- August 3, 2024
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Banking Analysis Should factor in other taxpayers documentations and explanations
Kamau_v_Commissioner_of_Domestic_Taxes_(Tax_Appeal_E914 of 2023)_[2024] KETAT 937 (KLR)_(19 July 2024)_(Judgment)
Kamau was issued with additional income tax assessments for the years of income 2017 – 2021 on 31st August 2023 for the sum of Kshs. 40,380,182.00, following a returns and tax payments review for income tax and PAYE for the period which was undertaken on 23rd January 2023.
Kamau objected to the said additional assessment on 27th September 2023 and submitted the relevant supporting documents.
KRA issued its Objection Decision on 23rd November 2023 wherein it rejected Kamau’s objection in entirety and confirmed its assessment of the principal tax with penalties and interest amounting to Kshs. 40,380,182.00.
Kamau appealed to the TAT on the following grounds:
- That KRA erred in law and fact in demanding income tax of Kshs. 40,380,182.00 for the years of income 2017 – 2021 and the said demand is excessive, punitive and is not based on law and any material facts that have been provided by Kamau.
- That KRA erred in law and fact in using erroneous figures as Kamau’s bank deposits and wrongly assuming the amounts to be Kamau’s taxable income and blatantly disregarding the actual figures as contained in Kamau’s bank statements that have been provided by Kamau.
- That KRA erred in law and fact in its decision to bring to charge all bank deposit entries appearing in Kamau’s bank statements as taxable income of Kamau as against the law, ignoring the nature of Kamau’s transactions, the material facts and supporting evidence that have been provided by Kamau.
- That KRA erred in law and fact in failing to exercise its best judgement and using Kamau’s industry average margin to determine Kamau’s taxable income as opposed to merely using the bank deposits as taxable income and subjecting the same to an unfairly higher margin than that which is used in the normal cause of Kamau’s business dealings in determining Kamau’s income tax.
- That KRA erred in law and fact by failing to take into account the expenses were incurred in the production of income and should be allowable deductions when arriving at the taxable income of Kamau in accordance with Section 15 of the Income Tax Act.
- That KRA erred in law and fact in blatantly disregarding and ignoring the evidence, explanations and supporting documentation provided by Kamau and proceeding to issue its Objection Decision dated 23rd November 2023. `
Kamau argued that:
- Kamau stated that he was he was vying for Gatundu South Parliamentary seat.On Campaign Funding Kamau stated that through his tax agents he demonstrated to KRA the movement of cash transactions in his bank account through his objection dated 27th September 2023 , which demonstrated that the bulk of the cash deposits were between 2020 – 2021 during the campaign and election season in Kenya , and that the trend in statements show that cash deposited in his account was immediately withdrawn or paid out to other parties , and that he did not retain any personal benefit from the campaign funding to constitute profits or gains that would be subject to income tax
- On Dowry Donations for his Traditional Wedding, Kamau averred that he held his traditional wedding on 20th November 2021 and he received dowry contributions from his friends, relatives and well-wishers. He averred that the said traditional wedding was attended by over 2,000 people, who contributed funds totaling the sum of Kshs 8,000,000.00, which he deposited in his personal account in the year 2021. He contended that KRA erroneously subjected deposits from dowry contributions to income tax and that the same does not amount to income that should be subjected to income tax pursuant to Section 3(2) of the Income Tax Act.
- Kamau further stated that through his agents, he demonstrated to KRA that the deposits were from dowry donations, and attached screen shots of a WhatsApp group of 35 friends who had contributed a sum of Kshs. 4,500,000.00 towards the traditional wedding, which funds he deposited in his personal account
- On Deposits by AGK, Kamau stated that KRA misapprehended the nature of the relationship between him and his wife, AGK in concluding that the deposits made by his wife in his personal account all totaling the sum of Kshs 10,610,000.00 was income that should be subjected to income tax.
- On Deposits by corporates and individuals for obtaining construction materials, Kamau stated that he is involved in the construction industry, and that he sources and obtains construction materials on behalf of companies, invoices the companies for the materials sought and retain a percentage as commission for the obtaining and delivering the construction materials.
- On Loans credited to Appellant’s account by the Bank, Kamau stated that on several occasions he obtained loans from the Equity Bank Ltd, and the said loans were credited to his personal bank account to the tune of Kshs. 21,194,000.00 for the period 2018 – 2022. He stated that the said loans were clearly demonstrated in the objection notice application dated 27th September 2023, his bank statements and further through the banking analysis that the said amounts were not income, but loans credited to his account by the bank.
- He stated that the said explanations and analysis shared were not considered by KRA in arriving at its objection decision, but instead KRA contended that he did not submit the loan agreements, which documents it did not request.
- He submitted that KRA had contended that his two accounts had credits for the two years of KES 160,534,631. Kamau submitted that the said figures presented as his taxable income were erroneous and he objected to the same, and provided KRA with the bank statements for the aforementioned accounts which demonstrated the actual and correct figures of the deposits in the accounts for the two years were KES 97,515,775.6
- Kamau submitted that KRA plucked figures from the air, and purported to assess and demand taxes based on the fabricated figures, which was not done in accordance with the law.
- Kamau submitted that being in the business of sourcing and obtaining construction materials on behalf of third parties, he invoices the third parties for the materials sought and retains a percentage as his profit for sourcing and delivery of the construction materials. He submitted that the deposits paid by the third-party procuring entities are not taxable income. He stated that he demonstrated to KRA the movement of the cash transactions in the bank account as credits to the bank account and debits to the suppliers of construction materials, and therefore it was erroneous, unfair and unjust for KRA to subject the entire deposits as income.
- Kamau submitted that KRA in its assessment and objection decision, erred in law and fact in failing to exercise its best judgement to determine Kamau’s taxable income, and erroneously brought to tax all cash deposits into Kamau’s bank account without taking into consideration the totality of the transactions
KRA Responded that:
- On Campaign funding, dowry payments and deposits by AGK, KRA stated that Kamau did not provide evidence in support such as sworn statements and affirmations by the financiers, well-wishers, financiers, donors or loan agreements /loan statements to support the loans.
- KRA posited that according to Section 59 of the TPA, the onus is on Kamau to produce records for purposes of obtaining full information in respect of Kamau’s tax liability. Further, Section 30 of the TAT Act and Section 56 of the TPA impose the burden of proof on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect.
In its decision on 19/07/2024, the TAT observed that
- It is noteworthy that KRA solely relied on Kamau’s bank accounts information to determine the taxable income and in its own judgement thus disregarded the bulk of the information, explanations and documents submitted by Kamau.
- that KRA did not utilize the said information provided to adjust, but made the assessments based on its best judgement.
- With regards to Third Party deposits, the Tribunal held that an appropriate case for KRA was to apply industry profit margin to determine Kamau’s profit, hence the proper taxable income.
As such Kamau won
