Banking analysis in tax assessments

Case study: Gichengo v Commissioner of Investigations & Enforcement (Tax Appeal 484 of 2022) [2023] KETAT 517 (KLR)

Banking analysis in tax assessments – BKG is a sole proprietor trading as Messrs Bernard Kingori Gichengo. BKG is a commission agent involved in sourcing and marketing and for supplier’s facilitation both locally and internationally.

KRA conducted investigations on the tax affairs of BKG for the period between 1st January 2015 to 31st December 2020.

BKG was issued with the tax findings through an email dated 17th September 2021 on its tax computation and subsequently issued with the Tax Assessment Orders dated 7th October 2021 for a total of Kshs 69,622,710.00 being outstanding Income tax and VAT including interest and penalties for the period 2015 to 2020 as shown below;

a.PAYE for the period 2015 to 2020 Kshs 45,660,327.00

b.VAT for the period 2015 to 2020 Kshs 23,962,383.00

BKG objected

KRA advised BKG to provide all the documents in support of the objection and BKG availed the documents on 10th January 2022 and 17th March 2022.

Upon review of the documents provided by BKG, KRA issued an objection decision dated 13th April 2022 confirming the tax assessment.

BKG appealed to the TAT on the following grounds:

  • KRA erred in fact and in law in the computation of taxable income based on gross banking. That KRA relied on creditor’s transactions in BKG Equity Bank account to ascertain taxable income, thus excessively overstating its tax liabilities. That the decision by KRA to disallow BKG’s explanations and support documents on the basis that it’s not logical to transact the amounts in its bank without agreements, invoices and delivery notes is punitive, unreasonable and legally unjustified.
  • That KRA erred in fact and law by ignoring the nature of BKG’s business as a broker and which was explained in details both in writing & interviews and support documents provided in the objection to commissioner assessment. Further BKG demonstrated that its taxable income is from brokerage commissions and schedules showing clients names, items descriptions, creditors funds, vendor payments and commissions was availed, and support evidences and claim by KRA that the evidence was not sufficient to demonstrate commission broker is arbitrary, unreasonable and oppressive.
  • BKG stated that the nature of its business as a broker does not involves buy and sell a fact that was explained and support documents provided in its objection to Commissioner Assessment. The nature of deposits and credit transactions was explained in details. Therefore, BKG business is not mandated to charge VAT as set out in section 5 of VAT Act. That KRA alleged that BKG had met the threshold set out in sections 5 of the VAT Act based on investigation findings not known or shared with BKG and further that KRA claims that it did not demonstrate bankings in its account did not constitute sales is untrue, unfounded and unsupported.
  • That KRA assertions that the lack of information to attest to actual business income forced to resort to alternative sources of information from the banks is untrue, unfair and unjustified and further that the claims that BKG had failed to discharge its burden of proof placed by law to warrant adjustment and therefore the deposits in its personal accounts have been treated as taxable income resulting to grossly overstated tax liabilities. KRA had turned a blind eye on the capacity challenges of record management to businesses of similar nature and instead has resulted to punitive measures of assessments of excessive and overstated tax liabilities.

BKG submitted that on 10th January 2022 it provided to KRA a bundle of support documents which were stamped with the received stamp. The documents included among others : Financial accounts 2016-2020, Sales ledgers 2016-2020, Purchases ledgers 2016-2020, General ledger -loan statements, General ledger-direct wages, General ledger- Travel and accommodations Receipts, Bank statements 2016-20, Invoices of Vendors to Sellers

BKG asserted that the above documents as provided and several meetings held to further explain were enough to come up with the correct tax liabilities assessment devoid of over-statement and arbitrary use of banking analysis.

BKG further asserted that the above documents as provided illustrates that the business is internationally done in China and the turnover being commission earned does not meet the threshold under Section 5 of the VAT Act for VAT registration, withholding, and remittance of VAT taxes. instead KRA resulted to punitive measures of assessments of excessive and overstated tax liabilities.

KRA submitted that Section 51(3) (c) of the Tax Procedures Act states that an objection shall be treated as valid where all the relevant documents relating to the objection have been submitted

KRA submitted that BKG bore the burden of proving that the objection decision and the finding of the investigations were erroneous. It relied on Section 56(1) of the Tax Procedure Act, that the tax payer in this case failed to avail evidence that would support a contrary assessment or that would have guided KRA at arriving to a different decision.

KRA further submitted that BKG was uncooperative in the provision of relevant records and failed to respond to request of documents hence no relevant records were provided to support the objection by BKG. As a result, the assessment was made based on the only available information based on the best judgment by KRA. KRA relied on the provisions under Section 59(1),24(1)(2) and 29(1) of the TPA

In its ruling on 13/10/2023, the TAT observed that:

BKG did not present all the documents captured in BKG’s submissions as the Objections support documentary evidence before the Tribunal for consideration other than the Annual Reports and Financial Statements for the period.
though BKG alleged that it was in the business of brokerage no evidence was adduced to confirm this allegation in terms of agreements with the suppliers or buyers of the imported products from China.
BKG had not discharged its burden of proof to show that KRA erred in confirming the tax assessments.

As Such BKG lost

Banking analysis in tax assessments

Banking analysis in tax assessments

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