https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1607

Osho Drapers Ltd v Commissioner of Domestic Taxes (Civil Appeal E214 of 2022) [2026] KECA 1607 (KLR) (31 July 2026) (Judgment) Neutral citation: [2026] KECA 1607 (KLR) Republic of Kenya In the Court of Appeal at Nairobi Civil Appeal E214 of 2022 DK Musinga, P Lilan & JO Okello, JJA July 31, 2026 Between Osho Drapers Limited Appellant and Commissioner of Domestic Taxes Respondent (Being an appeal from the Judgment and Decree of the High Court of Kenya at Nairobi (A. Mabeya J.) delivered on 18th March, 2022inHCCOMMITA No. E147 of 2020) Judgment 1.This appeal by Osho Drapers Limited (“the appellant”) originated from a Notice of Assessment of tax dated 7th April, 2018 issued by the Commissioner of Domestic Taxes (“the respondent”) disallowing purchases amounting to Kshs 11,224,259.00 and demanding the payment of VAT tax by the appellant of Kshs 1,795,881.00. Corporation tax assessments were issued later on 3rd, 4th and 7th May, 2018 demanding payment of Kshs. 3,367,278.00 for corporation tax. Both assessments and demands were for the period of July, 2015 to May, 2017. The appellant objected to the assessment by way of a Notice of Objection dated 20th May, 2018 and after reviewing the appellant’s objection, the respondent upheld the assessment in a Notice of Confirmation of Assessment dated 11th July, 2018. for both VAT and corporation tax. 2.The appellant proffered an appeal to the Tax Appeals Tribunal (“the Tribunal”) on 10th August, 2018 being Appeal No. 159 of 2018. In its judgment of 9th October, 2020, the Tribunal dismissed the appeal and confirmed the assessed amounts for both VAT and corporation tax. 3.Dissatisfied with the Tribunal’s judgment, the appellant appealed to the High Court on 8th December, 2020. The appeal to the High Court was founded on six grounds which the trial court summarized into three —a.that the tribunal erred in finding that the appellant did not furnish sufficient proof of purchase, hence failed to discharge its burden to the satisfaction of the respondent of proving that it purchased supplies;b.the tribunal misdirected itself and therefore arrived at the wrong conclusion on the doctrine of proof under section 30 of the Tax Appeals Tribunal Act; andc.the tribunal erred in upholding the respondent’s assessment of both VAT and corporation tax. 4.The High Court (“trial court”) dismissed the appeal and upheld the judgment of the Tribunal. The trial court, while dismissing the appeal, observed that when additional documents were requested by the respondent, the appellant was unable to provide the same. The trial court established that the discrepancies on the mode of payment is all apparent. Additional evidence such as stock control records and bank statements of the respective payments made vide cheques ought to have been supplied, the trial court stated. Without provision of such documents, the suspicion raised by the varying modes of payments persisted, hence both the respondent and the Tribunal justly found that the appellant failed to sufficiently discharge its burden of proof. The trial court, therefore, dismissed the appeal with costs. 5.Aggrieved by the decision, the appellant appealed to this Court and has raised five grounds of appeal in its memorandum of appeal dated 12th April, 2022. The grounds of appeal are summarized thus: that the learned Judge erred in law in finding that the documentation, as provided by the appellant to the respondent, were not sufficient proof for actual delivery; that the learned Judge erred in law in finding that the appellant failed to discharge the burden of proof placed upon him by statute; that the learned Judge erred in law and fact by finding that the respondent’s redundancy exercise was genuine; that the learned Judge erred in law in failing to consider the appellant’s evidence and the submissions of the appellant; the learned Judge erred in law and fact by failing to take into account peculiar terms of relationship between the appellant and the respondent as against the redundancy claim; that the learned judge erred in law in upholding the respondent’s assessment dated 17th April, 2018 for Kshs 1,795,881.00 and Kshs 3,367,278.00 being VAT and Income Tax respectively; and that the learned judge erred in law in awarding costs of the appeal at the superior court. 6.The appellant prays that the entire judgment dated 18th March, 2022 be set aside; that the respondent’s additional assessment dated 17th April, 2018 in respect of Kshs 1,795,881.00 as VAT and kshs 3,367,278.00 as corporation tax be vacated; and the respondent to bear the costs of this appeal, those of the superior court and those of the tribunal. 7.The appeal was heard on 4th March, 2026 on this Court’s virtual platform when learned counsel, Mr. Mbaye, appeared for the appellant, while learned counsel, Ms. Ng’ang’a, appeared for the respondent. The appellant relied on its written submissions dated 23rd February, 2026 and made oral highlights of the same, while the respondent relied on its submissions dated 3rd March, 2026 also highlighted them. 8.The appellant in its submissions identified two issues for determination from its appeal. The issues identified are—a.whether the respondent’s additional assessment of the VAT of Kshs 1,795,881.00 and corporation tax of Kshs 3,367,278.00 is valid?b.whether the respondent has proven the existence of fraud in the impugned transactions? 9.On the first issue on the validity of the assessed amounts for VAT and corporation tax, it was submitted on behalf of the respondent that the issue revolved around the ‘missing trader fraud’ and related carousel fraud. This, it submitted, is the theft of VAT from government where the fraudster charges VAT on the sale of goods and then absconds, taking the VAT with them instead of paying it to the government’s collection authority. The appellantsubmitted that since the law does not define a “missing trader”, the respondent, who is the custodian of ETR system that runs the VAT collection and management, must fail in its attempt to blame the appellant for the missing trader’s phenomenon. 10.It is further submitted on behalf of the appellant that unless the respondent can demonstrate on an intermediate standard of proof that the transactions done by the appellant are vitiated by VAT fraud within the meaning of the Act, the respondent is estopped from demanding taxes from the appellant where the taxes have not crystalized. The appellant cited the case of Commissioner of Domestic Taxes vs Ernie Campbell &__ Company Limited,__ Commercial Case E065 of 2020 [2024] KEHC 1405. 11.It is further submitted on behalf of the appellant that the burden of proof in tax matters is not stationary but swings between the taxpayer and the taxman at different points, but more times than not swings towards the taxpayer. The appellant avers that the taxpayer has the initial burden of proving that they submitted all the necessary documentation to support its case, or prove that an assessment is excessive, or a tax decision is incorrect as per section 30 of the Tax Appeals Tribunal Act and section 56 of the Tax Procedures Act. Once the taxpayer adduces evidence that discharges the taxpayer’s burden, the burden shifts to the Commissioner. 12.The appellant contends that it discharged its evidential burden imposed by statute by producing primary transactional documents demonstrating commercial reality, including VAT invoices, delivery notes, and payment acknowledgments. Once this evidence was placed before the respondent, the appellant avers, the evidential burden shifted to the respondent. The appellant avers that the disallowance of VAT by the respondent was not grounded on proof of non-supply, but on an inconsistency in the description of the mode of payment. The appellant concludes by averring that it had discharged its evidential burden by showing that the input tax had been deducted and therefore the burden swung to the respondent to disapprove this. 13.On the second issue relating to the existence of fraud in the impugned transactions, it was submitted on behalf of the appellant that the respondent merely alleged fraud, but did not prove fraud to the requisite standard. That by the respondent alleging missing trader fraud, the standard of proof in cases involving allegations of fraud is higher than the balance of probabilities but lower than beyond a reasonable doubt. The appellant submitted that the respondent having deducted purchase expenses to determine its taxable income as allowed under section 15(1) of the Income Tax Act, cannot be denied its legal entitlement based on an unproven claim that it acquired fraudulent ETR invoices from missing traders. 14.The appellant further contends that what is in dispute in this case is the mode of payment (cash/cheque), not that payments, which attract a credit for input VAT, were actually made. It further submitted that the documentation which it provided support the idea that a commercial transaction that payments were made, delivery notes show that goods moved, ETR invoices show that VAT was properly accounted for, and payment acknowledgement receipts show that consideration was received. They contend that in the present case, what is in contention is an inconsistency in payment description and this does not negate supply, value, or VAT declaration. The appellant concludes by urging this Court to allow the appeal with costs and set aside the trial court’s judgment. 15.The appeal is opposed. The respondent has crafted two issues which it has addressed in its submissions. The issues are —a.whether the respondent’s additional assessment of Kshs 1,795,881.00 and Kshs 3,367,278.00 corporation tax is valid; andb.whether the respondent has proven the existence of fraud in the impugned transactions. 16.On the issue of validity of additional assessment in relation to VAT and corporation tax, it was submitted on behalf of the respondent that the appellant had not proved to the satisfaction of the respondent that it had received supplies from four companies, which the respondent had established to be missing traders. The respondent submitted that from its investigations, it had established that the appellant was a beneficiary of the missing trader’s fraud. In this scheme, it submitted, businesses which registered for VAT obtain fictitious invoices. The invoices are introduced into their business purchase-records with the sole purpose of illegally reducing the rightful VAT payments.They further submitted that the fictitious invoices are generated to depict a business transaction, whereas there is no actual supply/movement of goods and services, so that at the end of the day, there is no commercial transaction or value. 17.In the instant case, the respondent contends that the appellant claimed VAT in the months of July, 2015 to May, 2017 from invoices acquired from the four companies which were missing traders. Based on this claim, the respondent invited the appellant to demonstrate and prove that it bought and received the supplies from the impugned suppliers, and the appellant failed in this respect. The respondent contended that when the appellant was requested to supply documents in support of their claim for input VAT, the appellant responded by providing copies of supplier invoices, delivery notes and payment receipts. The respondent avers that it expected to see purchase orders, pro- forma invoices, delivery notes, and inspection reports, among others. None of these documents were forthcoming, according to the respondent. The respondent relies on section 59 of the Tax Procedures Act which gives it power to request production of additional information which can fully satisfy it if it is of the view that the information given is insufficient. The respondent further relies on section 43 of the VAT Act, 2013 which require the appellant to keep transactional records for a period of five years. 18.On this issue, the respondent closes its submission by averring that the appellant failed to provide the requested documents. This, in the respondent’s view, meant that the documents were non-existent because the transactions did not take place in the first instance, and that this indicated knowledge on the appellant’s part that the said impugned transactions were orchestrated and fraudulent. The respondent submitted that based on this failure, the appellant did not discharge its burden, and thus did not prove that it had purchased the said supplies. The respondent relies on the South Africa case of MetcashTrading Limited vs Commissioner for the South African Revenue Service and Another CCT 3/2000. It also relies on the case of Commissioner of Domestic Taxes vs Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR). 19.On the second issue, that is, whether the respondent has proven existence of fraud in the impugned transactions, the respondent submitted that it was incumbent on the appellant to show that the transactions leading to the claim for VAT took place. That it is not enough to merely possess documentation, the documentation must be supported by an underlying transaction, and the taxpayer must furnish proof that there was actual purchase. It further contends that the documents furnished must satisfy the Commissioner. In this case, the respondent submitted, the burden of proof was on the appellant to prove that the transactions were genuine. The respondent avers that the respondent did not discharge this burden because it failed to provide additional documents as requested. 20.The respondent closes its submissions by urging this Court to dismiss the appeal with costs and uphold the judgment of the High Court. 21.This is a second appeal and therefore, this Court’s mandate is strictly limited to reviewing matters of law and substantial procedural errors. Rarely will it re-evaluate matters of facts, and may only interfere with factual findings if the lower courts considered matters, they shouldn't have, ignored crucial evidence, or made conclusions that no reasonable tribunal could possibly make. In Kenya Breweries Ltd vs Geofrey Odoyo [2010] eKLR, the Court held thus:“In a second appeal however, such as this one before us, we have to resist the temptation of delving into matters of facts. This Court in a second appeal, confines itself to matters of law unless it is shown that the two courts below considered matters, they should not have considered or failed to consider matters they should have considered or looking at the entire decision, it is perverse.” 22.Further, section 56(2) of the Tax Procedures Act provides that an appeal to the High Court or to the Court of Appeal shall be on a question of law. Section 56(3) continues by providing that in an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely on the grounds stated in the objection to which the decision relates, unless the Tribunal or Court allows the person to add new grounds. The law and authorities clearly define this Court’s mandate when it comes to appeals being second appeals, and we will not purport to go outside the law. 23.We have carefully considered the record of appeal, the grounds of appeal, the parties’ submissions, the parties oral highlights and the law. We discern the following two issues for determination: -a.whether the appellant discharged its burden of proof that it had expenditures and purchases from third party suppliers to entitle it to claim/deduct input tax and claim a charge on its income in computing its corporation tax; andb.whether the respondent proved to the required standard that the alleged expenditure and purchases were part of a fraudulent scheme, and if so, what the legal effect of such proof is. 24.We shall consider the two issues together because they are intertwined. As already noted from the record of appeal, the issues raised by both the appellant and respondent revolve around the proof by the appellant of the expenditures on purchases from suppliers for purposes of deduction of income and input tax, and proof by the respondent whether the alleged purchases by the appellant were part of a fraudulent scheme. 25.In order to prove expenditure and purchases by a taxpayer, section 15 of the Income Tax and section 17(1) to (3) of the VAT Act come into play. Section 17 of the VAT Act provides —“(1).Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.2.if, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—a.the person does not hold the documentation referred to in subsection (3), andb.the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation; provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred. 3.The documentation for purposes of subsection 2 shall be –a.an original tax invoice issued for the supply or certified copy;b.a customs entry duly certified by the proper officer and a receipt for the payment of tax;c.a customs receipt and a certificate signed by the proper officer stating theamount of tax paid, in the case of goods purchased from a customs auction;d.a credit note in the case of input tax deducted under section 16(2);e.A debit note in the case of input tax deducted under section 16(5); or 26.In the case of a participant in the Open Tender System for the importation of petroleum products that have been cleared through a non-bonded facility, the custom entry showing the name and PIN of the winner of the tender and the name of the other oil marketing company participating in the tender.” Then Section 2 of the Act then defines input tax and output tax thus —“input tax” means –a.tax paid or payable on the supply to a registered person of any goods or services to be used by him for the purposes of his business; andb.tax paid by a registered person on the importation of goods or services to be used by him for the purposes of his business;“output tax” means tax which is due on taxable supplies;” 27.From the above definitions, and for purposes of the instant appeal, the appellant had purchased goods from a registered supplier. Thus, output tax refers to the VAT charged on the sales of taxable goods or services, while input tax is the VAT charged on taxable purchases of goods and services for business purposes. The tax payable, therefore, is the difference between the output tax and input tax. 28.Section 56(1) of the Tax Procedure Act, another central legislation in this case, places the burden of proof upon a taxpayer to prove that any computation of tax or a tax decision in this regard is incorrect, while section 30 of the Tax Appeals Tribunal Act further lays the burden of proof on tax liability on the appellant where an appeal relates to an assessment and the appellant is of the view that the assessment is excessive; or in any other case, that the tax decision should not have been made or should have been made differently. 29.In order for the claim by the appellant to succeed, the taxpayer must submit the documents outlined in section 17 of the VAT Act. The documents required are particularized under section 17(3). A critical look at section 17 reveals that for a person to claim input VAT, there must be a purchase of taxable supply, and in order to support one’s claim, the documents submitted under section 17(2) must be supported by an underlying transaction, and the taxpayer must furnish proof that there was an actual transaction. 30.The trial court while sitting on appeal had this to say in relation to the documentations provided by the appellant—“The appellant properly supplied the documents set out in section 17(3) of the VAT Act. However, there was some discrepancies in the documents that it produced to support the taxable supplies. According to those documents, some payments indicated that they were made in cash, but the invoices were stamped as paid in cheque. No further cheque details were provided.When requested for additional documents, the appellant was unable to provide the same. This court has carefully perused documents furnished, the discrepancies on the mode of payment is all apparent. Additional documents such as stock control records and bank statements of the respective payments made vide cheques ought to have been supplied. Without provision of such documents, the suspicion raised by the varying mode of payments persisted, hence both the respondent and Tribunal justly found the that the appellant failed to sufficiently discharge its burden of proof.” 31.The appellant avers that it was able to provide the documentation required under section 17(3) by producing primary transactional documents demonstrating commercial reality, namely, VAT invoices, delivery notes and payment acknowledgments. This far, we find that the appellant had discharged the evidential burden imposed by statute and thus the burden shifted to the respondent. In the case of Pearl Industries Limited vs. Commissioner of Investigations and Enforcement, [2026] KECA 962 (KLR), by a majority decision, the Court stated that where a taxpayer complies with the provisions of Section 15 of the Income Tax Act and Section 17 of the Value Added Tax (VAT) Act by producing documentary evidence demonstrating that the expenditure was wholly and exclusively incurred in the production of income, the evidential burden does not remain static. In the instant case then, upon submission of the primary documents, the evidentiary burden shifted to the respondent. 32.The respondent, while disallowing the purchases by the appellant and further issuing a notice of assessment, averred that the appellant was not able to provide additional evidence to prove that there was an actual transaction, that this was a case of missing trader’s fraud. The respondents submitted that the respondent disallowed the appellant’s claim on the basis that the purchases are purported to have been supplied by persons investigated by the respondent and found to be involved in a tax fraud scheme of printing and selling the respective invoices without actual supply of goods. The notice of assessment was thus issued to the appellant on grounds that there was no delivery of goods to the appellant by their supplier. The appellant, the respondent submitted, is a beneficiary of the missing trader’s fraud. Section 59 of the Tax Procedures Act as read together with section 43 of the VAT Act mandates the respondent to request for more and additional information to satisfy himself on the taxable income declared. The respondent was thus within its powers to request for additional documents if it was habouring any doubt that a transaction ever occurred. As soon as the request was made, the burden of proof shifted back to the appellant to discharge it by providing additional documents to prove its case. This, the appellant failed to do, despite being requested and reminded severally. Indeed, the moment doubt was raised in the mind of the respondent on the mode of payment, the appellant ought to have provided further supportive documents to establish that there were actual transactions underlying their claim for input VAT. The appellant in its submission avers that they submitted the documentations as required under section 17(3) of the VAT Act, a fact that the respondent acknowledged 33.The claim for input VAT is based on a transaction taking place and not mere submission of documents. Sections 17 and 43 of the VAT Act, as read together with section 59 of the Tax Procedure Act, make it clear that there must be a transaction that forms a basis for claiming the input tax. This claim is established by producing particular documents as prescribed by law. The law further gives the Commissioner the power to call for additional documentation if the Commissioner doubts the authenticity of any documents. Accordingly, there was nothing difficult for the respondent to submit additional documents when requested, if at all they existed. The appellant did not attempt to assuage the fears of the respondent as to the conflicting mode of payment, where at one point there is statement that payment was made in cash and in another, payment was made in both cash and cheque. The moment this doubt was raised in the mind of the respondent, the appellant ought to have discharged its burden by submitting additional records to prove that the transaction, the basis upon which tax is chargeable, actually took place. The appellant was under legal duty to make solid proof that the transactions actually took place. It is not enough to purport to shift the burden to the respondent. We therefore agree with the findings of the trial court and the Tribunal that the respondent did not discharge its burden, and we see no reason to interfere with the trial court’s finding. The burden of proof had not shifted back to the respondent. 34.On the second aspect of missing trader fraud, it’s important to note that once the respondent has placed the required documents before the Commissioner, the burden shifts to the Commissioner to demonstrate that the documents produced are not genuine, are unreliable, or are otherwise tainted by fraud or misrepresentation. Mere suspicion, inference drawn from the inability to trace suppliers, or reliance on the so-called “missing trader” concept, is insufficient to displace properly adduced documentary evidence. In this regard, in Pearl Industries Limited vs Commissioner of Investigations and Enforcement, (supra), this Court reaffirmed that tax assessments and disallowances must be anchored on evidence and statutory authority, and not on presumptions that effectively reverse the burden of proof onto a Taxpayer without legal basis. The Court reinforced the principle that the pendulum of proof stops with the respondent once a Taxpayer complies with the provisions of Section 15 of the Income Tax Act and Section 17 of the Value Added Tax (VAT). In the instant case though, the doubt as to authenticity of the documents submitted arose because of the discrepancies in the mode of payment. Some invoices reflected payment in cash, while others showed payment in cheque. The respondent was under a legal duty to establish and lay a credible evidential foundation in order to effectively discharge the burden and have it swing back to the respondent. Section 43 of the VAT Act is apt in this regard. It provides—“(1)Every registered person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.2.The records to be kept under subsection (1) shall include—a.copies of all tax invoices and simplified tax invoices issued in serial number order;b.copies of all credit and debit notes issued, receipts for the payment of customs duty or tax, and credit noted received, to be filed chronological order;c.copies of all credit and debit notes issued, in chronologically either by date of receipt or under each supplier’s name;d.details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;e.tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;f.copies of stock records kept periodically as the Commissioner may determine;g.details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; andh.such other accounts or records as may be specified, in writing, by the Commissioner.” 35.A clear reading of the above provisions, clearly demonstrates that the respondent acted within its powers to call for additional documentations as soon as doubt was raised on the authenticity of the submitted documents. The appellant ought to have produced further supportive documents, including bank statements or cleared cheques, to buttress its claim. Failure to do so was fatal and just exacerbated the doubts that were on the Commissioner’s mind. We therefore see no reason, again, to interfere with the trial court’s findings. 36.In view of the conclusions arrived at on the issues addressed, we find no reason to interfere with the trial court’s findings. The trial court considered the totality of the material before it and arrived at the correct conclusion by dismissing the appeal. 37.Thus, having considered the record of appeal, the impugned judgment, the parties’ submissions, the oral highlights by counsel, the authorities cited and the law, we are persuaded that this appeal lacks merit. 38.Consequently, the appeal is dismissed with costs. DATED AND DELIVERED AT NAIROBI THIS 31ST DAY OF JULY 2026.D. K. MUSINGAJUDGE OF APPEAL.....................................PAUL LILANJUDGE OF APPEAL........................................DR. J. O. OKELLOJUDGE OF APPEALI certify that this is a true copy of the original.SignedDEPUTY REGISTRAR.