- October 29, 2024
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Case Study: Acrowood Imports & Exports Limited v Commissioner of Domestic Taxes (Tribunal Appeal E796 of 2023) [2024] KETAT 1461 (KLR) (Civ) (4 October 2024) (Judgment)
AIEL is a limited liability company incorporated in Kenya under the Companies Act, engaging primarily in the sale of timber.
KRA issued AIEL with Corporation tax, Pay As You Earn (PAYE) and Value Added Tax (VAT) additional assessments in its letter of findings of tax review dated 7th June 2023.
In this analysis, I will focus on PAYE only.
AIEL objected to the Corporation tax, PAYE and VAT additional assessments on 28th July 2023.
KRA issued an objection decision on 25th September 2023 rejecting AIEL’s objection in its entirety.
AIEL, being dissatisfied with KRA’s objection decision, filed its Notice of Appeal dated 24th October 2023 on the following grounds:
- That KRA erred in both law and fact in finding that the withdrawals made by the director were benefits subject to PAYE tax.
AIEL argued that:
- its director’s withdrawals from AIEL’s bank accounts were for purchasing timber and for covering direct and indirect costs necessary for the company’s operations. AIEL argued that such payments do not fall under PAYE as they are in respect of expenses consumed by AIEL and not AIEL’s employee/director.
- it had purchases which were declared in the tax returns and the payments for those purchases were made through the withdrawals made by the directors.
- in line with Section 2 as read together with Section 5 and Section 37 of the Income Tax Act, AIEL was under no obligation to account for PAYE on the expenses that were consumed in running its business activities. That these expenses were consumed by AIEL who is a separate legal entity from the directors. That the expenses paid for through the director’s cash withdrawals were wholly and exclusively incurred to generate taxable income.
KRA responded that:
- during the banking analysis, it was established that there were directors’ drawings amounting to Kshs. 7,160,000.00, which KRA subjected to Pay As You Earn (PAYE).
- AIEL did not provide any documentation.
- Section 56(1) of the Tax Procedures Act provides that the burden lies with AIEL to prove that the tax decision was erroneous as it claimed.
In its judgment on 04/10/2024, the TAT observed that:
- AIEL did not furnish the Tribunal with competent documentary evidence in support of its case.
- Due to AIEL’s failure to support its assertions, the Tribunal was unable to confirm if the withdrawals by AIEL’s directors were utilized to pay for AIEL’s business costs.
- AIEL failed to prove that the withdrawals from its bank accounts by its director were not drawings, and thus failed to prove that the withdrawals were not taxable emoluments. Therefore, the Tribunal was not persuaded that KRA erred in assessing PAYE on the unsupported withdrawals by AIEL’s director.
As such AIEL lost
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