Judgment summary
The Appellant, an umbrella organisation for savings and credit cooperatives in Kenya, was assessed by the Respondent for VAT, withholding tax, PAYE and Corporation tax totalling Kshs 972,953,059 following a compliance review (para 3).
The Appellant objected, stating it had identified material misstatements in its financial statements through a forensic audit and sought time to reconstruct its accounts, but the Respondent proceeded to issue and confirm the assessment based on the original, disputed financial statements (paras 4, 143-148).
The Tribunal held that while the Respondent was entitled to make a best-judgement assessment on available information, this did not foreclose a properly explained opportunity for the Appellant to complete the record where a bona fide, independently corroborated impediment to compliance had been shown (paras 159-161). It found the Respondent was not justified in confirming the assessment on the basis of financial statements it had been informed were erroneous and unreliable (para 165).
The Tribunal allowed the appeal, set aside the objection decision, and remitted the matter to the Respondent to issue a fresh, considered objection decision after reviewing the Appellant's reconstructed and signed financial statements (para 166).
Background
The Appellant is incorporated under the Co-operative Societies Act Cap 490 and acts as an umbrella body for SACCOs in Kenya, providing advocacy, education, training, a central finance fund, a housing fund, and related services (para 1).
The Respondent, a principal officer under Section 13 of the Kenya Revenue Authority Act, conducted a review of the Appellant's tax affairs and issued an assessment notice dated 29th November 2024 for Kshs 972,953,059 covering VAT, withholding tax, PAYE and Corporation tax, followed by iTax assessment orders issued between 3rd and 9th December 2024 (paras 2-3).
The Appellant objected by letter dated 24th December 2024. The Respondent issued an objection decision dated 18th February 2025 confirming the assessment in full (para 4). The Appellant, dissatisfied, lodged a notice of appeal on 1st April 2025 and a Memorandum of Appeal dated 22nd April 2025 (paras 5-6).
Core dispute
The central issue was whether the Respondent was justified in confirming the corporation tax, withholding tax, VAT and PAYE assessments raised against the Appellant (para 140).
The Appellant's overarching contention was that the Respondent erred by relying on financial statements containing material misstatements, despite being informed that a forensic audit had revealed discrepancies and that the Appellant was reconstructing its accounts, and despite a request for additional time to provide restated financial statements (paras 9, 15-21, 143-146).
Subsidiary grounds covered fair administrative action, corporate income tax treatment of exempt income, home sales, net profit variances and various disallowed expenses, withholding tax on local suppliers, staff benefits and facilitation fees, interest paid to financial institutions, work-in-progress costs, and marketing and advertising costs, VAT on residential property, seminar income earned outside Kenya, apportionment of input VAT, and PAYE on allowances paid to directors and delegates (paras 6, 24-105).
The Respondent maintained that the assessments were lawful under Sections 24 and 31(1) of the TPA, that the Appellant had failed to amend its self-assessment returns or provide reconstructed financial statements and supporting schedules, and that the Appellant had not discharged its burden of proof under Section 56(1) of the TPA and Section 30 of the TATA (paras 109-110, 137-138).
Court findings
The Tribunal noted that the Appellant had, in the first instance, complied with its statutory duty to keep and produce records, but the dispute had evolved into a question of the accuracy, veracity and reliability of the financial statements supplied, which the Appellant itself admitted did not reconcile with its underlying ledgers and transactional records (para 153).
The Tribunal found that the Respondent was informed in a timely manner, by letter dated 25th November 2024, of inaccuracies identified in the financial statements following a forensic audit, yet proceeded to issue and confirm additional assessments based on those same impugned statements, casting doubt on the accuracy of the assessments (paras 148, 157).
Referring to Section 31(1) of the TPA on best-judgement assessments, and to Sections 23(1)(c) of the TPA, 43(1) of the VAT Act and 54A of the ITA on record-keeping, together with Section 59 of the TPA on production of records, the Tribunal held that the Respondent's power to assess on available information does not foreclose a properly explained opportunity to complete the record where a bona fide, independently corroborated impediment to compliance has been shown, citing Kirima and Sons Limited v Commissioner of Domestic Taxes (Appeal E683 of 2025) [2026] KETAT 134 (KLR) (paras 149-152, 160).
The Tribunal observed that the requirement for financial statements to be signed under Section 54 of the ITA is a statutory requirement, and noted the Appellant's earlier unsuccessful application to adduce unsigned restated financial statements (para 158).
The Tribunal concluded that it would occasion injustice to allow the confirmation of the assessments to stand where the Appellant had demonstrated that the assessments and the objection decision were premised on misstated facts, a finding corroborated by the forensic auditor and notified to the Respondent before the objection decision was made (para 163). It held that the just course was to remit the matter to the Respondent for an informed objection decision after considering the reconstructed financial statements (para 164), and found that the Respondent was not justified in confirming the additional assessments on the basis of financial statements it had been informed were erroneous and unreliable (para 165).
Outcome
The Tribunal allowed the appeal and set aside the Respondent's objection decision dated 18th February 2025 (para 166(a)-(b)).
The matter was remitted to the Respondent to issue a considered objection decision based on the reconstructed financial statements (para 166(c)).
The Appellant was ordered to provide the Respondent with the signed audited financial statements within 14 days of the date of delivery of the judgment, and the Respondent was ordered to consider the documents and issue a fresh objection decision within sixty (60) days of receipt of the signed audited financial statements (para 166(d)-(e)).
Each party was ordered to bear its own costs (para 166(f)).
Major issues / areas of contention
- Whether the Respondent erred by disregarding information and documentation provided by the Appellant in support of its position (para 6).
- Whether the Respondent erred in relying on financial statements with material misstatements to assess tax despite being notified of ongoing reconstruction (para 6).
- Whether the Respondent erred by assessing corporate income tax without considering expenses wholly and exclusively incurred in generating income, and by disallowing expenses based on erroneous financial statement entries (paras 6, 24-50).
- Whether the Respondent erred by assessing tax on home sales relying on financial statements still under reconstruction (paras 6, 32-35, 113-116).
- Whether the Respondent erred by demanding tax on the variance between net profit before tax per the financial statements and the Income Tax Return for 2019 (paras 6, 36-40, 117-119).
- Whether the Respondent erred by subjecting legal and professional fees already subjected to withholding tax to further withholding tax, amounting to double taxation (paras 6, 53-58, 126).
- Whether staff benefits and facilitation fees were correctly subjected to withholding tax as management or professional fees (paras 6, 59-65, 127).
- Whether interest paid to financial institutions was correctly exempted from withholding tax under Section 35(3)(b) of the ITA (paras 6, 66-69, 128).
- Whether costs on supply of civil work materials and goods recorded under work in progress for the Kitengela Housing Project were correctly subjected to withholding tax (paras 6, 70-75, 129).
- Whether marketing and advertising costs paid to resident persons before 1st July 2023 were subject to withholding tax, given the Finance Act, 2023 amendment (paras 6, 76-80, 130).
- Whether VAT was correctly demanded on rent or sale of residential property said to be exempt under Paragraph 8 of Part II of the First Schedule to the VAT Act (paras 6, 81-83, 131).
- Whether VAT was correctly demanded on seminar income where training was conducted outside Kenya (paras 6, 84-87, 132).
- Whether input VAT was correctly disallowed where the Appellant claimed input attributable only to taxable supplies under Section 17(6) of the VAT Act (paras 6, 88-93, 133-134).
- Whether the Appellant was liable to account for PAYE on allowances paid to directors and delegates in the absence of an employer-employee relationship (paras 6, 94-105, 135).
- Whether the Appellant discharged its burden of proof under Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act (paras 136-138).