https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/202

 REPUBLIC OF KENYA IN THE TRIBUNAL OF KENYA AT NAIROBI COUNTY COURT NAME: TAX APPEALS TRIBUNAL CASE NUMBER: TATC/E720/2025 GLOSEC SOLUTIONS LIMITED VS KENYA REVENUE AUTHORITY JUDGMENT # BACKGROUND 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act and whose principal business activity is that of Building Equipment Contractors, Specialty Trade Contractors, Construction, Safety specialization and CCTV installation. 2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws. 3. The Respondent conducted an audit of the books, records and accounts of the Appellant for the years of income 2018, 2019, 2020, 2021 and 2022 to review of the Appellants tax affairs and the scope of investigation covered domestic taxes, which included, Corporate Income Tax ("CIT"), Pay As You Earn ("PAYE") and Value Added Tax (VAT) 1. The Appellant objected to these additional assessments vide a Notice of objection dated 9th October 2024. 2. The Respondent however confirmed the assessment in light of the objection, and issued an Objection Decision vide a letter dated 6th December 2024 confirming part of the assessment amounting to KES 470,356,187 inclusive of principal tax, penalties and interest 3. Dissatisfied with the Respondent’s tax decision on 6th December 2024, the Appellant filed a Notice of appeal dated and filed dated 22nd May 2025. # THE APPEAL 1. The Appellant lodged its Memorandum of appeal dated 4th July, 2025 and filed on 08th July, 2025 raising the following grounds of appeal; 1. **THAT** the Respondent erred in both law and fact by failing to exclude non-revenue cash Inflows despite supporting documentation when reconciling the variance between net banking income and declared sales. 2. **THAT** the Respondent erred in law and fact by disallowing prepaid purchases, disregarding that the classification was an accounting convention and not reflective of their actual use or incurrence in the business. 3. **THAT** the Respondent erred in law and fact by failing to adequately consider the documentation and explanations submitted by the Appellant during the audit, review, and objection processes. 4. **THAT** the Respondent erred in law and fact by disregarding the detailed reconciliations submitted by the Appellant, which clearly demonstrated the alignment between VAT taxable supplies and accounting sales. 5. **THAT** the Respondent erred in law and fact by assessing PAYE on gratuity amounts that were neither paid to employees nor incurred, as no actual termination or end-of-contract payments took place. 6. **THAT** the Respondent erred in law and fact by assessing WHT on management fees whereby the commissioner has no legal basis for collecting undeducted withholding tax during the period. # APPELLANT’S CASE 1. The Appellant case was premised on its statement of facts dated 4 th July 2025 and filed on 8th July, 2025 with no submissions on record as at the date of hearing on the 1st April 2026 2. The Appellant stated that The Commissioner of Domestic Taxes conducted an audit of the books, records and accounts of the Appellant for the years of income 2018, 2019, 2020, 2021 and 2022 3. The Appellant stated that The audit involved a review of the Appellants tax affairs and the scope of investigation covered domestic taxes, which included, Corporate Income Tax ("CIT"), Pay As You Eam ("PAYE") and Value Added Tax (VAT) 4. The Appellant stated that following the audit process, the Commissioner of Domestic Taxes issued an assessment vide a letter dated 10th September 2024 in which the assessment commissioner issued additional taxes as summarized in Table the tribunal has not reproduced. 5. The Appellant stated it objected to these additional assessments vide a notice of objection dated 9th October 2024. In its response the Appellant provided the respondent, with documentation/reconciliation to support the objection. The Appellant further clarified that the additional assessment was based on a misunderstanding of the operations of the Appellant and misapplication of the law. 6. The Appellant stated that the Respondent confirmed the assessment in light of the objection, and supporting documentation provided and issued an Objection Decision confirming part of the assessment amounting to Kshs. 470,356,187 inclusive of principal tax, penalties and interest in table the Tribunal has not reproduced 7. The Appellant stated that In confirming the assessment, the Respondent made the following allegations which formed the basis of its decision: unexplained variances between net banking income versus sales declared; overclaimed purchases which were not supported; deferred income not reported in the year 2018; unexplained work in progress; failure to demonstrate that PAYE on severance pay was accounted for; non remittance and non-deduction of withholding income tax. 8. The Appellant stated that being aggrieved by the objection decision lodged an Appeal against the entire assessment on the following grounds. 1. Income established from Banking Analysis. 2. The Respondent erred in both law and fact by failing to exclude non- revenue cash inflows despite supporting documentation when reconciling the variance between net banking income and declared sales. * 1. In the objection decision, the respondent classified certain bank inflows as under-declared sales and consequently subjected to tax. The assessment indicates that amounts totaling to Kshs. 165,283,354 (2019), 219,635,894 (2020), 80,413,304 (2021) and Kshs. 391,447,553 (2022) were deemed to be undeclared turnover for the respective periods. 1. The Appellant stated that upon review, it noted that this treatment does not accurately reflect the substance and character of the transactions recorded in our bank accounts. While these amounts represent total cash and credit inflows during the reviewed period, they do not all constitute revenue from the sale of goods or provision of services and therefore should not be taxed as such. 2. The Appellant stated that this approach overlooked the accounting and tax treatment of non-revenue receipts, which are common in the normal course of business operations. The Income Tax Act (Cap. 470) and the VAT Act (2013) require taxpayers to declare income derived from business operations, but not cash movements or non-taxable receipts that do not result from a supply or trading activity. 3. The Appellant stated that it provided a reconciliation of the underdeclared turnover for the respective periods as per table the tribunal has not reproduced. 4. The Appellant stated that a detailed explanation of the above-mentioned non- sales items is provided to clarify their nature and to demonstrate why they do not constitute taxable turnover or income. 5. The Appellant stated that it submitted, and referred, the relevant bank statements in which the non-revenue income streams mentioned have been identified, highlighted, and appropriately classified. In addition, the Appellant attached, a detailed breakdown and composition of the various categories of non- revenue income previously referenced. These documents have been provided to offer greater clarity and transparency regarding the nature and sources of the amounts in question. 6. The Appellant stated that during the audit process, the Appellant submitted a reconciliation explaining the differences between the purchases recorded in the ledgers and those reported in the financial statements, as outlined in its Table. 7. The Appellant stated that Further to the above, and as part of its follow-up review, the Respondent determined that the line item labelled "Prepaid expenses" did not qualify as a valid deductible expense. This decision was based on the fact that the amount in question had not been reported as a current asset under the balance sheet, which is the appropriate classification for prepaid expenses. Consequently, the Respondent proceeded to disallow the expense on the grounds that it was not properly accounted for in the financial statements in accordance with standard accounting principles. 1. The Appellant contended that this is a matter of substance over form, arguing that although the account is labelled as "prepaid expenses," the entries recorded under this ledger represent actual expenses that have already been incurred in the course of business operations. 2. The Appellant stated that it highlighted that the use of the term "prepaid expenses" is purely a naming convention adopted to suit the company's internal accounting structure and does not accurately represent the nature of the transactions. The Appellant further maintained that the expenses recorded under this account are genuine, properly incurred in the course of business, and fully supported by relevant invoices and documentation. As such, the Appellant argues that these costs qualify as deductible expenses for tax purposes. 3. The Appellant stated that it proceeded to provide a breakdown of the prepaid expenses ledgers for the years under review and provides actual invoices for items booked in ledgers as proof that the account is an expense account rather than a prepaid account. 4. The Appellant stated that it went on to present a detailed breakdown of the "Prepaid Expenses" ledgers for the years under review (2020 to 2022) and submits supporting invoices for the items recorded in these ledgers. This was intended to demonstrate that the account, despite its label, reflects actual business expenses incurred thus substantiating the Appellant's position that it functions as an expense account rather than a true prepaid account. 5. The Appellant stated that as part of the audit test the Respondent compared the turnover reported in the IT2C with the sales declared in the VAT returns and identified certain discrepancies. The Appellant averred that it provided a reconciliation of these variances. 6. The Appellant stated that the Respondent proceeded to assess VAT on work-in- progress, questioning the manner in which this item was treated in the financial records. Clarification was requested regarding the VAT treatment of work-in- progress in the current year, as well as its treatment for income tax purposes in the following year. 7. The Appellant stated that the Work in Progress (WIP) was brought to charge and primarily consists of long-term project invoices that were issued before the work was completed. Since the work had not been performed by the end of the financial year, the related income is recognized in the year the project is completed which is in line with the accrual accounting concept. 1. The Appellant stated that the WIP-related income pertains to project invoices issued to KenGen, KPLC, KCB, and UNHCR, where billing occurred prior to the completion of the respective work with the breakdown of the WIP and the related invoices issued. 2. The Appellant stated that for the financial year 2020 and 2022, the Work in Progress (WIP) was reported for VAT purposes, which explained why the income reflected in the VAT3 returns was significantly higher than the income reported in the IT2C. 3. The Appellant stated that in the subsequent financial years 2021 and 2022 the WIP was recognized for income tax purposes based on the percentage of completion method. As a result, the sales reported in the IT2C exceeded those declared for VAT, as shown in the reconciliation above. Furthermore, the WIP for the year 2022 was subsequently recognized as income in the 2023 financial year. 4. The Appellant stated that the Respondent compared the salaries and wages expensed in the income tax returns with the PAYE returns and identified certain discrepancies. The Appellant averred that it provided a reconciliation of these variances. 5. The Appellant stated that based on the reconciliation, the Respondent observed that severance payments had not been subjected to tax and consequently proceeded to assess tax on those amounts. 6. The Appellant asserted that no severance payments were made during the year under review. A detailed review of the gratuity ledger indicated that the recorded movements were merely provisions earmarked for specific employees, rather than actual payments. As such, these amounts do not constitute gratuity payments and are therefore not subject to tax. 7. The Appellant stated that it attached the severance ledger with narrations for each line item to confirm that there was no gratuity paid out during the year. The same can be supported by the bank statements as the amount did not leave the bank during the period. 8. The Appellant stated that to support this position, it has provided the gratuity ledger, which includes detailed narrations for each entry to demonstrate that no gratuity was paid during the period. This is further corroborated by the bank statements, which confirmed that no corresponding funds were disbursed from the company's bank account during the year. 1. The Appellant stated that during the years under review it incurred management fees payable to its parent company, Glosec Israel, amounting to Kshs 31,929,471 in 2019 and Kshs 16,832,100 in 2021. Consequently, the Respondent applied withholding tax on these payments in accordance with the provisions of Section 35(1) of the Income Tax Act. 2. The Appellant stated that it directed the Respondent's attention to the ruling in ***Commissioner of Domestic Taxes Department vs. Pevans East Africa Limited, Shop and Deliver Limited & 5 others (HCCOMMITA/E003/2019)*** in which the court held that the Commissioner lacked legal grounds to recover unwithheld withholding tax (WHT) from taxpayers who failed to withhold. The judgment emphasized that, during the relevant period, there were no operative provisions in the tax laws authorizing the Commissioner to demand undeducted WHT from withholding agents. 3. The Appellant stated that it had provided a detailed breakdown of the management fees incurred in the years 2019 and 2021, which was attached for the Respondent's reference and review. The Appellant submited this information to enhance transparency and support the legitimacy of the expenses, enabling the Respondent to fully assess the basis of the charges. # Appellant’s Prayers 1. The Appellant prayed that: 2. The Respondent's decision made on 6 th December 2024 that demands additional tax of Kshs. 470,356,187 be vacated; 3. The Appeal be allowed; the costs of and incidental to this appeal be awarded to the Appellant; 4. Any other remedies that the Honourable Tribunal deems just and reasonable. 5. The Appellant stated that with the leave of the Tax Appeals Tribunal, make further oral and written submissions on any relevant issues in the Appeal. # The Appellant’s Prayers 1. the Objection Decision dated 6th December 2024 be vacated or varied in such a manner that may appear just and reasonable to the tribunal.; 2. the Appeal be allowed; 3. costs be awarded to the Appellant; 4. any other remedies that the Honourable Tribunal deems just and reasonable. # THE RESPONDENT’S CASE 1. In response to the appeal, the Respondent filed its Statement of facts dated and filed on 26th September, 2025 together with written submissions dated 31st March 2026 and filed on even date. 2. The Respondent stated that the Appellant was selected for a compliance verification covering Corporation Tax, PAYE, VAT and Withholding Tax for the period 2018 to 2022. 3. The Respondent stated that following review of the Appellant’s tax affairs, additional tax liabilities amounting to Kshs 477,841,629 were assessed across Corporation Tax, VAT, PAYE and Withholding Tax. 4. The Respondent stated that the Appellant lodged an objection on 9th October 2024 but failed to sufficiently address discrepancies, leading to confirmation of the assessments on 6th December 2024. 5. The Respondent stated that a compliance verification exercise was conducted during which meetings were held and clarifications sought from the Appellant. 6. The Respondent stated that upon review of the information availed, an assessment dated 10th September 2024 was issued for taxes amounting to Kshs 477,841,629. 7. The Respondent stated that the Appellant, being aggrieved, lodged an objection through its tax agent on 9th October 2024 and that objection was reviewed but found insufficient and the assessments were confirmed on 6th December 2024. 8. The Respondent stated that a banking analysis was conducted comparing deposits with declared sales which revealed significant variances across the years under review. 9. The Respondent stated that the Appellant failed to provide explanations for the variances which were consequently treated as under-declared sales and subjected to income tax. 10. The Respondent stated that upon review of the objection and supporting documentation, it observed that the Appellant did not provide satisfactory explanations or evidence addressing the variances. 11. That the Appellant’s claim that bankings included contra entries and non-sales items was not adequately supported and reconciliations did not disprove the findings. 1. The Respondent stated that although a banking reconciliation was submitted, it was insufficient to support the Appellant’s position. 2. The Respondent stated that the objection lacked merit due to failure to address identified variances and that it confirmed the assessment on the basis of the unresolved discrepancies. 3. The Respondent stated that certain expenses such as shipment expenses, contractor fees and write-offs were properly supported and allowed as business expenses. 4. That the prepaid purchases were disallowed as they were not reflected as current assets in the balance sheet and were inadequately reconciled. 5. The Respondent stated that the Appellant’s explanation that prepaid purchases were expensed did not sufficiently address the concerns raised. That the Appellant failed to provide adequate documentation or reconciliation to justify classification of prepaid purchases. 6. The Respondent stated that reconciliations provided were insufficient and lacked evidence to resolve discrepancies and the objection on over-claimed purchases was rejected due to inadequate evidence. 7. The Respondent stated that variances were identified between turnover declared in IT2C and VAT returns. 8. The Respondent stated that certain reconciling items such as work in progress and deferred revenue were not explained and were subjected to VAT. 9. The Respondent stated that the Appellant failed to sufficiently address discrepancies between IT2C and VAT returns. 10. The Respondent stated that explanations regarding recognition of work in progress raised concerns on proper matching of income and VAT obligations. 11. The Respondent stated that explanations were unsupported by adequate documentation and thus insufficient to overturn the assessment and that a variance was identified between salaries declared in income tax returns and PAYE returns. 12. The Respondent stated that although some reconciliations were provided, severance pay discrepancies remained unsupported and that the explanations provided were insufficient to resolve PAYE discrepancies leading to confirmation of the assessment. 13. The Respondent stated that management fees paid to a non-resident entity were not subjected to withholding tax and were brought to charge and that the payments toward Glosec Israel constituted management fees subject to withholding tax under Section 35(1) of the Income Tax Act. 1. The Respondent stated that failure to deduct and remit withholding tax contravened Section 35 of the Income Tax Act, and liability remained with the Appellant. 2. The Respondent stated that the Appellant failed to provide sufficient evidence to counter the withholding tax assessment and that the objection on withholding tax was rejected. 3. The Respondent stated that analysis of bank statements revealed undeclared income for of income 2020 which was subjected to income tax and that unsupported expenses were disallowed due to lack of sufficient evidence linking them to the business. 4. The Respondent stated that banking variances were also subjected to VAT and that undeclared rental income was identified and subjected to tax. 5. The Respondent stated that withholding tax on professional and labour fees were assessed where not accounted for. 6. The Respondent stated that the Appellant conceded to certain VAT, MRI and withholding tax assessments and entered into a payment plan. 7. The Respondent stated that the Appellant’s grounds of appeal included failure to exclude non-revenue inflows, disallowance of prepaid purchases, failure to consider documents, and wrongful assessment of PAYE and WHT. 8. The Respondent stated that relevant provisions included Section 12 of the Value Added Tax Act, Section 31 of the Tax Procedures Act, Section 51 of the Tax Procedures Act and Section 59 of the Tax Procedures Act. 9. The Respondent stated that the Appellant provided documents including expense schedules and M-Pesa extracts for review. 10. The Respondent stated that upon review, it maintained that the assessment was based on banking variances between declared and actual income and that the Appellant failed to provide reconciliations or grounds to support its objection. 11. The Respondent stated that the Appellant conceded to VAT assessments arising from banking variances and argued that expenses were genuine, the supporting documentation was insufficient. 12. The Respondent stated that it did not dispute that business expenses are allowable under Section 15 of the Income Tax Act, but found the evidence inadequate. 13. The Respondent stated that invoices lacked proper identification and could not be linked to the Appellant and could not ascertain whether expenses were incurred wholly and exclusively for business purposes. 14. The Respondent stated that expense schedules lacked proper categorization, making verification difficult and that only unsupported expenses were disallowed while valid expenses were allowed. 15. The Respondent stated that invoice descriptions such as “labour costs” were insufficient to identify the nature of expense and the inconsistencies between claimed and disallowed amounts could not be reconciled due to lack of supporting evidence. 16. The Respondent stated that under Section 31(1) of the Tax Procedures Act, it is empowered to amend assessments based on available information and best judgment. 17. The Respondent stated that the Appellant failed to provide supporting documents to substantiate its case. 18. The Respondent stated that lack of documentation that led to confirmation of VAT assessments. 19. The Respondent stated that the Appellant failed to provide evidence to support objections leading to confirmation of assessments and relied on Section 51(3) and 51(4) of the Tax Procedures Act and Section 43(3) of the Value Added Tax Act. 20. The Respondent stated that the objection was invalid due to lack of invoices and failure to reconcile VAT declarations. It stated that under Section 51(3) of the Tax Procedures Act, a valid objection must state grounds, amendments and reasons. 21. The Respondent stated that the Appellant’s objection was invalid for failure to meet statutory requirements. 22. The Respondent stated that the Appellant’s claims were unsupported by evidence and unfounded in law and therefore failed to discharge the burden of proof under Section 56(1) of the Tax Procedures Act. 23. The Respondent stated that the Appellant’s objection did not meet the threshold of validity under Section 51(3) of the Tax Procedures Act. Its stated that the objection was a mere denial unsupported by evidence. 24. The Respondent stated that under Section 24(2) of the Tax Procedures Act, it is not bound by taxpayer returns and may use any available information it relied on available data including customs information to assess VAT. 25. The Respondent stated that assessments were amended under Section 31(1) of the Tax Procedures Act to reflect correct tax liability and that the Appellant had a duty under Section 51(3) of the Tax Procedures Act to provide supporting documentation when objecting. 26. The Respondent stated that the Appellant failed to discharge the burden of proof under Section 56 of the Tax Procedures Act. 27. The Respondent stated that the objection was disallowed and assessments confirmed tax assessments together with penalties and interest remains due and payable and confirmed assessments are proper in law and should be upheld. 28. The Respondent stated that it reserves the right to file further evidence and that the Appellant’s allegations are unfounded and unsupported by evidence. 29. The Respondent submitted that the Appellant was subjected to a compliance verification covering Corporation Tax, PAYE, VAT and Withholding Tax for the period 2018 to 2022 which resulted in additional tax assessments amounting to Kshs 477,841,629, and that upon objection dated 9th October 2024, the Respondent reviewed the same but confirmed the assessments on 6th December 2024 due to insufficient explanations. 30. The Respondent submitted that the issues for determination included whether the use of the banking analysis method was proper, whether self-assessments and documents were considered, whether non-revenue inflows were excluded, whether prepaid purchases were wrongly disallowed, whether PAYE and WHT were properly assessed, whether due process was accorded, and whether the burden of proof was discharged. 31. The Respondent submitted that it commenced investigations upon receiving intelligence of under-declaration of income tax and VAT and applied the banking analysis method, further undertaking comparative analysis between corporation tax and VAT declarations. 32. The Respondent submitted that under Section 3 of the Income Tax Act, income tax is chargeable on all income accruing in or derived from Kenya, and where income tax was described as a tax on income regardless of source. 33. The Respondent submitted that it is empowered to assess taxpayers under Section 24(2) of the Tax Procedures Act, which allows assessment using any available information, and that the test of an assessment is its reasonableness. 34. The Respondent submitted that it complied with the legal threshold of reasonable assessment as set out in ***Digital Box Limited V Commissioner of Investigations And Enforcement (Tat 115 Of 2017)***, including reliance on the principles on objective fact gathering and sound calculations. 1. The Respondent submitted that under Sections 29 and 31 of the Tax Procedures Act, it is entitled to issue assessments based on best judgment using available information, including third-party data such as bank statements. 2. The Respondent submitted that indirect methods such as banking analysis are legitimate tools in detecting non-compliance and determining tax liabilities, particularly where taxpayer records are inadequate, and that bank deposit analysis is based on the premise that all income is either deposited or spent. 3. The Respondent submitted that the burden shifted to the Appellant to demonstrate that deposits were non-taxable or already taxed, where failure to provide sufficient documentation justified reliance on alternative information. 4. The Respondent submitted that it acted within its statutory mandate as affirmed in ***Pili Management Consultants Ltd V Commissioner Of Income Tax [2010] Eklr****,* where the Court upheld the Commissioner’s investigative and assessment powers. 5. The Respondent submitted that under the self-assessment regime, it is not bound by taxpayer declarations pursuant to Section 24(2) of the Tax Procedures Act, and may amend assessments under Section 31 of the Tax Procedures Act using best judgment. 6. The Respondent submitted that it considered all documents provided but found them insufficient to reconcile discrepancies and the taxpayer’s obligation to maintain and provide records. 7. The Respondent submitted that variances between bank deposits and declared income were treated as undeclared sales due to lack of satisfactory explanation, and that reconciliations provided were inadequate to disprove findings. 8. The Respondent submitted that prepaid purchases were disallowed as they were not reflected as current assets in the balance sheet and lacked adequate supporting documentation, thereby failing to justify their treatment. 9. That VAT variances between IT2C and VAT returns were not adequately explained, particularly regarding work in progress and deferred revenue, and relied on Section 23 of the Tax Procedures Act requiring proper record keeping. 10. The Respondent submitted that the burden of proof operates as a shifting obligation which described the “pendulum of proof” between taxpayer and Commissioner. 11. The Respondent submitted that PAYE discrepancies relating to gratuity and severance pay remained unresolved due to lack of supporting documentation. 12. The Respondent submitted that management fees paid to a non-resident entity were subject to withholding tax under Section 35 of the Income Tax Act, and failure to deduct and remit WHT justified the assessment. 13. The Respondent submitted that additional assessments were raised on undeclared income, VAT variances, rental income and withholding tax on professional fees, some of which the Appellant conceded and entered into a payment plan. 14. The Respondent submitted that disallowed expenses were not sufficiently supported or linked to the Appellant’s business, with deficiencies in invoices and lack of proper categorization, thereby justifying disallowance under Section 31 of the Tax Procedures Act. 15. The Respondent submitted that the burden of proof rests on the Appellant under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, ***Ushindi Exporters Limited V Commissioner Of Investigation And Enforcement (Tat No 7 Of 2015)*** to support this position. 16. The Respondent submitted that the Appellant failed to adduce evidence to demonstrate that the assessments were excessive or erroneous and therefore failed to discharge its statutory burden. 17. The Respondent submitted that the Appellant was accorded a fair hearing in accordance with Article 50(1) of the Constitution and due process principles on fair administrative action and natural justice. 18. The Respondent submitted that the Appellant participated in the audit, objection process and ADR engagements and was therefore accorded procedural fairness. 19. The Respondent submitted that the Appellant’s objection was invalid for failure to meet statutory requirements and lack of supporting evidence, and that the confirmed assessments remain due and payable. 20. The Respondent submitted that the Appeal is devoid of merit as the Appellant failed to discharge the burden of proof and that the assessments were lawful and properly issued. # Respondent’s Prayers 1. The Respondent prayed: 2. Objection decision and confirmed taxes be upheld and that the 3. Appeal be dismissed with costs as it lacks merit. # ISSUE FOR DETERMINATION 1. The Tribunal having carefully evaluated parties’ pleadings it is of the respectful view that the single issue that call for its determination is as hereunder; # Whether the Appellant discharged the burden of proofing that the **Objection decision dated 6th December 2024 was incorrect.** **ANALYSIS AND FINDINGS** 1. Having identified the issue for determination, the Tribunal proceeds to analyse the same as hereunder; # Whether the Appellant discharged the burden of proofing that the Objection decision dated 6th December 2024 was incorrect. 1. The Tribunal having reviewed the context of the dispute, notes that the matter arises from a compliance verification exercise conducted by the Respondent on the Appellant covering the period of income 2018 to 2022. Following the said exercise, the Respondent issued additional tax assessments vide a letter dated 10th September 2024 amounting to Kshs 477,841,629, arising from banking analysis variances, alleged over-claimed purchases, unreported deferred income, unexplained work in progress, PAYE discrepancies relating to severance pay, and alleged failure to deduct and remit withholding tax. 2. Thereafter, the Appellant lodged a Notice of Objection dated 9th October 2024 challenging the assessments and availed various reconciliations, invoices, bank analyses and financial statements in support of its position. 3. The Respondent reviewed the objection and subsequently issued its Objection Decision dated 6th December 2024, partially allowing the objection but confirming tax liability in the sum of Kshs 470,356,187, which decision precipitated the present Appeal before the Tribunal. 4. **The Tribunal is called to determine whether the in light of Section 56(1) of the Tax Procedures Act, 2015** and **Section 30 of the Tax Appeals Tribunal Act, 2013,** the Appellant discharged its burden of proving the Objection Decision dated 6th December 2024 was erroneous. 1. The Court in the case **Prima Rosa Flowers Limited v Commissioner of Domestic Taxes [2019] eKLR** held that a taxpayer cannot merely rely on assertions but must produce cogent and verifiable documentary evidence capable of displacing an assessment made by the Commissioner. 1. In the case **Atronix Limited v Commissioner of Domestic Taxes (TAT 551 of 2021)**, the Tribunal further clarified that once the Commissioner issues an assessment based on available information, the evidential burden shifts to the taxpayer to demonstrate with credible records that the assessment is excessive or erroneous. The legal position is therefore that a tax assessment is presumed correct unless effectively rebutted through credible evidence. 1. The Respondent relied on a banking analysis which revealed significant variances between declared income and bank deposits, treating unexplained inflows as undeclared sales. The Appellant contended that the Respondent failed to exclude non-revenue inflows such as contra entries and interbank transfers. However, beyond this assertion, the Appellant did not provide complete transaction-by-transaction reconciliation linking each banking entry to a verified non-taxable source, nor did it provide third-party confirmations or audited schedules reconciling deposits to declared income. 2. The Tribunal in the case **Tazama Distributors Limited v Commissioner of Investigations and Enforcement (TAT 115 of 2017)** upheld banking analysis as a valid indirect assessment tool where records are inadequate, provided it is reasonable and based on objective financial data. Similarly, in **CA McCourtie (LON/92/191)** it was emphasized that indirect assessment methods are permissible where they reasonably infer income from available financial flows. 1. In the present case, the Appellant’s failure to substantiate its explanations means the burden under Section 56(1) was not discharged in relation to banking variances. 2. The Appellant also challenged the disallowance of prepaid purchases, arguing that they represented genuine business expenditure albeit misclassified in its accounting system. The Respondent, however, found that the items were not reflected as current assets and were not adequately reconciled to the financial statements. Although the Appellant produced invoices, the linkage between those invoices and the disputed ledger entries was not fully demonstrated. 3. In the case **Commissioner of Domestic Taxes v Galaxy Tools Limited [2021] eKLR**, the Court held that deductible expenses must be supported by verifiable documentation linking them to business operations. While Section 15 of the Income Tax Act permits deduction of expenses wholly and exclusively incurred in the production of income, such deduction must be substantiated. The Tribunal finds that although the Appellant produced some credible documentation, the reconciliation was incomplete and therefore only partially satisfies the evidentiary threshold. 1. On VAT, the Appellant attributed variances between IT2C and VAT returns to Work in Progress and IFRS revenue recognition principles. However, VAT liability is governed strictly by **Section 12 of the VAT Act, 2013,** which provides that tax is due at the earlier of invoice issuance or receipt of payment. Accounting treatment cannot override statutory tax provisions. 1. In the case **London County Council & Others v Attorney General [1901] AC 26**, it was held that tax liability is strictly statutory and not governed by accounting convenience. The Appellant did not provide invoice-level reconciliation or detailed project-based VAT timing schedules, and therefore failed to discharge its burden in this respect. 1. With regard to PAYE, the Appellant asserted that no severance payments were made and that the amounts represented provisions. The Respondent relied on payroll and ledger discrepancies to support the assessment. Under **Section 5 of** **the Income Tax Act**, employment income includes salaries, wages, and terminal benefits such as gratuity and severance. 1. In the case of **Mulherin v Commissioner of Taxation [2013] FCAFC 115**, it was held that the classification of payments as provisions does not alter their tax character where economic substance indicates remuneration. The Appellant failed to provide employment contracts, payroll reconciliation, or evidence confirming non-payment, and thus did not discharge the burden of proof. 2. On withholding tax, the Appellant challenged the assessment relying on **Commissioner of Domestic Taxes v Pevans East Africa Ltd & Others (HCCOMMITA/E003/2019)**. However, under **Section 35(1) of the Income Tax** **Act**, management fees paid to non-residents are subject to withholding tax. 1. In the case **Commissioner of Domestic Taxes v Metoxide Limited [2021] eKLR**, the Court held that failure to deduct withholding tax does not extinguish liability. The Appellant only partially demonstrated payment breakdowns and failed to fully distinguish timing and classification of payments across all relevant years, thereby only partially discharging the burden. 1. From the totality of the evidence, the Tribunal finds that the Respondent properly exercised its statutory powers under Sections 24, 29 and 31 of the Tax Procedures Act to issue assessments based on available data. The evidential burden was on the Appellant under Section 56(1). While the Appellant provided partial documentation, including invoices and limited reconciliations, it did not fully reconcile banking variances, VAT differences, or payroll discrepancies. 2. In the case **Golden Cara Investments Limited v Commissioner of Domestic Taxes [2024] KEHC 5570**, the Court described the burden of proof as a shifting pendulum that ultimately rests on the taxpayer. In this case, the Tribunal finds that the Appellant only partially shifted the pendulum back, particularly in relation to prepaid purchases, but failed to do so in respect of the remaining heads of tax. 1. The Tribunal finds that the Respondent lawfully raised the assessments and that the Appellant failed to fully discharge the burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act. However, the Tribunal further finds that the Appellant has produced credible documentary evidence in the form of invoices and expense records relating to prepaid purchases, which were not fully reconciled or considered in the computation and which therefore warrant limited intervention. The Appeal succeeds in part to the extent that the taxable base requires adjustment. 2. The Tribunal finds that while the Respondent’s assessment methodology was lawful and justified, the existence of credible but partially reconciled documentary evidence necessitates intervention to ensure that taxation reflects true income and adheres to principles of fairness and accuracy. # FINAL DECISION 1. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is partially merited and makes the following Orders: 2. The Appeal is partially allowed. 3. The Objection Decision dated 6th December 2024 is upheld in respect of the assessments arising from banking variances, VAT variances, PAYE and withholding tax. 4. The Objection Decision is set aside only to the extent of the expenses recorded under the “Prepaid Expenses” ledger which were supported by documentary evidence. 5. The Respondent shall, within sixty (60) days of this Judgment, verify the supporting documents relating to the disputed prepaid expenses and issue a revised assessment limited to that issue. 6. Save for the adjustment contemplated in Order (d) above, the Respondent’s assessments are upheld. 7. Each party shall bear its own costs. 8. It is so Ordered. # DATED AND DELIVERED AT NAIROBI ON THIS 12TH DAY OF JUNE 2026. SIGNED BY/FOR: **★ TH E JUDICIAR Y O F KENY A ★** **HON. ROBERT MUGAMBI MUTUMA (CHAIRPERSON) HON. EUNICE NJERI NGANGA HON. BONIFACE KIBIY TERER HON. BILLY GRAHAM OKUMU MIJUNGU** Tax Appeals Tribunal Tribunal Date: 2026-06-12 13:20:50