The High Court in Nairobi has reinstated a Sh29.2 million tax assessment against Jakoline Enterprises Limited after overturning a decision by the Tax Appeals Tribunal that had cancelled the liability.
The tax assessment issued by the Kenya Revenue Authority (KRA) comprises Sh14.48 million in Income Tax and Sh14.73 million in Value Added Tax (VAT) covering the period between 2017 and 2020.
The High Court set aside the Tribunal’s decision of November 10, 2023, and reinstated the Commissioner of Domestic Taxes’ objection decision confirming the tax liability.
The dispute arose from discrepancies between purchases declared by Jakoline Enterprises in its Corporation Tax returns and amounts reported in its monthly VAT returns.
The court found that the company was required to specifically explain and reconcile the differences identified by KRA instead of simply submitting financial records for review.
Jakoline Enterprises, a wholesale foodstuffs business, was subjected to a desk audit by the Commissioner of Domestic Taxes covering its Income Tax and VAT returns for the four-year period.
According to the case record, the audit identified significant differences in the company’s declarations.
In 2017, purchases reported in the VAT returns were higher than those declared in the Corporation Tax return by Sh115.05 million.
Jakoline argued that the purchases were supported by suppliers’ invoices and maintained that the variance did not result in any loss of tax revenue.
The company also disputed KRA’s method of calculating expected sales based on the purchase variance, arguing that purchases were not the only costs incurred in running the business.
It further argued that goods could be sold at different profit margins or remain unsold, making it inappropriate to automatically treat purchase variances as additional taxable sales.
For 2018, Jakoline said purchases reported in its Corporation Tax and VAT returns had been reconciled, apart from general expenses of Sh8.65 million that had been captured as purchases in its financial statements.
For 2019, the company attributed a Sh20.1 million difference to zero-rated purchases that had not been included in its VAT returns. It also provided KRA with an analysis of the variance for 2020.
KRA subsequently issued additional assessments on May 11 and May 16, 2022, covering Income Tax and VAT respectively.
Jakoline lodged notices of objection on June 15 and 16, 2022. The objections were admitted as late objections after KRA requested additional supporting documents from the company.
The tax authority subsequently sought further information before issuing its objection decision on August 29, 2022, confirming the assessments.
Jakoline then moved to the Tax Appeals Tribunal, arguing that it had provided documents to support its objection, including accounting records, purchase invoices, schedules and bank statements.
The Tribunal ruled in favour of the company in November 2023, finding that Jakoline had discharged its burden of proof.
It noted that KRA had acknowledged receiving the documents and held that the tax authority should have reviewed the records and independently verified the discrepancies before confirming the assessments.
KRA challenged the Tribunal’s decision at the High Court.
In determining the appeal, the High Court considered whether a taxpayer could discharge its burden of proof merely by submitting financial records or whether it was required to identify specific records and information explaining the discrepancies identified by the tax authority.
The court found that the Tribunal had erred in concluding that the documents supplied by Jakoline were sufficient to discharge the company’s burden of proof.
The High Court consequently allowed KRA’s appeal and set aside the Tribunal’s November 10, 2023 judgment.
It also reinstated the Commissioner’s objection decision dated August 29, 2022, confirming the Sh29.21 million tax assessment against Jakoline Enterprises.
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