[2025] KETAT 207 (KLR)

Ndungu v Commissioner for Investigations & Enforcements (Tax Appeal E564 of 2024) [2025] KETAT 207 (KLR) (4 April 2025) (Judgment)

Neutral citation: [2025] KETAT 207 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E564 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

April 4, 2025

Between

Juliet Mukami Ndungu

Appellant

and

Commissioner for Investigations & Enforcements

Respondent

Judgment

Background 1. The Appellant is an individual carrying out business within the Republic of Kenya. The Appellant is an Advocate of the High Court by profession and a director of Vertical Communication Company Limited. The Appellant also engages in several business ventures.

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 issued income tax and VAT additional assessments on 9th January 2024 but dated 9th January 2023 for the sum of Kshs. 81,813,257. 00 for the period 2018 to 2022 and the Appellant objected to the assessment on 19th February 2024.

4. Upon considering the notice of objection, the Respondent issued its objection decision on 28th March 2024 confirming the assessment as issued. Aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal dated 25th April, 2024 on even date.

The Appeal 5. The Appellant filed its Memorandum of Appeal dated 22nd May 2024 and filed on 25th May 2024 on the following grounds:i.That the Appellant disputes the reasons that the Respondent gave for the total rejection of the tax objection that the Appellant did not provide the supporting documents.ii.That the Appellant had fully complied with the Respondents requirements and provided the necessary documentation and explanations for validation.iii.That the Respondent erred in law and fact by failing to consider that the account they used to make the decision was not a personal account but a client account considering the Appellant is a practicing Advocate and handles clients’ funds.iv.That the Respondent erred in law and fact in making a decision without considering the documents necessary to access the account which the Appellant is in a position and attached to her statement of fact.v.That the Respondent erred in law and fact by failing to diligently assess the taxable income of the Appellant in form of salary excluding the monies deposited in the client account for sale of land, survey work and obtaining titles on behalf of third-party purchasers.vi.That the Respondent erred in law and fact by violating the Appellant's legitimate expectations and the right to fair administrative action.vii.That the matter be reviewed and the correct tax position be determined in respect to the matter.viii.That the Respondent demanded an amount that is not only erroneous, excessive, punitive and beyond the ability of the Appellant to pay contrary to the cannon of taxation.

Appellant’s Case 6. The Appellant’s appeal is premised on Statement of Facts dated 22nd May 2024 and filed on 25th May 2024. Whereas the Appellant was granted opportunity to file written submissions on or before 27th January 2025, the Appellant failed to do so and therefore, her case is premised on her pleadings.

7. The Appellant stated that she objected to a tax liability amounting to Kshs 81,813,257. 00 According to the Appellant, the Respondent treated most banking as undeclared taxable income as has been illustrated in the summary of bankings attached.

8. The Appellant posited that the firm of J. M. Theuri & Associates practices law of conveyancing and receives money on behalf of clients in the client account for sale of land. The Appellant also appoints surveyors to subdivide and obtain title on behalf of the client. In addition, the Appellant stated that she is also engaged in general trade with another director by the name Gladys Maisiba in Vertical Communication Limited and that the Appellant had been filing returns consistently.

9. The Appellant asserted that the initial investigation was based on a client account and the Respondent did not consider the documents that clearly state that funds were client funds and not in Appellant’s individual income.

10. The Appellant stated that the bank statement contained bounced/cancelled transactions which were not eliminated during the determination of taxable income.

11. The Appellant averred that she had fully complied and provided the necessary documentation for valuation, nevertheless, the Respondent raised an additional assessment and confirmed the same upon objection and is fully aware of the material facts of the issue at hand.

12. Consequently, the Appellant prayed that the Appeal be allowed.

Respondent’s Case 13. The Respondent’s case is premised on its Statement of Facts dated 30th September 2024 and filed on 1st October 2024 and its written submissions dated 7th January 2025 and filed on 14th January 2025.

14. In response to the appeal, the Respondent stated that it relied on the Appellant's bank statements, i-Tax declarations from its customers and import data. The Respondent stated that the data in the above sources was reviewed by the Respondent to ascertain the taxable income.

15. The Respondent averred that the Appellant was receiving professional practice income in her account number held at NCBA Bank.

16. It stated that the Appellant had sold vatable supplies amounting to Kshs 104,664,441. 00 for the period 2018-2022.

17. The Respondent posited that in the year 2019, the Appellant imported sugar worth Kshs 19,625,687. 00 and made an income tax declaration of Kshs. 2,015,093. 00. According to the Respondent, in 2020 and 2021, the Appellant made declarations of Kshs 10,000. 00 and nil declarations therefore, the Respondent presumed that the sales for the sugar were not reported.

18. In the objection decision, the Respondent upheld the assessment on the basis that the Appellant failed to avail documentation in support of the Objection.

19. The Respondent pleaded that as a result of the Appellant's failure to avail documents rendered the Respondent in a position where it was unable to consider all of the claims raised in the objection. It relied on Section 51(3) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) to argue that the Appellant had a duty to avail the necessary documents to support its the notice of objection but the Appellant failed to support its case.

20. That whereas the Appellant faulted the Respondent in her objection for determining that 30% of her gross banking deposits were professional banking income and that the Appellant in support of this availed a schedule indicating deposits that were legal fees, the Respondent averred that the Appellant failed to avail further documentation to confirm that it was the actual legal fees. The Respondent maintained that the tabulated list was not sufficient evidence to demonstrate professional fees paid.

21. That whereas the Appellant faulted the Respondent for taxing non-revenue deposits in her bank account and availed an excel document itemizing non-revenue deposits, the Respondent noted that the Appellant did not avail further documents in support of this claim.

22. The Respondent stated that burden of proof that an assessment is excessive and/or erroneous lies with the Appellant. The Respondent emphasized that in the absence of documents it was left with no option but to rely on information available to it. As such therefore it was the Respondent's case that its decision is not flawed as averred by the Appellant.

23. The Respondent relied Section 59 (1) of the TPA, Section 54A of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) and Section 23 of the TPA to assert that the taxpayers must keep records and produce them when needed but the Appellant failed to produce them. It therefore maintained that the Appellant failed to discharge the burden of proof as provided for under Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”).

24. Further, the Respondent submitted that its assessments were based on available information therefore, the assessments were proper and in accordance with the law. That in the case of Commissioner of Domestic Taxes v Altech Stream (EA) Limited [2021] eKLR the Court held that Section 31(1) of the TPA allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.

25. It submitted that the use of the banking analysis test/banking deposit method of proving income is legitimate and universally acceptable and relied on the case of Digital Box Limited v Commissioner of Domestic Taxes TAT Appeal No. 115 of 2017 where the Tribunal found that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment.

26. The Respondent further supported its case by relying on Boleyn InternationalLimited v Commissioner of Investigations & Enforcement (Tax Appeal Tribunal No 55 of 2019); and Rongai Tiles and Sanitary Ware Limited v Commissioner of Domestic Taxes (Tax Appeals Tribunal No 163 of 2017) where it was held that the taxpayer has to provide documents in support of the objection as required under Section 51(3) of the TPA.

27. That in the case of Osho Drapers Limited v Commissioner of Domestic Taxes [2022l eKLR, the court held that Section 59 of the TPA empowers the Commissioner to request for more and additional information to satisfy himself on the taxable income declared.

28. The Respondent also relied on Midland Emporium Limited v Commissioner of Domestic Taxes TAT 1137 of 2022 to submit that the taxpayer ought to maintain records.

Issues For Determination 29. The Tribunal having considered the pleadings puts forth the following single issue for determination:Whether the Appellant discharged her burden of proving that the Respondent’s decision dated 28th March 2024 was incorrect.

Analysis And Findings 30. The Tribunal will proceed to analyse the issue identified for determination hereinunder:Whether the Appellant discharged her burden of proving that the Respondent’s decision dated 28th March 2024 was incorrect.

31. The Tribunal noted that whereas the Respondent issued income tax and VAT additional assessments through a letter dated 9th January 2023, the Respondent in its statement of facts indicated that the assessment was issued on 9th January 2024. The Tribunal further noted that the Appellant lodged her notice of objection on 19th February 2024. However, the Appellant did not raise an issue about the conflicting dates of assessment. The view of the Tribunal is that the date of 9th January 2023 as indicated in the letter issuing the assessment was a typographical error. This is because the execution part of the letter had a stamp indicating that the letter was executed in January 2024. Accordingly, the date of the assessment was 9th January 2024.

32. The Tribunal notes the Appellant’s assertions that she had fully complied with the Respondent’s requirements and provided the necessary documentation and explanations in support of the notice of objection while the Respondent ignored the same. On the other hand, the Respondent argued that the Appellant failed to provide documents to support its objection contrary to the provisions of Section 51(3) of the TPA and that therefore, it had no option but to confirm the assessments in full. The following provisions of Section 56(1) of TPA place the burden of proving that a tax decision is incorrect on a taxpayer:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.’’

33. To view of the Tribunal is that in order for a taxpayer to discharge its/her /his burden of proving that a tax decision is incorrect, a taxpayer must adduce documents to support her notice of objection. The taxpayer must also keep records for a period of time as outlined by the following provisions of Section 23 (1)(b) of the TPA:“a person shall—(b)maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained.’’(c)subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

34. The Tribunal further notes the following provisions of Section 51(3) (c) of the TPA which require a taxpayer to adduce documents in support of the objection:“a notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—all the relevant documents relating to the objection have been submitted.’’

35. In addition, Section 59(1) of the TPA gives the Respondent powers to demand production of documents to determine tax liability of a taxpayer. It provides as follows:“(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorized officer may require any person, by notice in writing, to—(a)Produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)Furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice.’’

36. The Tribunal infers that the provisions of Sections 23, 51(3) and Section 59 of the TPA were enacted to assist a taxpayer in the parameters within which it can discharge its burden of proof. Further, the Tribunal notes that Kenya having adopted a self-assessment regime makes it incumbent upon a taxpayer to produce documents to demonstrate that the Respondent’s assessment is erroneous. In the High Court case of Commissioner of Domestic Taxes v Metoxide Limited (Income Tax Appeal E100 of 2020) [2021] KEHC 3 (KLR), the Court held as follows:“15. ...section 56(1) of the Tax Procedures Act provides that; the taxpayer has the burden of proving that a tax decision is incorrect.16. It is common knowledge that, the Kenyan system of taxation is based on self-assessment. The tax payer assesses self and remits what he/it considers to be the tax due to the tax authorities.17. In this regard, the tax laws mandate the appellant to later on assess the tax payer in order to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment is made years after the tax has fallen due and been paid or the economic activity or commercial transaction for which the tax arises has been undertaken. It is for this reason that the tax laws in this country shoulder the tax payer with the burden of disproving the correctness of the appellant’s tax decision.’’

37. The Tribunal is of the view that a taxpayer’s mandate of adducing documentary evidence does not terminate at the beginning of the dispute, which is the objection stage. When a taxpayer appeals against the objection decision, a taxpayer is still expected to discharge its/her/his burden of proof before the Tribunal. The following provisions of Section 30 of the TATA also place the burden of proof upon a taxpayer:“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.’’

38. The further view of the Tribunal is that a taxpayer adduce evidence to support her/his/its appeal to enable the Tribunal to decide or make a determination on the appeal. Section 13(2) of the TATA provides as follows:“The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)A memorandum of appeal;(b)Statements of facts;(c)The appealable decision; and(d)Such other documents as may be necessary to enable the Tribunal to make a decision on the appeal.’’ (emphasis is ours).

39. The Tribunal carefully examined the Appellant’s pleadings in view of the provisions of Section 23 and 51(3) of TPA and Section 13(2) of TATA and noted that whereas the Appellant referred to documentary evidence, the same were not on record.

40. The Tribunal also notes that whereas the Appellant averred that the firm of J. M. Theuri and Associates is a law practice specialising conveyancing [property and land transactions] and receives money on behalf of its clients in its client account and that her bank statement contained bounced/cancelled transactions which were not eliminated during the determination of taxable income, the Appellant did not file a bank statement to prove these averments.

41. The Tribunal also notes that the Appellant averred that she is also engaged in general trade with another director by the name Gladys Maisiba in a company known as Vertical Communication Limited and that she has been filing returns consistently. However, the Appellant did not adduce evidence to support this position.

42. The Tribunal notes the assertion of the Appellant that the initial investigation was based on a client account and the Respondent did not consider the documents that clearly stated that funds were client funds and not the Appellant’s individual income, the Appellant did not file documents to prove her position on this. The Appellant also referred to sale agreements for the purchase of land, but the said agreements were also not adduced as evidence at any stage of the dispute.

43. The Tribunal notes the averment by the Appellant that the Respondent erred in law and fact by violating her legitimate expectation and the right to fair administrative action but failed to demonstrate how the Respondent breached her legitimate expectation and right to fair administrative action. In this regard, the Court of Appeal in the case of Anarita Karimi Njeru v Republic [1979] KECA 12 (KLR) the court held as follows:“Constitutional violations must be pleaded with a reasonable degree of precision.”

44. The Tribunal notes that throughout her pleadings, the Appellant’s assertions are unsubstantiated and Consequently, the Tribunal is persuaded that the Appellant failed to discharge her burden of proving that the Respondent’s decision dated 28th March 2024 was incorrect.

Final Decision 45. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal lacks merit and proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 28th March 2024 be and is hereby upheld.c.Each party to bear its own cost.

46. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 4TH DAY OF APRIL 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER