(Being an Appeal against the Judgment of the Tax Appeals Tribunal at Nairobi delivered on 22 nd November 2024 in Tax Appeals Tribunal Appeal No. E972 of 2023)
Background
1. Hamron Logistics Limited, the appellant herein, is dissatisfied with the decision of the Tax Appeals Tribunal delivered on 22 nd November 2024 in Tax Appeal Tribunal Appeal No. E972 of 2023. The appellant filed this appeal through a memorandum of appeal dated 17 th December 2024. The record of appeal is also dated 17 th December 2024 and there is also filed a supplementary record of appeal dated 25 th April 2025.
Grounds of Appeal
2. The appeal is based on the grounds that the Tribunal erred:
a. In fact, and law, by upholding the Objection decision of the Respondent, on the basis that the appellant allegedly failed to discharge its burden of proof pursuant to Section 56(1) of the Tax Procedures Act.
b. In law and fact by failing to interrogate whether the documents requested by the Respondent were relevant in the process of determining if the VAT and Income tax assessments raised were due and payable.
c. In failing to consider that the appellant had delivered the documents in its possession and those relevant to the assessment to the Respondent together with its notice of Objection.
d. In erroneously finding that the appellant had not dislodged their duty to prove that the Objection decision was incorrect, despite the Appellant having delivered the documents in its possession and those relevant to the assessment in question, together with its notice of Objection.
e. In law by disregarding the fact that the burden of proof had shifted to the respondent to discharge after the appellant had provided the requisite documents at the Objection stage.
f. In law and fact by failing to consider all the material facts, evidence and legal arguments presented by the appellant and ultimately arrived at an erroneous decision.
3. The appellant therefore prays that this court allows the appeal and sets aside the judgment of the Tax Appeals Tribunal dated 22 nd November 2024 with costs to the appellant.
The case before the Tax Appeals Tribunal
4. The appellant went before the TAT to challenge the Objection decision by the Commissioner, the respondent herein, delivered on 10 th November 2023 which dismissed the appellant’s Objection to the respondent’s Income Tax and VAT additional tax assessments to the tune of KShs 13,232,273.58 based on bank analyses made by the respondent on the appellant’s bankings.
5. The appellant’s contention in all the grounds of appeal before the TAT was that the respondent failed to rely on the physical documents provided by the appellant in its tax audit computations but instead subjected the appellant to a bank analysis process that caused the tax computation to be higher than the self-assessment made by the appellant. According to the appellant, as a result of the same, the appellant’s turnover was unfairly increased for the period under review for reasons that bank credits such as loans and capital injections that were not revenue in nature were subjected to tax and some expenses that had been incurred by the appellant in generation of the taxable income were disallowed.
6. The appellant submitted before the TAT that it had supplied the respondent with all the relevant documentary evidence for review by the respondent and in support of its position that the respondent ought not to have solely relied on bank credits which showed that they were not entirely income in nature to be considered for the tax assessment, as they included loans, contra-entries, bounced cheques and capital injections.
7. The respondent’s response to the appellant’s appeal and submissions was that upon it undertaking a review of the Income Tax returns and VAT returns for the appellant for the period 1 st July 2020 to 31 st July 2022 it was established that the appellant had undeclared income derived from its banking for the said period. The appellant was issued with assessment orders for Value Added Tax and Income Tax on 27 th September 2021 and 16 th August 2023.
8. When the appellant raised notices of objection to the assessment, the respondent acknowledged the same and on 28 th September 2023 wrote to the appellant by way of e-mail requiring it to provide statutorily required documents under section 51(3) of the TPA to support the objection failure to which the objection would be invalidated.
9. There were follow-up engagements with the appellant through telephone conversations on 11 th October 2023 and 16 th October 2023 for the appellant to produce the required documents. A grace period was granted to the appellant to produce the documents but no response was forthcoming from the appellant and the respondent went ahead to make the Objection decision on 10 th November 2023.
10. The respondent submitted that the appellant failed to provide the requisite documents and its assertion that it did are false and misleading.
11. The respondent relied on various cases to bolster its submissions. Some of the relevant and applicable cases are considered in the analysis that follows.
Submissions
12. The appeal proceeded on written submissions filed by both parties.
13. In its submissions, the appellant raised one issue for determination, that is, whether the Tax Appeals Tribunal erred in dismissing the appellant’s appeal. It answered the question in the affirmative.
14. The respondent on its part raised two issues for determination:
a. Whether the additional assessments issued upon the appellant were justified, and
b. Whether the appellant discharged its burden of proof
15. The appellant submits that the Tribunal failed to interrogate whether the documents requested by the respondent were relevant or even considered in the process of determining the basis of the impugned taxes in question.
16. The appellant submits that the Tribunal erred in law and in fact in failing to appreciate that the respondent had misapplied the Banking Analysis Test by failing to take into account inter-bank transfers, loans, contra entries, bounced cheques and capital injections and assuming that every deposit is income contrary to section 3(2) of the Income Tax Act.
17. The appellant has cited the following English cases in support of that submission:
a) Bachmann – vs – The Queen, 2015 TCC where the Court stated as follows on the burden of the Respondent when using banking test to arrive at the Appellant’s tax liability:-
“This court has recognized that in an appropriate case a bank deposit analysis is an acceptable method to compute income.” Once it is established that the method is allowed, the question is whether the method was applied in arriving at a reasonable assessment in the case at hand.”
b) Hole vs the Queen, 2016 TCC 55, the court stated that:-
“There are two primary ways in which a taxpayer can challenge a bank deposit analysis. The first is to prove that his or her records were adequate and thus that his or her income should have been determined using those records. The second and more common method is to challenge the actual determination of income made by the Minister under the bank deposit analysis.
c) Van Boeckel v C & E QB Dec 1980, [1981] STC 290 Woolf J. it was further stated that:-
“the very use of the word ‘judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form judgment as to what tax is due… what the words ‘best of their judgment’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material, come to a decision which is one which is reasonable and amount to tax which is due. As long as there is some material on which the commissioners’ act then they are not required to carry out investigations which may or may not result in further material being placed before them.”
18. According to the appellant, once it had provided proof of inappropriate use of the appellant’s banking by the respondent, it discharged its burden of proof and that burden therefore shifted to the respondent to dispute the appellant’s position. The appellant contends that this was not done by the respondent during the Objection or at the hearing of the appeal before the Tribunal. Further, that the Tribunal in its decision failed to appreciate that the burden of proof to the respondent had shifted.
19. The appellant contends that the Tribunal erred by finding that they had failed to discharge its burden of proof pursuant to section 56(1) of the TPA.
20. It is the appellant’s contention that the respondent failed to interrogate whether the documents requested by the Commissioner were relevant in determining whether the VAT and Income tax assessments raised were due and payable.
21. The appellant submits that the Tribunal erred in failing to establish that the respondent erred in cherry-picking on apparent variances between estimated turnovers derived from bank deposits and the actual turn-overs hence failed to recognize that the variances arising from a comparison of the turnover per the filed returns and the sales over banking deposits which were because of a difference in the accounting treatment on different items of reconciliation.
22. On this issue, the appellant submits that the respondent erred by disregarding the actual turnover realized by the appellant in its financial statements and books of accounts but instead unfairly subjected it to a bank analysis method which prejudicially increased its turnover for the periods in question.
23. In response, the respondent submits that the appellant did not place any documentary evidence before the Commissioner or the Tribunal to controvert the assessments and therefore utterly failed to discharge its burden of proof.
24. It is the respondent’s position that no documents were delivered to the respondent in support of the notice of objection that resulted to the confirmation of the assessments, rendering the taxes due and payable and subsequently the Objection decision by the Commissioner which was upheld by the Tribunal.
25. It is the respondent’s position that the appellant’s assertion that the Tribunal erred in failing to consider the fact that the appellant had delivered the documents in its possession to the respondent together with their notice of objection is not supported by any evidence to demonstrate how the requested documents were delivered to the Commissioner such as a stamped letter or email message.
26. Further that had the appellant provided those documents with their objection notice as alleged, it would have provided copies of the same while filing its appeal before the Tribunal.
27. The respondent cites section 23 of the Tax Procedures Act, which imposes the responsibility on the taxpayer to maintain and provide all material documents required by the Commissioner in order to ascertain what taxes are due and payable by the taxpayer.
28. The respondent submits that the determination of the tax liability depends on submission of necessary records by the appellant and it is not upon the appellant place to determine which documents are relevant, but to discharge its responsibility of submitting the documents requested to aid the Commissioner to review the objection decision exhaustively.
29. On the burden of proof, the respondent submits that the same remained with the appellant and never shifted because the appellant never provided the documents requested for. The respondent also cites the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [supra] and Commissioner of Domestic Taxes v Trical and Hard Limited [2022] KEHC 9927 (KLR) for the position that in order to shift the evidential burden to the Commissioner, the taxpayer has to produce competent and relevant evidence to support its position.
Analysis
30. I have considered the grounds of appeal, the record of appeal, the submissions by learned counsels for the parties and the authorities submitted. The issue for determination is whether or not the appellant supplied documents requested for by the Commissioner and if so, whether the Commissioner failed to consider those documents and therefore inappropriately applied the banking analysis method in assessment of alleged undeclared tax by the appellant.
31. An appeal to this court from a decision of the TAT under section 56(2) of the TPA is on questions of law only. It is not correct as submitted by learned counsel for the appellant that this court as the appellate court is under the duty to re-evaluate and assess the evidence and make its own conclusions. Therefore, the decision cited by learned counsel in Anti Counterfeit Agency v Mwania t/a Tonermart Technologies & another [2024] KEHC 1725 (KLR) citing the case of Selle & Another vs. Associated Motor Boat Co. Ltd & Others [1968] EA 123 for the above position is not applicable to this case.
32. Having said that, I have no difficulty in finding that the issue raised by the appellant that the respondent failed to take into account its evidence, in the form of documents it contends it supplied to the respondent, in its tax audit of the appellant and in arriving at the Objection decision is an issue of law and this court has jurisdiction to consider it.
33. I have looked at the Commissioner’s Objection decision dated 10 th November 2023 and in the decision, the Commissioner informed the appellant that:
“Basis of assessment
The assessments were premised on an audit verification exercise which established under-declared income derived from your bankings for the periods 1 st August 2020 to 31 st July 2022. The identified variances/under-declared income were charged both VAT and corporation tax in the respective periods. While issuing the assessments the Commissioner allowed purchases based on physical/verified purchases as claimed in your VAT returns for 2020-2021 and 2021-2022 years of income, and for 2019-2020 using industry profit margins of 39% for Income Tax purposes.” ( emphasis in italics and underlining by this court).”
34. I have highlighted the relevant parts to show that from the outset, the Commissioner made it clear that they were relying on the appellant’s bankings and where available the assessment was based on physical verified purchases as claimed in the appellant’s VAT returns meaning some documents had been made available and the Commissioner had considered and verified them.
35. After setting out the assessments, the Objection decision went on to state that the basis of the assessments was explained in detail in the Commissioner’s Notice of Assessment dated 16 th August 2023.
36. The Objection decision went on to state as follows:
“Statement of Findings
5. Upon review of your grounds of objection we have made the following findings:
• On 28 th September 2023, you were allowed to submit your objection out of time together with relevant supporting documents, i.e. Audited Financial Statements, Trial Balances, relevant ledgers supporting the financial statements, together with supporting financial documents, Tax computations, Certified copies of bank statements and reconciliation of bank credits and declared income.
• We however note that you did not provide the above documents despite follow-up reminders made vide telephone on 11 th October 2023 and 16 th October 2023.
• In the foregoing you have failed to discharge the burden of proof required under the provisions of section 56(1) of the TPA, 2015...”
37. A summation of the basis of assessment and the statement of findings above shows that indeed the assessment was based on bank statements provided by the appellant, the appellant was given an opportunity to provide any further documents that could be relied upon by the Commissioner that could vary the assessment, the appellant failed to provide the said documents and so the Commissioner went ahead to make its Objection decision based on the bankings.
38. In its appeal to the TAT the appellant set out its grounds of appeal that the respondent erred in law and in fact by:
a. Overstating the appellant’s revenues for the periods in question based on erroneous summation of bank credits.
b. Charging income tax on bank credits that were not revenue in nature but rather loans and capital injections.
c. Disallowing deductible expenses that were claimed by the appellant.
d. Disregarding all the reconciliations, explanations, and documentation provided by the appellant including financial statements and tax returns and proceeded to confirm the erroneous tax assessments.
39. In the Statement of Facts dated 21 st December 2023, the appellant basically argued its case. In paragraph C.11(1) the appellant submitted that the respondent erred by disregarding the actual turnover realized by the appellant in its financial statements and tax returns by arbitrarily subjecting the appellant to a bank analysis process that unfairly increased the appellant’s turnover for the periods under review.
40. It is important to set out the relevant provisions of section 51 of the TPA in order to appreciate the dispute between the appellant and the respondent:
S. 51(1) A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.
(2) A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.
(3) A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—
(a) the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;
(b) in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and
(c) all the relevant documents relating to the objection have been submitted.
(4) Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged and request the taxpayer to submit the information specified in the notice within seven days after the date of the notice.
(4A)Despite subsection (3), where a taxpayer fails to provide the information required under subsection (4) or fails to provide the information within the specified period, the Commissioner may make an objection decision within sixty days after the date on which the notice of objection was lodged.
41. Section 23 of the TPA provides for record keeping by the taxpayer in the following terms:
S. 23(1) A person shall—
(a) maintain any document required under a tax law, in either of the official languages;
(b) maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and
(c) subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.
42. Section 54A (1) of the Income Tax Act sets out the records to be kept by any person carrying on a business namely 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. The appellant has not showed that it produced these or any of these documents to the Commissioner, other than its bare assertion that the same were supplied at the time of filing the objection notice, a fact that has been denied by the respondent.
43. I have found the following information, available at https://filingroomkenya.com/what-documents-does-kra-require-during-a-tax-audit-in-kenya/ to be useful with regard to the documents that a taxpayer such as the appellant herein may be required to keep and produce to the Commissioner when required as was the case herein.
a. Tax and financial recordsFiled tax returns, assessments, payment confirmations, VAT invoices, credit notes, and withholding tax schedules.
b. Accounting recordsGeneral ledgers, trial balances, management accounts, and audited financial statements for the relevant periods.
c. Business and legal documentsCertificate of incorporation, CR12 or CR13, shareholder information, supplier and customer contracts, and lease agreements.
d. Payroll and HR recordsPAYE schedules, NSSF and NHIF remittances, employment contracts, and payroll summaries.
44. I do not purport to say that the above list is of any probative value. It is not from any authoritative text on tax law and neither is it from the KRA, which I believe for its own reasons appears not to be keen on providing one for its own reasons, or perhaps because such a list would be endless, but I think it would be a good thing to do even if by way of example or sample only. The above list is by no means exhaustive and neither is it meant to be a strait jacket into which neither KRA nor any taxpayer should fit. However, it provides an insight into what one can see are basic primary records, required under section 23 of the TPA, that would be kept by any entity carrying on a business such as the appellant herein and readily available to provide to KRA on request during a tax audit.
45. Learned counsels have submitted correctly that the burden of proof is a swinging pendulum. It is initially placed on the taxpayer to submit all necessary documents to support its case and that once the taxpayer adduces evidence that discharges his or her burden, then the burden shifts to the Commissioner. This position is found in the cited case of Commissioner of Domestic Taxes v Trical and Hard Limited [2022] KEHC 9927 (KLR) where it was held that:
“The core of this appeal is that the Commissioner impugned the records and documentation submitted by the Respondent. It maintained that no supplies were actually made in support of those records. The question before the court that was also before the Tribunal was whether the Respondent sufficiently discharged its burden when it availed those records to the Commissioner as proof of supply.
I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer. The uniqueness of our tax system in placing the evidential burden of proof on the tax payer is neither a mistake nor is it unconstitutional. In Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment) the court stated that:
The most significant justification for placing the burden of proof on the tax payer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability. It is simply fair to place the burden of persuasion on the taxpayer, given that he knows the facts relating to his liability, because the commissioner must rely on circumstantial evidence, most of it coming from the taxpayer and the taxpayer's records. The taxpayer must present a minimum amount of information necessary to support his position. This safety valve seems to place the burden of production on the taxpayer without relieving the Commissioner of the overall burden of proof. The tax payers’ evidence must meet this minimum threshold.
A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.
From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner…”
46. It is also true as held in the case of Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] KEHC 559 (KLR) , that failure to consider material facts presented by a taxpayer against whom an assessment has been raised amounts to an abuse of legislative provisions and it is prejudicial to the taxpayer and such an assessment cannot be acted upon.
47. However, these two cases must be distinguished from the present case where the Commissioner’s position is that the documents requested to support the appellant’s objection notice were never supplied at all and that was the basis of the Commissioner’s Objection decision and which the TAT found was the case.
48. The appellant acknowledged that it received a request from the respondent during the audit verification exercise to make available documents for verification. According to the appellant it provided the said documents being copies of bank statements, financial statements, sales and purchase ledgers.
49. The request to the appellant to provide those documents was to underscore the respondent’s approach to tax assessment as being evidence-based. This is because, complete records made available to the respondent enables it to cross-check the tax assessment as filed by the appellant and its own assessment during the tax audit.
50. In spite of it alleging to have made available the requested documents, nowhere through the objection proceedings, the appeal to the TAT and the present appeal has the appellant indicated the date it provided the said documents, a list of the documents it allegedly provided and copies of the documents so provided and the mode by which it provided, whether by e-mail or delivery of hard copies.
51. The submission by learned counsel for the appellant that it is not in dispute that the appellant supplied the respondent with the relevant evidence and documents to support its objection and appeal, evidence that the respondent and the Tribunal disregarded, is therefore not correct. As set out above in the Objection decision, the respondent’s position right from the start was that the documents requested for were never supplied and that they had not even been supplied together with the objection notice filed by the appellant before the Commissioner.
52. Consequently, the further submission by learned counsel for the appellant that there is evidence of the respondent’s misapplication of the banking analysis test as it failed to make adjustments on non- income deposits from the banking, is an issue which the Tribunal failed to interrogate, again is not correct. The Tribunal could not have interrogated any issue when there were no documents to back the allegations by the appellant.
53. This submission by the appellant must be viewed in light of the respondent’s express findings in the Objection Decision that the appellant had failed to provide audited Financial Statements, Trial Balances, relevant ledgers supporting the financial statements, together with supporting financial documents, Tax computations, Certified copies of bank statements and reconciliation of bank credits and declared income.
54. The law places the primary burden upon the taxpayer to prove that a tax assessment by the Commissioner is incorrect. Section 56(1) of the Tax Procedures Act provides that in any proceedings under the Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.
55. Similarly, section 30 of the Tax Appeals Tribunal Act (Cap. 469A) Laws of Kenya provides as follows:
S. 30. In a proceeding before the Tribunal, the appellant has the burden of proving—
a. Where an appeal relates to an assessment, that the assessment is excessive; or
b. In any other case, that the tax decision should not have been made or should have been made differently.
56. In line with these provisions, courts have affirmed that the position reflects the ordinary principle of evidence that he who asserts must prove. The High Court in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] KEHC 13347 (KLR) Mativo, J (as he then was) explained this position thus:
“…Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect...
36. Placing the burden of proof in tax cases on the tax payer reflects the unique nature of the tax system. This is evident from the three-fold justifications for placing the burden on the tax payer. These are: - (a) the presumption of correctness; (b) the government's need for revenue’ and, (c) the taxpayer's possession of evidence. The taxpayer’s burden of proof comprises two parts: – establishing, with evidence, the underlying facts on which the law is to operate (and in this regard, the standard of proof to which each fact must be proved is relevant) (see FCT v Thomas [2018] HCA 31 at [84] and [85] per Gageler J.) and – that the operation of the law when applied to those facts establi
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Background
1. Hamron Logistics Limited, the appellant herein, is dissatisfied with the decision of the Tax Appeals Tribunal delivered on 22 nd November 2024 in Tax Appeal Tribunal Appeal No. E972 of 2023. The appellant filed this appeal through a memorandum of appeal dated 17 th December 2024. The record of appeal is also dated 17 th December 2024 and there is also filed a supplementary record of appeal dated 25 th April 2025.
Grounds of Appeal
2. The appeal is based on the grounds that the Tribunal erred:
a. In fact, and law, by upholding the Objection decision of the Respondent, on the basis that the appellant allegedly failed to discharge its burden of proof pursuant to Section 56(1) of the Tax Procedures Act.
b. In law and fact by failing to interrogate whether the documents requested by the Respondent were relevant in the process of determining if the VAT and Income tax assessments raised were due and payable.
c. In failing to consider that the appellant had delivered the documents in its possession and those relevant to the assessment to the Respondent together with its notice of Objection.
d. In erroneously finding that the appellant had not dislodged their duty to prove that the Objection decision was incorrect, despite the Appellant having delivered the documents in its possession and those relevant to the assessment in question, together with its notice of Objection.
e. In law by disregarding the fact that the burden of proof had shifted to the respondent to discharge after the appellant had provided the requisite documents at the Objection stage.
f. In law and fact by failing to consider all the material facts, evidence and legal arguments presented by the appellant and ultimately arrived at an erroneous decision.
3. The appellant therefore prays that this court allows the appeal and sets aside the judgment of the Tax Appeals Tribunal dated 22 nd November 2024 with costs to the appellant.
The case before the Tax Appeals Tribunal
4. The appellant went before the TAT to challenge the Objection decision by the Commissioner, the respondent herein, delivered on 10 th November 2023 which dismissed the appellant’s Objection to the respondent’s Income Tax and VAT additional tax assessments to the tune of KShs 13,232,273.58 based on bank analyses made by the respondent on the appellant’s bankings.
5. The appellant’s contention in all the grounds of appeal before the TAT was that the respondent failed to rely on the physical documents provided by the appellant in its tax audit computations but instead subjected the appellant to a bank analysis process that caused the tax computation to be higher than the self-assessment made by the appellant. According to the appellant, as a result of the same, the appellant’s turnover was unfairly increased for the period under review for reasons that bank credits such as loans and capital injections that were not revenue in nature were subjected to tax and some expenses that had been incurred by the appellant in generation of the taxable income were disallowed.
6. The appellant submitted before the TAT that it had supplied the respondent with all the relevant documentary evidence for review by the respondent and in support of its position that the respondent ought not to have solely relied on bank credits which showed that they were not entirely income in nature to be considered for the tax assessment, as they included loans, contra-entries, bounced cheques and capital injections.
7. The respondent’s response to the appellant’s appeal and submissions was that upon it undertaking a review of the Income Tax returns and VAT returns for the appellant for the period 1 st July 2020 to 31 st July 2022 it was established that the appellant had undeclared income derived from its banking for the said period. The appellant was issued with assessment orders for Value Added Tax and Income Tax on 27 th September 2021 and 16 th August 2023.
8. When the appellant raised notices of objection to the assessment, the respondent acknowledged the same and on 28 th September 2023 wrote to the appellant by way of e-mail requiring it to provide statutorily required documents under section 51(3) of the TPA to support the objection failure to which the objection would be invalidated.
9. There were follow-up engagements with the appellant through telephone conversations on 11 th October 2023 and 16 th October 2023 for the appellant to produce the required documents. A grace period was granted to the appellant to produce the documents but no response was forthcoming from the appellant and the respondent went ahead to make the Objection decision on 10 th November 2023.
10. The respondent submitted that the appellant failed to provide the requisite documents and its assertion that it did are false and misleading.
11. The respondent relied on various cases to bolster its submissions. Some of the relevant and applicable cases are considered in the analysis that follows.
Submissions
12. The appeal proceeded on written submissions filed by both parties.
13. In its submissions, the appellant raised one issue for determination, that is, whether the Tax Appeals Tribunal erred in dismissing the appellant’s appeal. It answered the question in the affirmative.
14. The respondent on its part raised two issues for determination:
a. Whether the additional assessments issued upon the appellant were justified, and
b. Whether the appellant discharged its burden of proof
15. The appellant submits that the Tribunal failed to interrogate whether the documents requested by the respondent were relevant or even considered in the process of determining the basis of the impugned taxes in question.
16. The appellant submits that the Tribunal erred in law and in fact in failing to appreciate that the respondent had misapplied the Banking Analysis Test by failing to take into account inter-bank transfers, loans, contra entries, bounced cheques and capital injections and assuming that every deposit is income contrary to section 3(2) of the Income Tax Act.
17. The appellant has cited the following English cases in support of that submission:
a) Bachmann – vs – The Queen, 2015 TCC where the Court stated as follows on the burden of the Respondent when using banking test to arrive at the Appellant’s tax liability:-
“This court has recognized that in an appropriate case a bank deposit analysis is an acceptable method to compute income.” Once it is established that the method is allowed, the question is whether the method was applied in arriving at a reasonable assessment in the case at hand.”
b) Hole vs the Queen, 2016 TCC 55, the court stated that:-
“There are two primary ways in which a taxpayer can challenge a bank deposit analysis. The first is to prove that his or her records were adequate and thus that his or her income should have been determined using those records. The second and more common method is to challenge the actual determination of income made by the Minister under the bank deposit analysis.
c) Van Boeckel v C & E QB Dec 1980, [1981] STC 290 Woolf J. it was further stated that:-
“the very use of the word ‘judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form judgment as to what tax is due… what the words ‘best of their judgment’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and on that material, come to a decision which is one which is reasonable and amount to tax which is due. As long as there is some material on which the commissioners’ act then they are not required to carry out investigations which may or may not result in further material being placed before them.”
18. According to the appellant, once it had provided proof of inappropriate use of the appellant’s banking by the respondent, it discharged its burden of proof and that burden therefore shifted to the respondent to dispute the appellant’s position. The appellant contends that this was not done by the respondent during the Objection or at the hearing of the appeal before the Tribunal. Further, that the Tribunal in its decision failed to appreciate that the burden of proof to the respondent had shifted.
19. The appellant contends that the Tribunal erred by finding that they had failed to discharge its burden of proof pursuant to section 56(1) of the TPA.
20. It is the appellant’s contention that the respondent failed to interrogate whether the documents requested by the Commissioner were relevant in determining whether the VAT and Income tax assessments raised were due and payable.
21. The appellant submits that the Tribunal erred in failing to establish that the respondent erred in cherry-picking on apparent variances between estimated turnovers derived from bank deposits and the actual turn-overs hence failed to recognize that the variances arising from a comparison of the turnover per the filed returns and the sales over banking deposits which were because of a difference in the accounting treatment on different items of reconciliation.
22. On this issue, the appellant submits that the respondent erred by disregarding the actual turnover realized by the appellant in its financial statements and books of accounts but instead unfairly subjected it to a bank analysis method which prejudicially increased its turnover for the periods in question.
23. In response, the respondent submits that the appellant did not place any documentary evidence before the Commissioner or the Tribunal to controvert the assessments and therefore utterly failed to discharge its burden of proof.
24. It is the respondent’s position that no documents were delivered to the respondent in support of the notice of objection that resulted to the confirmation of the assessments, rendering the taxes due and payable and subsequently the Objection decision by the Commissioner which was upheld by the Tribunal.
25. It is the respondent’s position that the appellant’s assertion that the Tribunal erred in failing to consider the fact that the appellant had delivered the documents in its possession to the respondent together with their notice of objection is not supported by any evidence to demonstrate how the requested documents were delivered to the Commissioner such as a stamped letter or email message.
26. Further that had the appellant provided those documents with their objection notice as alleged, it would have provided copies of the same while filing its appeal before the Tribunal.
27. The respondent cites section 23 of the Tax Procedures Act, which imposes the responsibility on the taxpayer to maintain and provide all material documents required by the Commissioner in order to ascertain what taxes are due and payable by the taxpayer.
28. The respondent submits that the determination of the tax liability depends on submission of necessary records by the appellant and it is not upon the appellant place to determine which documents are relevant, but to discharge its responsibility of submitting the documents requested to aid the Commissioner to review the objection decision exhaustively.
29. On the burden of proof, the respondent submits that the same remained with the appellant and never shifted because the appellant never provided the documents requested for. The respondent also cites the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [supra] and Commissioner of Domestic Taxes v Trical and Hard Limited [2022] KEHC 9927 (KLR) for the position that in order to shift the evidential burden to the Commissioner, the taxpayer has to produce competent and relevant evidence to support its position.
Analysis
30. I have considered the grounds of appeal, the record of appeal, the submissions by learned counsels for the parties and the authorities submitted. The issue for determination is whether or not the appellant supplied documents requested for by the Commissioner and if so, whether the Commissioner failed to consider those documents and therefore inappropriately applied the banking analysis method in assessment of alleged undeclared tax by the appellant.
31. An appeal to this court from a decision of the TAT under section 56(2) of the TPA is on questions of law only. It is not correct as submitted by learned counsel for the appellant that this court as the appellate court is under the duty to re-evaluate and assess the evidence and make its own conclusions. Therefore, the decision cited by learned counsel in Anti Counterfeit Agency v Mwania t/a Tonermart Technologies & another [2024] KEHC 1725 (KLR) citing the case of Selle & Another vs. Associated Motor Boat Co. Ltd & Others [1968] EA 123 for the above position is not applicable to this case.
32. Having said that, I have no difficulty in finding that the issue raised by the appellant that the respondent failed to take into account its evidence, in the form of documents it contends it supplied to the respondent, in its tax audit of the appellant and in arriving at the Objection decision is an issue of law and this court has jurisdiction to consider it.
33. I have looked at the Commissioner’s Objection decision dated 10 th November 2023 and in the decision, the Commissioner informed the appellant that:
“Basis of assessment
The assessments were premised on an audit verification exercise which established under-declared income derived from your bankings for the periods 1 st August 2020 to 31 st July 2022. The identified variances/under-declared income were charged both VAT and corporation tax in the respective periods. While issuing the assessments the Commissioner allowed purchases based on physical/verified purchases as claimed in your VAT returns for 2020-2021 and 2021-2022 years of income, and for 2019-2020 using industry profit margins of 39% for Income Tax purposes.” ( emphasis in italics and underlining by this court).”
34. I have highlighted the relevant parts to show that from the outset, the Commissioner made it clear that they were relying on the appellant’s bankings and where available the assessment was based on physical verified purchases as claimed in the appellant’s VAT returns meaning some documents had been made available and the Commissioner had considered and verified them.
35. After setting out the assessments, the Objection decision went on to state that the basis of the assessments was explained in detail in the Commissioner’s Notice of Assessment dated 16 th August 2023.
36. The Objection decision went on to state as follows:
“Statement of Findings
5. Upon review of your grounds of objection we have made the following findings:
• On 28 th September 2023, you were allowed to submit your objection out of time together with relevant supporting documents, i.e. Audited Financial Statements, Trial Balances, relevant ledgers supporting the financial statements, together with supporting financial documents, Tax computations, Certified copies of bank statements and reconciliation of bank credits and declared income.
• We however note that you did not provide the above documents despite follow-up reminders made vide telephone on 11 th October 2023 and 16 th October 2023.
• In the foregoing you have failed to discharge the burden of proof required under the provisions of section 56(1) of the TPA, 2015...”
37. A summation of the basis of assessment and the statement of findings above shows that indeed the assessment was based on bank statements provided by the appellant, the appellant was given an opportunity to provide any further documents that could be relied upon by the Commissioner that could vary the assessment, the appellant failed to provide the said documents and so the Commissioner went ahead to make its Objection decision based on the bankings.
38. In its appeal to the TAT the appellant set out its grounds of appeal that the respondent erred in law and in fact by:
a. Overstating the appellant’s revenues for the periods in question based on erroneous summation of bank credits.
b. Charging income tax on bank credits that were not revenue in nature but rather loans and capital injections.
c. Disallowing deductible expenses that were claimed by the appellant.
d. Disregarding all the reconciliations, explanations, and documentation provided by the appellant including financial statements and tax returns and proceeded to confirm the erroneous tax assessments.
39. In the Statement of Facts dated 21 st December 2023, the appellant basically argued its case. In paragraph C.11(1) the appellant submitted that the respondent erred by disregarding the actual turnover realized by the appellant in its financial statements and tax returns by arbitrarily subjecting the appellant to a bank analysis process that unfairly increased the appellant’s turnover for the periods under review.
40. It is important to set out the relevant provisions of section 51 of the TPA in order to appreciate the dispute between the appellant and the respondent:
S. 51(1) A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.
(2) A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.
(3) A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—
(a) the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments;
(b) in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); and
(c) all the relevant documents relating to the objection have been submitted.
(4) Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged and request the taxpayer to submit the information specified in the notice within seven days after the date of the notice.
(4A)Despite subsection (3), where a taxpayer fails to provide the information required under subsection (4) or fails to provide the information within the specified period, the Commissioner may make an objection decision within sixty days after the date on which the notice of objection was lodged.
41. Section 23 of the TPA provides for record keeping by the taxpayer in the following terms:
S. 23(1) A person shall—
(a) maintain any document required under a tax law, in either of the official languages;
(b) maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and
(c) subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.
42. Section 54A (1) of the Income Tax Act sets out the records to be kept by any person carrying on a business namely 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. The appellant has not showed that it produced these or any of these documents to the Commissioner, other than its bare assertion that the same were supplied at the time of filing the objection notice, a fact that has been denied by the respondent.
43. I have found the following information, available at https://filingroomkenya.com/what-documents-does-kra-require-during-a-tax-audit-in-kenya/ to be useful with regard to the documents that a taxpayer such as the appellant herein may be required to keep and produce to the Commissioner when required as was the case herein.
a. Tax and financial recordsFiled tax returns, assessments, payment confirmations, VAT invoices, credit notes, and withholding tax schedules.
b. Accounting recordsGeneral ledgers, trial balances, management accounts, and audited financial statements for the relevant periods.
c. Business and legal documentsCertificate of incorporation, CR12 or CR13, shareholder information, supplier and customer contracts, and lease agreements.
d. Payroll and HR recordsPAYE schedules, NSSF and NHIF remittances, employment contracts, and payroll summaries.
44. I do not purport to say that the above list is of any probative value. It is not from any authoritative text on tax law and neither is it from the KRA, which I believe for its own reasons appears not to be keen on providing one for its own reasons, or perhaps because such a list would be endless, but I think it would be a good thing to do even if by way of example or sample only. The above list is by no means exhaustive and neither is it meant to be a strait jacket into which neither KRA nor any taxpayer should fit. However, it provides an insight into what one can see are basic primary records, required under section 23 of the TPA, that would be kept by any entity carrying on a business such as the appellant herein and readily available to provide to KRA on request during a tax audit.
45. Learned counsels have submitted correctly that the burden of proof is a swinging pendulum. It is initially placed on the taxpayer to submit all necessary documents to support its case and that once the taxpayer adduces evidence that discharges his or her burden, then the burden shifts to the Commissioner. This position is found in the cited case of Commissioner of Domestic Taxes v Trical and Hard Limited [2022] KEHC 9927 (KLR) where it was held that:
“The core of this appeal is that the Commissioner impugned the records and documentation submitted by the Respondent. It maintained that no supplies were actually made in support of those records. The question before the court that was also before the Tribunal was whether the Respondent sufficiently discharged its burden when it availed those records to the Commissioner as proof of supply.
I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer. The uniqueness of our tax system in placing the evidential burden of proof on the tax payer is neither a mistake nor is it unconstitutional. In Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment) the court stated that:
The most significant justification for placing the burden of proof on the tax payer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability. It is simply fair to place the burden of persuasion on the taxpayer, given that he knows the facts relating to his liability, because the commissioner must rely on circumstantial evidence, most of it coming from the taxpayer and the taxpayer's records. The taxpayer must present a minimum amount of information necessary to support his position. This safety valve seems to place the burden of production on the taxpayer without relieving the Commissioner of the overall burden of proof. The tax payers’ evidence must meet this minimum threshold.
A presumption of correctness arises from the Commissioner’s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.
From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner…”
46. It is also true as held in the case of Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] KEHC 559 (KLR) , that failure to consider material facts presented by a taxpayer against whom an assessment has been raised amounts to an abuse of legislative provisions and it is prejudicial to the taxpayer and such an assessment cannot be acted upon.
47. However, these two cases must be distinguished from the present case where the Commissioner’s position is that the documents requested to support the appellant’s objection notice were never supplied at all and that was the basis of the Commissioner’s Objection decision and which the TAT found was the case.
48. The appellant acknowledged that it received a request from the respondent during the audit verification exercise to make available documents for verification. According to the appellant it provided the said documents being copies of bank statements, financial statements, sales and purchase ledgers.
49. The request to the appellant to provide those documents was to underscore the respondent’s approach to tax assessment as being evidence-based. This is because, complete records made available to the respondent enables it to cross-check the tax assessment as filed by the appellant and its own assessment during the tax audit.
50. In spite of it alleging to have made available the requested documents, nowhere through the objection proceedings, the appeal to the TAT and the present appeal has the appellant indicated the date it provided the said documents, a list of the documents it allegedly provided and copies of the documents so provided and the mode by which it provided, whether by e-mail or delivery of hard copies.
51. The submission by learned counsel for the appellant that it is not in dispute that the appellant supplied the respondent with the relevant evidence and documents to support its objection and appeal, evidence that the respondent and the Tribunal disregarded, is therefore not correct. As set out above in the Objection decision, the respondent’s position right from the start was that the documents requested for were never supplied and that they had not even been supplied together with the objection notice filed by the appellant before the Commissioner.
52. Consequently, the further submission by learned counsel for the appellant that there is evidence of the respondent’s misapplication of the banking analysis test as it failed to make adjustments on non- income deposits from the banking, is an issue which the Tribunal failed to interrogate, again is not correct. The Tribunal could not have interrogated any issue when there were no documents to back the allegations by the appellant.
53. This submission by the appellant must be viewed in light of the respondent’s express findings in the Objection Decision that the appellant had failed to provide audited Financial Statements, Trial Balances, relevant ledgers supporting the financial statements, together with supporting financial documents, Tax computations, Certified copies of bank statements and reconciliation of bank credits and declared income.
54. The law places the primary burden upon the taxpayer to prove that a tax assessment by the Commissioner is incorrect. Section 56(1) of the Tax Procedures Act provides that in any proceedings under the Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.
55. Similarly, section 30 of the Tax Appeals Tribunal Act (Cap. 469A) Laws of Kenya provides as follows:
S. 30. In a proceeding before the Tribunal, the appellant has the burden of proving—
a. Where an appeal relates to an assessment, that the assessment is excessive; or
b. In any other case, that the tax decision should not have been made or should have been made differently.
56. In line with these provisions, courts have affirmed that the position reflects the ordinary principle of evidence that he who asserts must prove. The High Court in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] KEHC 13347 (KLR) Mativo, J (as he then was) explained this position thus:
“…Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect...
36. Placing the burden of proof in tax cases on the tax payer reflects the unique nature of the tax system. This is evident from the three-fold justifications for placing the burden on the tax payer. These are: - (a) the presumption of correctness; (b) the government's need for revenue’ and, (c) the taxpayer's possession of evidence. The taxpayer’s burden of proof comprises two parts: – establishing, with evidence, the underlying facts on which the law is to operate (and in this regard, the standard of proof to which each fact must be proved is relevant) (see FCT v Thomas [2018] HCA 31 at [84] and [85] per Gageler J.) and – that the operation of the law when applied to those facts establi
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