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Pearl Industries Ltd v Commissioner of Investigations & Enforcement (Civil Appeal E101 of 2022) [2026] KECA 962 (KLR) (15 May 2026) (Judgment) (with dissent - F Tuiyott, JA) Neutral citation: [2026] KECA 962 (KLR) Republic of Kenya In the Court of Appeal at Nairobi Civil Appeal E101 of 2022 J Mohammed, F Tuiyott & P Nyamweya, JJA May 15, 2026 Between Pearl Industries Ltd Appellant and Commissioner of Investigations & Enforcement Respondent (An appeal from the Judgment and Decree of the High Court of Kenya at Nairobi (D.S. Majanja J.) dated 31st January 2022 in Tax Appeal No. E086 of 2020 Originating from the Tax Appeal Tribunal at Nairobi in Tax Appeal Tribunal Appeal No. 116 of 2018 Tax Appeal E086 of 2020 ) Judgment Judgment Of Nyamweya JA 1.The appeal to this Court by Pearl Industries Limited (“the appellant”) has its origin in a Notice of Assessment of tax dated 23rd March 2018 issued by the Commissioner of Investigation and Enforcement (“the respondent”) demanding the payment of additional tax by the appellant of Kshs 306,051,182/- and Kshs 166,512,947/- for Corporation Tax and Value Added Tax (VAT) respectively. The respondent claimed that the additional tax was due after conducting an investigation of the appellant company for the period 2012 to 2017. The appellant objected to the assessment by way of a Notice of Objection dated 23rd April 2018, and the respondent, after reviewing the appellant’s objection, upheld the assessment in a Notice of Confirmation of Assessment decision dated 26th June 2018. 2.Being dissatisfied, the appellant by a letter dated 26th June 2018 and Memorandum of Appeal dated 23rd July 2018 appealed to the Tax Appeals Tribunal in Tax Appeal No 116 of 2018, on the grounds that the respondent charged allowable purchases, which do not constitute chargeable income under the Income Tax Act; disallowed input VAT based on non- compliance by the company suppliers; and applied a tax shortfall penalty on non-compliance of tax by the company suppliers. The Tax Appeals Tribunal delivered a judgment on 21st August 2020, in which it found that the appellant supplied information evidencing that it indeed purchased goods from registered persons prior to claiming input tax. Furthermore, that in addition to the list of documents provided under section 17 of the VAT Act, the appellant also provided bank statements which indicated payments to the suppliers, and having discharged its burden of proving that there were purchases and supplies, the onus shifted to the respondent to support the averments that the invoices were not genuine, and that the payments did not clearly indicate to whom the payments in the bank statements were made. Lastly, that the respondent failed to table evidence that some of the traders whose invoices the appellant used were not registered for VAT and did not submit VAT to the Treasury, or to prove that the appellant knew or ought to have known that its suppliers were involved in fraud. The Tribunal accordingly found that the respondent erred in disallowing input tax and costs of sales in the computation of Corporation income tax, allowed the appellant’s appeal, and quashed the demand contained in the Objection Decision dated 26th June 2018. 3.The respondent subsequently challenged the Tribunal’s decision in an appeal filed in the High Court at Nairobi in Tax Appeal No. E086 of 2020. On 31st January 2022, D.S Majanja J. allowed the respondent’s appeal and set aside the Tribunal’s judgment for the reason that the Tribunal erred in its application of section 56 and 59 of the Tax Procedures Act and section 30 of the Tax Appeal Tribunal Act, and arrived at a wrong conclusion in the matter, with the result that the assessment issued by the respondent in the Objection Decision dated 26th June 2018 was upheld. The specific findings by the High Court Judge in this regard were that the respondent’s responses on the issue of fraud and the manner it was perpetrated were in great detail and specificity, and that the appellant failed to counter the responses with satisfactory evidence. Thus, that the issue of fraud remained uncontested and was proved, and the appellant failed to discharge its burden of proof as a tax payer as it did not demonstrate how the respondent’s findings were wrong. The learned Judge accordingly found that the appellant could not claim input VAT for purchases that did not happen and from persons that were unregistered and could not make any deductions from its sales (output) VAT or income and the respondent was entitled to charge corporation tax on its income without any deductions of the unproven purchase expenses. 4.These findings precipitated the appeal in this Court, and the appellant has raised nine grounds of appeal in its Memorandum of Appeal dated 4th March 2022. The appellant’s advocates collapsed the said grounds to two issues in their submissions dated 9th December 2024 namely, whether the respondent's additional assessment of the Corporation Tax and VAT was valid, and whether the respondent proved the existence of fraud in the impugned transactions. Additional issues identified by the respondent’s advocates in their submissions dated 6th December 2024, are whether the High Court in its judgement correctly interpreted sections 56 and 59 of the Tax Procedures Act 2015, section 30 of the Tax Appeals Tribunal Act, and sections 17 and 43 of the VAT Act 2013; and whether the High Court correctly found that the appellant could not claim input VAT for purchases that did not happen and from persons that were unregistered. The relevant provisions of sections 56 of the Tax Procedure Act and section 30 of the Tax Appeals Tribunal Act place the burden upon the taxpayer to prove that a tax decision is incorrect or that a tax assessment is excessive; while section 59 of the Tax Procedures Act and section 43 of the VAT Act provides for records to be kept by taxpayers, and section 17 of the VAT Act provides for the manner of crediting of the input tax against the output tax, including the documentation required for deduction of the input tax. 5.The appeal was heard on 18th December 2024 on this Court’s virtual platform, when learned counsel Mr. Mbaye appeared for the appellant, while learned counsel, Mr. Nick Osoro appeared for the respondent and relied on and highlighted their respective submissions dated 9th December 2024 and 6th December 2024. This is a second appeal, and as was held in Kenya Breweries Ltd v Geofrey Odoyo (2010) eKLR:“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. In the case of Stephen Muriungi and another v Republic (1982-88) 1 KAR 360, Chesoni, Acting JA (as he then was) said at page 366:-"We would agree with the view expressed in the English case of Martin v Glywed Distributors Ltd (t/a MBS Fastenings) 1983 ICR 511 that where a right of appeal is confined to questions of law only, an appellate court has loyalty to accept the findings of fact of the lower court(s) and resist the temptation to treat findings of fact as holdings of law or mixed findings of fact and law, and, it should not interfere with the decisions of the trial or first appellate court unless it is apparent that, on the evidence, no reasonable tribunal could have reached that conclusion, which would be the same as holding the decision is bad in law…” 6.Also notable in this respect is section 56 (2) and (3) of the Tax Procedures Act which provides as follows:“(2)An appeal to the High Court or to the Court of Appeal shall be on a question of law only.(3)In an appeal by a taxpayer to the Tribunal, High Court or Court of Appealin relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.” 7.It is evident that 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 tax and input tax, and proof by the respondent of the existence of fraud in the alleged expenditure and purchases. Incidental legal questions cutting across the two issues are the interpretation of the relevant statutory provisions, and the burden and standard of proof that is set by the law on the parties in this regard. The two legal issues therefore arising in this appeal are firstly, whether it was proved to the required legal standards that there were expenditures and purchases made by the appellant from third party suppliers to entitle it to claim a charge on its income in computing its corporation tax and deduct input tax; and secondly whether it was proved to the required standard that the alleged expenditure and purchases were part of a fraudulent scheme, and if so, the legal effect thereof. 8.On the issue of proof of expenditure and purchases by the appellant from third party suppliers and the taxable benefit therefrom, it is not contested that the applicable laws in this regard are section 15 of the Income Tax Act which allows a taxpayer to deduct all expenditure incurred exclusively in the production of income and which is considered as a charge on income in the computation of Corporation Tax; and section 171.to (3) of the VAT Act which provides as follows:“(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 the purposes of subsection(2)shall be—a.an original tax invoice issued for the supply or a 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 the amount of tax paid, in the case of goods purchased from a customs auction; andd.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); orf.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: 9.Output tax refers to the VAT charged on the sales of taxable goods or services, while input tax refers to VAT charged on taxable purchases of goods and services for business purposes. The tax payable is the difference between the output tax and input tax. 10.The provisions of section 56(1) of the Tax Procedures Act place the burden of proof upon a taxpayer to prove that any computation of tax or a tax decision in this regard is incorrect, and section 30 of the Tax Appeals Tribunal Act additionally provides as follows as regards the burden of proof on tax liability:“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; orb.in any other case, that the tax decision should not have been made or should have been made differently.” 11.The appellant therefore bore the burden of proof that the respondent’s additional assessment of the Corporation Tax and Value Added Tax was incorrect by providing the evidence of the expenditures or purchases relied upon to claim deductions on its income and input tax. The appellant’s counsel submitted that by the respondent insisting that the appellant’s suppliers did not actually supply the goods and completely disregarding the documents submitted by the appellant in this regard created grounds not recognised by law for denying the appellant's legitimate input VAT claims. Additionally, the respondent did not specify the documents it stated were required, and once a taxpayer adduces evidence that discharges his burden, the burden shifts to the respondent to demolish such evidence. 12.Furthermore, that despite the respondent explaining the so- called inconsistencies in its evidence, the appellant contended that the issue of fraud was not satisfactorily addressed as no evidence was provided to support the claim of fraud. However, from the evidence on record, the appellant discharged its evidential burden by showing that the input tax had been deducted, and it was up to the respondents to disprove this, which they did not, and the taxes under the assessment cannot therefore be allowed to stand. 13.In response, the respondent’s counsel submitted that despite its various requests for the appellant to provide documentary evidence to support the refund claim, this was not done. Further, that upon a request for information as provided by section 43 of the VAT Act the appellant failed to avail records to the satisfaction of the respondent and the requirement of section 42(2) (b) of the VAT Act that invoices should be issued in respect of supplies only by persons who are registered. The respondent in carrying out its statutory mandate, found out that the appellant’s local purchases were only supported by business and tax invoice (ETR) receipts and other records such as delivery notes and stock records were missing, Therefore, that the respondent disallowed the said purchases on the basis that the purchases are purported to have been supplied by persons investigated by the respondent and found to be involved in the illegal VAT refund scheme of printing and selling the respective invoices without actual supply of goods. In addition, that the appellant had also used the same invoices to account for expenses in the financial statements thus reducing their income tax liability as well. Accordingly, that the High Court appreciated and correctly applied the provisions of section 56 and 59 of the Tax Procedure Act, 2015 and at no time did the burden of proof shift to the respondent since the aappellant did purchase goods from a supply chain where VAT was illegally evaded, and knew or ought to have known that the transaction was connected to an illegality. 14.Having considered the arguments made by both parties, it is necessary to clarify the principles that apply to the construction and interpretation of tax laws at the outset. Francis Bennion, in the text Bennion on Statutory Interpretation, Fifth Edition sets out the following principles on the nature of tax laws and their construction and interpretation. Firstly, taxes should be levied fairly collected honestly and without oppression, expended in accordance with the will of Parliament, and have uniform application (see pages 190-191 and 332). Secondly, since taxation has penal consequences, the principle against doubtful penalization necessarily applies and there is a presumption against imposition of a statutory detriment to a person’s property or other economic interests without clear words to that effect in a statute (pages 825 – 831 and 846 - 851). There are also legal consequences in terms of the standard of proof applicable when it comes to penalties, which we shall address later on in this judgment. Courts are therefore reluctant to adopt a construction permitting a person’s tax liability to be fixed by administrative discretion. While a tax authority may in this respect give guidance to taxpayers on how it interprets a statutory enactment whose administration it is responsible for, including on how it will exercise any power or discretion conferred on it, the guidance does not deprive the court of its ultimate interpretative function. In addition, if a tax authority departs from any guidance it has given, judicial review will lie if the departure is unfair(page 705) 15.Lastly, on construction of tax acts, the clear words of a statute are to be ascertained on normal principles of construction including a purposive construction and a construction against absurdity that avoids unworkable and impractical and inconvenient results in the administration of tax laws. (pages 965-966 and 974-982). It was in this regard explained by Lord Wilberforce of the UK Supreme Court in W.T. Ramsay v IRC [1981] UKHL 1 as follows:“11 A subject is only to be taxed upon clear words, not upon "intendment" or upon the "equity" of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are "clear words" is to be ascertained upon normal principles: these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded.” 16.Indeed, this approach also appreciated by the learned Judge of the High Court when he held as follows:“ 12.It is agreed that in interpreting tax statutes, the court adopts the principle that the same must be interpreted strictly, leaving no room for intendment or implication. This view was summarised by Nyamu JA, in Stanbic Bank Kenya Limited v Kenya Revenue Authority CA Civil Appeal No. 77 of 2008 [2009J eKLR as follows:In my interpretation of the law, it is quite evident that I have not sought any assistance from outside a dictionary in ordinary use. Moreover, I have not strained the meaning of the words in order to achieve anyparticular result. I have simply adopted the ordinary meaning of the words used in the relevant tax statute. This is because as regards tax law the issue of intention or intendment does not arise. If there is any ambiguity, and I did not detect any in my analysis, the same must be construed in favour of the tax payer. In tax law, the converse is also true that if the meaning is clear, that tax is chargeable, the issue of what was intended is not the function of the court and where tax liability is expressed andlocated bylaw the courtsmust uphold the taxman's position.” 17.As regards the burden and standard of proof, as I pointed out earlier, sections 56 of the Tax Procedures Act and section 30 of the Tax Appeals Tribunal Act place the burden upon the taxpayer to prove that a tax decision is incorrect or that a tax assessment is excessive. A tax decision is in this respect defined in section 3 of the Tax Procedures Act as follows:“(a)an assessment;b.a determination under section 17(2) of the amount of tax payable or that will become payable by a taxpayer;c.a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under section 15, section 17 and section 18;d.a decision on an application by a self-assessment taxpayer under section 31(2)”. 18.In addition, this Court held in Mbuthia Macharia v Annah Mutua Ndwiga & another [2017] KECA 290 (KLR) that the legal burden is discharged by way of evidence, with the opposing party having a corresponding duty of adducing evidence in rebuttal which constitutes evidential burden. Therefore, while both the legal and evidential burdens initially rested upon the appellant, the evidential burden may shift in the course of trial, depending on the evidence adduced. It is in this context that Iunderstand the finding by the learned Judge of the High Court that the pendulum of proof swings three times. I however must emphasize that while the initial burden of proof on the respondent is both legal and evidential, the rest of the incidents of proof are evidential, with the standard of proof being determined by the nature of the claim. 19.When then, does the legal and evidential burden on the taxpayer attach? It is my view that this burden arises at the point when the tax authorities demand payment of a tax due from a taxpayer in an assessment or any other determination in line with the definition of a tax decision set out hereinabove. In this appeal, the tax decision that the appellant was required to disprove was the assessment of additional tax in the respondent’s Notice of Assessment of tax dated 23rd March 2018. The burden was therefore required to be discharged by the taxpayer in its Notice of Objection dated 23rd April 2018 in accordance with the procedure set out in section 51 of the Tax Procedures Act. At this point, the nature of the claim was a civil claim for tax payable, and the appellant was required to prove on a balance of probabilities that the additional tax demanded was incorrect or excessive. The Supreme Court of Canada in this regard held in Hickman Motors Ltd. v Canada (1997) 2 SCR 336 that this threshold or onus is met when a taxpayer makes out a prima facie case. 20.The first question I therefore need to answer is whether the appellant discharged its initial legal and evidential burden of proof to the required standard. As indicated earlier, the appellant was required to provide evidence of the expenditure on, and the purchases from suppliers. In this respect section 17(3) of the VAT Act provides the evidence required is an original tax invoice issued for the supply or a certified copy, and section 42 sets out the following requirements as regards tax invoices:1)Subject to subsection (2), a registered person who makes a supply shall, at the time of the supply furnish the purchaser with the tax invoice containing the prescribed details for the supply.2.No invoice showing an amount which purports to be tax shall be issued on any supply—a.which is not a taxable supply; orb.by a person who is not registered.2.Any person who issues an invoice in contravention of this subsection commits an offence and any tax shown thereon shall become due and payable to the Commissioner within seven days of the date of the invoice.2.A registered person shall issue only one original tax invoice for a taxable supply, or one original credit note or debit note, but a copy clearly marked as such may be provided to a registered person who claims to have lost the original. 21.It is notable that the respondent had in its Notice of Assessment of tax dated 23rd March 2018 disallowed the input tax claimed by the appellant for purchases from some suppliers for reasons that the tax invoices were not accompanied with ETR receipts, delivery notes and payment documents, and some of the suppliers “do not supply goods”. It is also notable in this regard that the main reason given by the respondent for disallowing the input tax in the Notice of Assessment was the lack of supporting documents from the suppliers it listed therein. The appellant thereupon in its Notice of Objection dated 23rd April 2018 annexed five bundles of documents, which had a summary of all the purchases made from each of the suppliers listed in the assessment notice, which stated the purchase price and VAT for each invoice by the different suppliers, a copy of the invoice issued for each purchase and the corresponding ETR receipt, a copy of the delivery note provided for each supply , and copies bank records which included bank statements, bank transfers, copies of cheques, and RTGS transfers. There is also evidence on record of the appellant sending additional bundles of these documents to the respondent with respect to additional suppliers in various letters dated 26th April 2018. 22.It is my view that with this evidence, the appellant did discharge both its legal and evidential burden of proof in terms of the documentation required by section 15 of the Income Tax Act and section 17 of the VAT Act. The said evidence demonstrated that the appellant had incurred expenditures and made purchases in the course of its business from the suppliers that the respondent had indicated in the Notice of Assessment, which it was thereby entitled to deduct from its income tax and as input tax. 23.The learned Judge of the High Court held as follows in this regard:“ 16.After the Respondent objected to the Commissioner' s findings, the Commissioner affirmed its position in the Objection Decision that the said suppliers did not sell or deliver any goods at all but have instead devised a scheme where they only print fictitious invoices and ETR receipts which they sell to other companies to inflate their inputs. The Commissioner further stated most of the businesses the Respondent was claiming input VAT from were not registered persons. The Commissioner further faulted the Respondent's proof of payments by stating that what was presented were only cheque withdrawals which did not show who was being paid thus the same never amounted to proof of payment. 17.Under section 56 of the TPA, it was incumbent upon the Respondent to prove that the Commissioner's findings above were wrong. How could it do so? By providing evidence and supporting documentation to dislodge the Commissioner's findings. For instance, it could have provided PIN certificates of its suppliers to prove that they were actually registered persons capable of making taxable supplies. Since the validity of the invoices, ETR receipts and delivery notes issued to it were doubted by the Commissioner, the Respondent could have produced witnesses including some from the suppliers to prove that they actually supplied goods to it.” 24.It is my view that the learned Judge of the High Court failed to examine and appreciate when the legal and evidential burden of proof under section 30 and 56 of the Tax Procedures Act arose with respect to the appellant, and conflated the evidential burden upon the respondent with the legal burden of proof of the appellant. I say so since the appellant had already discharged his legal and evidentiary burden of proof in providing the documents initially required by the respondent in the Notice of Assessment of Tax. In addition, upon perusal of the record, I did not find evidence of any further requests for information made by the respondent after the appellant’s Notice of Objection dated 23rd April 2018 and letters of 26th April 2018. The respondent’s submissions that the appellant failed to provide requested information is therefore not supported by any evidence. 25.The evidential burden thereby shifted to the tax authority to demonstrate that this evidence fell short of the requirements of the law. In its Notice of Confirmation of Assessment decision dated 26th June 2018 the respondent indicated that its investigations had established a grand missing supplier of fraud perpetrated by the suppliers who did not sell or deliver any goods at all, and had instead devised a scheme where they only print fictitious invoices and ETR receipts which they sold at a commission to other companies to inflate their inputs and hence were not able to supply the appellant; that some culprits had been charged in court with several offences; most of the businesses that the appellant claimed input VAT were not registered persons; and most of the bank entries that were highlighted as proof of payment only showed cheque withdrawals by the company but did not show who was being paid since the copies of the corresponding cheques were not attached. 26.The second question that therefore arises is the standard of proof that the respondent required to meet to prove these allegations, and if it was met. In this respect, three relevant facts are noteworthy. First, the respondent raised the issue of fictitious invoices and fraud for the first time in its Confirmation of Assessment Decision dated 26th June 2018, after the appellant had already discharged its burden of proof in relation to the reasons and allegations made in the Notice of Assessment of 23rd March 2018 and provided supporting documents. Secondly, the respondent had only observed in the Notice of Assessment that "Interesting to note from the above table is the fact that five of your alleged suppliers/businesses are owned by one person" without requesting any particulars as regards these suppliers or indicating how this was contrary to law, or the appellant's role in this respect. The strict interpretation principles of tax laws do not in this regard allow imputation of any issue in the Notice of Assessment if it was not expressly raised by the respondent. 27.Thirdly, the respondent made certain comments, statements and conclusions in its Confirmation of Assessment Decision dated 26th June 2018 on the documents produced by the appellant without any supporting evidence. In particular, these conclusions relied on investigation findings which it claimed it had in its possession but did not produce, nor did it produce evidence of the criminal charges that the respondent claimed it had as a result brought against some of the suppliers. Once it became a fact in issue, the respondent should have produced this evidence before the tribunal or the High Court as proof of the fraud and complicity of the appellant. 28.At the legal front, two aspects of the respondent’s Notice of Confirmation of Assessment Decision dramatically changed the standard of proof required to be met. The first was that the specific allegations of fraud made by the respondent, and in particular that the documents presented by the appellant in response to the Notice of Assessment were fraudulent. In this respect, it was established by the Court of Appeal for Eastern Africa (the predecessor of this Court) in Railal Gordhanbhai Patel v Lalji Makanji, [1957] EA 314 that the standard of proof in fraud claims is notably higher than that required in ordinary civil proceedings, and that although the standard falls below that of proof beyond reasonable doubt, it is above the ordinary balance of probabilities. Similarly, this Court held as follows in Total Kenya Limited v Kenya Revenue Authority [2018) KECA 266 (KLR):“It is trite that allegations of fraud, being of a serious nature so as to even attract penal consequences must be specifically pleaded and the particulars thereof given. The standard of proof required has been said to be higher than that in ordinary civil cases, namely proof upon a balance of probabilities; but such proof is certainly not beyond reasonable doubt as in criminal cases. See Kinyanjui Kamau v George Kamau Njoroge (2015) eKLRand Bruce Joseph Bockle v Coquero Limited (2014) eKLR.” 29.This standard has been confirmed by the Supreme Court of Kenya in Fanikiwa Limited & 3 others v Sirikwa Squatters Group & 17 others [2023] KESC 105 (KLR) as follows:(82)We are unconvinced that such vague particulars of fraud were proved to the required standard going by the absence of any serious attempt to table concrete evidence to prove the subject allegations to the required degree. Our appellate court has over the years developed settled jurisprudence on the requisite standard of proof for allegations of fraud which we endorse. In Central Kenya Ltd v Trust Bank Limited & 4 Others, Civil Appeal No. 215 of 1996; [1996] eKLR the appellate court determined:“The appellant has made vague and very general allegations of fraud against the respondents.Fraud and conspiracy to defraud are very serious allegations. The onus of prima face proof was much heavier on the appellant in this case than in an ordinary civil case.” [Emphasis added]” 30.The second aspect which attracted a higher standard of proof was the penalties imposed by the respondent pursuant to section 84(2) of the Tax Procedure Act arising from the appellant’s alleged fraud, and the respondent in this respect stated in the Confirmation of Assessment Decision that “the statement made in your returns claiming alleged purchases from fictitious invoices were done deliberately and therefore attracts a fraud penalty of 75%” . The standard of proof that applies when imposing a penalty was explained in Bennion on Statutory Interpretation, Fifth Edition sat page 830 as follows:“Where an enactment would inflict a serious detriment on a person if certain facts were established then, even though the case is not a criminal cause or matter, the criminal standard of proof will be required to establish those facts, that is their existence will not be taken to be proved merely on a balance of probabilities. Proof must be beyond reasonable doubt so that anyone testing it would feel sure.” 31.Section 84 of the Tax Procedures Act in this respect provides for a tax shortfall penalty to a person who knowingly makes or omits from a statement to an authorized officer matters that are false or misleading in a material particular and if the tax liability of that person or of another person computed on the basis of the statement made by that person is less than it would have otherwise have been paid, the person shall be liable to a penalty of seventy-five per cent of the tax shortfall. There are therefore a number of elements that needed to be proved beyond reasonable doubt for this penalty to apply, including that the appellant knowingly made a false and misleading statements. No such evidence was provided by the respondent. 32.I must again emphasise in this respect that the allegations of the appellant’s fictitious invoices and particulars of its alleged fraud were raised for the first time in the Notice of Confirmation of Assessment dated 26th June 2018, and were never raised in the respondent’s Notice of Assessment dated 23rd March 2018 for the appellant to be required to rebut the same. The decision of the respondent was as regards the nature of the documents presented by the appellant was as follows in the Notice of Assessment dated 23rd March 2018:“Please note that the only documents that were brought are copies of invoices and supplier statements. We have not received ETR receipts and signed delivery notes and payment documents to confirm that actual purchase took place. Further, our investigation has established that some of the suppliers you claimed input VAT from do not supply any goods and therefore input tax claimed from the suppliers listed in the table below have been disallowed on the said ground and for lack of supporting documents.” 33.It is on the basis of these findings by the respondent that the appellant proceeded to provide evidence in its Notice of Objection dated 23rd April 2018 and letters dated 26th April 2018 to demonstrate in that it had indeed made the disallowed purchases from the suppliers identified by the respondent. It is in this regard pertinent that the specific allegations of fraud were subsequently made by the respondent after the appellant provided additional documents in discharge of its legal and evidentiary burden of proof. In addition, in its appeal to the Tax Appeals Tribunal from the decision of Notice of Confirmation of Assessment decision, the appellant provided copies of the respondent’s KRA online Pin checker, as proof that the suppliers it purchased the goods from were indeed registered with the respondent. 34.Having provided the necessary documentation required under section 15 of the Income Tax Act and section 17 of the VAT Act of the expenditure incurred and purchases from each of its suppliers, it was upon the respondent to demonstrate that the appellant’s documents were tainted with fraud, and on a standard higher than just on balance of probabilities. However, the respondent made bare allegations without any concrete evidence to support the statements that it had carried out investigations, the findings thereof, the charges it alleged had been brought against the culprits, and most importantly, the appellant’s role and participation in the alleged fraud. The respondent therefore did not discharge its evidentiary burden of proving the allegations it made of fraud on the part of the appellant. 35.Put differently, the pendulum of proof effectively stopped at the second swing with the respondent, and was no further evidentiary obligation placed on the appellant. The circumstances in this appeal are therefore different from that in Total Kenya Limited v Kenya Revenue Authority [2018) KECA 266 (KLR) which was relied on by the respondent, since in this appeal the appellant did actually submit evidence of the required documentation and discharged its burden of proof, and the onus of proving fraud in this appeal lay on the respondent. 36.I therefore find that there was no legal basis for the additional tax assessment dated 23rd March 2018 and confirmation of assessment dated 26th June 2018, arising from the fact that the respondent failed to prove the alleged fraud on the part of the appellants to the required standard, after the appellant had laid out a prima facie case that it had met the necessary legal requirements. The tax liability of the appellant was therefore not established, for this Court to aid the respondent in its legal and constitutional duty of collection of tax. 37.I accordingly set aside the judgment delivered on 31st January 2022 in Income Tax Appeal No. E086 of 2020 by the High Court of Kenya at Nairobi (D.S.Majanja J.) in its entirety. The result is that the findings in the judgment dated 21st August 2020 by the Tax Appeals Tribunal in Tax Appeal No. 116 of 2018 are reinstated, and the demand by the respondent in the Notice of Confirmation of Assessment decision dated 26th June 2018 for the payment of additional tax by the appellant of Kshs 306,051,182/- and Kshs 166,512,947/- as Corporation Tax and Value Added Tax (VAT) respectively is hereby quashed. 38.The respondent shall meet the appellant’s costs of the appeal in the High Court and in this Court. Concurring Judgment Of Jamila Mohammed, JA. I.I have had the advantage of reading in draft the judgment of my sister, P. Nyamweya, JA. I am in full agreement with both the reasoning and the conclusion reached therein and have nothing useful to add. Consequently, the judgment of the Court shall be as proposed by Nyamweya, JA. Dissenting Judgment Of Tuiyott, JA 1.This appeal calls on us to discuss aspects of the burden and standard of proof of tax liability which is self-assessed by the taxpayer under the provisions of the Tax Procedures Act 2015 (the Act). A common ground in this appeal is that in Kenya, as in many other tax jurisdictions, Value Added Tax (VAT) is assessed on this basis. 2.VAT is a tax chargeable on supply of taxable goods or services made or provided in Kenya and on importation of taxable goods or services into Kenya. The tax payable is the difference between output tax and input tax, output tax being the VAT charged on the sale of taxable goods or services while input tax refers to the VAT charged on taxable purchases of goods and services for business purposes. This is the explanation given by counsel for The Commissioner Investigations and Enforcement (the respondent or the Commissioner or the Tax Authority) which I accept to be correct. 3.The background to this dispute and the arguments made by the parties have been ably set out in the leading and majority decision of Nyamweya, JA, who I thank. My intention is to only highlight aspects of the evidence which, in my view, are critical in resolving the impasse between the taxpayer and tax authority. 4.Section 59(1) of the Act, empowers the Commissioner or an authorised officer, for purposes of obtaining full information in respect of tax liability of any person, after issuing due notice in writing, to call for production of records. Invoking this power, the Commissioner wrote to Pearl Industries Limited (Pearl or the appellant or the taxpayer) on 30th November 2017 seeking certain information regarding eight (8) listed suppliers of Pearl. 5.In follow up to this letter, the Commissioner wrote to Pearl on 23rd March 2018 lamenting that Pearl had only supplied copies of invoices and supplier statements and had not availed ETR receipts, signed delivery notes and payment documents to “confirm that actual purchase took place.” In that letter, which also served as a notice of assessment, the Commissioner raised additional tax of Corporation Tax of Kshs. 306,051,152 and VAT of Kshs. 166,512,947. The tax authority invited Pearl to file a notice of objection if it wished to dispute the additional assessment levied. 6.In a lengthy letter dated 26th April 2018, through its then advocates, Iseme Kamau and Maema (IKM) Advocates, Pearl filed a notice of objection whose details shall be discussed later. On 26th June 2018, the tax authority dismissed the objection and confirmed the assessment. The confirmation triggered the proceedings first before the Tax Appeals Tribunal (the Tribunal), escalated by way of appeal to the High Court and finally to this Court. 7.After crafting three substantive issues, the Tribunal returned the following view: Pearl had discharged its obligation of proving that there was a purchase by providing invoices and proof of payment for the supplies; KRA had failed to prove that the appellant knew or ought to have known that its transaction was part of a fraudulent scheme and in view of the second holding KRA erred in disallowing input tax and cost of sales in the computation of corporation income tax for its supplies. 8.On its part the High Court (Majanja, J.) formulated a three- swing pendulum of proof as follows;“In this case, the pendulum of proof swung three times; the first was upon the Respondent, which it did by providing the documents requested by the Commissioner; the second shifted the (sic) Commissioner, who after reviewing the documents challenged their authenticity and validity. This meant that the burden of proof finally swung back to the Respondent to prove that the Commissioner was wrong in its position and overall findings.” 9.The Court then made the following finding:“Likewise, in this case, the Commissioner’s responses to the Respondent directly to it and before the Tribunal were in great detail and specificity on the issue of fraud and how it was being perpetrated. The Respondent failed to counter this with satisfactory evidence thus the issue of fraud remained uncontested and thus proved. I therefore find and hold that the Respondent failed to discharge its burden of proof as tax payer as it did not demonstrate how the Commissioner’s findings were wrong. This means that the Commissioner’s findings that the invoices, ETR receipts, delivery notes issued by the suppliers and the goods apparently supplied to the Respondent were bogus and that the said suppliers were not registered persons, were proved.” 10.I join the majority in endorsing the three-swing pendulum of proof set out by Majanja, J. Regarding the nature of proof, I will be proposing that, under the statutory scheme, on the two occasions when the pendulum is on the side of the taxpayer, the burden of proof is legal while the tax authority only bears an evidential onus at the only time the pendulum is on its end. 11.In keeping with its mandate, the tax authority, through the letter of 30th November 2017 sought information from the taxpayer regarding the taxpayer’s tax liability. The taxpayer does not assert that in doing so the Commissioner acted improperly, unlawfully or outside the law. Neither is it argued that the information and documents required of the taxpayer in that letter placed an onerous or unreasonable burden on it. 12.After receiving certain documents from Pearl, the Commissioner observed as follows: the only documents supplied were copies of invoices and supplier statements; not received were ETR receipts, signed delivery notes and payment documents to confirm that actual purchase took place; and that their own investigations established that some of the suppliers from whom Pearl had claimed input VAT did not supply any goods. Based on these, the tax authority disallowed the input claims from the impugned traders and disallowed for Corporation Tax and VAT. The Commissioner, in addition, raised the disputed additional assessment. 13.I take the view that up to that point, the burden of proof pendulum had not begun to swing at all. The Commissioner had, by raising the additional assessment, simply made a tax decision based on the information and documents supplied to him by the taxpayer and the supposed investigation it had carried out. Important to note is that even this early, the Commissioner was asserting that some of the input VAT claim was fraudulent as they were based on supply of goods that never happened. Fraud was implied even if the word was not used. The taxpayer would be aware that it was required to answer the assertion that it was taking part in a fraudulent scheme. 14.As the taxpayer disputed the tax decision, it filed an objection permitted by section 51 of the Tax Procedure Act which reads:“51. Objection to tax decision1.A taxpayer who wishes to dispute a tax decision shall first lodge an objection against that tax decision under this section before proceeding under any other written law.2.A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.3.A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if—a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.4.Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.5.Where the tax decision to which a notice of objection relates is an amended assessment, the taxpayer may only object to the alterations and additions made to the original assessment.6.A taxpayer may apply in writing to the Commissioner for an extension of time to lodge a notice of objection.7.The Commissioner may allow an application for the extension of time to file a notice of objection if—a.the taxpayer was prevented from lodging the notice of objection within the period specified in subsection (2) because of an absence from Kenya, sickness or other reasonable cause; andb.the taxpayer did not unreasonably delay in lodging the notice of objection.8.Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".9.The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.10.An objection decision shall include a statement of findings on the material facts and the reasons for the decision.11.Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of the objection, the objection shall be allowed.” 15.Sub-section (3) sets out what comprises a valid objection.Regarding this matter, it would be an objection stating precisely the grounds of objection, the amendments required to be made to correct the decision and the reasons for the amendments, and the relevant documents relating to the objection. This constitutes the first swing of the pendulum. This is borne out by the provision of section 56 of the Tax Procedures Act which relates to objections and appeals which reads:“ 56.General provisions relating to objections and appeals1.In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.2.An appeal to the High Court or to the Court of Appeal shall be on a question of law only.3.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 only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds”.1.A provision reinforced by section 30 of the Tax Appeals Tribunal Act in regard with the burden of proof imposed on the taxpayer in proceedings before the Tribunal.2.The legal burden of proving that the decision of Commissioner was wrong rested on the taxpayer. The burden imposed on the taxpayer by section 56 of the Act is in harmony with the provisions of section 112 of the Evidence Act that, in civil proceedings, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving the fact is upon that party. VAT is self- assessed based on records and information which are substantially in possession of or with the taxpayer. It would therefore be logical to require the taxpayer who would be armed with the relevant documentation and information to prove that the tax decision reached by the tax authority is wrong or erroneous. As a corollary, it would be to place an onerous and unreasonable burden on the tax authority, which has to depend on documents provided or information made available by the taxpayer, to discharge the burden. 18.The rationale for the theory of proof set by section 56 has been acknowledged elsewhere. See for example Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] KEHC 13347 (KLR). Even if, arguendo, it was illogical or unreasonable, tax statutes are to be construed, not by second guessing the intendment of the provision, but by giving effect to its text where it is clear and unambigious. The uncontested text of section 56(1) is that, in objections and appeals arising therefrom, the legal burden shall be on the taxpayer to prove that a tax decision is incorrect. This provision can only be faulted if it runs afoul the provisions of the Constitution, not said to be so here. 19.Pearl asserts that it successfully discharged that burden when, in its objection, it provided proof that it indeed purchased goods from listed suppliers. In the notice of objection Pearl stated that it forwarded, in respect to each supplier, “a summary of all the purchases made from each of the suppliers listed in the assessment letter stating the purchase price and VAT for each invoice by the different suppliers, a copy of the invoice issued for each purchase and the corresponding ETR, a copy of the delivery note provided for each supply; and copies of bank records showing evidence of payment of each purchase”. At a blush, the taxpayer had discharged its burden, but had it really done so? 20.Upon considering the objection, the tax authority disallowed it contending that: on its investigations it had established a grand money supplier fraud perpetrated by the listed suppliers; the listed suppliers did not sell or deliver goods at all; they only printed invoices and ETR receipts which they sold to other companies; the invoices were fictitious without actual sale; the ETR machines used to print receipts issued to various companies including Pearl had been confiscated and some culprits charged in court as most of the listed suppliers were not registered persons; and most of the bank entries highlighted as proof of payment by Pearl only showed cheque withdrawals by the company but did not show who was being paid since copies of corresponding cheques were not attached. The last reason is not without significance as will soon be apparent. 21.Clearly in disallowing the objection, the tax authority was reiterating its earlier contention of fraud. Now elaborating that the taxpayer was part of a missing trader scheme or at the very least knew or ought to have known that it was connected to a fraudulent scheme or evasion. 22.The majority of this Court have held that because of the allegation of fraud and consequent imposition of a fraud penalty against the taxpayer, the Commissioner ought to have proved its assertions on the standard of proof in fraud claims, namely higher than required in ordinary civil proceedings although not as high as proof beyond reasonable doubt. I respectfully hold a different view. 23.In paragraph 65 of its decision, the tribunal noted that “the evidence adduced raised pertinent questions on fraudulent behavior by some of the appellant’s suppliers”. Because of this holding it turned its attention to the question whether presence of fraud could jeopardize the right of a taxpayer to claim input VAT. In answering this important question, the Tribunal set out the burden of proof of the tax authority to be as follows:“Thus, it follows, the burden of proving that the appellant knew or ought to have known that its transaction was part of a fraudulent scheme was upon the respondent. All the respondent had to do was establish on a balance of probabilities that the appellant knew, or it ought to have known of the transaction it was involved in was part of a fraudulent scheme. The respondent merely had to establish a case that demanded answers from the appellant.” 24.This conclusion, regarding the burden, was in tandem with some English decisions on the subject. In Calltell Telecom Ltd & Anor v Revenue & Customs [2007] UKVAT V20266, where the UK VAT and Duties Tribunal held:“For those reasons we think it is incumbent on the Commissioners to raise a case, not necessarily amounting to proof but sufficient to demand an answer, that there were facts or circumstances which support, or at least are consistent with, the conclusion that the appellant knew, or should have known, of fraud in the chain. The mere fact that there was fraud will not be enough; there must be some reason which might lead the tribunal to conclude that the trader knew or could have known of it, or that he should have taken precautions. Although, as we have already pointed out, the Court of Justice, at paragraph 51 of its judgment in Kittel, referred to traders “who take every precaution” as those who are not liable to forfeit their right to deduct, it should be borne in mind that most traders do not, and do not need to, carry out extensive enquiries into the honesty and credit worthiness of their suppliers and customers. But if the commissioners are able to mount a case which demands some explanation, the burden shifts to the appellant to show that he took the precautions which could reasonably have required of him and that, despite his having done so, he did not know, and could not have known, of the fraudulent purpose of others.” 25.Although that decision discusses a tax authority’s burden in establishing a taxpayer’s knowledge or presumed knowledge that it was part of a fraudulent transaction, it is also the burden to be discharged in establishing the existence of the fraudulent scheme in which the taxpayer was a participant, which would then demand an answer from the taxpayer. To paraphrase Calltel Telecom Ltd, the Commissioner need only raise an objective case that there are facts or circumstances which support or are, at least, consistent with the existence of fraudulent scheme which the taxpayer was a participant or knew or should have known to exist. The tax authority simply needs to mount an objective case which demands some explanation from the taxpayer. 26.I am attracted to this proposition because it is in consonance with the provisions of section 56(1) of the Tax Procedures Act; which places the burden on the taxpayer to prove that a tax decision is incorrect. The legal burden of proof, unlike the evidential burden, never leaves the taxpayer. He or she bears it throughout the objection and appeal proceedings. If as argued by the tax payer, and readily admitted, that the taxpayer’s burden is discharged on a balance of probabilities, then it cannot be logical to require the tax authority who only bears an evidential burden at the second swing of the pendulum to discharge a more exerting burden even where fraud is asserted. This aligns, as well, with a tax regime that is self-assessed. While an allegation of fraud imputes a criminal conduct on the tax payer and is no doubt a damning allegation, the tax payer has all the arsenal required to easily confront and rebut such an allegation. It is the one in possession of documents and information upon which it bases its tax claim and should have no difficulty rebutting an allegation of improper or unlawful conduct. The tax authority on the other hand is handicapped as it has to substantially rely on information and documents in possession of the tax payer to make out its case. It is for this reason that even where it is asserting fraud, the tax authority need only make out an objective case that demands an answer from the tax payer. Once it does so, then it has discharged its evidential burden of proof. 27.Having resolved the question of the burden of proof, next is to examine whether KRA, in disallowing the objection, mounted a case which demanded some explanation from the tax payer. 28.But I digress for a moment. It is true that neither at the time of deciding on the objection nor at the appeal, did the Commissioner produce the investigation report which was said to contain evidence of the fraudulent scheme. At the hearing of the matter before the Tribunal, counsel for the Commissioner asserted that the report was confidential as it touched on people other than Pearl and that in any case, the findings of the report had been fully summarized in the documents presented to the Tribunal. This explanation, in my view, is not plausible because no reason is given why the report could not be redacted to exclude information on the other persons who were not party to the proceedings. Secondly, a summary of the report would be secondary information or evidence, hearsay or worse still, double hearsay. If the investigation report and its findings was the whole basis for the tax authority disallowing the objection, then one would have been sympathetic to the contention by Pearl that the Commissioner had failed to discharge its evidential burden. 29.This is not so however. Upon analysis of the proof of payment to the suppliers presented by the taxpayer, the Commissioner concluded that “most of the bank entries you have highlighted as proof of payment only show Cheque withdrawals by the company but do not show who is being paid since you did not attach copies of the corresponding Cheques. This therefore does not amount to proof of payment of the said businesses”. At this juncture, it needs to be emphasized that the tax authority can build a case demanding a further explanation from the taxpayer by simply analyzing and raising queries from the documents and information provided by the taxpayer. The case need not be based on alternative evidence. It can be set up by pointing out gaps, shortfalls or inconsistencies in the taxpayer’s evidence that call for explanation or rebuttal by the taxpayer who, it has to be remembered, in a self-assessment tax regime, would be in possession of all evidence necessary to debunk the tax authority’s case. 30.If it was true as asserted by the Commissioner, that the taxpayer had failed to prove payment for the supplies as it had alleged, then it could be believable, absent further explanation or counter-evidence, that the taxpayer was a participant in a fraudulent tax evasion scheme. This was sufficient to bespeak an explanation from the taxpayer and this would be the reason why the Tribunal framed its first substantive question thus; “whether the appellant furnished sufficient proof of purchase?” 31.It has to be emphasized that documentary evidence such as invoices, ETR receipts or deliveries are not conclusive proof of compliance. Once the tax authority raises a reasonable challenge to those documents then the taxpayer must do more to prove that the transactions upon which VAT is claimed actually occurred or happened. 32.Regarding this issue, the Tribunal appreciated the rival positions taken by the two parties. On the one hand, Pearl stated that the bank statements it had supplied indicated payments to the suppliers, on the other hand was the assertion by the Commissioner that the bank statements did not indicate to whom the payments were made. The rival contentions called upon the Tribunal, in the very least, to carry out an evaluation of the evidence presented in respect of the payments before reaching the conclusion that “the appellant also provided bank statements which indicated payments to the suppliers.” There is no such assessment in the decision of the Tribunal. In addition, we have before us a record of appeal and supplementary record of appeal which does not include the contentious bank statements. This is so even when the intention by Pearl for filing the supplementary record of appeal was to provide a complete record of the supporting documents filed in support of its statement of facts before the tribunal. The controversial bank statements have been omitted and it is not clear whether that evidence was before the High Court. 33.This is a second appeal and our remit is limited to reviewing matters of law only, accepted that a perverse conclusion of the evidence or a misapprehension of facts is a matter of law. (See for example Kenya Breweries Ltd v Godfrey Odoyo [2010] eKLR). 34.Bearing in mind that the burden of legal proof lay with Pearl and having no evidence before me that counters the assertion of KRA that “most of the bank entries you have highlighted as proof of payment only show Cheque withdrawals by the company but do not show who is being paid since you did not attach copies of the corresponding Cheques. This therefore does not amount to proof of payment of the said businesses”, I have no reason to fault the conclusion reached by the High Court that Pearl did not mount satisfactory evidence to counter the question of fraud raised by the tax authority. 35.I would dismiss this second appeal with costs to the respondent. 36.It is for those reasons that I respectfully dissent. However, since I am in the minority, and the majority are of a contrary view, the final orders of the judgment shall, therefore, be in terms as proposed by Nyamweya, JA. DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF MAY 2026.P. NYAMWEYA .....................JUDGE OF APPEALJAMILA MOHAMMED .....................JUDGE OF APPEALF. TUIYOTT .....................JUDGE OF APPEALI certify that this is a true copy of the originalSigned DEPUTY REGISTRAR