https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/208

 REPUBLIC OF KENYA IN THE TRIBUNAL OF KENYA AT NAIROBI COUNTY COURT NAME: TAX APPEALS TRIBUNAL CASE NUMBER: TATC/E1191/2025 LABAITA LOUNGE LIMITED VS KENYA REVENUE AUTHORITY JUDGMENT # BACKGROUND 1. The Appellant is a private limited company duly incorporated in Kenya under the provisions of the Companies Act and has operations in Kenya. 2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 undertook a compliance check on the Appellant, covering Income Tax, PAYE, withholding tax, and VAT for 2021-2024. Consequently, the Respondent issued additional assessments dated 13th June 2025 totalling to principal tax of Kshs 189,572,156.00. the total tax assessed was Kshs 251,302,509 being the principle tax, penalties and interests. 4. The Appellant lodged a Notice on Objection on 7 th July 2025. The Respondent having considered the objection, issued an Objection decision dated 1st September 2025 wherein it confirmed the assessment. 5. Dissatisfied by the Respondent’s decision, the Appellant filed this appeal vide the Notice of appeal on 23rd October 2025. # THE APPEAL 1. The Appeal is premised on the Memorandum of Appeal dated 19th August 2025 and field on 23rd October 2025. The memorandum raised the following grounds of appeal: 1. That the Respondent erred in fact and in law by treating directors' capital injections and shareholder loans as taxable business income, contrary to the Income Tax Act and established accounting principles. 2. That the Respondent acted in error by basing the Corporation Tax and VAT assessments on gross banking’s without distinguishing between trading income and non-revenue inflows, resulting in an overstated tax liability. 3. That the Respondent erred in disallowing rent, repairs, travel, and start-up costs which were wholly, exclusively, and necessarily incurred in the production of income as required under Section 15(1) of the Income Tax Act Cap 470 (ITA). 4. That the Respondent failed to take into account that a significant portion of the Appellant's transactions, particularly in the real estate line of business, constitute VAT-exempt supplies, and that several operational purchases are non-vatable by virtue of being sourced from non-registered small-scale suppliers. 5. That the Respondent erred in law and fact by holding the Appellant liable for VAT on periods when it was administratively placed on the VAT special table, thereby preventing lawful filing of VAT returns. 6. That the Respondent erred in assessing VAT on the entire turnover variance instead of apportioning input VAT between taxable and exempt supplies as required by law. 7. That the Respondent erred in fact and law by subjecting all employee-related payments to PAYE or corporate income tax without recognizing that the majority of the employees earned below the taxable threshold of Kshs 24,000 per month. * 1. That the Respondent erred in fact and law by classifying operational reimbursements, loan repayments, and temporary transfers through directors' accounts as drawings subject to tax. 2. That the Respondent acted in breach of the principles of fair administrative action by disregarding the reconciliations, bank statements, loan documents, and audited financial statements tendered to substantiate the Appellant's position. # THE APPELLANT’S CASE 1. In support of the appeal, the Appellant relied on its Statement of facts dated 20th October, 2025 and field on 23rd October, 2025 and written submissions dated and filed on 30th March 2026. 2. In further support of its case the Appellant relied on the following documents; 3. Demand notice dated 13th June 2025; 4. Findings of return review dated 5th March 2025; 5. Email correspondences; 6. Substantive Response to assessment dated 18th August 2025; 7. Appellant’s CR12; 8. Loan Statements showing loans advanced to Appellant’s director; 9. Bank statement in the name of Baita Trading Company Limited; 10. Bank statement in the name of LA Baita Lounge Limited; 11. Financial Statements for the period 2021 – 2023; 12. Bank & Drawings Reconciliations; and 13. Objection decision dated 1st September 2025. 14. That the Respondent issued tax assessment on 13th June 2025, wherein the Respondent assessed and demanded payment of various tax obligations allegedly due and payable by the Appellant. The said assessment comprised multiple tax heads, inclusive of Corporation Tax, Pay as You Earn (PAYE), Value Added Tax (VAT), and Withholding Tax, together with attendant penalties. 1. That prior to the issuance of the Assessment, the Respondent, by way of a notice of preliminary findings dated 5th March 2025, communicated its initial observations and sought the Appellant's clarification on the same tax heads forming the subject of the present dispute. The Appellant duly responded to the said notice through a series of consultative meetings and written correspondences exchanged via email. 2. That subsequent to the issuance of the impugned assessments, the Appellant lodged a Notice of Objection on 7th July 2025. Thereafter, the Appellant submitted a further clarification to the said Notice of Objection vide correspondence dated 18th August 2025, providing additional particulars and supporting explanations in respect of the disputed tax heads. The Appellant in support of the appeal stated as follows: # Erroneous Characterization of Capital Injections as Income 1. The Appellant stated that it is a recently incorporated entity, and the impugned assessments cover the period from its inception to date. It noted that the Appellant's business required considerable financial support from its directors and shareholders to establish its hospitality operations. In setting up its premises and related facilities, the shareholders periodically advanced capital contributions and shareholder loans. These inflows, duly supported by bank statements, loan agreements, and audited financial statements, were submitted to the Respondent during the objection process. However, the Respondent erroneously characterized these inflows as taxable income. The Appellant argued that this treatment is contrary to the express provisions of Section 3(2) of the ITA, which defines taxable income as gains or profits from business, employment, or property. The Appellant argued that Capital injections and shareholder loans are not income derived from business activity; but they are sources of financing used to fund operations and expansion. 2. According to the Appellant, by including capital contributions in taxable income, the Respondent contravened the basic tax principles distinguish between financing and revenue transactions. The Appellant asserted that it provided reconciliations clearly separating shareholder loans and capital contributions from operational receipts. It contended that the Respondent's disregard of this evidence resulted in inflated and erroneous Corporation Tax and VAT assessments. 3. The Appellant therefore, urged the Tribunal to find that the inclusion of shareholder loans and capital injections in taxable income was both factually and legally untenable and to order that the assessments be revised to exclude these non-revenue inflows. # Failure to Distinguish Between Revenue and Financing Inflows 1. The Appellant asserted that the assessments were premised on the assumption that all bank deposits constituted taxable turnover. It stated that this approach ignored the fact that the Appellant's accounts recorded not only business sales but also shareholder loans, capital injections, and inter-account transfers. It added that such treatment offends basic tax principles as is a well- settled accounting principle that bank deposits may comprise both revenue and non-revenue items. 2. The Appellant cited the case of **Commissioner of Domestic Taxes v Total Kenya Limited [2021] eKLR**, wherein the High Court emphasized that tax assessments must be grounded on verifiable evidence and not on assumptions or presumptive figures. The Appellant contended that the Respondent's reliance on gross deposits without any factual verification was therefore arbitrary and unlawful. 1. The Appellant contended that it submitted reconciliations distinguishing between sales income and non-income inflows. It asserted that the failure to consider these records led to an exaggerated tax liability. # Improper Disallowance of Legitimate Business Expenses 1. According to the Appellant, the Respondent disallowed several of the Appellant's expenses, such as rent, travel, repairs, and start-up costs on grounds of insufficient documentation. It argued that the disallowance ignored evidence tendered, including rent schedules, receipts, and ledgers detailing these expenditures. 2. The Appellant noted that under Section 15(1) of the ITA, deductions are allowable for expenses "wholly and exclusively incurred in the production of income." It noted that the Respondent's blanket disallowance of these expenses contravened this provision. It averred that rent and repairs are ordinary operational costs necessary for running and maintaining business premises. It noted that start-up costs and travel expenses were integral to the establishment and continuity of the enterprise. 3. The Appellant pointed out that the principle of matching income with related expenditure, affirmed in **Republic v KRA ex parte Bata Shoe Co. (Kenya) Ltd [2014] cKLR**, requires that legitimate business expenses be recognized against the income they help generate. It contended that by disregarding the Appellant's clarifications without providing a reasoned explanation, the Respondent violated the constitutional principles of fair administrative action under Article 47. The Appellant therefore urged the Tribunal to reinstate these deductions and direct a lawful re-computation of the tax. # Failure to Recognize VAT-Exempt and Non-Vatable Transactions liability. 1. According to the Appellant, as per the Preliminary Findings dated 5 th March 2025, the Appellant indicated that the VAT assessment was premised in the basis of the VAT assessments issued against the Appellant arose from alleged variances between the amounts banked by the taxpayer and the sales as reported in its VAT returns. 2. The Appellant argued that it operates in two business segments, hospitality and real estate. The real estate component, which involves acquisition and sale of land, is expressly VAT-exempt under Part II of the First Schedule to the VAT Act, 2013. The Respondent, however, treated all transactions as vatable, thereby overstating VAT liability. The Appellant asserted that this approach contravened Section 5(1) of the Value Added Tax Act Cap 476(VATA), which applies VAT only to taxable supplies made by registered persons in the course of business. 3. The Appellant contended that the failure to distinguish between taxable, exempt, and non-vatable transactions resulted in an unlawful and excessive VAT assessment. # Improper Reliance on Variances Arising from VAT Special Table Restriction 1. The Appellant asserted that it was placed on the VAT Special Table in January 2023, an administrative measure that prevented the filing of VAT returns during the restricted period. Despite this, the Respondent proceeded to issue VAT assessments for those very months. 2. It stated that this action violated the principles of fair administrative action under Article 47 of the Constitution and Section 4(3) of the Fair Administrative Action Act, which prohibit penalizing a party for administrative restrictions beyond its control. 3. According to the Appellant, its inability to file returns was a direct consequence of the Respondent's own system restrictions. Accordingly, it argued that the Respondent's imposition of VAT assessments for that period was unfair, unreasonable, and unlawful. The Appellant asserted that the VAT assessments for the special table period should be nullified alongside the attendant penalties or interest accrued thereon. # Failure to Apply Input VAT Apportionment 1. That given the Appellant's mixed operations– taxable hospitality and exempt real estate, it was required to apportion input VAT in accordance with Section 17(6) of the VATA. The Appellant claimed that it submitted reconciliations detailing the apportionment formula. 2. According to the Appellant, the Respondent disregarded this statutory mechanism and treated all input tax as disallowed. It contended that such treatment violated both the VATA and Section 29 of the TPA, which require assessments to be evidence-based and in conformity with the law. # Unfair and Unlawful Assessment of PAYE 1. That in relation to the PAYE, the Respondent asserted that the assessment was premised on variances between declared salaries and PAYE returns, with the Respondent assuming all payments were taxable. However, it noted that many of the employees earned below the Kshs 24,000 statutory threshold under Paragraph 2 of the Third Schedule to the ITA, and were thus not subject to PAYE. 2. That the Respondent's blanket application of a 30% tax rate to all salary payments effectively imposed a corporate tax on employment income, an approach unsupported by law. Moreover, it pointed out that some discrepancies arose from administrative errors by a prior consultant, not from deliberate non- compliance. The Appellant maintained that this assessment was therefore unreasonable, punitive, and contrary to the Income Tax Act. # Erroneous Classification of Director Transactions as Drawings 1. According to the Appellant, the Respondent classified all transactions passing through directors' personal MPESA accounts as drawings and treated them as taxable income. It averred that this conclusion ignored the evidence showing that these payments were operational in nature, covering utilities, supplier payments, taxes, and temporary loan movements. 2. The Appellant opined that it is common in small enterprises for directors to use personal accounts to facilitate business operations. It contented that the doctrine of substance over form requires that transactions be assessed by their commercial substance rather than their form. 1. The Appellant argued that loan repayments and reimbursements cannot, in law, constitute income. The Appellant averred that Respondent's approach contravenes Section 3(2) of the ITA and accepted accounting standards. 2. That based on the above, the Appellant urged the Tribunal to find that the impugned transactions were operational or financing-related, not drawings, and direct reversal of the resultant tax charges. # Failure to Accord the Appellant's Evidence Proper Consideration 1. The Appellant contended that throughout the objection process, the Appellant furnished the Respondent with audited accounts, reconciliations, bank statements, and other documentation substantiating its position. It asserted that the objection decision, however, made no reference to or analysis of this evidence. 2. That such omission violates Section 51(8) of the TPA which requires the Commissioner to base the objection decision on the documents and arguments supplied. The Appellant also argued that it also breaches the constitutional and statutory requirements for fair administrative action under Article 47 of the Constitution and Section 4(3) of the Fair Administrative Action Act. 3. The Appellant averred that a decision that disregards material evidence is arbitrary and ultra vires the Commissioner's mandate. It urged the Tribunal to find that the objection decision was procedurally defective, substantively flawed, and to set it aside in its entirety. 4. The Appellant submitted that the Respondent wrongly treated capital injections, shareholder loans and other financing inflows as taxable income instead of non-revenue receipts. It also submitted that the Respondent improperly disallowed legitimate business expenses incurred in the establishment and operation of the Appellant's business. 5. The Appellant submitted that the Respondent incorrectly assessed VAT disregarding exempt supplies, non-vatable transactions, and the requirement for input VAT apportionment. It also submitted that the Respondent unlawfully relied on variances arising during the VAT Special Table. 6. The Appellant submitted that the Respondent improperly assessed PAYE and incorrectly characterized director-related transactions as taxable income; and that the Objection Decision was reached after improper consideration of the Appellant's explanations and documentation. 1. The Appellant relied on the case of **Republic v Kenya Revenue Authority ex-parte Bata Shoe Company (Kenya) Limited [2014] eKLR,** to highlight that the Court emphasized that tax administration must be grounded in rationality and fairness, and that legitimate business expenditure cannot be disregarded arbitrarily. 1. That Appellant cited **Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes [2020] eKLR** where the Court of Appeal underscored that VAT liability must be determined strictly within the framework of the VATA and that classification of supplies is central to computing the correct tax. 1. The Appellant further relied on the case of **Republic v Kenya Revenue Authority Ex-Parte Universal Corporation Limited (2016] eKLR**, wherein the High Court held that a failure to consider relevant material placed before a statutory body amounts to an unlawful exercise of discretion. It also placed reliance on the case of **Suchan Investment Limited v Ministry of National** **Heritage & Culture &3 Others [2016] eKLR**, where the Court of Appeal underscored that failure to take into account relevant considerations render a decision irrational and unlawful. 1. The Appellant also quoted on **Kenya Commercial Bank Limited v Commissioner of Domestic Taxes [2021] eKLR**, to submit that the Court affirmed that tax administration must be anchored in evidence and rational justification. # Appellant’s Prayers 1. The Appellant prayed for the following reliefs: 2. That the Objection decision dated 1st September 2025 be set aside; and 3. Any other remedies that the Honourable Tribunal deems just and reasonable. # THE RESPONDENT’S CASE 1. The Respondent’s case was premised on its Statement of facts dated 2nd December 2025 and filed on 3rd December 2025 and its written submissions dated 25th March 2026 and filed on 27th March 2026. 2. The Respondent pleaded that its assessment for VAT and Income tax was lawful and issued on the basis that the Appellant failed to provide relevant records to support its objection. The Respondent averred that the Appellant provided loan statements that were not for Labaita Lounge but for a related entity. 3. The Respondent averred that the loan statement from Agricultural Finance Corporation was in the name of the director rather than in the name of the company. It noted that the loan narration was 'beef cattle loan'. According to the Respondent, no evidence was provided that the loan was advanced to the company. It asserted that the statement shows this was a personal loan to the director in personal name and for a different purpose that is, beef cattle. 4. The Respondent averred that the Equity bank statements provided was for a related company Baita Trading Company Limited and that there was no proof that the related company advanced the whole loan or part of the loan to the company assessed. 5. That the bank reconciliation provided for all the years was simply a table showing an item known as loans received' with no indication as to the loan agreements relied upon. The Respondent also noted that the loan amounts used as reconciling items were sourced from the loan statements provided for the related entity Baita Trading Company Limited. 6. The Respondent averred that the Appellant provided a schedule-detailing bank and drawing reconciliation. However, it did not highlight on the bank statement each reconciliatory item. It stated that no analysis was provided linking the capital injection and operational revenues to the bank statement. 7. That the Appellant failed to satisfy the burden of proof under Section 56(1) of the TPA which provides; ‘‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. 8. The Respondent averred that under Section 24 and 31(1) of the TPA, the Respondent can issue assessment based on available information. The Respondent also stated that the Appellant has an obligation to maintain records as provided under Section 23 of the TPA but it failed. The Respondent pleaded that the Appellant having failed rebut its assessments as excessive and unfair, the assessment was lawful and ought to be upheld. # Variance in purchases 1. The Respondent asserted that in the objection clarification letter dated 18th August 2025, the Appellant stated that 'considering the nature of the Appellant's primary line of business, the majority of VAT-declarable purchases typically relate to beverages acquired from registered VAT suppliers. However, a substantial portion of the remaining purchases, particularly those connected to the kitchen and hospitality operations do not ordinarily attract VAT. These include items such as fresh groceries, fruits, vegetables, meat, poultry, fish, cereals, grains, bread, milk, dairy products, eggs, spices, and other perishable or semi-processed foodstuffs which are customarily procured from small-scale or informal suppliers who are not registered for VAT.’ The Respondent noted that to support this, the Appellant provided a tabular reconciliation distinguishing vatable purchases from non-vatable purchases. The Respondent averred that since no source document was provided to support the reconciliation, it was impossible to verify that the purchases were not Vatable. # Disallowed expenses 1. According to the Respondent, whereas in the letter dated 18 th August 2025 the Appellant indicated that it had already furnished detailed rent schedules together with proof of payments, the Respondent pleaded that no schedules or proof of payments were provided as purported. The ground of objection therefore, failed for lack of support. 2. That while the Appellant averred that it incurred expenses on repairs of buildings and start-up costs, the Respondent pleaded that no schedules or proof of payments were provided as purported. The ground of objection therefore, failed for lack of support. 3. That whereas the Appellant averred that it incurred expenses on repairs of buildings and start-up costs, the Respondent pleaded that no supporting documents were provided, like proof of purchase of construction materials and payment of construction workers. 4. On travelling expenses, the Respondent averred that no supporting document was provided to show the places travelled, who travelled, when they travelled, and the purpose of travel. Additionally, the Respondent asserted that no proof was provided on how the expense were wholly and exclusively incurred for business. # VAT 1. On banking variance, while the Appellant averred that the bank deposits are attributable to non-revenue items, including but not limited to capital injections, loan proceeds, and other inflows unrelated to the Appellant’s ordinary course of business, the Respondent stated that the evidence provided in this regard was of a personal loan to the director and a loan to a related entity. Hence, the assessment in this regard was confirmed as issued. 2. That whereas the Appellant indicated that not all sales during the relevant period were subject to VAT, the Respondent pleaded that the Appellant failed to provide evidence to support any land sale transactions by the Company. It asserted that no land sale agreements or land transfers at the Lands office were provided clearly showing that the Appellant deals in the sale of land. The Respondent argued that the related party Baita Trading Company Limited is the entity that deals with sale of real estate. The Respondent therefore, was of the view that the ground of objection was unproven therefore, it was disallowed. 3. That whereas the Appellant averred that it was placed on the VAT special table effective January 2023, the Respondent averred that the Appellant had been requested to provide supporting documents to show the correct sales for VAT to enable removal from the special table, however, the Appellant failed to do so. The Respondent asserted that requests were made on numerous occasions, including at the objection level, but the same were not provided. According to the Respondent, by failing to provide information to help verify the correct sales for VAT, the Appellant failed to comply with the VATA, and therefore the non-compliance is occasioned by the Appellant’s own doing. # PAYE variances 1. The Respondent averred that owing to the unique nature of its business operations, a substantial proportion of your employees earn remuneration which falls below the statutory taxable threshold of Kshs 24,000 per month hence the variance between the salaries under income tax returns and PAYE returns, the Respondent asserted that the Appellant failed to support this assertion. It pointed out that the Appellant did not provide the list of these employees who fall below the PAYE threshold, and proof of payment of amounts below the threshold. 2. The Respondent pleaded that based on Section 56(1) of the TPA, the burden of proof that the tax decision of the Respondent is incorrect lies with the Appellant. The Respondent asserted that the Appellant failed to provide the supporting documents to back up the assertion. # PAYE on director drawing 1. The Respondent averred that the bank statements of the Company indicated that the director indeed drew substantial amounts of money from the bank. These amounts were credited to the director's MPESA number. The Respondent asserted that it is not in dispute that there were drawings. The Respondent also noted from the bank statements that there are suppliers who are paid directly from the bank. It therefore maintained that it was incorrect that all the drawings by the director were applied towards purchases. 2. According to the Respondent, if there were indeed any purchases made by the director on behalf of the business from the drawings, the Appellant did not provide proof of the exact nature of the purchases; proof of payment of the suppliers; and invoices evidencing the purchases. 3. The Respondent relied on Section 23 of the TPA which mandates taxpayers to maintain accurate records of its financial transactions which ensures that all income, expenses, and deductions are well documented and can be substantiated when required. The Respondent contended that the Taxpayer failed to maintain and avail accurate records to support their assertion. 4. That whereas the Appellant averred that certain drawings reflected the repayment or repatriation of principal loan amounts advanced to the company, the Respondent pleaded that the Appellant has not defined what amount constitutes the 'certain amounts' advanced by the director to the company. The Respondent asserted that there is also no entry in the bank statement showing any advances by the director to the company and that if there were any cash advances from the director to the company, the Appellant failed to provide any evidence of such advances in the form of loan agreements. 5. According to the Respondent, the MPESA statements demonstrate that some funds transferred to the director's account were subsequently reversed back to the company's operational account after settling day-to-day expenditures. 6. The Respondent pointed out that the Appellant stated that some funds were reversed but it did not indicate the amount of funds that were reversed. 7. The Respondent stated that it did not identify instances of reversal of amounts sent from the bank to the director's Mpesa number. It averred that the Appellant failed to support its ground of objection through any documentary evidence. The assessment on this issue was then confirmed as issued. # Withholding Tax 1. The Respondent pleaded that the Appellant acknowledged that there were certain instances where withholding obligations were not duly complied with, particularly in relation to payments made for professional services rendered to the company. According to the Respondent, the Appellant conceded that this omission arose inadvertently and without any intention to evade tax obligations. 2. The Respondent also averred that the Appellant conceded to the withholding tax assessment. The assessment was then confirmed as issued as the tax was not in dispute and that the Appellant should settle the liability immediately. 3. The Respondent submitted that the Appellant failed to discharged its burden of Proof. 4. The Respondent relied on the cases of Commissioner of **Domestic Taxes v Trical and Hard Limited KEHC 9927 (KLR); Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR); Commissioner of Domestic Services v Galaxy Tools Limited [2021] KEHC 5530 (KLR);** and **Boleyn international Ltd v Commissioner of Investigations Enforcement, Nairobi TAT Appeal no. 55 of 2018** to submit that the Taxpayer has a duty to prove that the assessment was incorrect but the Appellant failed to discharge the burden. 1. The Respondent submitted that the Appellant failed to provide information that would have led to variation of the appeal. It relied on the case of **Digital** # Box Limited v Commissioner of Domestic Taxes Tax Appeal No.115 of **2017** to submit that the Respondent is empowered to use available information to make a determination. # Respondent’s Prayers 1. Based on the above grounds, the Respondent prayed that: 1. The Appeal be dismissed with costs; 2. The additional assessments raised by the Respondent be confirmed and the principal taxes and interest be found due and payable as per the Objection decision rendered by the Respondent on 1st September, 2025 # ISSUES FOR DETERMINATION 1. The Tribunal has considered the parties’ pleadings and submissions, and has identified the following issues for determination: # Whether the Respondent erred in the assessment and confirmation of Corporation tax; * 1. **Whether the Respondent erred in the assessment and confirmation of VAT;** 2. **Whether the Respondent erred in the assessment of PAYE.** **ANALYSIS AND FINDINGS** 1. Having identified the issues for determination, the Tribunal proceeds to analyse the same as hereunder: - # Whether the Respondent erred in the assessment and confirmation of Corporation Tax 1. The dispute arises from assessments raised by the Respondent flowing from a bank deposit analysis conducted on the Appellant’s accounts. The primary question is whether the Respondent properly distinguished taxable receipts from non-taxable inflows and whether the resulting assessment were supported by sufficient evidence. 2. The Respondent’s Corporation Tax assessment was founded on variances between bank deposits and turnover declared by the Appellant. 3. In particular, the Appellant asserted that Appellant's business required considerable financial support from its directors and shareholders to establish its hospitality operations. It therefore, argued that the Respondent erroneously characterized these inflows as taxable income. It opined that this was contrary to the express provisions of Section 3(2) of the ITA. Whereas the Appellant stated that the inflows are duly supported by bank statements, loan agreements, and audited financial statements which were submitted to the Respondent during the objection process, the Respondent argued that those documents could not prove the Appellant’s assertions. 4. The Tribunal sought to establish whether Respondent included inflows that are not revenue in nature in its workings thereby inflating the bank deposits. The Tribunal considered the bank statements, loan agreements, and audited financial statements that the Appellant filed. 5. The Tribunal examined the loan statement relied upon by the Appellant and noted that the facility was issued in the personal name of one of the Appellant’s directors, Mr Henry Mwingirwa, and not in the name of the Appellant’s company. The Tribunal reiterates the settled principle in **Salomon** **& Co Ltd Vs Salomon (1897) A.C 22 H.l** that a company is a distinct legal entity separate from its directors and shareholders. Consequently, a loan advanced to a director in a personal capacity cannot automatically be presumed to constitute a liability or financing inflow of the company without supporting evidence demonstrating transfer or application of the funds to the company’s operations. 1. While the Tribunal appreciates that bank deposit analysis is a recognised audit tool, such analysis does not create an irrebuttable presumption that every deposit constitutes taxable income. The purpose of the exercise is to identify unexplained deposits which may constitute income. It remains necessary to examine the nature of each category of inflow before subjecting it to tax. 2. The Appellant consistently maintained that a substantial portion of the deposits represented shareholder funding, capital injections, inter-account transfers and loan financing utilised in establishing and operating the business. 3. The Tribunal notes that the Appellant furnished audited financial statements, bank reconciliations, bank statements and explanations distinguishing operational income from financing transactions. While the Respondent questioned the adequacy of that documentation, the Objection Decision does not demonstrate that the Respondent undertook any meaningful examination of the reconciliations supplied by the Appellant or identified specific entries which it considered unsupported or taxable. 4. Tax is imposed on gains and profits. Capital contributions, shareholder funding, loan proceeds and inter-account transfers do not constitute gains or profits merely because they pass through a taxpayer’s bank account. Before such amounts may properly be subjected to income tax, the Respondent must establish through evidence that the disputed deposits represented business income within the meaning of Section 3 of the Income Tax Act. 5. The Tribunal is guided by the case of **Commissioner of Domestic Taxes v Total Kenya Limited [2021] eKLR** where the High Court emphasized that a tax assessment must be grounded on evidence and proper analysis, not assumptions drawn from raw figures. 1. Having reviewed the record, the Tribunal finds that the Respondent treated the banking variance substantially as taxable turnover without demonstrating that the disputed deposits constituted taxable income. Equally, the Objection Decision does not show why the Appellant’s reconciliations, audited accounts and explanations were rejected. 1. The Tribunal is guided by the case of **Republic v Kenya Revenue Authority Ex-Parte Aberdare Freight Services Ltd [2004] eKLR,** which held that statutory powers vested in the revenue authority must be exercised fairly and in good faith, and that administrative discretion cannot be used oppressively or punitively; while in **Keroche Industries Limited v Kenya** **Revenue Authority & 5 Others [2007] eKLR**, the court emphasized that public authorities must act consistently and fairly, and that a taxpayer should not be subjected to arbitrary or capricious treatment. 1. The Tribunal is alive to the provisions of Section 56(1) of the Tax Procedures Act which place the burden upon a taxpayer to prove that a tax decision is incorrect. However, where a taxpayer places before the Commissioner audited accounts, bank reconciliations, bank statements and explanatory schedules identifying deposits as loans, shareholder contributions, capital injections or inter-account transfers, the Commissioner is under a corresponding obligation to evaluate that evidence and provide reasons for rejecting it. The burden of proof does not entitle the Commissioner to disregard prima facie evidence furnished by a taxpayer without undertaking a reasoned analysis thereof. 2. Consequently, the Tribunal finds that the Corporation Tax assessment was arrived at without sufficient analysis of the nature of the disputed deposits and without adequate consideration of the evidence placed before the Respondent. The assessment therefore cannot stand in its present form. # Whether the Respondent erred in the assessing VAT 1. The Appellant argued that the Respondent failed to recognize VAT exempt and non-vatable transactions. It stated that the VAT assessment was premised in the basis of the VAT assessments issued against the Appellant arose from alleged variances between the amounts banked by the taxpayer and the sales as reported in its VAT returns. The Appellant contended that it operates in two business segments, hospitality and real estate. 2. The Appellant asserted that the real estate component, which involves acquisition and sale of land, is expressly VAT exempt under Part II of the First Schedule to the VATA. The Appellant asserted that the Respondent treated all transactions as vatable, thereby overstating VAT liability hence contravening Section 5(1) of the VATA, which applies VAT to taxable supplies made by registered persons in the course of business. It maintained that the failure to distinguish between taxable, exempt, and non-vatable transactions resulted in an unlawful and excessive VAT assessment. 1. On the other hand, the Respondent asserted that the Appellant did not provide source documents to support its case. 2. The Tribunal notes that the VAT assessment was similarly founded upon banking variances identified by the Respondent. The Appellant’s position was that it conducted both hospitality operations and real estate activities and that a portion of the transactions reflected exempt supplies, financing inflows and other non-vatable receipts. 3. Under the Value Added Tax Act, VAT is chargeable only on taxable supplies. Consequently, before assessing VAT on banking variances, the Respondent was required to establish that the underlying transactions constituting taxable supplies for purposes of the Act and not exempt transactions, capital contributions, loans or other non-taxable receipts. 4. The Appellant’s case was that real estate component of its business which involves acquisition and sale of land, is expressly VAT-exempt. In this regard, Section 2(1) of the VATA defines **"exempt supplies"** means, 'supplies specified in the First Schedule which are not subject to tax.' Paragraph 8, part II of the First Schedule to the VATA provides as follows: *8. Supply by way of sale, renting, leasing, hiring, letting of land or residential premises;* *"residential premises" means land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation;* *Provided that this paragraph shall not apply where such services are supplied in respect of—* 1. *car park services; or* 2. *conference or exhibition services, except where such services are provided for educational institutions as part of learning.* 3. The Appellant specifically asserted that part of its business involved transactions in land and real estate which fall within the exempt supplies contemplated under Part II of the First Schedule to the Value Added Tax Act. Once this explanation was advanced and supporting records supplied, the Respondent was required to analyse the nature of the transactions and demonstrate why they remained taxable notwithstanding the Appellant’s explanations. 1. The Tribunal further notes that the Appellant raised the issue of apportionment of input tax under Section 17(6) of the Value Added Tax Act on account of its mixed supplies. However, the objection decision contained no discernible analysis of this statutory requirement or the reconciliation presented by the Appellant regarding apportionment. 2. The Objection decision equally does not demonstrate any exercise undertaken by the Respondent to distinguish taxable supplies from exempt supplies, financing inflows, shareholder contributions, loan proceeds or inter- account transfers. Instead, the assessment proceeded on the assumption that all deposits reflected taxable turnover. 3. The Tribunal finds that such an approach is inconsistent with the statutory framework governing Value Added Tax. Accordingly, the VAT assessment was arrived at without adequate consideration of the nature of the underlying transactions and is therefore unsustainable. # Whether the Respondent erred in the assessing PAYE 1. The PAYE assessment arose from variances identified by the Respondent between payroll figures reflected in the Appellant’s records and PAYE returns filed during the period under review. The Appellant maintained that a substantial number of employees earned below the applicable taxable threshold and that certain payments treated by the Respondent as remuneration represented reimbursements and operational transactions. 2. The Tribunal notes that PAYE is chargeable only upon taxable employment income. Consequently, before assessing PAYE on any variance, the Respondent was required to establish that the disputed amounts constituted taxable emoluments paid to identifiable employees. 3. The Tribunal finds that the Respondent adopted a generalized approach by treating the entirety of the identified variance as taxable employment income without undertaking employee-specific analysis or demonstrating how the disputed amounts translated into taxable remuneration. 4. The Objection Decision does not identify the employees allegedly under- declared, the specific emoluments attributable to each employee, or the basis upon which the PAYE liability was computed. Equally, the decision does not demonstrate consideration of the Appellant’s explanation that certain employees earned below the statutory threshold. 1. In the absence of such analysis, the Tribunal is unable to conclude that the entire assessed variance represented taxable employment income. The PAYE assessment therefore lacks sufficient evidential support and cannot be sustained. 2. The Tribunal further finds that although the Respondent was entitled under Sections 24 and 31 of the Tax Procedures Act to issue assessments based on available information, such assessments must nevertheless be grounded on a reasonable evaluation of all relevant material presented by a taxpayer. Where reconciliations, audited accounts, bank statements and explanatory schedules are supplied during the objection process, the Commissioner is required to demonstrate consideration of that material and provide reasons for rejecting it. 3. The Tribunal further finds that the Objection Decision does not demonstrate adequate consideration of the Appellant’s explanations, reconciliations, audited financial statements and supporting documentation as required under Section 51(11) of the Tax Procedures Act. 4. With regard to the withholding tax assessment, the Tribunal notes the Respondent’s contention that the Appellant conceded liability. However, the Tribunal is unable to discern from the Objection Decision or the assessment schedules on record the extent of the alleged concession. # FINAL DECISION 1. The upshot of the foregoing is that the Appeal is meritorious and the Tribunal proceeds to make the following orders: 2. The Appeal be and is hereby allowed. 3. The Objection Decision dated 1st September 2025 be and is hereby set aside. 4. The assessments arising from the Objection Decision are hereby vacated. 5. Each party shall bear its own costs. 6. It is so ordered # DATED AND DELIVERED AT NAIROBI 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: 2026-06-13 14:19:25