Judgment summary
The Appellant, Paul Macharia Nduati, trading as Palmac Agricultural Services, is a resident individual engaged in large-scale farming, horticultural infrastructure services and labour outsourcing (para 1). Following a verification exercise covering 2020 to 2023, the Respondent issued additional assessments for Income Tax - Resident Individual and VAT, totalling Kshs. 231,602,607.00 inclusive of principal, penalties and interest (paras 3-5).
The assessments rested on disallowed expenses, unsupported cash drawings, under-declared sales from a variance between VAT and income tax turnover, unsupported amounts due to related parties, and undeclared sales identified through a fund test comparing cash available against payments made (paras 6-7).
The Appellant objected, and after correspondence and a meeting the Respondent issued an Objection Decision on 29 October 2025 rejecting the objection in its entirety, noting that the absence of requested records had limited its review (para 10). The Appellant then appealed to the Tribunal.
The Tribunal framed two issues: whether the additional assessments were validly issued under Section 31 of the Tax Procedures Act (TPA), and whether the Respondent was justified in confirming them in the Objection Decision (para 60). It found for the Respondent on both issues and dismissed the Appeal (paras 71, 104-105).
Background
The Appellant trades as Palmac Agricultural Services and is a Kenyan resident engaged in large-scale farming, specialised horticultural infrastructure services and labour outsourcing (para 1). The Respondent is appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469, and administers tax laws under Section 5 of that Act (para 2).
The Respondent conducted a verification exercise on the Appellant's tax deductions for 2020 to 2023 and identified inconsistencies, omissions and unsupported declarations (para 3). By notice dated 27 March 2025, it communicated additional assessments for Income Tax - Resident Individual and VAT, later raised on iTax on 23 July 2025 (para 4).
The income tax principal was Kshs. 124,150,958.00 for 2020 to 2023 and the VAT principal was Kshs. 45,614,036.00 for 2020, 2021 and 2023. With penalties of Kshs. 8,488,250.00 and interest of Kshs. 53,349,363.00, the total demand was Kshs. 231,602,607.00 (para 5).
The Appellant lodged notices of objection on 2 September 2025 (para 8). The Respondent requested specific documents and the parties corresponded and met, but on 29 October 2025 the Respondent issued an Objection Decision rejecting the objection in full, citing the absence of requested records (paras 9-10). The Appellant then lodged this Appeal (para 11).
Core dispute
The Tribunal identified two issues for determination: first, whether the additional assessments were validly issued under Section 31 of the Tax Procedures Act; and second, whether the Respondent was justified in confirming the assessments in its Objection Decision (para 60).
The Appellant contended that the assessments lacked proper computation and reasons contrary to Section 31 of the TPA, that uploading them onto iTax without prior notice breached Section 54 of the TPA, that the Respondent failed to consider its audited accounts and the nature of its project-based agricultural business, that the fund test was wrongly applied by treating all bank deposits as taxable income, that legitimate expenses were disallowed contrary to Section 15 of the Income Tax Act and Section 59 of the TPA, and that proprietor injections and related-party balances were wrongly treated as income (paras 12, 18-28).
The Respondent maintained that the amendments were validly made within the five-year period under Section 31(4) of the TPA, that it had repeatedly requested supporting documentation which the Appellant failed to furnish, that the burden of proof under Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act lay with the Appellant, and that the objection process had been fair and transparent (paras 33-44).
Court findings
On the validity of the assessments, the Tribunal found that the amendments fell within the five-year limitation period under Section 31(4)(b)(i) of the TPA, measured from the submission of the self-assessment returns (paras 63-64). The Appellant neither produced the notice dated 27 March 2025 nor identified any missing particular under Section 31(8), and the Objection Decision in fact set out the specific bases for the assessments, which the Appellant's own objection had engaged with directly (paras 65-67).
The Tribunal held that Section 54 of the TPA, which concerns appeals to the Court of Appeal, had no bearing on service of assessments via iTax, and that the Appellant's timely objection within 30 days under Section 51(2) of the TPA undermined its own claim of not having received notice (paras 69-70). The first ground of appeal accordingly failed (para 71).
On the second issue, the Tribunal applied Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act, which place the burden on the taxpayer to prove a tax decision incorrect, noting that this evidential burden shifts to the Commissioner only once competent and relevant evidence is produced, per Commissioner of Domestic Taxes v Trical and Hard Limited (paras 75-78).
The Tribunal found that the Appellant's explanation for the fund test deposits (capital injections, client advances, supplier refunds, mobilisation funds, crop proceeds, farmer support advances and inter-account transfers) was not tied to any specific credit entry, date or figure, and that the bank and loan statements produced on appeal had never been placed before the Respondent during the objection and lacked any reconciliation (paras 79-82).
Referring to Commissioner of Domestic Taxes v Jakoline Enterprises Limited, the Tribunal held that an unindexed 'document dump' does not discharge a taxpayer's evidential duty to provide a clear, specific and indexed reconciliation (paras 83-85).
The Tribunal examined the Appellant's audited accounts and found them unreliable for four reasons: the accounts for 2020-2022 named a different proprietor, Elizabeth Wanjiku Ngera, rather than the Appellant; the auditor's reports were unsigned and one report was dated before the period it purported to cover; the 2022 financial statements and the comparative figures for 2022 in the 2023 accounts diverged materially, including a difference in net assets exceeding Kshs. 83 million; and the cash flow statement's capital injection and fixed asset purchase figures for 2022 could not be traced in the balance sheet, including the Kshs. 49,000,000.00 corresponding to the unsecured liabilities in question (paras 86-93).
The Tribunal concluded that these accounts could not displace the assessments and in fact supported the Respondent's exercise (para 94). It also found that the Appellant's admitted informal record-keeping among rural suppliers meant the obligation under Section 23 of the TPA to maintain adequate records had not been discharged, and that Section 59 of the TPA did not impose an evaluative obligation on the Commissioner to allow unvouched expenditure (paras 97-99). The Appellant produced no documentary support for the proprietor loans or related-party balances (paras 102-103).
Outcome
The Tribunal found that the Appellant did not discharge the burden imposed by Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, and that the Respondent was justified in confirming the assessments in its Objection Decision (para 104).
The Appeal was dismissed, the Respondent's Objection Decision dated 29 October 2025 was upheld, and each party was ordered to bear its own costs (para 105).
Major issues / areas of contention
- Whether the additional assessments were validly issued under Section 31 of the Tax Procedures Act
- Whether the Respondent was justified in confirming the assessments in its Objection Decision
- Whether the fund test method was properly applied to reconstruct the Appellant's income
- Whether the Appellant's audited accounts were reliable enough to displace the assessments
- Whether the Appellant discharged the statutory burden of proving the tax decision incorrect
- Whether disallowed expenses, proprietor drawings and related-party balances were properly treated as taxable