https://new.kenyalaw.org/akn/ke/judgment/kehc/2026/6857

Commissioner of Investigations and Enforcement v London Distillers (K) Limited (Income Tax Appeal E096 of 2022) [2026] KEHC 6857 (KLR) (Commercial and Tax) (14 May 2026) (Judgment) Neutral citation: [2026] KEHC 6857 (KLR) Republic of Kenya In the High Court at Nairobi (Milimani Commercial Courts) Commercial and Tax Income Tax Appeal E096 of 2022 F Gikonyo, J May 14, 2026 Between Commissioner Of Investigations And Enforcement Appellant and London Distillers (K) Limited Respondent Judgment 1.This is an appeal against the Tax Appeals Tribunal’s judgment dated 4.11.2022 in Tax Appeal No. 408 of 2021. It concerns validity of additional taxes based on alleged undeclared production and understated turnover. Background 2.The respondent, London Distillers (K) Limited is a company incorporated in Kenya engaged in manufacture of spirits and allied products. The Commissioner of Investigations and Enforcement (the Commissioner or appellant) investigated the respondent’s tax affairs for 2015 to 2019. The investigations were focused on bankings, excise stamps and bottles. The Commissioner issued its letter of preliminary findings on 3.7.2020 for a tax liability of Kshs. 2,681,871,986. The respondent gave its clarifications and supporting evidence through several letters. This was followed by a notice of assessment dated 18.3.2021 for Kshs. 2,055,304,414 comprised of Corporation tax, Excise Duty and Value Added Tax (VAT). 3.The respondent objected to the assessment through a notice of objection dated 16.4.2021. The commissioner issued an objection decision raising the assessment to Kshs. 3,022,728,615. 4.Dissatisfied, the respondent appealed to the Tribunal leading to the judgment that is the subject of this appeal. The appeal 5.The memorandum of appeal dated 16.12.2022 cites the following grounds of appeal: -1.The Tribunal erred by failing to recognize that various methods used to analyze production accuracy are collaborative, and one method may be substituted for another if persuasive reasons exist.2.The Tribunal failed to appreciate that the Appellant accounted for all adjustments sought by the Respondent when calculating the final tax payable.3.The Tribunal erred in failing to see that since all adjustments were allowed, the site visit was redundant to the tax case and only potentially relevant to a separate criminal matter.4.The Tribunal failed to appreciate that the assessment was strictly based on unexplained variances; any amount for which the Respondent provided an explanation was fully deducted without requiring further support.5.The Tribunal erred in not finding the "bottle method" to be the most accurate and reliable, especially since the Respondent could not account for procured bottles and the Appellant had accepted proposed adjustments.6.The Tribunal failed to consider the evidence provided by the Appellant during the proceedings.7.The Tribunal erred by basing its findings on tax evasion and fraud—matters that were neither pleaded by the parties nor part of the original objection decision.8.The Tribunal considered evidence and issues that fell outside the scope of the pleadings and the objection decision under appeal.9.The Tribunal erred in law by holding that the Appellant accounted for wastage of stamps above 1% in compliance with the Excise Duty Act.10.The Tribunal erred in setting aside the Appellant's assessment regarding excise stamps reconciliation (totaling Kshs 22,187,616) as well as assessments for Excise Duty, VAT, and Corporation Tax.11.The Tribunal erred in law by shifting the burden of proof to the Appellant, contrary to Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.12.The Tribunal misapplied the law and facts of the case, leading to an overall erroneous decision. 6.The Commissioner urged the court to allow its appeal with costs; to set aside the entire judgment of the Tribunal and its consequential orders. It also urged the court to substitute the impugned judgment with a judgment upholding its objection decision issued on 9th June 2021. Response 7.In opposition to the appeal, London Distillers (K) Limited (the respondent) filed a statement of facts dated 4.3.2024. It urged the court to uphold the Tribunal’s judgment and to dismiss the appeal with costs of the appeal and the proceedings before the Tribunal. Submissions 8.The Commissioner and the respondent filed written submissions dated 26.5.2025 and 16.7.2025 respectively. 9.The Commissioner contended that the Tribunal exceeded its mandate by considering issues regarding investigations and matters relating to letters exchanged between the parties before the assessments were issued. 10.The Commissioner argued that the banking analysis was merely a corroborative test and not a basis of the assessment raised and was not a proper ground of objection. 11.The Commissioner highlighted that the respondent declared taxes on 359,162 liters out of the 527,250 liters produced; leaving unaccounted 168,088 liters, on which additional excise duty and VAT was charged (Kshs. 22,187,616). 12.The Commissioner contended that the respondent’s objection did not address the unexplained production variance in ready-to-drink products. That instead, it addressed stamp wastage which did not form part of the assessment. 13.The Commissioner argued that the Tribunal erred in law by holding that the respondent accounted for wastage of stamps above 1% in compliance with the Excise Duty Act. That therefore, it erred in setting aside the appellant's assessment regarding excise stamps reconciliation (totaling Kshs 22,187,616). 14.The Commissioner argued that the issue of fraud and evasion was brought by the Tribunal and was not an issue in contention before it. That the issue of fraud and evasion only arises for cases falling under section 31(4) of the TPA where it has assessed beyond the five-year statutory period. 15.The Commissioner submitted that the Tribunal’s finding on production records, flow meter readings, data from accounting system and resident’s officer’s involvement were not issues covered by the investigation conducted, the assessment, the objection, the objection decision and the pleadings filed by the parties before the Tribunal. 16.The Commissioner faulted the Tribunal for relying on a site visit that took place after the objection decision had been rendered and the respondent had filed the notice of appeal. The site visit was not an issue in dispute under the assessment, the objection and the objection decision, which was the basis of the appeal before the Tribunal. 17.The Commissioner relied on Independent Electoral and Boundaries Commission & Another v Stephen Mutinda Mule & 3 Others [2010] eKLR, Dakianga Distributors (K) Ltd v Kenya Seed Company Limited [2015] eKLR and Commissioner Investigation and Enforcement v Prexidis N. Muasya t/a Prexx Ventures [HCCOMMITA/E152/2024] to assert that parties are bound by their pleadings. 18.The Commissioner relied on Commissioner of Domestic Taxes v Ibangua Investments Co. Ltd (Tax Appeal E093 of 2023) [2023] KEHC 26013 (KLR) to argue that in an appeal to the Tribunal the taxpayer shall rely on the grounds stated in the objection. It also relied on Daniel Toroitich Arap Moi v Mwangi Stephen Muriithi & another [2014] eKLR to the effect that submissions cannot take the place of evidence. 19.The Commissioner relied on Commissioner of Customs and Border Control v Rex International Limited [HCCOMMCTA/E027/2024] where the High Court faulted the Tribunal for making a finding on an issue that was not in dispute. 20.On the burden of proof in tax disputes, the Commissioner relied on Primarosa Flowers Ltd v Commissioner of Domestic Taxes [2019] eKLR and Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR. 21.In its submissions, the respondent supported the Tribunal's findings. It relied on Vestey v Inland Revenue Commissioners (1979) 3 All ER at 984 and Keroche Industries Limited v Kenya Revenue Authority & 5 others (2007) 2 KLR 240 to assert that taxes must be on clear terms not intendment. 22.On burden of proof, the respondent relied on Supreme Court of Canada’s decision in Hickman Motors Ltd v Canada (1997) 2 S.C.R 336. 23.The respondent also relied on Commissioner of Domestic Taxes v Mount Kenya Bottlers Ltd [2019] eKLR to the effect that the EGMS system is a statutory requirement under the Excise Duty Regulations, and its data is critical for determining excisable volumes. 24.The respondent further relied on Article 2(6) of the WTO Valuation Agreement Constitution which requires evidence-based valuation for customs and excise duties. It also relied on Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] eKLR, for the proposition that assessments based on estimates without corroboration from production records or EGMS data are unlawful. Analysis and Determination Duty of court 25.This court’s duty in such an appeal is circumscribed under Section 56 (2) and (3) of the Tax Procedures Act (TPA), which provides: -“(2)An appeal to the High Court or to the Court of Appeal shall be on a question of law only.”“(3)In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.” 26.It is also within the jurisdiction of the court to ascertain whether the Tribunal’s findings are based on evidence and the law. Mercy Kirito Mutegi v Beatrice Nkatha Nyaga & 2 others [2013] eKLR 27.A question of law would arise in three instances: -“a.the construction of a statute or document of title;b.the legal effect of the facts found where the point for determination is a mixed question of law and fact;c.a finding of fact unsupported by evidence.” Meenakshi Mills, Madurai v The Commissioner of Income Tax, Madras (1957) AIR 49, (1956) SCR 691, the Supreme Court of India 28.The overarching issue concerns validity of the Commissioner’s assessments for additional corporate tax, Excise Duty and Value Added Tax (VAT) based on alleged undeclared production and understated turnover. Excise and VAT on Ready-to-drink products 29.The appellant contended that the Tribunal erred by failing to find that the bottle method was the most accurate and reliable. It faulted the Tribunal for failing to recognize that the methods used to analyze production accuracy are collaborative and that one method may be substituted for another based on persuasive reasons. 30.On the other hand, the respondent argued that the Tribunal was correct to find that it provided clarifications on bottle purchases and wastage as it could not verify the quantum of bottles. It also highlighted that the Commissioner did not physically verify the bottles purchased and wastage at the respondent’s premises before issuing the objection decision. 31.The Tribunal found thus: -“ 163.…the Respondent seemingly only undertook analysis of bottles purchased by the Appellant in coming up with an input-output analysis that formed the main basis of its assessment, to the exclusion of other factors as stated earlier in this analysis. Further, the Appellant provided clarifications on bottle purchases as well as wastage that the Respondent was to physically verify at the Appellant’s premises ideally before a decision was arrived at. Unfortunately, the verification visit did not happen before the issuance of the objection decision. In this regard, the physical verification at the Appellant’s factory by the Respondent’s team should, logically, have established this detail – the clarity required around bottle purchases and other factors affecting bottles. Therefore, the Tribunal is unable to establish the veracity of the quantum of bottles used by the Appellant in arriving at its assessment. 164.Additionally, and based on the previously quoted sections of the EDA that speak to the basis and tax point for Excise Duty, the Tribunal is not convinced that an input-output analysis of bottles, without considering actual production data at the factory, as stated earlier, is a conclusive basis for the raising of the assessment by the Respondent.” 166.…The respondent in its documents has not demonstrated how the said product was produced without appearing in any production records. Secondly, flow meter data which would have been further evidence of such production, is not mentioned at any point in the Respondent’s submissions. Lastly, in this regard, it would be expected that the resident officer would be aware of any “extra” production by the Appellant if that was the case and should have corroborated the findings by the Respondent’s investigative team.” 32.According to the Tribunal, the basis of the tax computation by the appellant was input-output analysis of bottles to quantify their equivalent production. 33.However, according to the Commissioner, the basis of the assessments was comprised of Excise Goods Management System (EGMS) activation v deliveries analysis which revealed variances in the appellant’s ready-to-drink products between quantities activated and quantities delivered. The Commissioner then inferred that the discrepancies were indicative of unaccounted production. 34.The findings were further supported by the banking analysis which established turnover inconsistent with the declared turnover, leading to the conclusion that turnover was understated. 35.The Commissioner then applied the bottle method as an input–output analysis tool to estimate and quantify the respondent’s actual production volumes for purposes of determining unexplained variances under Section 12 of the Excise Duty Act. 36.The Commissioner contended that the Tribunal failed to appreciate that the assessment was based on unexplained variances and that the respondent could not account for procured bottles. The Commissioner also contended that the site visit was redundant to the tax dispute since all adjustments were allowed. It was only potentially relevant to the criminal matter. 37.The respondent argued that the Tribunal was correct to find that it provided clarifications on bottle purchases and wastage as it could not verify the quantum of bottles. It also complained that the Commissioner did not physically verify the bottles purchased and wastage at the appellant’s premises before issuing the objection decision. 38.Conversely, the Commissioner argued that the Tribunal erred by holding that the respondent accounted for wastage of stamps above 1% as required. It also contended that the respondent’s objection did not address the unexplained production variance in ready-to-drink products but addressed stamp wastage which was not part of the assessment. 39.In its objection to the assessments, the respondent argued that the Commissioner wrongly treated purchases of caps and labels as bottles, misclassified new and second-hand bottles, or improperly relied on packaging materials. 40.The Commissioner, on the other hand, contended that bottles were not taxed as packaging materials, they were merely used as a quantification tool to estimate production volumes under Section 12 of the Excise Duty Act. Excise stamps reconciliation 41.The record shows that following an excise stamps reconciliation for 2016-2018, the Commissioner found that the respondent activated 1,610,150 stamps with a production equivalent to 527,250 liters of finished product after stock adjustments. It further found that the respondent declared and paid taxes on 359,162 liters. It concluded that there was a variance of 168,088 liters, leading to the assessment for additional Excise and VAT. Input-output analysis on bottles 42.From the input-output analysis on bottles to quantify their equivalent production, the Commissioner found significant variances of 9,970,441 litres. The Commissioner obtained the data of bottles supplied from the respondent’s suppliers, Vivek Investments Ltd and Milly Glass Works Ltd. Banking analysis 43.From the banking analysis, the Commissioner found that the income received over the period from sales of over 23 Billion and that turnover as per the input-output analysis on bottles would be the basis for Corporation tax, Excise and VAT computation. It then compared the turnover values declared by the respondent in its annual returns and equivalent sales per bottle usage. The findings gave rise to a principal tax liability of Kshs. 2,681,871,986. 44.In the notice of assessment, the Commissioner noted that there were statements for two additional banks. It considered the clarifications given by the respondent and adjusted the gross bankings, reconciled the excise stamps for spirits and ready-to-drink products as well as activations v deliveries. 45.The Commissioner also did an input-output analysis on bottles to quantify their equivalent production. It found that the respondent did not satisfactorily account for 21,366,406 second hand bottles. It factored in the bottle breakages computations of 11,151,083. 46.Overall, the Commissioner raised an assessment of Kshs. 2,055,304,414 upon finding that the respondent made sales of over 25 billion in the period. 47.In the notice of objection, the respondent challenged the assessment on the major grounds that not all money deposited in a business account directly relate to product sales; tax should not be based on assumption of income and that insisting that all bottles purchased end up in the market is dangerous. 48.The respondent claimed that the banking and excise stamps reconciliation was erroneous; that the input output analysis was based on erroneous narration of transactions representing purchase of second-hand bottles as new bottles (2017 and 2019) and caps and labels as bottles in 2016. 49.In its objection decision of 9.6.2021, the Commissioner found regarding the banking reconciliations, the Cooperative and Absa Bank adjustments were not reflected in the actual bank statements but in the respondents internal accounting system Sage. That the Prime Bank adjustments were not allowable as they did not form part of the total deposits. That banking analysis was corroborative test not a basis of the assessment. 50.The Commissioner found that the respondent did not address the issue of variance of volumes produced and reported. 51.As regards the input-output analysis of bottles, the Commissioner reasoned that the respondent’s claim that it misclassified new bottles from Vivek Investments Limited and Milly Glass Works Ltd was not supported and the misclassification did not affect the amount of bottles purchased. 52.It also reasoned that the objection on misclassification of caps and labels purchased in 2016 as second hand bottles was not properly supported. That the documents relied on were internally generated purchase vouchers and list of invoices and invoice dates, numbers and narrations did not correspond to the purchases’ ledger. 53.Since the Commissioner considered the respondent’s objection and the documents provided and pointed out evidentiary gaps as highlighted above, it was the burden of the respondent to prove that the retained assessments were excessive or incorrect. 54.This is in line with section 30 of the Tax Appeals Tribunal Act and section 56 of the Tax Procedure Act which place the burden of proof on the taxpayer to prove that an assessment is excessive, or a tax decision is incorrect. 55.Further, section 51(3) (c) of the Tax Procedures Act, requires a taxpayer to submit all the relevant documents relating to the objection. 56.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 observed 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.” 57.The court also held in the same case that it is only where the taxpayer provides all relevant documents to the objection, that the evidential burden shifts. 58.As per earlier findings, the Commissioner found that the respondent did not provide all relevant documents to the objection. Thus, there was no shift in the burden of proof regarding the bottles purchased. 59.Therefore, I find that the Tribunal erred by finding that the respondent provided the necessary clarifications on the bottles purchased. I also find that the Tribunal erred by holding that the respondent accounted for wastage of stamps above 1%. 60.I further find that the Tribunal erred by making findings on the production records, flow meter readings, data from accounting system and resident’s officer’s involvement which were not grounds in the objection. Section 56 (3) of TPA Tax evasion and fraud? 61.The Tribunal further found that the overall basis of the assessment was illicit financial flows and the related tax evasion which is a criminal offence. It found that the burden of proof which rested on the respondent shifted to the appellant at the point where issues of tax evasion were raised. That the appellant did not prove the alleged tax evasion as required by law. 62.The Commissioner faulted the Tribunal for basing its findings on tax evasion and fraud which were neither pleaded by the parties nor part of the original objection decision. 63.From the record, issues of fraud and tax evasion were not pleaded. 64.As earlier noted, the Commissioner established from investigations that there were unexplained production variances from a review of the respondent’s tax returns, bank statements, invoices, receipts and purchase ledgers. 65.The Commissioner noted that the total bank deposits showed higher income as compared to the respondent’s declared turnover for tax. 66.Therefore, I find that the Tribunal failed to appreciate that the assessment was strictly based on unexplained variances. I am aware that arguments were made that tax should not be based on assumption of income and that not all money deposited in a business account directly relate to product sales. But, as the variance between the banking deposits and the tax returns filed was ascertained and became part of the investigations and the specific assessment in issue, it was upon the respondent to prove the assessment was excessive or the tax decision was incorrect on that basis. The deeming of income provisions also come into play. 67.I am also aware of the argument that insistence that all purchased bottles ended up in production and the market would be dangerous proposition. I agree. But, again, the basis for the assessment in question was unexplained variances and it was the onus of the respondent to prove the assessment was excessive or the tax decision was incorrect on that basis. Disposition 68.In conclusion, I find that the appeal herein is merited. 69.Accordingly: -1.The Tribunal’s judgment dated 4.11.2022 in Tax Appeal No. 408 of 2021 is set aside.2.The Commissioner’s objection decision dated 9.6.2021 is upheld.3.No orders as to costs. DATED, SIGNED AND DELIVERED AT NAIROBI THROUGH MICROSOFT TEAMS ONLINE APPLICATION THIS 14TH DAY OF MAY, 2026-----------------------F. GIKONYO MJUDGEIn the presence of: -Ms. Kithinji for AppellantTiego for RespondentCA-Ivan/Aggrey