[2023] KETAT 327 (KLR)

Embridge Engineering Limited v Commissioner of Investigations & Enforcement (Appeal 102 of 2022) [2023] KETAT 327 (KLR) (2 June 2023) (Judgment)

Neutral citation: [2023] KETAT 327 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 102 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

June 2, 2023

Between

Embridge Engineering Limited

Appellant

and

Commissioner Of Investigations & Enforcement

Respondent

Judgment

Background 1. The Appellant is a private limited liability company registered under the companies Act, and is engaged in construction activities.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and the Kenya Revenue Authourity is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Appellant was selected for investigations following receipt of information to the effect that John Huba and Beryl Aluoch (being directors of Embridge Engineering Limited), had received monies from Kenya Pipeline Company Limited (KPC) for various supplies without declaring the same for tax purposes.

4. The matter was investigated and a letter of findings shared with the Appellant on 15th April 2021 with a total tax demand of Kshs. 64,373,604. 00 for both Corporation tax and VAT.

5. The Appellant was subsequently issued with additional assessments based on the tax investigation findings, and a notice of the same issued on 6th July 2021.

6. The Appellant objected to the assessment vide a letter dated 15th October 2021.

7. The Respondent then issued the Appellant with the objection decision dated 20th December 2021, confirming the assessment as per the notice of assessment dated 6th July 2021.

8. Aggrieved by the decision of the Respondent to reject its objection, the Appellant filed a Notice of Appeal on 20th January 2022.

THE APPEAL 9. The Appeal is premised on the following grounds stated in the Memorandum of Appeal filed on 2nd February 2022:-a.That the Respondent charged tax on gross income.b.That the Respondent failed to consider cost on additional income.c.That the Commissioner contravened Section 23(1)(c) of the TPA, 2015. d.That the company is a distinct entity from its directors.

Appellant’s Case 10. The Appellant’s case is also premised on the Appellant’s Statement of Facts dated and filed on 2nd February 2022 together with the documents attached thereto.

11. The Appellant averred that the Respondent commenced a compliance check on the Appellant's tax affairs for the period 2014 to 2018 and issued investigation findings vide a letter dated 31st March 2021 establishing taxable income of Kshs. 174,439,433. 00 through the bank analysis method.

12. That the Appellant responded to the findings of the investigations articulating concerns on the errors of omission and commission committed by the Respondent.

13. That the parties were further involved in numerous engagements on the tax issues towards solving the dispute.

14. That the Respondent issued a conjoined tax assessment vide a letter dated 6th July 2021 for both the company and the directors.

15. That the Appellant being dissatisfied with the tax assessment issued by the Respondent, filed an objection to the assessment dated 15th October 2021 after approval of late objection application by the Respondent.

16. That after the review of the objection was lodged, the Respondent issued an objection decision dated 20th December 2021, confirming principal taxes of Kshs. 64,373,604. 00 for the company, Kshs. 14,424,105. 00 for John Huba (Director) and Kshs. 3,281,103. 00 for Beryl Huba (Director).

17. The Appellant elaborated on its grounds of Appeal as follows:-

a. The Respondent charged tax on gross income. 18. That the Respondent carried out bank reconciliations to establish taxable income. That the Respondent contended that documents were not availed to establish whether the income was taxable.

19. That in the review, the Respondent failed to address the substantive issue of taxable income. That whereas the Respondent is conversant of the provisions of Section 3(1)(2)(a) of Income Tax Act 2015, it deliberately erred in law and facts by subjecting net banking to taxes.

20. That it is not only unfounded but illogical and unfair for the Respondent’s assumptions that the income was generated without incurring costs and alluded to Section 56 to disguise the correct application of the law. That the basis of establishing taxable income was a bank analysis which provided for no costs of the generated income.

b. Failure to consider Cost of sales 21. That the Respondent argued that operational expenses were not supported by any documentary evidence and alluded to provisions of Section 54 of Income Tax Act but failed to consider the provisions of Section 23(1)(c) which allows the taxpayer to keep records for a period of five years for tax purposes.

22. That it is not only unlawful but illogical for the Respondent to request for documents of transactions for the last nine years. The Appellant contended that income cannot be generated without incurring costs and the Respondent's assumption of 100% GPR was erroneous and unfitting to any sector of business.

c. The Company is a distinct entity from its Directors. 23. The Appellant submitted that a company is a legal entity separate from its directors. The Respondent issued a conjoined assessment and objection decision for the company and its directors whereas they are separate entities. That the same should be set aside since, as it stands, no assessments have been issued to the directors and neither do they have any enforceable tax liabilities.

d. The Respondent erred by going beyond the five years provided by the law 24. The Appellant submitted that the Respondent contravened Section 31(4)(b)(i) of the TPA and had no latitude to expand the scope since the years under review taxes were being filed manually and it was the Respondent’s responsibility to key them into the System. That the Respondent's arguments of Section 31(4)(a) are unfounded and of bad motive to unfairly incriminate the Appellant hence in the spirit of fair administration of justice and interpretation of the law, should be set aside by the Tribunal.

Appellant’s Prayers. 25. The Appellant made the following prayers to the Tribunal:-a.To set aside the Respondent’s assessment.

Respondent’s Case 26. The Respondent’s case is premised on the hereunder filed documents:-a.The Respondent’s Statement of Facts dated and filed on 15th February 2022. b.The Respondent’s written submissions dated and filed on 1st November 2022.

27. The Respondent averred that the Appellant is a private limited liability company registered under the Companies Act, and engaged in the construction industry and was registered on 9th July 2014.

28. That the Appellant was selected for investigations following receipt of information to the effect that John Huba and Beryl Aluoch (being directors of Embridge Engineering Limited), had received monies from Kenya Pipeline Company Limited (KPC) for various supplies without declaring the same for tax purposes.

29. That the investigation involved comparative analysis of declared income/established income to determine the correct income chargeable to tax.

30. That the net bank deposits and payments made to the Appellant, through its accounts held at National Bank Account No. 01020014806600 was compared against declaration of income in the tax returns.

31. That the total established gross inflows in the years 2013 to 2018 was Kshs. 174,439,433. 00 against which the Appellant filed nil returns for the years 2015 to 2018.

32. That the Appellant declared income amounting to Kshs. 3,000,000. 00 for VAT in 2015 and filed nil returns for the rest of the years i.e. 2016 to 2018.

33. That the case was investigated and a letter of findings shared with the Appellant on 15th April 2021 with a total tax demand of Kshs. 64,373,604. 00 for both Corporation Tax and VAT.

34. That the Appellant was subsequently issued with additional assessments based on the tax investigation findings, and a notice of the same issued on 6th July 2021.

35. That the Appellant responded to the assessment vide an objection letter dated 15th October 2021.

36. That the Respondent then issued the Appellant with the objection decision dated 20th December 2021, confirming the assessment as per the notice of assessment dated 6th July 2021.

37. That the Appellant was required to settle the taxes due amounting to Kshs. 64,373,604. 00 for the Appellant and Kshs. 14,424,105. 00 for John Huba and Kshs. 3,281,013. 00 for Berly Aluoch; all being principal taxes.

38. The Respondent averred that it made use of information obtained from its internal systems and third party information in the absence of documents from the Appellant to demonstrate that the income established was taxable income.

39. That the Appellant failed to demonstrate that the assessment was done wrongly.

40. That Section 15 of the Income Tax Act provides for allowable expenses. That it is a general accounting principle that expenditures must be supported with evidence to ensure they are verifiable.

41. That the Appellant failed to support its claim with relevant documents hence the expenses were not allowed.

42. That it was the Appellant's contention that the Respondent was time-barred from making an amended assessment under Section 31(4)(b)(i) of the TPA which is limited to a 5-year period.

43. That however, Section 31(4)(a) of the TPA gives the Respondent latitude to expand the period in instances of gross or willful neglect, evasion or fraud by a taxpayer.

44. That the tax liability by the Appellant and its directors for the period under review point to evasion through gross mis-declaration of income earned for the period hence resulting in the Appellant paying less tax.

45. That in light of Section 1002 of the Companies Act No. 17 of 2015, a corporate veil can be lifted when the Appellant is involved in fraud or suspected fraudulent activities. That the Appellant's directors were involved in the operation of the Appellant hence they were the brains behind such actions. That the two directors were therefore issued with assessments as well.

46. The Respondent submitted that this case raises four issues for determination as follows:-a.Whether the Commissioner erred in law by charging corporation tax on gross incomeb.Whether the Commissioner erred in 1aw by failing to allow cost of salesc.Whether the Commissioner contravened the provisions of Section 23(1)(c) of the TPA by assessing the taxpayer on income earned between 2013 and 2015d.Whether the Appellant can be cited as a distinct entity from the directors.

a. Whether the Commissioner erred in law by charging corporation tax on gross income. 47. The Respondent submitted that in computing the taxes payable by the Appellant, the Respondent’s team made use of information obtained from its internal databases and third party information. That in the review process, it was apparent that the Appellant did not, for various reasons have documents to demonstrate the correct taxable income. That in the absence of documents for the Appellant to demonstrate that the income established was not taxable income, the Commissioner employed his best judgement to determine the chargeable income.

48. The Respondent submitted that Section 56 of the Tax Procedures Act 2015 places an obligation on the taxpayer to prove that a tax assessment is wrong/incorrect.

49. That the said Section provide as follows:-“56(1) In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

50. The Respondent further submitted that the Appellant must satisfy the burden of proof to successfully challenge the assessments issued and this can only be done by adducing evidence which demonstrates the taxable income on which tax ought to have been levied.

51. The Respondent relied on the Income Tax Appeal E028 of 2020 Commissioner Investigations and Enforcement vs. Evans Odhiambo Kidero where Justice Majanja held that:-“in line with Section 56(1) of the Tax Procedures Act (TPA), the Taxpayer bore the burden of proving that assessment made by the Commissioner was incorrect. That also fit in with the principles of the law of evidence that he who asserted had to prove encapsulated in Sections 107 of the Evidence Act. In addition, the receipt of such political campaign funds and their use was a matter within the Taxpayer’s peculiar knowledge hence under Section 112 of the Evidence Act, the taxpayer bore the burden of proving that the receipts were not taxable income"It was further held that:“Section 3 of the Income Tax Act (ITA) imposed a charge on tax on income accrued in and derived from Kenya. To determine whether money received by the taxpayer was income, the Commissioner was entitled to seek information and use it in order to establish whether money in the hands of the taxpayer constituted income subject to tax. If the Commissioner was satisfied that the money constituted taxable income, the burden was on the taxpayer to show otherwise."

b.Whether the Commissioner erred in law by failing to allow cost of sales. 52. The Respondent submitted that the assessing team reviewed and examined all the documents provided by directors regarding the inflows into their bank accounts and allowed adjustments on the supported costs which were incurred wholly, exclusively to earn the income.

53. The Respondent submitted that the Section 15 of the Income Tax Act provides for allowable expenses. The Respondent further submitted that it is a general accounting principle that expenditures must be supported with evidence to ensure they are verifiable. That the Appellant's claim did not meet the threshold provided under Section 15 of the Income Tax Act as a large portion of the operational expenses claimed by the Appellant were not supported by any documentary evidence.

54. The Respondent relied on the case of Leah Njeri vs. Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKLR, where the Court held that:“The only way the Commissioner could have allowed deductions of expenses as per section 15(1) of the ITA is if they were supported to its satisfaction.”

55. That further, Section 54 A(1) of the Income Tax Act requires the taxpayer to keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds and contacts and vouchers which in the opinion of the Commissioner are adequate for the purpose of computing tax.

56. That in the course of investigations and the objection review process, the Appellant failed to provide supporting documents for the company's costs alleging that the documents to support the costs were carted away by DCI officers during a raid conducted on the company. That in the circumstances, the Respondent’s team computed the taxes payable based on the Appellant's bankings.

57. That in addition to the documents, the Appellant was also not able to support the proposed Gross Profit Margin (GPM) of 20%. That in the circumstances, the Respondent’s team was of the view that the proposed GPM was arbitrary, hence retained the position taken in issuing the initial assessments without allowing for any margins.

c. Whether the Commissioner contravened the provisions of Section 23(1)(c) of the TPA by assessing the taxpayer on income earned between 2013 and 2015. 58. The Respondent submitted that Section 31(4)(b)(i) of the TPA provides for amendment of assessments. That while the Respondent accepted that under Section 31(4)(b)(i) of the TPA, it is prevented from making default assessment 5 years from the reporting period, Section 31(4)(a) of the said Act gives the Commissioner latitude to expand the period in instances of gross or willful neglect, evasion or fraud by a taxpayer.

59. The Respondent submitted that the Commissioner established that there was willful neglect on the Appellant's part since they failed to declare any income (as the company actually filed nil returns), in the period under review.

60. The Respondent relied on the case of Republic vs. Kenya Revenue Authority; Proto Energy Limited (Ex-parte Judicial Review Application E023 of 2021)[2022] where Justice J M Mativo, in upholding the Respondent's position, held that:“A reading of the enabling statute leaves me with no doubt that it imposes a general duty upon the Respondent to decline a request to amend returns where the legal requirements have not been met. Such circumstances include but are not limited to where a taxpayer is under investigations for fraud or tax evasion or has failed to supply required information as in this case."

d. Whether the Appellant can be cited as a distinct entity from its directors. 61. The Respondent submitted that in light of Section 1002 of the Companies Act No.17 of 2015, a corporate veil can be lifted when the Appellant is involved in fraud or suspected fraudulent activities.

62. The Respondent relied on the case of Joel Ndemo Ong'au & Another vs. Loyce Mukunya (2015), where the court stated that:“Notwithstanding the effect of a company's incorporation, in some cases the court will "pierce the corporate veil" in order to enable it to do justice by treating a particular company, for the purpose of the litigation before it, as identical with the person or persons who control that company. This will be done only where there is fraud or improper conduct but in all cases where the character of the company, or the nature of the persons who control it, is a relevant feature. In such case, the court will go behind the mere status of the company as a separate legal entity distinct from its shareholders, and will consider who are the persons, as shareholders or even as agents, directing and controlling the activities of the company."

63. The Respondent further submitted that the directors were involved in the operation of the Appellant hence they were the brains behind such actions. The Respondent submitted that in the review process carried out by the Respondent, it was apparent that there was willful neglect and evasion from the Appellant's failure to declare any income (filing nil returns), in the period under review.

64. The Respondent submitted that as the drivers of the business and decision makers on behalf of the company, the directors played a role in the filing of returns of the company and hence can be held responsible for the decisions made on behalf of the company such as filing nil returns when there was taxable income.

Respondent’s Prayers. 65. The Respondent made the following prayers to the Tribunal:-a.That the Respondent’s objection decision dated 20th December 2021 be upheld.b.That the taxes be found to be due and payable.c.That the Appeal be dismissed with costs awarded to the Respondent.

ISSUES FOR DETERMINATION 66. The Tribunal has carefully studied the pleadings and documentation of both parties and is of the respectful view that that the issues that call for its determination are as follows:-a.Whether the Respondent erred in law and in fact by issuing assessments for the period outside the statutory timelines provided by the law.b.Whether the Respondent was justified in combining the tax assessment of the Appellant with the tax assessments of its directors.c.Whether the Respondent erred in law by failing to allow expenses incurred in generating the business income.

Analysis And Findings. 67. Having identified the issues for its determination, the Tribunal proceeds to analyze them as hereunder.

a. Whether the Respondent erred in law and in fact by issuing assessments for the period outside the statutory timelines provided by the law. 68. The Appellant submitted that the Respondent erred in law by going beyond five years provided for in Section 31(4)(b)(i) of the TPA.

69. The Respondent on the other hand submitted that Section 31(4)(b)(i) of the TPA provides for amendment of assessments. That while the Respondent accepted that under Section 31(4)(b)(i) of the TPA, it is prevented from making default assessment 5 years from the reporting period, Section 31(4)(a) of the said Act gives the Commissioner latitude to expand the period in instances of gross or willful neglect, evasion or fraud by a taxpayer.

70. The Respondent submitted that the Commissioner established that there was willful neglect on the Appellant's part since it failed to declare any income (as the company actually filed nil returns) in the period under review.

71. The Tribunal notes that Section 4(3) of the Tax Procedures Act 2015, confers powers of enforcing tax laws to the Respondent. The Section states that:-“An authorized officer shall enforce, and ensure due compliance with, the provisions of the tax law, and shall make all due inquiries in relation thereto.”

68. The Respondent submitted that there was willful neglect on the Appellant's part since it failed to declare any income (as the company actually filed nil returns), in the period under review. The Respondent also submitted that the tax liability of the Appellant and its directors for the period under review point to evasion through gross mis-declaration of income earned.

69. The Tribunal finds that it was the duty and responsibility of the Respondent to enforce the law. The Respondent should therefore have prosecuted the Appellant if it had the evidence. The fact this was not done creates doubt as to whether there was any fraud, evasion or willful neglect.

70. The Tribunal has pronounced itself on the issue of fraud and in TAT No 88 of 2021 Glenrose Ltd vs. Commissioner of Investigations & Enforcement stated as thus:-“the Tribunal finds that the burden of proof, which essentially in law rests upon the Appellant, shifted to the Respondent at the point where issues of fraud were raised. In this regard, the Tribunal relies on the Halsbury’s Laws of England, 4th Edition, Volume 17, Paragraphs 13 and 14, which provide as follows: -“(13) The legal burden is the burden of proof which, remains constant throughout a trial, it is a burden on establishing the facts and contentions which will support a party’s case. If at the conclusion of the trial he has failed to establish that to the appropriate standard he will lose.(14)The legal burden of proof normally rests with the party desiring the court to take action: thus, a claimant must satisfy the court or tribunal that the conditions which entitle him to an award have been satisfied. In respect of a particular allegation, the burden lies upon the party for whom substantiation of that particular allegation is an essential element of this case. There may therefore be separate burdens in a case with separate issues.”

68. The Tribunal is also guided by the ruling in Evans Kidero vs. Speaker of Nairobi City County Assembly & Another [2018] eKLR where the court stated as follows:-“30. Its trite law that he who alleges fraud must prove it. Allegations of fraud must strictly be proved. Great care needs to be taken in pleading allegations of fraud or dishonesty. In particular the pleader needs to be sure that there is sufficient evidence to justify the pleading. This was considered in some detail by Lewison J in Mullarkey -v- Broad. [17] In Central Bank of Kenya Ltd -Vs- Trust Bank Ltd & 4 Others [18] the Court of Appeal in considering the standard of proof required where fraud is alleged had this to say-

‘The Appellant has made vague and very general allegations of fraud against the Respondent. Fraud and conspiracy to defraud are very serious allegations. The onus of prima facie proof was much heavier on the Appellant in this case than in an ordinary Civil Case’. 31. The burden of proof lies on the applicant in establishing the fraud/dishonesty that he alleges. The parties opted to adopt their pleadings as opposed to oral evidence. In my view, whereas it is proper to proceed by way of written submissions and pleadings, where allegations of fraud or dishonesty are alleged, the higher standard of prove required under the law may not be realized. This is because such a high standard of prove may require oral evidence and cross-examination for both parties test the veracity of the allegations.”

68. The Tribunal finds that since no evidence was tendered, the allegations of fraud or willful neglect have not been proved. The Respondent therefore erred in law and in fact by issuing assessments for the period outside the statutory timelines.

69. The Tribunal finds that the Respondent should only have computed VAT tax liabilities for the period not earlier than 30th June 2016 and income tax liabilities for the years starting 2016 to July 2021 when the tax assessments were issued. This would ensure that the Respondent remains within the statutory timelines of five years.

SUBDIVISION - b. Whether the Respondent was justified in combining the tax assessment of the Appellant with the tax assessments of its directors.

68. In Paragraph 1 of its Statement of Facts, the Respondent indicates that the Appellant was registered on 9th July 2014.

69. In Paragraph 7 of the same Statement of Facts, the Respondent stated that the total gross inflows in the years 2013 to 2018 was Kshs. 174,439,433. 00.

70. The Respondent did not indicate how the inflows to the Appellant occurred when it was not in existence as a registered entity.

71. From the pleadings of the parties, it was not demonstrated whether the funds of the Appellant were being channeled to the personal accounts of the directors.

72. The Appellant submitted that the company is a separate legal entity from its directors.

73. On the other hand, the Respondent submitted that Section 1002 of the Companies Act No 17 of 2015, allows for a corporate veil to be lifted when the taxpayer is involved in fraud or suspected fraudulent activities.

74. The Tribunal notes that Section 18 of the TPA provides the following in respect of liability for tax payable by a company:-“(1)Subject to subsection (2), where an arrangement has been entered into by any director, general manager, company secretary, or other senior officer or controlling member of the company with the intention or effect of rendering a company unable to satisfy a current or future tax liability under the tax law, every person who was a director or controlling member of the company when the arrangement was entered into shall be jointly and severally liable for the tax liability of the company.”

68. The Tribunal notes that the Respondent submitted that the investigations covered the period starting 2013 when the Appellant was not in existence as a registered business entity. No evidence was tendered before the Tribunal that monies of the Appellant and the directors was co-mingled. The Appellant could only discharge its burden of proof in matters relating to its tax liabilities as the directors were not parties in this case.

68. In the case of Joel Ndemo Ong’au & another vs Loyce Mukunya [2015] cited by the Respondent, the Tribunal notes that the court stated when corporate veil can be lifted. The court stated that “this will be done only where there is fraud or improper conduct, but in all cases, where the character of the company, or the nature of the persons who control it, is a relevant feature.”

69. In the instant case, the Tribunal notes that no evidence of fraud or suspected fraudulent activities was presented to the Tribunal. Also, no evidence was tendered that the monies from the Appellant were paid through the personal accounts of its directors.

70. The Tribunal relied on the case of Vijay Morjaria vs. Nansingh Madhusingh Darbar & Another [2000] eKLR (Civil Appeal No. 106 of 2000) where Tunoi JA (as he then was), stated as follows:-“It is well established that fraud must be specifically pleaded and that particulars of the fraud alleged must be stated on the face of the pleading. The acts alleged to be fraudulent must of course be set out, and then it should be stated that these acts were done fraudulently. It is also settled law that fraudulent conduct must be distinctly alleged and as distinctly proved, and it is not allowable to leave fraud to be inferred from the facts.” 68. Since no evidence of fraud or fraudulent activities was tendered before it, the Tribunal finds that the Respondent was not justified in combining the tax assessments of the Respondent with those of its directors. c. Whether the Respondent erred in law by failing to allow expenses incurred in generating the business income. 68. The Appellant submitted that income cannot be generated without incurring cost and that the Respondent’s assumption of 100% GPR is erroneous.

69. The Respondent on the other hand submitted that the Section 15 of the Income Tax Act provides for allowable expenses. That it is a general accounting principle that expenditures must be supported with evidence to ensure they are verifiable. That the Appellant's claim did not meet the threshold provided under Section 15 of the Income Tax Act as a large portion of the operational expenses claimed by the Appellant were not supported by any documentary evidence.

70. The Respondent relied on the case of Leah Njeri vs Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021/ eKLR, where the Court held that:“The only way the Commissioner could have allowed deduction of expenses as per section 15(1) of the ITA is if they were supported to its satisfaction."

68. That further, Section 54 A(1) of the Income Tax Act requires the taxpayer to keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds and contacts and vouchers which in the opinion of the Commissioner are adequate for the purpose of computing tax.

69. That the Appellant failed to provide supporting documents for the company's costs alleging that the documents to support the costs were carted away by DCI officers during a raid conducted on the company. That in the circumstances, the Respondent’s team computed the taxes payable based on the Appellant's bankings.

70. The Tribunal has previously considered and substantively expressed itself in regard to the Respondent's use of alternative means of tax assessment and more particularly the use and application of the bank deposit analysis in determining the taxable income and assessment of tax liability of a taxpayer. The Tribunal reiterates to that extent its decision in Digital Box Limited vs. Commissioner of Investigation & Enforcement [TAT No. 115 of 2017] when it stated as thus:“Further, the courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an assessment. This was held to be so in the case of Bachmann-vs-The Queen, 2015TCC where the Court stated that:-"This court has recognised 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."

68. The Respondent appears to have been prompted to resort to bank deposit analysis test when the Appellant failed to provide the material and sufficient documents.

69. The Respondent in the absence of a taxpayer providing the desired information and documentation to facilitate in the assessment and/or verification of the appropriate tax liability is empowered both under Sections 29(1) and 31(1) of the Tax Procedures Act to use its best judgment in making the tax assessment.

70. The Tribunal finds that the Appellant failed to discharge the burden of proof placed upon it in demonstrating that the Respondent's use and application of the bank deposit analysis yielded in an unfair and unreasonable tax assessment. The Appellant did not adduce any evidence in this matter to demonstrate that the tax assessment was incorrect or excessive.

71. The Tribunal finds that the Respondent did not err in law and in fact by failing to allow expenses incurred in generating the business income.

Final Decision 68. The upshot of the foregoing analysis is that this Appeal partially succeeds and consequently, the Tribunal proceeds to make the following Orders: -a.The Respondent’s objection decision dated 20th December 2021 be and is hereby set aside.b.The matter is referred back to the Respondent for it to undertake the following:-i.To compute the tax liabilities of the Appellant separately from those of its directors taking into consideration the period the company was not in operation and for funds not specifically paid through its accounts.ii.To compute the tax liabilities for the Appellant that relates only to periods within the 5 years allowable by the law.c.Each party to bear its own costs.

68. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 02ND DAY OF JUNE, 2023. ERIC N. WAFULACHAIRMANCYNTHIA B. MAYAKA GRACE MUKUHAMEMBER MEMBERJEPHTHAH NJAGI ABRAHAM K. KIPROTICHMEMBER MEMBER