The burden of proof lies with the taxpayer in tax disputes

Case Study: Mwaniki v Commissioner of Domestic Taxes (Appeal 1043 of 2022) [2024] KETAT 12 (KLR) (Commercial and Tax) (26 January 2024) (Judgment)

MW is a sole trader registered in Kenya with income tax resident obligation and the principal business activities include dealing in livestock, cereals and liquor sale, public transport, and transportation in general under his own name.

KRA conducted an assessment on MW income tax resident returns for the year 2015, 2016, 2017, 2019 and 2020.

On 16th December 2021 KRA assessed additional total sales amounting to Kshs 409,803,554.00 as additional revenue.

The additional sales resulted in an incremental principal tax liability of Kshs 167,531,887.50 plus penalty and interest.

MW objected to KRA’s additional assessment and KRA issued an acknowledgement receipt of the objection on 17th January 2022.

MW submitted the relevant documents to KRA on 18thJanuary 2022 to support its objection.

KRA reviewed the objection grounds together with the supporting documents but the same were rejected.

In a letter dated 19th August 2022 KRA confirmed the assessment of Kshs 205,867,969.00 together with resultant penalties and interests

MW, aggrieved by KRA’s decision lodged a Notice of Appeal with the Tribunal on 21st September 2022.

The appeal was premised on the following grounds:

  • KRA erred in fact and in law in assessing the tax payable.
  • KRA erred in fact and in law in failing to consider MWs nature of business thereon.
  • KRA erred in fact and in law in failing to consider authentic assessment of taxes for MW.

MW argued that:

KRA did not understand MW’s industry, its working models, and contractual obligations of MW.
MW filed a Notice of Appeal as per Section of 52 of the Tax Procedures Act 2015 to the Tax Appeals Tribunal.

KRA responded that:

  • MW is registered in Kenya with income tax resident obligation and whose principal business activities include dealing in transportation of smuggled goods from Tanzania into Kenya, for which he is a repeat offender.
  • On 14th March 2021, MW’s vehicle was intercepted along Namanga-Athi River road carrying smuggled alcoholic drinks from Tanzania by officers from KRA’s I&SO Department, which had been affixed with Tanzanian Revenue Authority Excise stamps.
  • KRA served MW with the investigation findings for the years 2015 to 2020 vide a letter dated 21st June 2021.
  • the above letter established that MW had committed the following offences based on the investigation findings:-

Omission of income from returns contrary to Section 97(a) of the Tax Procedures Act 2015 by omitting income from returns to lower his tax liability.

-Defaulting on an obligation imposed under a tax law contrary to Section 97(e)of the Tax Procedures Act, 2015 by deliberately failing to apply for VAT obligation, which he ought reasonably to have applied.

-Failure to apply for registration for VAT obligation contrary to Section 34 as read with Section 37 of VAT Act, 2013.

  • Further, on 16th July 2020, MW was found in possession of concealed goods in his compound on-board motor vehicle which were impounded by KRA’s I&SO Department with tax revenue implication of Kshs 275,198.00.
  • the investigation conducted on MW, covered business transactions by MW for the period-2015 to-2020-with-a view of establishing any violations of tax laws and tax implications thereof.
  • MW in filing his returns did so only for 2016 and 2019 while filing Nil returns for the other years.
  • MW failed to produce the relevant documents to validate his objection.

In its ruling on 26/01/2024 , the TAT observed that:

Section 56 (1) of Tax Procedure Act, provides as follows regarding burden of proof-

“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

  • The duty imposed on the taxpayer to keep records and the provisions on the burden of proof all go to support the Kenyan tax collection regime which is centered on a system of self- assessment. This system relies on the taxpayer making full and good faith disclosures in its tax declaration and affairs and hence empower the Commissioner to demand documents from time to time when investigating the affairs of a taxpayer.
  • MW did not submit any supporting documentation to show that the assessment by KRA was wrong. It merely filed an objection with no grounds adduced, no explanation on the assessment

As Such MW Lost

The burden of proof lies with the taxpayer in tax disputes

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