Judgment summary
The Tribunal heard an appeal by Lamnas Investors Limited against a decision of the Commissioner of Domestic Taxes confirming additional VAT and Corporation Tax assessments totalling Kshs. 3,478,209 for the years 2023 to 2025.
The assessments arose from an investigation into a missing trader scheme involving the dormant PIN of one Michael Otieno Odhiambo, who was found to have died on 19th February 2021, years before the purported purchases attributed to him by the Appellant.
The Tribunal declined jurisdiction over the Appellant's constitutional fair administrative action claim, found the input VAT disallowance justified (a point the Appellant had conceded), and held that the Appellant failed to discharge its burden of proving the disputed income tax expenses were genuinely incurred. The Appeal was dismissed and the Objection Decision dated 28th January 2026 was upheld, with each party bearing its own costs (paras 66-67).
Background
The Appellant is a private limited liability company incorporated in Kenya, registered for income tax and VAT, trading from Bungoma (para 1). The Respondent is appointed under Section 13 of the Kenya Revenue Authority Act and mandated to collect revenue under Section 5(1) of that Act (para 2).
An investigation arising from sector profiling in the North Rift region examined Michael Otieno Odhiambo, who traded as Yeyote and was found to have under-declared VAT sales for 2023 to 2024 and filed nil income tax returns despite earning income (paras 3-4). A notice of tax investigation dated 27th August 2025 went unanswered, and inquiries with his bankers proved unproductive (para 4).
The investigating team traced him to Homa Bay County and established, through a certified burial permit and witness statements from the area chief, that he had died on 19th February 2021 (para 5). His purported customers, including the Appellant, were sampled and interviewed (para 6). The investigation concluded this was a missing trader scheme using a dormant PIN to generate fictitious VAT input claims, attributing to the Appellant purchases totalling Kshs. 9,200,869 for 2023 to 2025, with input VAT of Kshs. 1,472,139 claimed (para 7).
A notice of assessment dated 2nd December 2025 disallowed the input VAT and corresponding business expenses, raising additional Corporation Tax and VAT assessments totalling Kshs. 3,478,209 (para 8). The Appellant's objection of 20th December 2025 was declared invalid on 24th December 2025 for non-compliance with Section 51(3) of the Tax Procedures Act, 2015 (para 9). Following a meeting on 22nd January 2026 and in the absence of a validated objection, the Respondent issued an Objection Decision on 28th January 2026 confirming the liability of Kshs. 3,478,209 (para 10).
Core dispute
The Appeal, lodged following the Objection Decision, contended that the Respondent erred in disallowing genuine purchases and related input VAT and expenses without properly considering the Appellant's objection and supporting documentation, and that the assessments were excessive and contrary to the VAT Act, 2013 and the Income Tax Act, Cap 470 (para 12).
The Appellant initially disputed both the input VAT disallowance and the disallowance of business expenses, attributing the absence of invoices to an omission by its former accountant, supported by a police abstract, and arguing that income accepted by the Respondent could not have been earned without corresponding purchases (paras 15-16). It later narrowed its case, abandoning the challenge to the VAT assessment and confining the dispute to whether the Respondent was justified in disallowing the corresponding business expenses for income tax purposes (para 22).
The Respondent maintained that the case involved a missing trader scheme using a dormant PIN belonging to a deceased person to generate fictitious invoices, and relied on Sections 24(2), 29, 31 and 59(1) of the Tax Procedures Act, 2015 and Section 56(1) on burden of proof (paras 32-34).
The Tribunal identified the issues for determination as whether the disallowance of the input VAT claim of Kshs. 1,472,139 was justified, and whether the Respondent was justified in disallowing the Appellant's business expenses for income tax purposes (para 41).
Court findings
The Tribunal first considered its jurisdiction over the Appellant's claim that the Objection Decision violated Article 47 of the Constitution and the Fair Administrative Action Act. It held that, as a creature of statute under Sections 3 and 12 of the Tax Appeals Tribunal Act, its mandate is confined to tax decisions and does not extend to standalone constitutional claims, which fall within the jurisdiction of the High Court under Article 165(3)(b) (paras 43-46).
On the input VAT issue, the Tribunal noted the Appellant had abandoned its challenge in its Reply to the Respondent's Written Submissions, accepting the VAT assessment as raised. The Tribunal found the concession well made, since the input VAT traced to purchases from a supplier proven, by certified burial permit, to have died before the transactions were said to occur, and upheld the disallowance of Kshs. 1,472,139 on both the concession and the merits (paras 47-48).
On the income tax expenses, the Tribunal held that Section 15(1) of the Income Tax Act presupposes a genuine transaction and does not validate an expense merely asserted by a taxpayer (paras 50-51). The uncontroverted evidence that Michael Otieno Odhiambo died on 19th February 2021, before the earliest 2023 purchase and years before the latest 2025 purchase, established a prima facie case that the claimed purchases were not genuine, shifting the evidential burden to the Appellant (paras 52-54).
The Tribunal found the Appellant's explanation of an accountant's oversight did not explain how it transacted with a deceased supplier, and that its general argument linking income to expenditure conflated the abstract existence of costs with the genuineness of this specific, disputed expenditure (paras 55-57). Applying Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, and citing Alfred Kioko Muteti v Timothy Miheso & another, Mulherin v Commissioner of Taxation, Mugo v Commissioner of Domestic Taxes, and Commissioner Investigations and Enforcement v Sangyug Enterprises (K) Limited, the Tribunal held that the burden intensifies once a missing trader scheme is raised, and that the Appellant produced no proof of payment, delivery or stock records to substantiate the transactions (paras 58-62).
The Tribunal rejected the Appellant's argument that disallowing the entire cost of sales amounted to taxing gross receipts, noting the Appellant tied its costs specifically to the disputed supplier and offered no alternative source of supply or reconciliation (paras 63-64). It concluded the Appellant failed to discharge its burden of proof and that the Respondent was justified in disallowing the expenses for income tax purposes (paras 65).
Outcome
The Tribunal dismissed the Appeal in its entirety, upheld the Respondent's Objection Decision dated 28th January 2026, and ordered each party to bear its own costs (para 66).
Major issues / areas of contention
- Whether the Tribunal had jurisdiction to determine the Appellant's claim that the Objection Decision violated Article 47 of the Constitution and the Fair Administrative Action Act.
- Whether the Respondent's disallowance of the Appellant's input VAT claim of Kshs. 1,472,139 was justified.
- Whether the Respondent was justified in disallowing the Appellant's business expenses for income tax purposes.
- Whether the Appellant discharged its burden of proof under Section 56(1) of the Tax Procedures Act, 2015 and Section 30 of the Tax Appeals Tribunal Act.
- Whether purchases purportedly transacted with a supplier who had died before the transactions occurred could be treated as genuine business expenditure under Section 15(1) of the Income Tax Act.