https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/274

**REPUBLIC OF KENYA** **IN THE TAX APPEALS TRIBUNAL AT NAIROBI** **TAX APPEAL NO. E463 OF 2025** MEDIHEAL TOWN CLINIC ELDORET LIMITED ………………………….….... APPELLANT VS **COMMISSIONER OF DOMESTIC TAXES……………………………………..RESPONDENT** **JUDGMENT** BACKGROUND 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. The appellant's core business is that of provision of human medical services. 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 issued assessment dated 28th February 2025 on Corporation Tax for the period 2019 to 2022 seeking to recover Kshs 10,583,865.47. 4. On 13th March 2025, the Appellant lodged an objection to the additional assessments as provided under Section 51 of the Tax Procedures Act Cap 469B(TPA). The Respondent vide objection decision dated 17th April 2025 disallowed the objection. 5. The Appellant being aggrieved with the objection decision lodged the Appeal herein vide a Notice of Appeal dated 9th May 2025. **THE APPEAL** 1. The Appellant filed memorandum of appeal dated 9th May 2025 on the following grounds of appeal: 2. That the objection decision by the respondent dated 17th April 2025, is erroneous in law and facts as it is based on assessments that were arrived at by the commissioner allowing 60% of the purported unsupported expenses hence charging an unrealistic net profit margin of 40% contrary to the industry margin which is around 4% - 5% per annum, as provided for in section 3(2) of the Income Tax Act Cap 470 (ITA). These tax calculations are unreasonable and in bad faith with total disregard of the ITA and an abuse of statutory powers. 3. That the objection decision by the Respondent is tainted with illegality as the commissioner is disallowing 40% of the expenses wholly and exclusively used in generation of the business income by the Respondent as provided under Section 15 (1) of the ITA. 4. That the Respondent erred in law by not exhausting all available mechanisms to try and reach Appellant before issuing the additional tax assessment. 5. That the Appellant is aggrieved by the Respondent's decision not to allow the objection despite the appellant stating clearly the grounds of objection as provided for under Section 51(1) (a) of the Tax Procedures Act, Cap 469 B(TPA). 6. That the Respondent failed to consider adequately or at all the grounds of objection filed by the Appellant in the objection and consequently erroneously disallowed the Appellant’s objection. **The Appellant’s Case** 1. The Appellant relied on its statement of facts dated and filed on 9th May 2025 wherein it stated that the Respondent erroneously with intent to collect undue taxes, confirmed Income Tax additional assessment even though the Appellant demonstrated clearly in the tax objection the business expenses used to generate incomes were partially considered to a tune of 60% in arriving at the additional tax assessment issued. 2. According to the Appellant, the respondent in arriving at the Income tax additional assessment only allowed 60% of the business and ignored 40% of the operating expenses used to wholly and exclusively generate the incomes before taxation as provided for in Section 15(1) of the ITA. 3. According to the Appellant, the rights to fair administrative action as provided by Article 47 of the Constitution of Kenya were violated by issuing the additional assessments without exhausting all avenues to try and reach the taxpayer and hearing him out before raising the additional assessment. 4. The Appellant was aggrieved by the respondent's decision not to allow the objection to the additional assessments despite stating clearly the grounds of objection as required under Section 51 (3) (a) of the TPA. **Appellant’s Prayers** 1. In light of the preceding, the Appellant urged this Tribunal to allow the appeal. **THE RESPONDENT’S CASE** 1. In response to the appeal, the Respondent lodged a Statement of facts dated 28th July, 2025. 2. The Respondent stated that a compliance check was carried out on the Appellant for the years 2019-2022. Consequently, the Appellant was issued with notices of assessments dated 28 February, 2025. It stated that the Appellant objected to the additional assessment on 7 March, 2025. 3. Upon receipt of the notices of objection, the Respondent requested the Appellant to validate notices of objection so as to comply with the provisions of section 51(3) of the TPA. It stated that the Appellant was required via email dated 11th March, 2025 to provide statutory required documents within seven (7) days in support of the objection failure to which the objection would be invalidated. In the absence of satisfactory explanation from the Appellant, the Respondent issued an objection decision dated 17th April, 2025. 4. In Response to ground 1 and 2 of the Memorandum of Appeal, while the Appellant contended that the Respondent erred by disallowing 40% of the expenses wholly and exclusively and that the tax calculations are unreasonable, and in bad faith, the Respondent averred that it disallowed unsupported expenses claimed in the Income tax returns. 5. It averred that the Appellant failed to provide sufficient/relevant documents for review. In particular, the Appellant on 27th March, 2025 availed bank statements for the period January, 2019 to January, 2021 for review together with a letter explaining the challenges they faced in obtaining the records. 6. The Respondent averred that the bank statements alone in absence of the invoices and other supporting documents was insufficient to support the expenses incurred. The Respondent relied on Section 15 of the ITA to support its case. 7. The Respondent averred that the Appellant did not satisfy the criteria stipulated under section 15 of the ITA which governs the deductibility of expenses. The Respondent maintained that it was therefore justified in disallowing the expenses. 8. The Respondent further averred that Appellant’s assertion that the tax calculations are unreasonable and in bad faith is incorrect and misleading. On the contrary, the Respondent averred that additional assessments were issued pursuant to section 31 of the TPA. 9. The Respondent averred that it is allowed by section 24(2) of the TPA to assess a taxpayer’s liability using any information available. 10. In Response to ground 3, 4 & 5 of the Memorandum of Appeal wherein the Appellant contended that the Respondent did not consider all the grounds of objection and therefore, the objection decision ought to be set aside, the Respondent averred that the onus is on the Appellant to ensure that the documents submitted are clear, complete, and address the specific points of contention. The Respondent maintained that it cannot be held accountable for a failure to revise the assessment if the Appellant's documentation were inadequate or failed to rebut the findings. 11. The Respondent averred that the determination of the Appellant’s tax liability depends on submission of necessary records by the Appellant for the Commissioner’s review and appreciation. It cited section 54A (1) of the ITA which requires that any person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax. 12. The Respondent stated that under Section 56 of the TPA and 30 of the Tax Appeals Tribunal Act Cap 469A(TATA), the Appellant herein bears the burden to demonstrate that it has discharged a tax liability. The Respondent maintained that it reviewed and considered all the documents supplied and in the exercise of best judgment admitted, reconciled and disregarded others i.e. where the Appellant failed to controvert the assessments. 13. According to the Respondent, the Appellant’s assertion that the Respondent did not exhaust all available mechanism to reach out to the Appellant is incorrect and misleading. In the contrary, the Respondent stated that the Appellant’s response to the email dated 11th March, 2025 is a confirmation that the Respondent’s mode of communication to the Appellant was not only effective but also efficient. **The Respondent’s written submissions** 1. The Respondent filed written submissions dated 23rd May 2026 and further submissions dated 14th January 2026. 2. The Respondent submitted that the assessment was proper in law and that the Appellant failed to discharge its burden of proof. 3. The Respondent submitted that the Appellant did not provide documents to support the objection. It cited the cases of **Commissioner for Her Majesty’s Revenue and Customs Tc/2017/02292 Saima Khalid Appellant v the Commissioners for Her Majesty’s Respondents Revenue & Customs to support**; and **Digital Box Ltd Vs Commissioner of Investigation & Enforcement (2019) eKLR**; to support the position that the Respondent is allowed to use available information and best judgment to make a decision. 4. It relied on the cases of **Hancock v General Reversionary and Investment Company; Mars Logistics Limited v Commissioner of Domestic Taxes [2021] eKLR;** **Commissioner for Inland Revenue v Genn & Co (Pty) Ltd** to submit that for an item of expenditure to be deductible, it must be incurred wholly and exclusively’ for the purposes of the trade, profession or vocation. 5. It cited the case of **Greenroad Kenya Limited v Commissioner of Domestic Taxes TAT Appeal No. 538 of 2021 Nick KIKALOS and Helen Kikalos v United States of America, No. 2:98 CV 618. 313 F. supp. 2d 876 (2003); and Afya X-Ray Centre v Commissioner of Domestic Taxes TAT No. 70 of 2017; and Sea-Tech Limited v Commissioner of Domestic Taxes (Income Tax Appeal E134 of 2023) [2024] KEHC 7343 (KLR)** to submit that the taxpayer has a duty to adduce positive documents to discharge burden of proof. The Respondent maintained that the Appellant failed to discharge this burden. 6. The Respondent also submitted that the Appellant has attempted to introduce new evidence at the appeal stage without providing a justifiable reason for its failure to produce the documents earlier. It cited the case of **Style Industries Limited Vs Commissioner of Legal Services and Board Coordination TAT E128 of 2023** to support the position that the taxpayer cannot introduce new documents without leave. **Respondent’s prayers** 1. Based on the foregoing, the Respondent prayed that this Honourable Tribunal be pleased to uphold and affirm the Respondent’s Objection Decision dated 17th April, 2025; and ddismiss the appeal with costs to the Respondent. **ISSUE FOR DETERMINATION** 1. Having examined the pleadings, the Tribunal identified the following issue for determination: **Whether the Respondent erred in disallowing 40% of the Appellant’s operating expenses and confirming the additional tax assessments for the year 2019 to 2022** **ANALYSIS AND FINDINGS** 1. The Respondent conducted a compliance check for the years of income 2019 to 2022 and issued additional corporation tax assessments. The Assessments confirmed by the objection decision were premised on the Respondent’s view that part of the operating expenditure declared by the Appellant was unsupported. In arriving at the assessment, the Respondent allowed 60% of the claimed business expenses and disallowed the remaining 40%. 2. The Respondent maintained that the original documents supplied were inadequate. It submitted that the Appellant bears the burden of proof and that bank statements and schedules, without a complete reconciliation and primary records could not justify the deductions. The Respondent also objected to the Appellant’s additional documents, but the Tribunal granted the Appellant leave to file the additional documents. 3. On the other hand, the Appellant contended that the disallowed 40% comprised operating expenses incurred wholly and exclusively in producing its medical-services income, and that the percentage approach resulted in an unrealistic taxable profit. 4. The Appellant maintained that the expenses ought to have been considered under Section 15(1) of the Income Tax Act (ITA) which provides for deduction of expenses properly incurred. It provides *inter alia*: ***“15. Deductions allowed*** *(1) For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act,* *be deducted all* *expenditure incurred in such year of income which is* *expenditure wholly and exclusively incurred by him in the production of that income…”* 1. The words 'wholly and exclusively' impose both a purpose and a nexus test. It is not enough that money left a bank account or that an expense appears in a schedule. The taxpayer must establish, by credible records, that it incurred the expense, that the expense belongs to the relevant year and taxpayer, and that its object was the production of the taxpayer's taxable income. 2. The provisions of Section 15 of ITA cannot be read in isolation; Section 16(1)(a) reinforces that rule by prohibiting a deduction for expenditure or loss not wholly and exclusively incurred in producing the income. Capital expenditure is likewise not deductible as an ordinary operating expense under Section 16(1)(b), although qualifying capital allowances may be available under the Second Schedule upon proper proof. 3. Under Section 15(1) of the ITA, the burden is on the taxpayer to prove, first, that it incurred deductible expenditure; and second, that the expenditure was incurred wholly and exclusively in the production of that income. The Court in the case of **Income Tax v T Ltd (No 2) EA (1971) 569**, held that for expenditure to be deductible, it must have been incurred for the direct purpose of producing profits. 4. Further, in the case of **Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] KEHC 8118 (KLR),** the High Court stated as follows in relation to section 15(1) and section 54A(1) of the ITA at paragraph 28 of the judgment: *‘‘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. This is in line with section 54A(1) of ITA which provides as follows:* ***54A Keeping records of receipts, expenses, etc*** *(1) A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.’’* 1. In addition, in the case of **Commissioner of Legal Services and Board Coordination v Prabhaki Development Limited (Income Tax Appeal E114 of 2024) [2025] KEHC 9065 (KLR)** the High Court stated that Section 15(1) of the Income Tax Act allows a taxpayer to deduct expenses wholly and exclusively incurred in the production of that income in computing their taxable income. 2. The record-keeping obligation in Section 54A(1) of the Income Tax Act is integral to that enquiry. A person carrying on business must keep records of receipts and expenses, goods purchased and sold, accounts, books, deeds, contracts and vouchers adequate for computing tax. Under section 23 of the Tax Procedures Act, records required under a tax law must generally be maintained so that the taxpayer's liability can be readily ascertained. 3. There is no doubt that the taxpayer has a duty to demonstrate that the Respondent unlawfully declined to allow 40% of the expenses it incurred. This is true in light of Section 30 of the Tax Appeals Tribunal Act which provides as follows: ***“30. Burden of proof*** *In a proceeding before the Tribunal, the appellant has the burden of proving—* *(a) where an appeal relates to an assessment, that the assessment is excessive; or* *(b) in any other case, that the tax decision should not have been made or should have been made differently.”* 1. Further, section 56(1) of the TPA provides that: ***“56. General provisions relating to objections and appeals*** *(1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”* 1. In the case of **Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR**, Mativo J (as he then was) held: *“The pertinent issue in this appeal as I see it is the question of the taxpayer's burden of proof in tax cases. The party with the obligation of persuasion - what Wigmore termed the risk of non-persuasion - is said to bear the burden of proof. [14] The effect of non-persuasion on a party with the burden of proof is that the particular issue at stake in the litigation will be decided against the party. Generally, the taxpayer has the burden of proof in any tax controversy. The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. This position enjoys statutory backing courtesy of section 56 (1) of the TPA which provides that in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. As if to underscore the import of the above provision, the legislature deployed the word “shall'' in the said section meaning that the provision is couched in peremptory terms.”* 1. Further, the Court in the case of **Eldama Technologies Limited v Commissioner of Customs & Border Control (Tax Appeal E200 of 2021) [2023] KEHC 20762 (KLR)** stated as follows at paragraph 31 of the judgment: *‘’This means that it is the Appellant, as the taxpayer who is expected to surmount the burden of proving that the Commissioner was wrong in its assessment...’’* 1. The Tribunal first clarifies the effect of its order of 26th February 2026. Leave regularised the filing of the supplementary documents and made them part of the appeal record. It did not deem their contents proved, establish their relevance to every disputed item, or transfer the statutory burden from the Appellant to the Respondent. Admissibility and probative sufficiency are distinct questions. 2. The Respondent's reliance on **Style Industries Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E128 of 2023) [2024] KETAT 653 (KLR)** concerned the introduction of material at the appeal stage without leave. Here, leave was granted. The Tribunal has therefore considered the supplementary bundle in full. The question is whether, considered with the rest of the record, it proves that the assessment was excessive. 3. The tribunal notes that the assessment covers four years and a quantified tax demand of Kshs 9,958,512. The supplementary bundle bears directly upon the expense heads whose partial disallowance generated that demand. Taken as a whole, it provides contemporaneous business records, supporting third-party documents and payment-traceability material capable of establishing the existence, period, ownership and business nexus of the expenses claimed. The documents are therefore relevant and material to the application of section 15(1) of the Income Tax Act and are potentially capable of altering the assessment. 4. The Tribunal emphasises that relevance is not the same as final proof. The documents do not automatically establish that every amount is deductible; their weight depends on the Respondent verifying authenticity, the relevant year, commercial purpose, and statutory treatment. 5. The Tribunal observes that the additional evidence provides a sufficient factual foundation for a fresh reconciliation. It would be unsafe to sustain the 40% blanket disallowance without testing evidence that may show expenditure was incurred wholly and exclusively in generating the Appellant's income. Equally, it would be unsafe to allow the expenses in full before their contents are verified against the Appellant's returns and records. 6. The Tribunal further observes that the supplementary bundle contains positive evidence that the Appellant's medical business incurred substantial operating expenses, including payroll, security, electricity, water, telephone and rent expenses. Although the documents are incomplete and not sufficiently reconciled to justify the whole amount claimed, they render it unsafe simply to sustain an unexplained blanket disallowance without a transaction-by-transaction and year-by-year review. 7. The Tribunal cannot undertake the reconciliation for either party, reconstruct four years of accounts from an unindexed mass of schedules and third-party documents, or speculate upon a substitute tax figure. The Appellant's failure of reconciliation therefore precludes an order vacating the assessment to nil or varying it by a definite sum. It does not, however, validate the Respondent's unexplained 40% disallowance. 8. Section 29(2)(c) of the Tax Appeals Tribunal Act empowers the Tribunal, upon setting aside a decision, either to make a substitute decision or to refer the matter to the Commissioner for reconsideration in accordance with the Tribunal's directions or recommendations. 9. In **Njeri v Commissioner of Customs & Border Control (Customs Tax Appeal E001 of 2023) [2024] KEHC 7800 (KLR),** the High Court considered that provision and confirmed that the Tribunal acts within its statutory jurisdiction when it refers a matter back to the Commissioner for reconsideration. 10. The Tribunal observes that referral is appropriate where the impugned methodology cannot stand but the evidential record does not permit the Tribunal to substitute the correct assessment. That is the position here. The Respondent must test the expenses against sections 15 and 16 of the Income Tax Act using an identifiable and reasoned methodology. 11. Having found that the Appellant presented relevant documents which are central to the determination of the correct tax position, the Tribunal finds that the Respondent did not have the benefit of considering the complete set of documents now placed before the Tribunal and therefore should be given an opportunity to consider them in computing the assessments afresh. **DETERMINATION** 1. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is merited and proceeds to issue the following Orders: - 2. The Appeal be and is hereby allowed. 3. The Objection decision dated 17th April 2025 be and is hereby set aside. 4. The matter is referred back to the Respondent to review the documents provided by the Appellant and make a fresh Objection decision within 60 days of the date of delivery of this Judgment. 5. It is so ordered. d) Each party to bear its own cost. **DATED AND DELIVERED AT NAIROBI THIS 27TH DAY OF JULY 2026.** **……………………………..….** **ROBERT M. MUTUMA** **CHAIRMAN** **……………………………… ……..….……..……………..** **JIMMY M. MALLA. GLORIA A. OGAGA MEMBER MEMBER** **………………………………** **TIMOTHY VIKIRU** **MEMBER**