to expect that the Respondent will strictly follow taxable income, thus by using an unjust ratio in apportioning the expenses incurred by the Appellant, the Respondent violated its right to legitimate expectation.

34. The Respondent submitted that it relied on the case of Hazina Sacco Society Limited v Commissioner Domestic Tax Appeal Tribunal Case No.76 of 2016 and submitted that it conducted a compliance check on the operations of the Appellant and established that the apportionment of expenses was not done in accordance with the provisions of Section 19A (4) (d) as read with Section 15 (7) (e) of the ITA leading to the further assessment of 17th November 2022. It further submitted that in as much as the Appellant objected to part of the said assessment and sought to have the apportionment of expenses at the ratio of 46% to 54% of personnel expenses for taxable income and exempt income respectively on the basis of an appendix prepared by the Appellant, it did not provide any documents such as employment contracts showing the job descriptions, the employee ranks, timesheets, departmental posting, and pay slips to support the said apportionment.

35. The Respondent relied on the case of Republic v Chairman Public Procurement Administrative Review Board & another Ex-Parte Zapkass Consulting and Training Limited & another [2014] eKLR and asserted that it is trite law that new issues cannot be raised in submissions thus the Tribunal should only consider issues raised in the Memorandum of Appeal and Statement of Facts and not the new issues raised in the Appellant’s submissions. The counsel for the Respondent referred to the provisions of Section 15(1) of the ITA which provides for the guiding principle for deductibility of any expenditure is against an income and stated that the expenditure referred to therein must be wholly and exclusively incurred in the production of that particular income.

36. This means that for an expense which is used to produce both taxable and non-taxable income, it will be apportioned so that only the part relating to the taxable income is deducted. In this case, the Appellant is involved in both taxable service (banking) and non-taxable service (loaning). The Respondent cited the provisions of Sections 15(7) (e) and 54A (1) of the ITA and Section 23(1) of the TPA and contended that the Appellant had an obligation to not only account for the different sources of income separately but also ensure that there is documentation that will enable the Respondent to ascertain the said income.

37. It was stated by the Respondent that in apportioning the personnel expenses in the absence of documents to support any other method, it relied on the statutory recognized formulae of apportionment of taxable income/total income as provided for under Section 31(1) of the TPA. The Respondent further stated that pursuant to the provisions of Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of Kenya’s Laws (hereinafter ‘TATA’), the Appellant bore the burden of proof which they failed to discharge by failing to produce documents in support of their objection.

38. The Respondent asserted that the Appellant sought that this Tribunal would allow its objection on grounds that it failed to invalidate their objection as provided under Section 51(4) of the TPA. Further, the Respondent submitted that it is however noteworthy that this issue has been introduced for the first time in the Appellant’s submissions. The High Court in Republic v Chairman Public Procurement Administrative Review Board & another Ex-Parte Zapkass Consulting and Training Limited & another [2014] eKLR held that submissions were not a place to introduce new issues. For this reason, this issue ought to be ignored.

39. It was submitted by the Respondent that the issue of whether the objection decision is proper under Section 51(10) of the TPA was also introduced for the first time in the Appellant’s submissions thus it should be ignored. Nevertheless, the Respondent averred that its objection decision meets the requirements of Section 51(10) of the TPA thus it is valid. It relied on the provisions of Section 78(1) of the TPA and further averred that any defect in the objection decision such as the structure would not affect the validity of the document.

Issues For Determination 42. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions finds that the dispute distils into a single issue that calls for its determination namely:Whether the Respondent’s objection decision was justified.

Analysis And Findings 43. The Tribunal will proceed to analyse the issue as hereinunder.Whether the Respondent’s objection decision was justified.

40. It is settled law that the burden of proving that an additional assessment is wrong lies with the taxpayer pursuant to the provisions of section 56(1) of the TPA. This means that the Appellant has the duty of proving that the Respondent’s additional assessment on business income was wrong and/or erroneous.

41. The Tribunal notes that the Appellant’s case is that it generates both taxable (banking) and non-taxable (loaning) income and because of the shared facilities and amenities within the business premises, the expenses would need to be apportioned between the two streams of income.

42. The Tribunal also notes the Appellant’s contention that during the period under review, the average salaries in the banking business were 46% of the total salaries while salaries in the loaning business were 54% of the total salaries as can be seen from the payroll and summary provided by the Appellant. Accordingly, the Appellant relied on the provisions of Section 15 (1) of the ITA and submitted that all personnel expenses should be allocated in the ratio of 46% to 54%. However, the Respondent in allocating the personnel expenses used the income approach instead of using actual employment cost besides there being a very clear separation of personnel between the two streams of income.

43. The Tribunal notes the Respondent’s submission that the Appellant did not produce any documents such as employment contracts showing the job descriptions, the employee ranks, timesheets, departmental posting, and pay slips to support the apportionment of expenses at the ratio of 46% to 54% of personnel expenses for taxable income and exempt income respectively. The Appellant however, produced an appendix prepared by itself which was not sufficient to prove the said apportionment, as a result the apportionment of expenses by the Appellant was not done in accordance with the provisions of Section 19A (4) (d) as read with Section 15 (7) (e) of the ITA thereby leading to the further assessment of 17th November 2022.

44. The Tribunal noted the Appellant’s submission that if the Respondent was of the view that its objection was not adequately supported, it had the right pursuant to the provisions of Section 51(4) of the TPA to request for additional information and/or documentation from the Appellant but it failed to do so thus the Respondent’s objection decision was wrong.

45. The Tribunal finds that the bone of contention between the parties herein is the ratio which ought to be applied when apportioning personnel expenses for taxable income and exempt income. It is also the finding of the Tribunal that the issue that ought to be resolved is whether the Appellant sufficiently demonstrated that the applicable ratio in apportionment of expenses should be 46% to 54%. Section 15(1) of the ITA provides for allowable deductions in ascertainment of total income and it states as hereinunder:“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.”

46. Accordingly, the Tribunal is of the view that any expenditure incurred by a taxpayer in the production of its income shall be deducted from its total income. It is not disputed that the Appellant generates both taxable (banking) and non-taxable (loaning) income hence its personnel expenses ought to be apportioned between taxable income and exempt income. It is also not disputed that Section 19(4A) of the ITA is the relevant provision that prescribes the mode of ascertaining the total income for a credit and savings co-operative society.

47. The Tribunal has scrutinized the Appellant’s objection dated 28th November 2022. The Appellant in its objection of the Respondent’s additional assessment on business income urged the Respondent to allocate all personnel expenses in the ratio of 46% to 54% since the average salaries in the banking business were 46% of the total salaries while salaries in the loaning business were 54% of the total salaries.

48. The Tribunal notes that in support of this averment, the Appellant supplied the Respondent with a payroll for its employees and a summary indicating no additional income taxes are payable except in 2019. The Appellant therefore asserts that it discharged its burden of proof. The Respondent in opposing this Appeal cited the provisions of Sections 15 (7) (e) & 54(A)(1) of the ITA and Section 23(1) of the TPA and submitted that the Appellant had a duty to maintain documentary evidence to support the expenses they want to be expensed as against an income.

49. This Tribunal takes note of Section 51(3) of the TPA which provides as follows:“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;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); andc.all the relevant documents relating to the objection have been submitted.”

49. The Respondent is empowered by the provisions of Sections 51(4) and 59 of the TPA to require a taxpayer to avail additional documentation in support of its objection if it is of the view that the documents availed by the taxpayer are not sufficient. The said sections provide as follows:“Section 51 (4)Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”Section 59 of the TPA provides as follows:“(1) For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to-a.produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;b.furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc.attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person. 1. If the person required to produce documents under subsection (1)(a) is a financial institution-a.the documents shall not, while they are being examined, be removed from the premises of the financial institution or other premises at which they are produced;b.the Commissioner or authorised officer carrying out the examination may make copies of such documents for the purposes of any report relating to the examination; andc.the confidentiality of the information obtained in the course of the examination by the Commissioner or authorised officer shall be maintained and the information shall be used solely for the purposes of the tax laws.”

50. The burden of proof in tax disputes rests on the taxpayer, even at the objection stage. It is the taxpayer who is to prove that the assessment is erroneous, excessive or unlawful or that the decision made by the Respondent is incorrect.

51. In the Tribunal’s mind, lodging a valid objection does not mean that the Respondent is bound to accept the same. Section 51(8) of the TPA gives the Respondent latitude to consider the objection and the supporting documents and evidence and the Respondent, in the end, the Respondent could either allow the objection in whole or in part or disallow it in its entirety.

52. In the Tribunal’s mind, it is not the Respondent’s obligation to review each and every objection and to advice the taxpayer on what nature of documents or evidence to adduce in order to support their objection. That obligation remains on the taxpayer, meaning it is the taxpayer who must exercise due diligence and provide sufficient documents and evidence to support its objection.

53. Turning to the instant appeal, the dispute revolves around the apportionment of expenses between banking business and the loaning business.

54. In support of its objection, the Appellant states that it produced and/or supplied the Respondent with a payroll for its employees and a summary indicating the deployment between the banking business and the loaning business. The Appellant therefore asserted that it discharged its burden of proof.

55. For an expense to be allowable for deduction, it must be wholly and exclusively incurred in the production of income. It follows therefore that for an expense which is used to produce both taxable and non-taxable income to qualify for deduction, some apportionment has to be carried out to ensure that only the part relating to the taxable income is deducted and the one relating to the exempt income is disallowed. This approach would apply to the Appellant herein as it carries out both taxable service (banking) and non-taxable service (loaning).

56. In order to confirm if the apportionment undertaken by the Appellant is in accordance with what is allowed under Section 15 of the ITA , the burden rested on the Appellant to furnish the Respondent with sufficient documentation to be able to do so.

57. The Respondent contended that the Appellant did not produce any documents such as employment contracts showing the job descriptions, the employee ranks, timesheets, departmental posting, and pay slips to support the apportionment of expenses at the ratio of 46% to 54% of personnel expenses for taxable income and exempt income respectively. All the Appellant produced was an appendix prepared by itself which was not sufficient to prove the said apportionment, as a result the apportionment of expenses by the Appellant was not in accordance with the provisions of Section 19A (4) (d) as read with Section 15 (7) (e) of the ITA thus leading to the further assessment of 17th November 2022.

58. The Appellant has not controverted this assertion by the Respondent save to say that the Respondent did not request it for any additional documents.

59. As the Tribunal reiterates that the burden is on a taxpayer to provide sufficient documentation to support its objection. The Tribunal additionally notes that the Appellant has not provided any such documentary evidence to show that its apportionment was proper and in accordance with the law.

60. In Faisawema Company Limited versus Commissioner of Domestic Taxes TAT 326 of 2022, it was held that “the assertions that the Appellant provided documents must be shown to the Tribunal as well”.

61. Flowing from the above, the Tribunal finds and holds that the Appellant did not discharge its evidentiary burden both at the objection stage and during the appeal stage and in the absence of documents to support the Appellant’s apportionment of the expenses, the Respondent was entitled to rely on the statutory recognized formulae of apportionment of taxable income/total income as provided for under Section 31(1) of the TPA.

62. Consequently, this Tribunal finds that the objection decision was justified.

Final Decision 63. The upshot of the above is that the Appellant’s appeal is not merited and the Tribunal makes the following orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 13th January 2023 is hereby set upheld.c.Each party to bear its own costs.

64. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 28TH DAY OF JUNE, 2024. .................CHRISTINE A. MUGA - CHAIRPERSON....................BONIFACE K. TERER DELILAH K. NGALA - MEMBER MEMBER....................GEORGE KASHINDI OLOLCHIKE S. SPENCER - MEMBER MEMBER