Judgment summary
The Appellant, Kirima and Sons Limited, a company in the real estate industry, appealed against the Respondent's objection decision dated 8 May 2025 confirming additional income tax assessments for the years 2019 to 2023 [1] [5] [57].
The assessments arose from the full disallowance of repairs and maintenance and security expenses that the Appellant had claimed as deductions but had not substantiated with documents [11] [26] [57].
The Tribunal framed the single issue as whether the Respondent was justified in confirming the income tax additional assessments [55].
The Tribunal accepted the Appellant's explanation that a succession dispute following the death of its former director disrupted its custody of business records, found the explanation plausible and independently corroborated, and held that the Respondent was not justified in confirming the assessments without an opportunity to consider the outstanding records [65] [73].
The Tribunal allowed the appeal, set aside the objection decision, and remitted the matter to the Respondent for a fresh objection decision after production of the records [74].
Background
The Appellant is a limited liability company incorporated in Kenya under the Companies Act and operates in the real estate industry [1]. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 [2].
The Respondent issued the Appellant with income tax additional assessments for the periods 2019 to 2023 on 30 January 2025 following a tax declaration verification exercise [3]. The Respondent stated it had reviewed the Appellant's income tax and VAT declarations for 2019 to 2023 and noted inconsistencies between declared revenue in the IT2C returns and nil VAT declarations [25].
The Respondent stated that a Notice of Intention to Verify Tax Declarations was issued on 23 October 2024, a Pre-Assessment Notice was issued on 30 January 2025, and Additional Income Tax Assessments of Kshs. 52,858,957 covering 2019 to 2023 were issued on 27 February 2025, arising from the full disallowance of unsubstantiated expenses under repairs and security [26].
The Appellant objected via iTax on 12 March 2025 [4] [10]. The Respondent issued a Notice of Invalid Objection on 26 March 2025 and held a meeting on 14 April 2025 inviting the Appellant to regularise the objection [28]. The Respondent issued the objection decision on 8 May 2025 confirming the assessments [5] [29].
The Appellant filed its Notice of Appeal dated 19 June 2025 on the same date, and its Memorandum of Appeal and Statement of Facts dated 27 June 2025 [6] [7] [8].
Core dispute
The Appellant disputed the assessment on two limbs. First, that the repairs, maintenance and security expenses were genuinely incurred and procured from third-party service providers, being necessary to keep aged properties habitable and competitive [15] [17] [58]. Second, that its inability to substantiate the expenses at the assessment and objection stages was attributable to a succession dispute following the death of its former director, the late Hon. G.K. Kirima, which disrupted access to its business records [12] [58].
The Appellant relied on Section 15(1) of the Income Tax Act (Cap 470), arguing that expenses wholly and exclusively incurred in the production of income are deductible and that disallowing them breaches the principle of taxation [14].
The Respondent contended that only expenses wholly and exclusively incurred in the production of income are deductible under Section 15 of the Income Tax Act, that the Appellant produced no supporting documents at any stage, and that the objection was a bare iTax filing lacking grounds and documentation contrary to Section 51(3) of the Tax Procedures Act [27] [33] [39] [45].
The Respondent further argued that the Appellant was attempting to cure its non-compliance at the appeal stage by introducing new material contrary to Section 51(4) of the TPA, and that the burden of proof lay on the Appellant under Section 56 of the TPA and Section 30 of the TAT Act [30] [32] [50].
Court findings
The Tribunal held that the documents the Appellant produced on appeal could not have altered the Respondent's decision beyond the oral explanation already available, and that their production was not the kind of ambush by late-sprung evidence that Section 56(3) of the Tax Procedures Act guards against [59]. It admitted these documents for the limited purpose of explaining the gap in the record, not as proof of deductibility [59].
The Tribunal noted that the duty to keep records attaches to the Appellant as a distinct corporate person and that the death of its director did not extinguish it; the succession dispute could explain a disruption to practical custody of records but not the existence of the duty [60].
The Tribunal held that the burden lay on the Appellant under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act to prove the assessments were excessive or incorrect [61]. It noted the record-keeping obligations under Section 54A(1) of the Income Tax Act and Section 23 of the Tax Procedures Act [62].
It was common ground that no documents substantiating the disallowed expenses were furnished at any stage, and the documents were not placed before the Tribunal [63]. The documents produced comprised a certified grant of letters of administration intestate dated 21 February 2025 and a letter dated 21 May 2025 by the Estate administrators requesting records for 2019 to 2024 [64].
The Tribunal found the Appellant's explanation plausible, corroborated by a court-issued grant and contemporaneous correspondence, and consistent with the change in governance, distinguishing the cases relied on by the Respondent [65]. It made no finding on whether the disputed expenditure was actually and properly incurred, noting the absent proof was a narrow evidentiary gap and not a defect in the legal character of the claimed expenses [66].
The Tribunal was persuaded the Appellant did not have custody or control of the required documents, custody or control being a precursor for production under Section 59(a) of the Tax Procedures Act [67] [68]. It held that the Respondent was entitled under Section 31 to issue a best-judgement assessment on the information available and did not fault the Respondent at that time [69].
The Tribunal held that a best-judgement assessment is provisional on the state of the record and does not foreclose a properly explained opportunity to complete it where a bona fide, independently corroborated impediment is shown [70]. The presumption of correctness remained unperturbed, but the confirmation should not stand as final where reasonable cause was shown [71]. It found the just course was to remit the matter to the Respondent for an informed objection decision after sight of the outstanding records [72] [73].
Outcome
The Tribunal found the appeal merited and allowed it [74].
The objection decision dated 8 May 2025 was set aside, and the matter was remitted to the Respondent to issue a considered objection decision [74].
The Appellant was ordered to provide the Respondent with original or certified copies of documents supporting its objection within thirty (30) days from delivery of the judgment [74]. The Respondent was ordered to consider the documents and issue a fresh objection decision within sixty (60) days of being provided them [74].
Each party was ordered to bear its own costs [74].
Major issues / areas of contention
- Whether the Respondent was justified in confirming the income tax additional assessments for 2019 to 2023 [55].
- Whether the disallowed repairs, maintenance and security expenses were deductible under Section 15 of the Income Tax Act absent supporting documentation.
- Whether the Appellant's failure to keep and produce records was excused by a succession dispute following the death of its director.
- Whether documents introduced at the appeal stage could be admitted given Section 51(4) and Section 56(3) of the Tax Procedures Act.
- Whether the Appellant discharged the burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.
- Whether the matter should be remitted to the Respondent for a fresh objection decision after production of records.