The Supreme Administrative Court (SAC) upheld a taxpayer's cassation complaint in a dispute over the legitimacy of claiming costs/expenses for destroyed goods. According to the SAC, without informing the appellant the appellate body assessed the issue differently from the tax administrator, concluding, without this being supported by the relevant file, that the taxpayer failed to prove the deductibility of the expenses. The principle of two-instance administrative proceedings was thus breached.
In the case in question (1 Afs 70/2021 – 40), the taxpayer disposed of inventories after these had been irreversibly damaged (plants worth CZK 3.5 million destroyed by frost). After their disposal, the taxpayer only received CZK 3,000 for sold planters/pots. The tax administrator did not accept the original value of the plants as a tax-deductible expense.
The Appellate Financial Directorate then changed the assessment of the facts of the case, without informing the party to the proceedings. By this, as the SAC emphasised, the principle of two-instance administrative proceedings was breached. The SAC referred to existing case law (e.g. 6 Ads 134/ 2012-47), which emphasises that if in remedying the shortcomings of a first-instance decision, the appellate administrative authority intervenes in the continuity of the administrative proceedings in this way, it may infringe on the participant’s rights.
In its decision, the SAC reiterated the conditions that are, under current case-law, seen as necessary for the tax deductibility of costs/expenses:
1. the expenses were actually incurred;
2. the expenses were incurred in connection with the generation of taxable income;
3. the expenses were incurred in the relevant taxable period; and
4. the law stipulates that they are tax-deductible expenses.
In the case in question, the SAC believed that the burden of proof as regards supporting the tax deductibility of the expenses had been carried by the taxpayer. In contrast, the SAC pointed out the unacceptable and purely speculative approach by the tax administrator – and subsequently the Appellate Financial Directorate – where witness statements and certain other circumstances were interpreted selectively against the taxpayer. The SAC further noted that any doubts about the records of goods should lead to asking for further evidence, rather than treating all such expenses as non-deductible.
According to the SAC, the amount of CZK 3.5 million by which the value of the goods being disposed of decreased due to frost damage was a tax-deductible expense. The disposal was carried out properly, as evidenced by witness statements. Inconsistencies in the testimonies are understandable, as five years elapsed since the liquidation, and this does not disprove the facts of the case as presented by the taxpayer.
The SAC concluded by noting that in this type of disputes (where external factors such as weather play an important role), tax authorities are obliged to consider the limited scope of information available to the taxpayer. If, after taking evidence, they do not discover any “fundamental facts disproving” the taxpayer's assertions, they cannot categorically exclude the entire expense as tax non-deductible.
Michaela Thelenovámthelenova@kpmg.cz+420 222 123 520
Dominik Hajdukdhajduk@kpmg.cz+420 222 123 715