Documentary evidence for Tax Purposes

Case Study:Roshina Timber Mart Ltd Vs KRA

?KRA carried out an audit on the RTML financial records for the period January, 2013 to February, 2016. RTML was notified of the outcome vide a letter dated 28/8/2017. From the audit, KRA assessed RTML, tax liability at?Kshs.?23,216,692/- for?VAT?and Kshs. 28,219,258/- for Income Tax.

The result of the audit was communicated to RTML and a demand for Kshs. 28,219,258/- for Income Tax and Kshs. 23,612,692/- VAT made. RTML had proper documentation for its foreign suppliers, but there was no enough evidence for its local purchases as only?ETR?receipts were availed. That other crucial documents such as delivery notes and goods received notes were missing

The suppliers were scrutinized on a simple basis aided by information obtained from TML bankers. It was established that the beneficiaries of those payments were different from the suppliers and that all the purported payments by the appellant were actually partners’ drawings and inter-bank transfers.

As such KRA disallowed all purchases claimed with respect to those particular suppliers and issued as assessment of Kshs. 23,612,692/- and Kshs. 28,219,258/- as VAT and Income Tax, respectively.

TML objected to the tax assessment which KRA declined. RTML appealed to the Tax Appeals Tribunal (TAT) against that objection decision. By its judgment of 26/2/2020, the Tribunal dismissed the appeal and upheld KRA’s tax assessment.

Being dissatisfied with that judgment, the RTML appealed to the High Court

In its ruling on 18/02/2022 , the High Court observed that:

• ETR receipts must of necessity be accompanied by other supporting documents to support commercial transactions if one wishes to benefit under section 17 of the VAT Act aforesaid. In this case, upon requesting for information from RTML’s banks, it was revealed that the payments claimed by the appellants did not indeed correspond with the bank records, as those payments were made out to other beneficiaries and not the suppliers claimed by the appellant.
• Section 54A (1) of the?Income Tax Act, Cap 470, provides: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”
• Further,Section 43 of the VAT Act 2013 requires a taxpayer to keep transactional records for a period of five years. The section provides: -

“Every registered person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.

As such , it is evident that RTML failed to meet the evidentiary burden of proof to satisfy the KRA as to the veracity of the transactions with the listed suppliers. In this regard, the Tribunal cannot be faulted in upholding KRA’s assessments for both VAT and Income Tax

RTML , therefore lost the case.

Keeping proper accounting records is the first line of defense in any tax dispute with the tax authorities