Commissioner of Domestic Taxes v Karshah Ltd (Income Tax Appeal E154 of 2021)  KEHC 16028 (KLR) (Commercial and Tax) (2 December 2022) (Judgment)
Neutral citation:  KEHC 16028 (KLR)
Republic of Kenya
Income Tax Appeal E154 of 2021
A Mabeya, J
December 2, 2022
Commissioner of Domestic Taxes
1.On April 18, 2018, the appellant issued a tax demand notice to the respondent of Kshs 3,971,493.27 for input VAT and Kshs 2,590,104.31 as corporation tax. The respondent objected to the assessment on May 14, 2018 whereby the appellant gave his objection decision on June 26, 2018 which confirmed the VAT of Kshs 1,381,388.96.
2.Aggrieved by the objection decision, the respondent lodged an appeal at the Tax Appeals Tribunal (“the tribunal”). On October 30, 2020, the tribunal delivered its judgment in favor of the respondent. The appellant has filed this appeal against that judgment setting out eight grounds of appeal which can be summarized into two as follows: -a.That the tribunal erred in shifting the burden of proof to the appellant and failing to appreciate that section 17 of the Value Added Tax (“the Act”) could not be read in isolation.b.That the tribunal erred in holding that the respondent had availed all the required documents
3.In response to the appeal, the respondent filed a statement of facts dated January 25, 2021. It contended that the appellant did not prove that the respondent was involved in fraudulent dealings and that the Tax Procedures Act did not mandate the respondent to provide a list of suppliers listed by the respondent. That the appellant being the custodian of the iTax, VAT and ETR could not go round and require the respondent to produce a missing trader. Further, that the law did not require the respondent to inquire whether a supplier had a valid pin or not.
4.The appeal was canvassed by way of written submissions which I have considered.
5.The appellant submitted that the tribunal extended the appellants duty beyond what was prescribed under section 51(9) of the Tax Procedures Act (“TPA”). That it erred in finding that the burden of proof was on the appellant to prove that there was actual supply of goods. It was submitted that the tribunal failed to apply the provisions of section 43 of the Act which requires the respondent to keep records of transactions for of 5 years. That it only considered the provisions of section 17 of the Act while ignoring the provisions that were relevant with regard to documentation.
6.On its part, the respondent submitted that the appellant failed to produce evidence to support the allegation that the respondent was involved in fraudulent evasion of VAT. It was the respondent’s submissions that the appellant failed to present an investigation report to show that the respondent was a participant or beneficiary of the fraud. It was submitted that the respondent had submitted all the invoices for the purchases and proof of payments for the supplies.
7.The court has considered the entire record. One the first ground, the appellant faults the tribunal for shifting the burden of proof to him. The appellant’s contention is that the burden of proof lies with the respondent in line with section 56(2) of the TPA and section 30 of the Tax Appeals Tribunal Act, 2013 (“TAT”) to prove that there was no tax due or that the assessment was erroneous.
8.Section 56 of the TPA provides: -
9.On the other hand, section 30 of the TAT provides: -
10.In view of the above provisions, the taxpayer is under the obligation to demonstrate that a decision of the Commissioner on tax assessment was wrong. From the record, the tribunal observed that even though the law places the burden on the respondent to prove that tax was indeed paid and the appellant’s assessment was wrong, the documents required should be those prescribed by law. The tribunal further noted that it was not enough for the appellant to state that the documents produced were fictitious but there ought to be evidence to demonstrate that the invoices produced were fictitious.
11.In the present case, VAT input tax is governed by section 17 of the VAT Act which however, cannot be read in isolation from the other provisions of the Act.
13.Further, section 59 (1) of the TPA also requires a tax payer to produce records when required to do so by the Commissioner. It provides: -
14.In view of the foregoing, the respondent was obligated by the law to produce the documents required in the support of its VAT claim. In Commissioner of Domestic Taxes v Structural International Kenya Ltd , the court held: -
15.In the present case, the appellant accused the respondent of participating in the missing trader scheme. It was the appellants case that no supplies were actually made and the tax invoices produced were from companies that were notorious for tax evasion.
16.The question however, is whether the respondent discharged its burden. In order to establish whether the respondent had discharged its burden of proof then the court needs to examine the documents that were relied on by the parties before the tribunal.
17.The first letter written by the appellant is a request for underpaid tax. In that letter, he listed three suppliers whose supply was questionable. The respondent filed an objection and attached documents to the disallowed purchases which included copies of the invoices issued for each purchase, copies of delivery notes and copies of payment vouchers.
18.The commissioner responded with an objection decision stating that there was no supply of the taxable goods. I note that there was no additional document that was requested by the appellant and the documents prescribed under section 17(3) of the VAT Act were availed by the respondent. It is also noteworthy to state that the authenticity and reliability of the documents produced were not questioned by the Commissioner.
19.In Commissioner of Domestic Taxes v One Stop Trading Limited (Income Tax Appeal E098 of 2020 , the court observed: -
20.Similarly in Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021)  KEHC 5 (KLR), the court held: -
21.In the present case, it is clear that the respondent produced all the documents that were requested of it. It further availed a cashbook ledger which gave evidence of the payments made in cash. There was no further documentation or information that was requested that was reasonably expected to be within its knowledge that it failed to avail to the appellant. Having done so, its evidentiary burden shifted to the appellant. The appellant having done nothing, the evidentiary burden rested with him. It was for him to disapprove the evidence of the respondent. This he failed to.
22.That being the case, I agree with the tribunal that the respondent had discharged its burden.
23.In the upshot, I find no basis to disturb the judgment of the tribunal and hereby upholds it. The appeal lacks merit and is dismissed with costs to the respondent.It is so decreed.
DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF DECEMBER, 2022.A. MABEYA, FCIArbJUDGE