Prevailing Securities company has had the last laugh against the BURS after the taxman fined the company and ordered it to pay millions of Pula for what was alleged to be an under-declaration of income.
Before Judge Michael Leburu recently, Prevailing Security directors emerged victorious over the BURS in their case against the fine and the order.
The company was accused of understating its income for the period between January 2013 and December 2017, with the BURS fining it over P78 million. Prevailing Securities judicial manager, Danny Julius Guduli filed a review application before court after denying the allegations.
In the judgment, the Court agreed with the director that BURS acted in bad faith by imposing a re-assessment and penalties solely based on the bank statements of the company.
Leburu explained that the director of the company made out a case for review and succeeded in showing that the decision of the BURS Commissioner General to include non-income receipts and receipts that did not constitute a taxable supply was irrational and unreasonable. “The re-assessment by BURS is hereby set aside including the consequent penalties imposed,” the Judge said.
He further explained that while the bank statements may show the amount in the bank at any given point, they do not indicate the company’s profitability, the various taxes collected nor deductions that a taxpayer would be entitled to. The Judge pointed out that thus a bank statement was not necessarily a reflection of the profitability or the financial performance of a company and that it could not be objectively used to determine the profitability of a company nor its VAT liability given the allowable deductions permitted under the Income Tax and Value Added Tax legislation.
“Any assessment by the Commissioner General based on extrapolation which have a link to the profitability of company or VAT or which ignore what law accords a taxpayer in terms of allowance deductions, is thus unreasonable and irrational,” Leburu said.
The Judge said throughout the proceedings the revenue service never disputed that the security company had over 300 employees and that expenses associated with the company’s operations are by law not part of its taxable income and that the re-assessment should not have ignored that fact. He asserted that the company denied it earned income in the amount of P72, 420,714.39 and noted that such amount included non-income credits, inter-bank transfers and loans while BURS alluded to the amount as income deposited in the company bank accounts.
The Judge emphasised that the perusal of the bank statements’ narration made against each entry would thus have assisted the revenue services in sifting what was relevant and irrelevant to the assessment rather than their “bogus approach,” which was not only unreasonable but also irrational.
“In other words the revenue services in the assessment took into consideration irrelevant consideration, even if the security company may have omitted to submit all the required documentation,” he said. Leburu further pointed out that tax was not levied on gross income but taxable income and VAT on the difference between output and income tax meaning that income in the bank was not representative of either taxable income or the difference between output and input tax. “The company is entitled to deduct its business expenses and to be taxed only on its taxable income and difference between its output and input tax and nothing else,” he said.
The Judge then ordered that a re-assessment be done within 60 days of the judgment, and that all penalties be set aside including a 200% fine that was imposed.
Meanwhile according to the backdrop of the case, a tax compliance investigation was commenced against Prevailing Securities in the year 2018 and the company failed to avail all the documentation for taxation.
According to BURS, the investigation ascertained that the company did not declare all the income deposited in the company bank accounts and thereby understated its taxable income over the relevant periods.
“It was further established that the company’s income over the periods were understated in the tax returns for both VAT and Income Tax,” said BURS. However the security company denied the allegations saying it had provided all the requisite documents and that it never understated its income. The director then made an application before court after BURS imposed penalties including having to pay a tax amounting to over P56m.