Judgment summary
The Tribunal considered whether the Commissioner was justified in confirming the assessments in its objection decision dated 15th August 2025 [38].
The Tribunal found that the Commissioner had raised assessments based on adopted purchases obtained from the Appellant's suppliers, which the Appellant disowned. The Appellant provided bank statements, purchase invoices, sales invoices and financial statements, along with tabulations of purchases and an analysis of vatable and non-vatable sales [43][46][48].
The Tribunal held that the burden of proof in tax cases is not stationary and can shift to the Commissioner once the taxpayer makes out a prima facie case [49][50]. It found that the Appellant had established a prima facie case, and the Commissioner failed to rebut the Appellant's assertions or demonstrate the source of the adopted purchases [52][53][55].
The Tribunal found the Commissioner was not justified in confirming the assessments, allowed the appeal and set aside the objection decision [57][58].
Background
The Appellant is a limited liability company incorporated in Kenya, operating in Eldoret town, whose principal business activity is selling consumable products [1].
The Respondent conducted an audit to verify the Appellant's compliance status on income tax, VAT, WHVAT and WHIT for the period 2019 to 2024. The Respondent compared the Appellant's income tax self-assessment returns with the Appellant's suppliers' declarations and identified variances which were brought to charge [3].
The Respondent issued the Appellant with additional assessments on 21st May 2025 for taxes amounting to Kshs. 65,342,346.00 [4]. The Appellant lodged an objection dated 20th June 2025 [5]. The Respondent issued an objection decision dated 15th August 2025 confirming the assessments fully [6]. The Appellant lodged the appeal on 18th September 2025 [7].
Core dispute
The Appellant contended that the Respondent assessed income tax and VAT based on adopted purchases derived by applying a mark-up on purported purchases obtained from a third party, despite the fact that the Appellant did not make such purchases, contrary to Section 15(1) of the Income Tax Act and Sections 6 and 7 of the Value Added Tax Act 2013 [12][13].
The Appellant also stated that the variance between sales declared for VAT purposes and those in the IT2C returns was due to the unintentional omission of non-vatable sales from the initial VAT filings [14].
The Respondent maintained that the assessments were proper, that the Appellant failed to provide a reconciliation to address the variance, and that the burden of proof rested on the Appellant to show the tax decision was incorrect [22][35]. The single issue for determination was whether the Respondent was justified in confirming the assessments in its objection decision dated 15th August 2025 [38].
Court findings
The Tribunal found that the dispute arose from the compliance audit, whereon the Respondent raised additional income tax assessments pursuant to Section 24(2) and 31(1) of the Tax Procedures Act [40].
Regarding withholding VAT, the Tribunal noted that the Respondent averred the Appellant was registered as a withholding VAT agent on 6th November 2023, but did not provide any document to show that the Appellant had been appointed as an agent and duly informed of its registration and attendant obligations [41].
The Tribunal noted the Appellant categorically disowned the adopted purchases and provided bank statements detailing actual purchase transactions [46]. It observed that upon the Appellant denying knowledge of the adopted purchases, the Respondent, being the custodian of third party data, ought to have demonstrated the source of the alleged adopted purchases before declaring them the Appellant's understated purchases. The Tribunal stated that the Respondent's failure to establish a proper basis amounts to plucking figures from the air, citing KRA & 2 Others vs. King Bird (Kenya) Ltd [47].
The Tribunal held that the burden of proof under Sections 56(1) of the TPA and Section 30 of the TATA rests on the taxpayer but is not stationary and may shift to the Respondent if the Appellant makes a prima facie case, citing Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR and Commissioner of Domestic Taxes v Trical and Hard Limited [49][50][54].
The Tribunal found that the Appellant made out a prima facie case, effectively swinging the burden back to the Respondent, and that the Respondent failed to rebut the Appellant's assertions. The presumption of correctness ascribed to the Respondent's assessment vanished [52][53][55].
The Tribunal stated that where the Respondent relies on third party data not in the Appellant's domain, it is obliged to exercise best judgement, citing Moses Kiarie Kuria vs. Commissioner of Domestic Taxes and Van Boeckel vs. C&E QB (1981) STC 290 [56]. It found the Respondent was not justified in confirming the assessments [57].
Outcome
The Tribunal found the appeal merited. It allowed the Appellant's appeal, set aside the Respondent's objection decision dated 15th August 2025, and ordered each party to bear its own costs [58].
Major issues / areas of contention
- Whether the Respondent was justified in confirming the assessments in its objection decision dated 15th August 2025.
- Whether the Respondent could raise assessments based on adopted purchases obtained from third party supplier declarations that the Appellant disowned.
- Whether the Appellant had made out a prima facie case sufficient to shift the burden of proof to the Respondent.
- Whether the Respondent established a proper basis for the withholding VAT assessment given the absence of documentation showing the Appellant's appointment and notification as a withholding VAT agent.