Judgment summary
The Appellant, a construction company, was issued additional VAT and income tax assessments on 29th January 2024 totalling Kshs 211,433,282, covering the years 2017 to 2021. The Appellant objected on 9th January 2025, and the Respondent confirmed the assessments in an Objection Decision dated 1st April 2025.
The Tribunal identified two issues for determination: whether the assessments were time-barred, and whether the Objection Decision was justified.
On time-bar, the Tribunal held that the VAT assessments for 2017 and 2018, and the income tax assessment for 2017, were time-barred under Section 31(4)(b)(ii) and Section 23 of the Tax Procedures Act, because the Respondent failed to adduce evidence of willful neglect, evasion or fraud to justify assessing beyond the five-year period.
On the merits of the Objection Decision, the Tribunal found that the Appellant had provided invoices and documentation to support its input VAT claims and disallowed purchase expenses, which the Respondent had disregarded without a plausible reason and without filing a supplementary statement of facts to rebut them. The Tribunal also found that the Respondent had failed to consider casual labourer wage bill evidence when confirming PAYE assessments, and had double-taxed rental income already declared and taxed in the Appellant's 2017 financial statements.
The Tribunal declined to determine the Appellant's arguments on Work-in-Progress (WIP) and VAT, finding that this issue had not been raised at the objection stage and could not be introduced for the first time on appeal.
Having found that the burden of proof had shifted to the Respondent and had not been discharged, the Tribunal allowed the appeal and set aside the Objection Decision dated 1st April 2025, with each party to bear its own costs.
Background
The Appellant is a limited liability company incorporated in Kenya, involved in the construction industry (para 1). The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act, mandated with collection and administration of tax laws (para 2).
On 29th January 2024, the Respondent issued additional assessments for VAT and income tax totalling Kshs 211,433,282 (para 3). On 9th January 2025, the Appellant objected to the assessments (para 4). On 1st April 2025, the Respondent issued its Objection Decision confirming the additional assessments (para 5). Aggrieved, the Appellant lodged its appeal dated 14th May 2025 (para 6).
Core dispute
The Appellant contended that the assessments for 2017 and 2018 were time-barred under Sections 29 and 31 of the Tax Procedure Act, that the Respondent had disallowed purchases and casual wages contrary to Section 15 of the Income Tax Act, that variances between IT2C and VAT 3 returns for 2019 to 2021 were wrongly subjected to VAT because they related to Work in Progress which does not constitute a supply, that losses carried forward of Kshs 14,671,350 from 2016 had not been applied under Section 15(4) of the Income Tax Act, and that the Respondent had violated its right to fair administrative action and legitimate expectation.
The Respondent maintained that its assessments were based on multiple verification tests, that the Appellant had failed to provide supporting documentation for purchases from named suppliers and for casual wages, that the 2017 assessment was justified beyond the five-year limit due to willful neglect, and that the Appellant had not discharged its burden of proof under Section 56 of the TPA.
Court findings
The Tribunal held that VAT assessments for 2017 and 2018, and the income tax assessment for 2017, were time-barred under Section 31(4)(b)(ii) and Section 23 of the Tax Procedures Act, because the Respondent made only bare assertions of willful neglect, evasion or fraud without supporting evidence (paras 67 to 73).
On input VAT, the Tribunal found that the Appellant had provided invoices from Harmony, Gosteen, Dakimah, Super Deal and Colas East Africa, which the Respondent disregarded without explanation and failed to rebut despite being granted leave to file a supplementary statement of facts; the disallowance of input VAT therefore could not stand (paras 74 to 81).
On disallowed expenses, the Tribunal found the Appellant had provided receipts showing expenditure wholly and exclusively incurred in its business, and that the Respondent's resort to best judgment was not justified where such documents had been provided and ignored (paras 82 to 88).
On PAYE, the Tribunal found the Appellant had provided over 755 pages of casual wage bill evidence signed by labourers, which the Respondent ignored without plausible reason, and held that the Respondent erred in failing to consider these costs (paras 89 to 96).
On rental income, the Tribunal found that the Appellant had already declared and paid tax at 30% on net rental income in its 2017 financial statements, and that the Respondent's use of a variance including this income to charge VAT and further tax amounted to double taxation (paras 97 to 103).
The Tribunal declined to consider the Appellant's submissions on Work-in-Progress and VAT, finding that this issue had not been raised in the objection to the Commissioner and could not be introduced for the first time at the appeal stage, under Sections 12 and 13(6) of the TAT Act (paras 105 to 108).
The Tribunal held that the burden of proof had shifted to the Respondent once the Appellant produced competent evidence, and that the Respondent's failure to file a supplementary affidavit meant the burden never shifted back, so the presumption of correctness of the assessment vanished (paras 109 to 113).
Outcome
The Tribunal found the appeal meritorious. It ordered that the appeal be allowed, that the Objection Decision dated 1st April 2025 be set aside, and that each party bear its own costs (para 114).
Major issues / areas of contention
- Whether the assessments for 2017 and 2018 were time-barred under Section 31(4) of the Tax Procedures Act.
- Whether the Respondent adduced evidence of willful neglect, evasion or fraud to justify assessing beyond the five-year statutory period.
- Whether the disallowance of input VAT was lawful given the invoices and documentation the Appellant provided.
- Whether the disallowance of purchase expenses was justified where the Appellant had provided supporting receipts.
- Whether the PAYE assessment on casual labour wages properly accounted for wage bill evidence provided by the Appellant.
- Whether rental income already declared and taxed in the Appellant's financial statements was subjected to double taxation.
- Whether the Tribunal could consider the Work-in-Progress VAT issue raised for the first time at the appeal stage rather than at objection.
- Where the burden of proof lay as between the taxpayer and the Commissioner once evidence was produced.