Judgment summary
The Appellant, a company supplying solar home systems on pay plan arrangements, was audited by the Respondent for the period 2018 to 2022 (para 3). The Respondent issued a Corporation Tax assessment for the year of income 2019 demanding Kshs. 780,173,126.25, comprising principal tax of Kshs. 450,967,125.00 and interest of Kshs. 329,206,001.25 (para 4).
The assessment arose from two adjustments: under-declared sales of Kshs. 1,534,762,601.00, computed by treating lease stock as credit sales and applying a 30% margin, and the add-back of a hire purchase asset write-off of Kshs. 33,747,809.00 (para 5). The Appellant objected, and the Respondent's objection decision dated 18th September 2025 fully rejected the objection and confirmed the assessment (paras 6-7).
The Tribunal held that the Appellant's arrangements constituted hire purchase rather than finance lease, based on its audited financial statements, Note 29 disclosures, and the terms of its contracts (paras 61-78). However, the Tribunal found that the Respondent's 30% margin applied to lease stock to derive under-declared income was arbitrary and unexplained, and failed to eliminate revenue already recognised and taxed, and was therefore not justified (paras 83-92). The Tribunal also found the add-back of the hire purchase asset write-off unjustified, as the written-off assets had a nil net book value and the write-off had no impact on the profit and loss account (paras 93-97). The appeal was allowed and the objection decision set aside (para 98).
Background
The Appellant is a private limited liability company incorporated in Kenya, whose principal activity is the supply, purchase and sale of solar panels, lamps, batteries, connectors, solar parts and solar accessories, providing customers with solar home systems on pay plan arrangements (para 1).
The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (para 2). By notice dated 22nd November 2023, the Respondent notified the Appellant of an intention to audit its tax affairs for 2018 to 2022 (para 3).
On 29th June 2025, following the audit, the Respondent issued an assessment order on iTax for Corporation Tax for the year of income 2019 demanding Kshs. 780,173,126.25, comprising principal tax of Kshs. 450,967,125.00 and interest of Kshs. 329,206,001.25 (para 4). The Appellant objected by letter dated 28th July 2025, and the Respondent's objection decision dated 18th September 2025 rejected the objection and confirmed the assessment (paras 6-7). The Appellant lodged a Notice of Appeal dated 29th September 2025 (para 8).
Core dispute
The Appellant argued that it operated a finance lease business model under the Income Tax (Leasing) Rules, 2002 and IFRS 16, under which title to solar home systems always remained with it while risks passed to customers, and that the Respondent wrongly reclassified its business as hire purchase (paras 11-24).
The Appellant also contended that the Respondent's application of a 30% margin to its lease stock balance to compute under-declared sales was arbitrary, lacked legal or accounting basis, and resulted in double counting of revenue already recognised and taxed (paras 25-32). Further, it argued that the add-back of a hire purchase asset write-off of Kshs. 33,747,809.00 was unjustified because the write-off represented removal of fully depreciated, nil net book value assets with no impact on taxable income (paras 33-38).
The Respondent maintained that the Appellant's own audited financial statements, including Note 29, described the business as making hire purchase sales, and that the Appellant had not provided operative 2019 contracts or reconciliations to substantiate its objections (paras 41-49). The Respondent submitted that it was entitled to use best judgement under Sections 24(2) and 31 of the Tax Procedures Act in the absence of such evidence (paras 51-57).
Court findings
The Tribunal analysed the definitions of "finance lease" and "hire purchase" under Rule 2 of the Income Tax (Leasing) Rules, 2002, and found that the determinative feature is the intention as to ownership, not the transfer of risk (paras 61-65). Applying IFRS 16 and the Appellant's own audited financial statements, including Note 29 disclosing no finance leases and descriptions of hire purchase sales, together with the terms and conditions referring to a "purchase price" and "final payment", the Tribunal found that the Appellant's arrangements were hire purchase contracts and not finance leases (paras 66-78).
On the under-declared income adjustment, the Tribunal found that the Respondent's use of lease stock as the base for deemed credit sales, and the unexplained 30% margin applied to it, were not supported by any demonstrated methodology, and that the resulting figure was superimposed on revenue already declared and taxed without elimination, amounting to double counting (paras 83-85). The Appellant's reconciliations, ledgers and movement schedules were found to demolish the presumption of correctness, shifting the evidential burden to the Respondent, which tendered no rebuttal (paras 86-89). The Tribunal accordingly found the under-declared income assessment of Kshs. 1,534,762,601.00 arbitrary and without a demonstrated factual foundation (para 92).
On the hire purchase asset write-off, the Tribunal found that the written-off assets had a nil net book value, that the write-off generated no gain or loss and passed no charge through the profit and loss account, and that the Respondent had not identified any deduction to which the add-back could correspond (paras 93-95). The Tribunal found the add-back of Kshs. 33,747,809.00 to be without legal or factual foundation (para 97).
Outcome
The Tribunal found the Appeal to be merited and allowed it. The Respondent's Objection Decision dated 18th September 2025 was set aside, and each party was ordered to bear its own costs (para 98).
Major issues / areas of contention
- Whether the Appellant's solar pay-plan arrangements constituted a finance lease or a hire purchase under the Income Tax (Leasing) Rules, 2002 and IFRS 16.
- Whether the Respondent was justified in assessing under-declared income of Kshs. 1,534,762,601.00 by applying an unexplained 30% margin to the Appellant's lease stock.
- Whether the Respondent's under-declared income adjustment resulted in double counting of revenue already recognised and taxed.
- Whether the Respondent was justified in adding back a hire purchase asset write-off of Kshs. 33,747,809.00 that had a nil net book value.
- Which party bore the burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, and whether that burden was discharged.