Judgment summary
This is a decision of the Tax Appeals Tribunal at Nairobi concerning an appeal by Mediheal Town Clinic Eldoret Limited against a Commissioner of Domestic Taxes objection decision dated 17th April 2025 (para 4).
The dispute centred on additional corporation tax assessments for the years 2019 to 2022, in which the Respondent allowed only 60% of the Appellant's claimed operating expenses and disallowed the remaining 40% as unsupported (paras 3, 33).
The Tribunal held that the Appellant's supplementary documents, filed with leave, were relevant and material to the expense claims but were not sufficiently reconciled to prove the entire disallowed amount was deductible (paras 49, 52). It found that the blanket 40% disallowance could not safely be sustained without further verification, but the record did not allow the Tribunal to substitute a definite figure (paras 51, 53). The appeal was allowed, the objection decision was set aside, and the matter was referred back to the Respondent for a fresh objection decision within 60 days (para 58).
Background
The Appellant is a limited liability company incorporated under the Companies Act, whose core business is the provision of human medical services (para 1).
The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469, responsible for administering and enforcing tax laws for the assessment, collection and accounting of revenue (para 2).
The Respondent conducted a compliance check on the Appellant for the years 2019 to 2022 and issued an assessment dated 28th February 2025 on Corporation Tax seeking to recover Kshs 10,583,865.47 (paras 3, 13).
On 13th March 2025, the Appellant lodged an objection under Section 51 of the Tax Procedures Act, Cap 469B (TPA) (para 4). The Respondent requested validating documents by email dated 11th March 2025, and in the absence of a satisfactory explanation, issued an objection decision dated 17th April 2025 disallowing the objection (paras 4, 14). The Appellant lodged a Notice of Appeal dated 9th May 2025 (para 5).
Core dispute
The issue for determination was whether the Respondent erred in disallowing 40% of the Appellant's operating expenses and confirming the additional tax assessments for the years 2019 to 2022 (para 32).
The Appellant contended that the disallowed 40% comprised expenses incurred wholly and exclusively in producing its medical-services income under Section 15(1) of the Income Tax Act (ITA), and that the resulting net profit margin of 40% was unrealistic compared to an industry margin of around 4% to 5% (paras 6(a), 35, 36).
The Appellant also argued that the Respondent's decision violated its right to fair administrative action under Article 47 of the Constitution by not exhausting avenues to engage the taxpayer before raising the additional assessment, and that the Respondent failed to adequately consider its grounds of objection (paras 6(c)–(e), 9, 10).
The Respondent maintained that it disallowed only unsupported expenses, that bank statements without invoices and supporting documents were insufficient under Section 15 of the ITA, and that the Appellant bore the burden of proof under Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act (TATA) (paras 15–23).
Court findings
The Tribunal held that Section 15(1) of the ITA imposes both a purpose and a nexus test through the words 'wholly and exclusively', requiring the taxpayer to establish by credible records that the expense was incurred, belongs to the relevant year and taxpayer, and was for the production of taxable income (paras 36, 37).
The Tribunal noted that Section 16(1)(a) and (b) of the ITA reinforce this rule, and that Section 54A(1) of the ITA and Section 23 of the TPA impose record-keeping obligations on the taxpayer (paras 38, 42). It reiterated, citing Section 30 of the TATA and Section 56(1) of the TPA, that the burden of proof lies on the taxpayer to show that an assessment is excessive or that a tax decision is incorrect (paras 43, 44).
The Tribunal clarified that its earlier order granting leave to file supplementary documents regularised their filing but did not deem their contents proved or shift the statutory burden to the Respondent (para 47). It found the supplementary bundle relevant and material to the expense heads in dispute, providing contemporaneous business records and payment-traceability material, but not sufficiently reconciled to justify the whole amount claimed (paras 49, 52).
The Tribunal noted that the assessment covered four years and a quantified tax demand of Kshs 9,958,512 (para 49). It concluded it could not undertake the reconciliation itself, reconstruct four years of accounts, or substitute a tax figure, and that this precluded vacating the assessment to nil or varying it by a definite sum, while also finding it unsafe to validate the Respondent's unexplained 40% disallowance (para 53).
Relying on Section 29(2)(c) of the TATA, the Tribunal held that referral back to the Commissioner was appropriate where the impugned methodology could not stand but the record did not permit the Tribunal to substitute a correct assessment (paras 54, 56).
Outcome
The Tribunal found the appeal merited and allowed it (para 58).
The objection decision dated 17th April 2025 was set aside (para 58(b)).
The matter was referred back to the Respondent to review the documents provided by the Appellant and to make a fresh objection decision within 60 days of the date of delivery of the judgment (para 58(c)).
Each party was ordered to bear its own costs (para 58).
Major issues / areas of contention
- Whether the Respondent erred in disallowing 40% of the Appellant's operating expenses in confirming additional tax assessments for 2019 to 2022.
- Whether the disallowed expenses met the 'wholly and exclusively' test for deductibility under Section 15(1) of the Income Tax Act.
- Whether the Appellant discharged its burden of proof under Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act.
- Whether the record-keeping requirements under Section 54A(1) of the Income Tax Act and Section 23 of the TPA had been satisfied.
- Whether the supplementary documents filed with leave were sufficient to prove the deductibility of the disallowed expenses.
- Whether the Tribunal should substitute its own assessment figure or refer the matter back to the Commissioner under Section 29(2)(c) of the Tax Appeals Tribunal Act.