Jarso v Commissioner of Investigations & Enforcement [2025] KETAT 190 (KLR) | Tax Assessment Limitation Period | Esheria

Jarso v Commissioner of Investigations & Enforcement [2025] KETAT 190 (KLR)

Full Case Text

Jarso v Commissioner of Investigations & Enforcement (Tax Appeal E453 of 2024) [2025] KETAT 190 (KLR) (14 March 2025) (Judgment)

Neutral citation: [2025] KETAT 190 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E453 of 2024

E.N Wafula, Chair, RO Oluoch, G Ogaga, AK Kiprotich & Cynthia B. Mayaka, Members

March 14, 2025

Between

Abdi Boru Jarso

Appellant

and

Commissioner of Investigations & Enforcement

Respondent

Judgment

1. The Appellant is a sole proprietor of Lihub Bullah Enterprise whose principal business is in general supplies.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent undertook investigations on the Appellant’s tax affairs for Corporation tax for the tax period 2018 to 2022, VAT for 2018 to 2023, PAYE for 2018 to 2023 and Withholding tax for 2018 to 2023. The Respondent subsequently issued its tax investigation findings through a letter dated 7th December, 2023.

4. The Respondent issued its assessment on 19th December 2023. The Appellant objected in iTax on 18th January 2024.

5. The Respondent wrote to the Appellant asking it to validate its objection on 12th February 2024. The Appellant through a letter dated 15th February 2024 objected to the assessments.

6. The Respondent issued an objection decision through a letter on 15th March 2024

7. The Appellant being dissatisfied with the objection decision filed a Notice of Appeal on 12th April 2024.

The Appeal 8. The Appeal as captured from the Memorandum of Appeal dated 26th April 2024 and filed on the even date raised the following grounds:i.That the Respondent erred in law and fact in issuing assessment for the periods 2018 and 2019 contrary to the express provisions of Section 31 (4) of the Tax Procedures Act.ii.That the Respondent erred in law and fact in requiring the Appellant to avail records beyond the stipulated period of five years contrary to the express provisions of Section 23 of the Tax Procedures Act hence placing the Appellant in a situation it cannot defend itself.iii.That the Respondent erred in law and fact in ignoring all the information and documentation that were furnished at the various deliberations following the pre-assessment and post Assessments.iv.That the Respondent erred in law and fact in bringing to charge the deposits in the Appellant’s bank account without considering the nature of the deposit that they intend to bring to charge.v.That the Respondent erred in law and fact in seeking to justify the Assessments instead of considering the objection and the provided information independently.vi.That the Respondent erred in law and fact in considering all the deposits to be taxable without considering the charging clause of the Income Tax Act and placing the same within Section 3 (2) of the Income Tax Act.vii.That the Respondent erred in law and fact in failing to make adjustments for non-sales deposits including interbank transfers between related entities and the Appellant's various accounts, unpaid cheques, loan deposits, and other banks related deposits.viii.That the Respondent erred in law and fact in ignoring the explanations on deposits made from related entities who are separate entities and operating as such and treated them as self-deposits and brought them to charge.ix.That the Respondent erred in law and fact in failing to appreciate that the related party deposits cannot be brought to charge as this will result in the same figures being brought to charge twice.x.That the Respondent erred in law and in fact in disallowing amounts that were clearly stated to be soft loans from friends to ensure business sustenance and disregarding the supporting documents.xi.That the Respondent erred in law and fact in failing to make adjustments for the expenses and purchases while reviewing the bank statements while the same statements provided for the same.xii.That the Respondent erred in law and fact in ignoring the explanation advanced and the evidence presented during the deliberations pointing out to the entries in the bank statements that related to the purchases that ought to be considered.xiii.That the Respondent erred in law and fact in ignoring the documents provided that supported the purchases but rather erroneously stating that no documents were provided.xiv.That the Respondent erred in law and fact in failing to consider the explanations and documentation provided to support expenses.xv.That the Respondent erred in law and fact in subjecting the variance from the analysis to Value Added Tax without establishing if indeed any taxable supply was made.xvi.That the Respondent erred in law and fact in failing to make adjustments for the expenses and proceeding to make an assessment in full disregard of all the explanations provided by the Appellant.

The Appellant’s Case 9. The Appellant’s case is premised its Statement of Facts filed on 26th April 2024 together with the documents attached thereto and its submissions dated 23rd January 2025.

10. The Appellant submitted that the Respondent analyzed it's Equity Bank Statements for and the IFMIS data and issued it with tax investigations findings dated 7th December, 2023.

11. That in the tax investigation findings, the Respondent established that:a.That during the period 2021-2022, the Appellant made supplies of Ksh 5,695,122. 00. b.In the review of the bankings, the Respondent took all the deposits for the period 2018 to 2022 and treated them as taxable deposits.c.The Respondent further reviewed the claimed purchases as per the return and indicated that they were unsupported.

12. That the Respondent in the tax investigation finding proceeded to demand that the Appellant makes the payment of the taxes within 14 days.

13. That the Appellant immediately went to the Respondent's offices in Mombasa where they were told to provide explanations.

14. It stated that the Respondent on 19th December 2023 proceeded to make a system based assessments.

15. That the Appellant on 18th January, 2024 proceeded to make system based objection. The Appellant further submitted that on 15th February 2024 it proceeded to make an Objection as the iTax system does not allow for a comprehensive objection. That the objection was based on the grounds that:i.The deposit included non-revenue deposits including loans from third parties, friendly loans, inter-bank transfers, and bank reversals.ii.The Appellant further provided the documents to support the purchases.iii.The Appellant was also able to avail documents to support the expenses that it had been indicated not to be allowable.iv.The Appellant also had meetings with the Respondent and provided other details which explained the deposits.

16. The Appellant further challenged the legitimacy of the assessment on the as summarized hereunder:i.Defying legal precedent: That the Respondent blatantly ignored the clear provisions outlined in Section 31(4) of the Tax Procedures Act, which explicitly dictate the conditions under which assessments should be issued and proceeded to issue assessment beyond five year limit. That by disregarding these legal safeguards, the Respondent had undermined the integrity of the entire assessment process.ii.Overreach beyond legal bounds: That requesting records beyond the statutory limitation of five years, as outlined in Section 23 of the Tax Procedures Act, constitutes a severe overreach of authority. That this arbitrary demand not only violates established legal boundaries but also places undue burden and prejudice on the Appellant, hindering the Appellant’s ability to mount a fair defense.iii.Failure to discern financial realities: That the Respondent's oversight in assessing the nature of deposits demonstrates a fundamental failure to comprehend the intricacies of the Appellant's financial transactions. That by lumping all deposits together without considering their individual characteristics, the Respondent had grossly misrepresented the true financial and Tax picture, leading to an unjust assessment.iv.Disregard for due process: That despite the diligent efforts of the Appellant to provide comprehensive information and documentation during both pre-assessment and post-assessment deliberations, the Respondent callously disregarded these vital inputs. That such blatant disregard for due process not only undermines the Appellant's right to a fair hearing but also erodes trust in the integrity of the assessment process.v.Abdication of independent review: That instead of impartially evaluating the Appellant's objections and the evidence provided, the Respondent opted to blindly defend its initial assessments. That this failure to independently assess the merits of the Appellant's objections reflects a disturbing lack of accountability and impartiality on the part of the Respondent.vi.Misapplication of tax law: That by erroneously categorizing all deposits as taxable without proper consideration of relevant provisions within the Income Tax Act that only accrued income is subject to tax and not non-sale deposits, such misapplication of tax law leads to unjust assessments as is the case herein.vii.Failure to make necessary adjustments: That the Respondent's failure to make necessary adjustments for non-sales deposits, including interbank transfers and loan deposits, underscores a disturbing disregard for the nuanced complexities of financial transactions. That this error skewed the assessment process requiring that the same be struck out.viii.Unjust treatment of related party transactions: That treating deposits from related entities as self-deposits and subjecting them to taxation constitutes a grave injustice. That such flawed reasoning not only overlooks the distinct legal and financial identities of related parties but also risks double taxation, further compounding the injustice suffered by the Appellant.ix.Risk of double taxation: That the Respondent's insistence on bringing related party deposits to charge poses a significant risk of double taxation. That this reckless approach not only disregards established legal principles but also exposes the Appellant to unnecessary financial burdens and legal complications.x.Disregard for economic realities: That disallowing soft loans from friends, which are crucial for business sustenance, demonstrates a troubling disconnect from economic realities. That such arbitrary decisions not only jeopardize the Appellant's financial viability but also undermine the broader economic ecosystem of persons operating in small towns like Hola.xi.Failure to recognize legitimate expenses: That the Respondent's failure to acknowledge documented purchases outlined in bank statements represents a grave oversight. That by neglecting to account for legitimate expenses, the Respondent had unjustly inflated the Appellant's tax liability, exacerbating the financial strain on their business operations.xii.Failure to consider documents: That the Respondent's failure to consider explanations and documentation supporting expenses constitutes a dereliction of duty. That by neglecting to properly assess legitimate expenses, the Respondent had unjustly inflated the Appellant's tax liability, imposing undue financial strain and hardship.xiii.Dismissal of valid explanations: That by ignoring the Appellant's explanations and evidence regarding purchases during deliberations reflects a concerning disregard for transparency and fairness. That this dismissive attitude undermines the credibility of the assessment process and erodes trust in the integrity of the tax administration.xiv.Neglect of supporting documents: That disregarding supporting documents provided by the Appellant further underscores the Respondent's lack of diligence and attention to detail. That such oversight not only compromises the accuracy of the assessment but also raises questions about the competency and professionalism of the tax administration.xv.Blatant disregard for Appellant's purchases: That proceeding to make an assessment without making necessary adjustments for expenses and purchases, despite the Appellant's comprehensive explanations, is a flagrant violation of due process. That such blatant disregard for the Appellant's inputs not only undermines the fairness of the assessment process but also erodes trust in the integrity of the tax administration.

17. The Appellant submitted that by emphasizing the egregious nature of the Respondent's errors and their detrimental impact on the Appellant's rights and financial well-being, these points are aimed at highlighting the importance of rectifying the unjust assessment by having the same struck out with cost to the Appellant.

18. The Appellant further expounded on its the grounds of appeal as hereunder;i.Whether the assessments for the period for the period 2018 and 2019 are valid

19. According to the Appellant, the issuance of assessments by the Respondent to the Appellant on 19th January, 2024, for the period spanning from 2018 to 2023, raises critical concerns regarding procedural fairness and adherence to statutory provisions. Section 31 (4) of the Tax Procedures Act.

20. It stated that as per Section 31(4) of the Tax Procedures Act, the Respondent is only empowered to amend assessments for five years and it can only expand the scope under specific circumstances, including instances of gross neglect, evasion, or fraud.

21. That however, it was essential to point out that throughout the entire discourse leading to this Appeal, no allegations of fraud or gross negligence were ever raised. That the same can only be ascertained from the actions leading to the assessment and not the assessment.

22. The Appellant submitted that it was crucial to emphasize that accusations of fraud or evasion demand a court determination before they can be substantiated hence the same cannot be said to have been attributable to the issues herein.

23. That conversely, negligence, as defined by legal standards, denotes a conscious, voluntary act or omission in reckless disregard of a legal duty and its repercussions to another party.

24. That despite the Appellant's commitment to fulfilling its statutory obligations by dutifully filing returns and remitting all taxes due in accordance with its calculations, the Respondent had chosen to raise concerns solely about what it considered unexplained deposits post-bank statement verification. That a divergent position concerning what constitutes income cannot be regarded as being negligent.

25. That in the current case, it filed the returns which is the statutory duty and remitted all the taxes which were due as per the calculation. That the only issue that the Respondent was alleging is that after verifying the bank statement, some of the deposits were not convincingly explained hence taxes were due. That this was an issue of whether the amounts are taxable or not and not negligence.

26. The Appellant stated that apart from the above provisions of Section 29(5) & (6) and Section 23(1)(c) of the TPA emphasize the obligation for individuals to retain documents for five years from the end of the reporting period, unless otherwise specified by tax law.

27. The Appellant submitted that the Respondent at the initial point of the assessment invoked Section 59 of the Tax Procedures Act to require the Appellant to provide documentation, this being the case, the limits of Section 23 concerning the limits of maintaining documents had to be taken into consideration.

28. That indeed, the Appellant should not be compelled to defend an assessment that extends beyond the scope of the documents they are obligated to retain. That as per Section 23(1)(c) of the Tax Procedures Act, individuals are required to retain documents for a period of five years from the end of the reporting period, as specified by law. It averred that this provision serves as a safeguard against undue burden and ensures fairness in tax assessments.

29. The Appellant posited that given this legal framework, any attempt by the Respondent to hold the Appellant accountable for matters beyond the timeframe covered by the retained documents would not only contravene statutory requirements but also undermine the principles of procedural fairness and due process. That the Tribunal needs to recognize and uphold the Appellant's rights in this regard.

30. It stated that if the Respondent perceives Section 23 as being inconsistent with Section 31(4) of the Tax Procedures Act, then it is incumbent upon it to initiate legislative amendments to resolve any perceived inconsistencies. That it was essential for tax legislation to be clear, coherent, and aligned with overarching principles of fairness and legality.

31. The Appellant submitted that in cases where statutory provisions appear to conflict or create ambiguity, it is the responsibility of the legislative body to review and amend the law to ensure consistency and effectiveness in its application. That any lack of certainty in tax statute must be interpreted in favor of the Appellant.

32. That therefore, in assessing the validity of the Respondent's claims, the Tribunal must consider the limitations imposed by the relevant provisions of the Tax Procedures Act. That the Appellant should not be unfairly burdened with defending assessments that fall outside the prescribed scope of document retention. That any attempt to do so would be a departure from established legal principles and should be rejected accordingly.

33. That drawing attention to the precedent outlined in the case of Gitere Kahura Investments Ltdvs Commissioner of Investigations and Enforcement Tax Appeal No. 16 of 2019, it becomes evident that the onus lies squarely upon the Respondent to substantiate any claims of the Appellant's failure to file returns motivated by gross or wilful neglect, attempts to evade tax payments or fraudulent behaviour.

34. That hence, it was imperative for the Tribunal to meticulously examine the assessment issued by the Respondent on 19th January, 2024. That it must acknowledge the assessment's restricted scope, which extends solely up to 24th January, 2020. That any endeavour by the Respondent to impose tax liabilities for the years 2018 and 2019 would constitute an undue overreach beyond the permissible timeframe.

35. The Appellant submitted that it follows therefore that the Respondent’s assessment of 19th January 2024 could only go for five years back that is, 24th January 2020. That the Respondent could not go beyond the period to assess for 2018 and 2019.

36. That the assessment was therefore a breach of the five-year limit as envisaged under Section 23 and Section 31 (4) of the TPA and the same should be struck out.ii.Whether the Respondent was correct in assessing the bankings without taking into account the true character of the deposits

37. The Appellant stated that the Respondent during the objection never considered the information availed by the Appellant and only sought to justify the assessments instead of considering the objection and the provided information independently.

38. That the Respondent at objection failed to address any of the limbs articulated in the objection and the explanations advanced and evidence provided and instead proceeded to affirm the assessments.

39. That the Respondent's decision not to conduct a regular audit of the Appellant and thereby accord the Appellant an opportunity to provide inputs, information, and documentation was an error of both law and fact.

40. The Appellant stated that at the objection it proceeded to provide an analysis as to the character of the bankings and further explanation to demonstrate that the deposits were not incomes to be subjected to either Income tax or VAT.

41. That the Respondent failed to consider the charging clause of the Income Tax Act and placed the same within Section 3 (2) of the Income Tax Act.

42. The Appellant asserted that the Respondent was applying cosmetic adjustments to be seen to comply with the law. That the Respondent's handling of the deposits paints a troubling picture of mistakes and negligence. It averred that while the Respondent may have taken initial steps to address non-income deposits through cosmetic adjustments, a closer examination reveals a failure to delve into the true character of these financial transactions. That specifically, interbank transfers between related entities, unpaid cheques, loan deposits, and other significant banking activities had been overlooked or inadequately addressed.

43. The Appellant submitted that this omission was a systematic failure to fully grasp the complexities of applying the banking analysis method in tax assessments.

44. That the requirement that a comprehensive adjustment be made is to ensure that, the Respondent does not leave out crucial elements unaccounted for, leading to an inaccurate portrayal of the Appellant's financial standing and exaggeration of the Appellant's tax status.

45. That such oversight undermines the integrity of the assessment process and raises serious concerns about the fairness of the Respondent's actions.

46. The Appellant further asserted that the Respondent’s failure to accurately assess the nature of deposits, despite superficial adjustments to appear compliant, was deeply concerning. That the Respondent’s failure to fully consider interbank transfers, unpaid cheques, loan deposits, and deposits from other banks had led to an incomplete analysis.

47. That notably, the Respondent had neglected to acknowledge the legitimate soft loans provided by various entities for example for Flexy Limited and Holakibs Limited.

48. It averred that in the case of the soft loan from Flexy Limited, the Respondent's stance was perplexing. That while acknowledging the loan's existence and the provision of supporting loan documents, it unjustly rejected the explanation due to a lack of proof of repayment. That however, the deposit's supported nature renders it clearly non-taxable, a fact that cannot be overlooked.

49. That it was evident that the Respondent's refusal to consider the true nature of the deposit, solely on the grounds of repayment absence of proof, was unfounded. That the supported nature of the deposit unequivocally establishes its non-taxable status.

50. The Appellant averred that the Respondent blatantly dismissed its explanations. That furthermore, the Respondent dismissed the explanation that alternative payment methods, such as cash, were often utilized for transactions like the soft loan, especially given the close association between parties. That there exists no mandate for such payments to be exclusively routed through banks.

51. Regarding the loan from Holkabib Limited, it averred that despite providing a comprehensive loan agreement confirming the amounts loaned, the Respondent's objection merely rested on the instalment nature of the loan receipt, ignoring the legitimacy of the loan itself.

52. That these glaring oversights and inconsistencies in the Respondent's approach significantly impact the Appellant's taxable income unfairly. It submitted that these issues must be rectified to ensure a just and accurate assessment of the Appellant's financial situation.

53. That further, concerning the loan from Holkabib Limited, the loan agreement was provided which supported that indeed the amounts were loaned. That the Respondent on this loan only had an issue with the fact that the amounts were received in instalments.

54. That also with regard to Robcom Electronical Constructions the Respondent acknowledged that the loan supporting documents were provided but disallowed the same on the basis the Appellant had not repaid the loan.

55. That the Respondent further ignored the letters from some of the suppliers acknowledging that their loans had been repaid.

56. That while the Appellant provided documents to support several deposits of loans to the account, the fact that the bank statement described them as bank deposits, the Respondent declined to recognize them as non-sale deposits.

57. That it also provided soft loan agreements for a loan from Tugoza Enterprises, Tekalu Limited, Hero Bwanamaka, and Suleiman Mahad. That these were supported loans but the same were disallowed. That the same were as follows:No. LENDER AMOUNT

1. Tugoza Enterprises dated 1st Sept.2022 900,000

2. Tugoza Enterprises dated 19th Aug. 2022 950,000

3. Tugoza Enterprises dated 24th Aug 2022 950,000

4. Tugoza Enterprises dated 28th April 2022 3,550,480

5. Tugoza Enterprises dated 30th Aug 2022 900,000

6. Tekalu Limited 15th February 20 700,000

7. Hero Bwanamaka 7th Mar 20 140,000

8. Hero Bwanamaka 24th Feb 20 260,000

9. Hero bwanamaka 3rd Feb20 380,000

10. Suleiman Mahad 17th Aug 21 400,000

Total 8. 750,480

58. The Appellant asserted that the Respondent failed to consider the nature of the trading environment. That it was paramount to understand the intricate dynamics of life in a small town like Hola, nestled within Tana River County. That here, community bonds run deep, and transactions are often woven into the fabric of trust and mutual reliance. That in such tight-knit communities, formalities take a back seat to the intrinsic relationships and trust that flourish among its inhabitants.

59. The Appellant explained that within this communal context, the documentation of a loan serves as a mere formality, affirming its existence within a network built on trust. That transactions unfold based on the unspoken agreements and mutual understanding shared among community members. It averred that repayments therefore are not solely bound by contractual obligations but are often shaped by the practicalities of each individual's circumstances. That in many instances, repayments manifest in various forms, reflecting the nuanced nature of communal exchange.

60. That moreover, it was crucial to acknowledge that in the realm of small-town commerce, cash remains a prevalent medium of exchange. That loans received in cash predominantly fuel local businesses, with any surplus funds finding their way into formal banking channels. That in light of this the Respondent's insistence on strict adherence to deposit amounts mirroring loan receipts is unduly rigid. That such an approach fails to appreciate the fluidity and pragmatism inherent in local economic transactions, potentially leading to unjust outcomes for hardworking entrepreneurs striving to navigate their enterprises within the parameters of their community's ethos.

61. That further, most of the loans having been received in cash for business supplies, the same were used for business purposes and the balance was what was deposited in the bank, especially in cases where the supplier lacks what is needed or there is no one to be sent to the major towns like Voi to get what is missing.

62. The Appellant insisted that to demand that it shows the exact figure in the deposit will therefore be unrealistic. That it was therefore unjust for the Respondent to require that if a loan is for 14,000 then the amount deposited must be 14,000 and not even in instalments.

63. That this was the case concerning the loan from Lihub-Bullah Enterprises where the loan of Ksh 800,000 was made for supplies and upon not being able to acquire the required stocks, due to unavailability, the balance of Ksh450,000 was banked through Mpesa to the bank account. That the Respondent disregarded this explanation on the basis that the same was a self-deposit.

64. That the Respondent's approach appears to be illogical, as once the true character of the deposit has been established, how the loan is repaid should not be a determining factor. It insisted that whether the loan is repaid in instalments, in a lump sum, or never paid does not alter the fundamental nature of the deposit.

65. That consequently, it was evident that the Respondent was wrong by neglecting to make necessary adjustments for non-sales deposits. That this includes failing to account for interbank transfers between related entities, transactions involving the Appellant's various accounts, outstanding cheques, loan deposits, and other related banking activities.

66. Regarding variances, the Appellant stated that the Respondent's decision to subject variances from the analysis to Value Added Tax (VAT) without establishing the occurrence of any taxable supply represents a serious error in both law and fact. That VAT is levied on the supply of vatable goods or services, and its application must be firmly rooted in the existence of such taxable transactions.

67. That despite the absence of concrete evidence indicating the occurrence of taxable supplies, the Respondent proceeded to apply VAT to variances from the analysis.

68. It averred that this was even after the Appellant had provided evidence that the variance was from non-sale deposits including loans and bank adjustments. That this arbitrary imposition of VAT without establishing the underlying taxable transactions demonstrates a fundamental misunderstanding of VAT principles.

69. The Appellant submitted that Section 5 of the Value Added Tax Act provides that VAT is chargeable on a supply. That in this case, the Appellant provided evidence that no supply was ever made concerning the variance.

70. That the Respondent's failure to conduct due diligence to verify the existence of taxable supplies before applying VAT was aimed at ensuring that the Appellant is brought to charge even in cases where there was no evidence of supply.

71. The Appellant posited that the Respondent's failure to establish the occurrence of taxable supplies before applying VAT reflects a concerning departure from evidence-based taxation practices, casting doubt on the integrity and reliability of the tax assessment.

72. That in light of these shortcomings, the Respondent's actions fail to provide an accurate reflection of the Appellant's business, financial, and tax affairs. That as a result, the demands made by the Respondent were flawed from the outset, lacking the precision and thoroughness required for a fair and just assessment.iii.That the Respondent ignored to consider the related entities deposits.

73. On related entities deposits, the Appellant submitted that the Respondent's demands exhibited a concerning oversight regarding deposits from related entities. That despite clear explanations provided, illustrating the separate nature of these entities and their independent operations, the Respondent erroneously categorized these deposits as self-deposits, subjecting them to taxation without due consideration of their external origin and purpose and brought the same to charge.

74. That the Respondent's demands exhibited a concerning oversight regarding deposits from related entities. That despite clear explanations provided, illustrating the separate nature of these entities and their independent operations, the Respondent erroneously categorized these deposits as self-deposits, subjecting them to taxation without due consideration of their external origin and purpose and brought the same to charge.

75. That furthermore, even when detailed clarifications were furnished, highlighting that not all self-deposits constituted income from trade, the Respondent persisted in disregarding these explanations.

76. It averred that for instance, in cases where deposits were derived from cash loans extended by third parties and only a portion of the funds were utilized for business activities, with the remaining balance deposited for safekeeping, were unjustly treated as trade income.

77. That additionally, the Respondent’s inclination to find mistake rather than to understand the Appellant deprived the Appellant of the opportunity to provide essential inputs, information, and documentation that could have elucidated the nature of the transactions and potentially mitigated any erroneous assessments. That the related entities and companies for which deposits were brought to charge included the following: for the year 2021No. Entity Amount

1. Buqais Travels Limited 5,630,000

2. Holakibs Holding Limited 2,550,000

3. Zeinamall Limited 4,400,000

4. Robkim Constractors Limited (soft Loan) 3,000,000

5. Ishaq Buya (soft Loan) 800,000

6. Lihub Bullah Limited 8000,000

Total 17,910,000

78. According to the Appellant, while documents to support several amounts received from Ishaq Buya, the Respondent only accepted one for the year 2022.

79. That throughout the objection process, it became apparent that the Respondent overlooked a fundamental aspect of tax law, that related party deposits cannot be doubly taxed under the Income Tax Act.

80. That charging these deposits would result in the same figures being taxed twice or being subjected to taxation in the hands of two separate entities. That this oversight underscores a critical misunderstanding of tax principles and highlights the need for a reassessment of the Respondent's approach.

81. On expenses and purchases, the Appellant stated that the Respondent in the objection decision, disallowed the expenses claimed because the same could not be traced from the i-Tax profile.

82. That throughout the objection process, the Appellant diligently presented a comprehensive bundle of invoices, meticulously reproduced within the Appeal.

83. That these documents serve as undeniable proof affirming that the Appellant genuinely incurred the expenses it claimed. That each invoice details specific transactions and purchases made by the Appellant, providing clear evidence of the expenditures in question.

84. That it was important to highlight the intricacies of Hola town's commercial environment, characterized by its old-fashioned village crux. It averred that within such intimate settings, transactions predominantly unfold in small, local shops that often operate without the sophistication of elaborate electronic invoicing systems

85. The Appellant submitted that these shops cater to the everyday needs of the community, offering goods and services without the formality of electronic tax invoices complete with Personal Identification Numbers (PINs).

86. That instead, transactions are typically recorded through handwritten or informal receipts, reflecting the informal nature of commerce in such environments. It stated that although the period under consideration was not covered under eTIMS the Respondent had appreciated this in its efforts to role out electronic tax invoice management systems (eTIMS) following the enactment of Finance Act 2023, which it had, but consistently suspended the full implementation in some sectors.

87. The Appellant averred that the Respondent had introduced user-friendly modules for the electronic Tax Invoice Management System (eTIMS), including USSD technology, to cater for small-scale traders and suppliers, particularly those residing in towns like Hola.

88. That the introduction of the different modules and phased role out was an acknowledgement of the dynamic nature of trade in different parts of the country.

89. That further Section 15 of the Income Tax Act which provides for allowable expenses, provides that expenses must be incurred wholly and exclusively for income generation purposes within the relevant fiscal year.

90. The Appellant submitted that there was no requirement that the invoices should be contained in the iTax system for them to be allowable.

91. That the Appellant's invoices demonstrate that the expenses incurred were directly related to its business activities and were necessary for generating income during the period in question

92. That furthermore, the absence of these invoices within the iTax system does not detract from their legitimacy as valid expenses. That there was no requirement that invoices be included in iTax for Income Tax.

93. The Appellant maintained that any insistence on such a requirement would not only contravene the principles enshrined within Section 15 but also undermine the fundamental tenets of fairness and equity within the tax assessment process.

94. The Appellant stated that it further provided petty cash receipts which the Respondent did not consider. That the pPetty cash was used to provide business units with sufficient cash to cover running expenditures. That the intent is to simplify the reimbursement for day-to-day expenses generally such as taxi, tuk tuk and boda boda fares, postage, office supplies.

95. It was the Appellant’s contention that the Respondent in the objection decision indicated that the Appellant provided invoices to support expenses including from Skippers Enterprises and Suwaku Enterprises for the years 2018 and 2019.

96. That it was misleading for the Respondent to state in the objection decision that no grounds were provided to support the purchases for 2021 and 2022. It averred that the amounts to be considered as purchases for the years 2021 and 2022 was Kshs 2,650,050. 00 and Kshs 1,878,500. 00, respectively as clearly captured in the objection.

97. The Appellant also contended that the Respondent in the objection decision disallowed inputs amounting to Kshs 2,603,328. 00 for the year 2021, that this was even though the Appellant had provided invoices to support the purchases.

98. The Appellant averred that it further provided information verbalized when it was sought. That it had provided documents to support the said expenses, and the same was reproduced in the Appeal. That the Respondent chose to ignore the purchases and cannot be allowed to aver that no ground was provided to support the expenses.

99. That the Appellant had in all the years provided invoices that supported the purchases for both the vatable and non-vatable purchases. It insisted that no explanation was made as to why the expenses for the year 2020 and 2021 were not fully allowable and as such the expenses for the two years should be adopted as correctly incurred.

100. That it therefore follows that the Respondent having ignored the explanations and documentation provided to support expenses and purchases in its computation, the whole Objection decision was improper and should be set aside.

Appellant’s Prayers 101. The Appellant prayed to the Tribunal to that;a.The Objection decision dated 15th March 2024 which was made contrary to the provision of the Income Tax Act, Value Added Tax Act, and the Tax Procedures Act,2015 be set aside.b.The Respondent's actions were a breach of the Appellant's Constitutional rights.c.The Appeal is merited and the Objection decision be set aside with cost to the Appellant.

Respondent’s Case 102. The Respondent’s case is premised on the hereunder filed documents:i.The Respondent’s Statement of Facts dated 6th June 2024 and filed on 10th June 2024 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 18th November 2024.

103. The Respondent stated that it undertook investigations into the Appellant’s tax affairs on Corporation tax for the tax period 2018 to 2022, VAT for 2018 to 2023, PAYE for 2018 to 2023 and Withholding tax for 2018 to 2023 to establish tax compliance, ascertain income accrued by the Appellant and verify the correctness of purchases and costs claimed.

104. It averred that the investigations were prompted by allegations tendered in the intelligence profile highlighting entities that benefited from the tenders awarded by Tana River and Lamu Counties which entities were suspected of being involved in procurement fraud, tax evasion, conflict of interest, and money laundering.

105. That in the investigations, the Respondent's team analyzed the income based on IFMIS data, vatable purchases claimed by the Appellant, comparative analysis of the Income tax returns, analysis of costs claimed in the income statements and VAT returns, and the bank accounts operated by the Appellant namely;i.Equity Bank in the name of Libub Bullah Enterprises;andii.Equity Bank in the name of Abdi Boru Jarso.

106. That following the investigations, the Respondent issued the Appellant with its tax investigation findings for the tax period in dispute vide a letter dated 7th December 2023 with preliminary taxes highlighted therein as follows;Details 2018 2019 2020 2021 2022 2023 Total

Income Tax 16,822 85,470 1,072,447 4,424,959 3,125,370 - 8. 725,068

VAT - 92,584 681,180 2,397,066 1,569,520 82,555 4,822,905

Total Tax 16,822 178,054 1,753,627 6,822,025 4,694,890 82,555 13,547,973

107. The Respondent stated that in its findings it sought an explanation of the variances between the bank deposit analysis and turnover declared for VAT and Income tax as well as supporting documents on the purchases claimed.

108. The Respondent added that it then issued its system-based tax assessments on the Appellant on 19th December 2023 which covered the period from 2017 to 2021 which the Appellant objected to on iTax on 18th January 2024.

109. The Respondent stated that it issued its objection invalidation letter dated 12th February 2024 noting that the Appellant's objection failed to comply with the requirements of Section 51(3) of the Tax Procedures Act.

110. That subsequently, the Appellant lodged an objection vide a letter dated 15th February 2024 which objection was based on grounds that their incurred purchases for the financial year 2018 and non-income deposits for the years 2019 to 2022 were not considered by the Respondent at the assessment stage.

111. The Respondent averred that it validated the objection and upon review of the same, issued its Objection decision on 15th March 2024. wherein it partially accepted the Appellant's objection and computed the taxes due and payable as per the table below;Description 2018 2019 2020 2021 2022 2023 Total

Income Tax 16,822 85,470 362,888 2,685,642 2,668,931 - 5,819,753

VAT - 92,584 239,091 892,277 1,337,000 82,555 2,643,507

Total Tax Due 16,822 178,054 601,979 3,577,919 4,005,931 82,555 8,463,260

112. The Respondent was of the view that the case evokes the following issues for determination;a.Whether the Respondent was proper in issuing its assessment for the period 2018 and 2019. b.Whether the Respondent erred in relying on the banking analysis method in assessing the tax position of the Appellant.c.Whether the Respondent ignored the explanations made, documents availed and evidence presented in its review of the tax position of the Appellanta.Whether the Respondent was proper in issuing its assessment for the period 2018 and 2019.

113. That the Appellant in Grounds 1 and 2 of its Memorandum of Appeal contends that the Respondent erred in law and fact in issuing assessment for the periods 2018 and 2019 and requiring the Appellant to avail records beyond the period of five years contrary to Sections 23 and 31 (4) of the Tax Procedures Act.

114. The Respondent contended that contrary to the Appellant's contentions, it raised the assessment on 19th December 2023 and subsequently reviewed and confirmed Corporation tax and VAT for the tax periods between 2018 and 2023. That in raising the assessment, the Respondent relied on Sections 31(1) and (4) of the Tax Procedures Act.

115. That in light of the provisions of Section 31(1) and (4), the Respondent maintained that it was proper to raise and amend the Appellant's assessment for the period from 2018 as the same falls within the five-year statutory period and prayed the same be upheld by this Tribunal.b.Whether the Respondent erred in relying on the banking analysis method in assessing the tax position of the Appellant

116. The Respondent submitted that in Grounds 4, 6,7,9, 11, and 12 of its Memorandum of Appeal, the Appellant contended that the Respondent erred in law and fact in bringing to charge the deposits in the Appellant's bank account without considering the nature of the deposits.

117. The Respondent averred that the tax legislation empowers it to use the information available to it to assess a taxpayer's tax position. That in so doing, the Respondent was allowed to embrace a range of methods and techniques for determining and verifying a taxpayer's income. That in some instances, like in this case, detecting and deterring non-compliance requires more than an examination of a taxpayer's books and records and necessitates an analysis of the taxpayer's financial affairs to correctly assess tax liabilities.

118. To support its case the Respondent relied on Section 24 of the Tax Procedures Act, which requires the Appellant to submit a tax return in the approved form and manner prescribed by the Respondent. That the provision further states that; “(2) The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

119. The Respondent further referred to the provisions of Section 51 of the Tax Procedures Act which provides for a taxpayer's objection to a tax decision by the Respondent.

120. The Respondent averred that the Appellant herein failed to validly lodge the objection by providing documents to reconcile the variances contrary to Section 51(3)(c) of the Tax Procedures Act and consequently, it confirmed the assessments raised against the Appellant.

121. The Respondent further averred that it adjusted the deposits to the extent of the explanations provided in the bank statements and the documents provided by the Appellant. That the findings of the review of the bank statements was highlighted extensively in the Respondent's Objection decision dated 15th March 2024.

122. The Respondent stated that it was justified in raising and confirming the assessments based on the variances established from the review of the Appellant's bank accounts and prayed that the Tribunal upholds this position as the Appellant had failed to prove the contrary.c.Whether the Respondent ignored the explanations made, documents availed and evidence presented in its review of the tax position of the Appellant

123. The Respondent averred that the Appellant in Grounds 3, 5, 8, 12,13 and 14 of its Memorandum of Appeal contended that the Respondent erred in law and fact in ignoring the explanations advanced, documents provided in support of the Appellant's position and evidence presented to it for review.

124. The Respondent pleaded that the Kenyan tax regime is based on a self-assessment tax regime wherein a taxpayer determines what it considers income, assesses itself and pays. That where a taxpayer fails to submit a tax return for a reporting period, the Respondent may to the best of its judgment and on the information available to it, raise an assessment.

125. The Respondent contended that it raised the assessment and informed the Appellant of the same following the provisions of Section 29 of the Tax Procedures Act.

126. The Respondent stated that it received, reviewed and gave an elaborate statement of findings in its decision regarding its review of the Appellant's documents and its grounds of objection as follows;i.That the Respondent noted that from the provided copies of invoices from Skippers Enterprises and Suwaku Enterprises for the years 2018 and 2010 no proof of payments for purchases was availed for review.ii.That in its review of the deposits made, the Appellant claimed that for the year 2019, it received non-trading deposits which the Respondent in its review found that the Appellant received on various dates throughout the year, cash deposits amounting to Kshs. 250,000 which no evidence of repayment was advanced and therefore, such sums could not be treated as loans.iii.The loans claimed to have been received from Hero Said and Tekilu Limited were unsupported by a loan agreement and no evidence of repayment was demonstrated.iv.The Appellant's claim of soft loans from Flexy Limited were received as cash deposits but no evidence was tendered of the loan repayment and the same was therefore treated as income.v.For the year 2021, the Appellant failed to present evidence of loan repayments and therefore, the review team could not make adjustment on such basis.vi.In 2022, the Appellant still failed to avail evidence of repayment of loans it claimed to have received.vii.The Appellant claims to have made purchases during the period under assessment and provided copies of invoices from Skippers Enterprises and Suwakwa Enterprises which are not registered on iTax and therefore the Respondent could not find this satisfactory to make adjustments as objected.

127. The Respondent maintained that the assessment was raised after it found inconsistencies in the returns in the records available on the iTax system, the IFMIS data, and the bank statements which the Appellant failed to provide evidence in support of the same.

128. The Respondent further maintained that the Appellant was in contravention of Section 30 of the Tax Appeals Tribunal Act and Section 56 (1) of the Tax Procedures Act which places the burden of proof in tax matters on the Appellant.

129. It was the Respondent's case that the Appellant's contention as laid out in its Memorandum of Appeal and Statement of Facts unless where it was not in agreement were unfounded in law and not supported by evidence.

Respondent’s Prayers 130. The Respondent prayed that the Tribunal finds;a.That the Respondent's objection decision dated 15th March 2024 demanding taxes amounting to Kshs 8,463,260 was proper in law and be upheld.b.That the Appeal be dismissed as the same lacks merit.c.That costs be awarded to the Respondent

Issues For Determination 131. The Tribunal upon due consideration of the pleadings, documents and the written submissions filed on the part of both parties was of the view that the issues that crystalizes for its determination are as follows: -a.Whether the Respondent’s assessments were in contravention of Section 31(4) of the Tax Procedures Act.b.Whether the Respondent erred in confirming the assessments by charging to tax bank deposits and disallowing the Appellant’s expenses.

Analysis And Determination 132. The Tribunal having appropriately ascertained the issues that falls for its determination shall proceed to make an analysis on the issues separately as hereafter.a.Whether the Respondent’s assessments were in contravention of Section 31(4) of the Tax Procedures Act.

133. It was the Appellant’s contention that the Respondent blatantly ignored the clear provisions outlined in Section 31(4) of the Tax Procedures Act, which explicitly dictate the conditions under which assessments should be issued and proceeded to issue assessment beyond five-year limit. That by disregarding these legal safeguards, the Respondent had undermined the integrity of the entire assessment process.

134. The Respondent on the other hand contended that contrary to the Appellant's contentions, it raised the assessment on 19th December 2023 and subsequently reviewed and confirmed Corporation tax and VAT for the tax periods between 2018 and 2023. That in raising the assessment, the Respondent relied on Sections 31(1) and (4) of the Tax Procedures Act

135. Section 31 of the Tax Procedures Act provides as follows regarding time limits for assessments;“(4) The Commissioner may amend an assessment—a.in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; orb.in any other case, within five years of—i.for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; orii.for any other assessment, the date the Commissioner notified the taxpayer of the assessment.”

136. In the instant case it was not in dispute that the Respondent’s assessments were issued on 19th December, 2023. It follows therefore that the last assessments for Corporation tax that the Respondent could assess were for the year 2018 which fell due in June 2019. For VAT it could only assess up to VAT for December 2018 which fell due on 20th January 2019.

137. The Tribunal notes that in the Objection decision the Respondent confirmed Corporation taxes for the period 2018 to 2022 and VAT for the period 2019 to 2023.

138. From the foregoing analysis the Respondent’s assessment for Corporation tax and VAT were within time. Accordingly, the Tribunal finds and holds that the Respondent’s assessments were not in contravention of the law.b.Whether the Respondent erred in confirming the assessments by charging to tax bank deposits and disallowing the Appellant’s expenses.

139. The Respondent in its objection decision dated 15th March, 2024 confirmed assessment for Income tax amounting to Ksh 5,819,753. 00 and VAT amounting to Ksh 2,643,507. 00. The assessments were confirmed after the Respondent charged to tax deposits in the Appellant’s bank accounts and disallowing certain expenses the Appellant had purported to have incurred,

Bank Deposits 140. The Appellant’s argument was that the deposits in its bank accounts in the period were mostly soft loans from relatives and friendly companies for the purpose of trading.

141. From the documents presented to the Tribunal it was not disputed that the Appellant during the period was in the business of trading and supplies.

142. The Appellant’s assertion that the Respondent failed to accurately assess the nature of deposits, despite superficial adjustments to appear compliant, was deeply concerning. That the Respondent’s failure to fully consider interbank transfers, unpaid cheques, loan deposits, and deposits from other banks had led to an incomplete analysis.

143. That notably, the Respondent had neglected to acknowledge the legitimate soft loans provided by various entities for example for Flexy Limited and Holakibs Limited.

144. The Appellant averred that in the case of the soft loan from Flexy Limited, the Respondent's stance was perplexing. That while acknowledging the loan's existence and the provision of supporting loan documents, it unjustly rejected the explanation due to a lack of proof of repayment. That however, the deposit's supported nature renders it clearly non-taxable, a fact that cannot be overlooked.

145. The Respondent on its part averred that it adjusted the deposits to the extent of the explanations provided in the bank statements and the documents provided by the Appellant. That the findings on the review of the bank statements was highlighted extensively in the Respondent's Objection decision dated 15th March 2024.

146. From the objection decision the Tribunal notes that the Respondent extensively explained the basis of rejection of certain explanation from the Appellant regarding deposits in its bank accounts that were brought to charge. It however acknowledges the existence of loans from some related parties and even made some adjustments.

147. The Respondent however charged to tax several deposits that the Appellant had provided agreements with some of the entities and individuals alleged to have loaned the money to the Appellant. The Tribunal has sighted some of loan agreements for the following entities and individuals which the Respondent did not make adjustments for;i.Flexy General Supplies & Contractors Limited.ii.Robcom Electrical Construction.iii.Suwaku Enterprisesiv.Maro Hassanv.Fredrick Michaelvi.Salome Maina Kimanivii.Boda Ware Abdullahiviii.Abuti Hussein Kateloix.Adhan Ali Rokax.Omar Kofa Komoraxi.Winfred Wairimuxii.Ishaq Buyaxiii.Tugoza Enterprises.xiv.Tekalu Limited.xv.Hero Bwanamaka Saidxvi.Barke Mahsen.xvii.John Karhayu Maro.xviii.Wario Hassan Barisaxix.Hussein Bajula Jiloxx.Rukial Mohamud Hajilaxxi.Suzan Kamau Kibe.xxii.Wilson Ade Komora.xxiii.Bakari Garise Dhadho.xxiv.Shurie Adan Ahmedxxv.Omar Kofa Komoraxxvi.Suleiman Mahad Guleid.

148. The Tribunal notes that although the Appellant provided these agreements to demonstrate that they were actual loans to the Respondent and further provided analysis of the non-income items in its bank statements and letters from some entities indicating that it had repaid some of the loans, the Respondent in the Objection decision declined to make adjustments stating in some cases that there was no evidence of the Appellant having repaid the loans.

149. It is the Tribunal’s position that although the Respondent is empowered under tax law to assess a taxpayer, it ought to demonstrate that it exercised best judgment to ensure that the taxpayer is liable for the correct amount of tax.

150. In the Tribunal’s view the Respondent upon being given the evidence in terms of the agreements ought to have excluded the amounts in the agreements that were demonstrated to have been received by the Appellant when determining the Appellant’s income that is subject to tax. In the alternative the Respondent should have specifically challenged the authenticity of these agreements and document in its pleadings which in this case it hasn’t. In any event enforcement of the terms of the agreement lies with the parties and not the Respondent.

151. The Tribunal reiterates its position as was held in Afya X Ray Center Limited v. Commissioner of Domestic Taxes (TAT Appeal No. 70 of 2017 ) where it stated:-“… the Tribunal is concerned with the status, or better yet, the validity of an assessment that has relied only on bank statements. It is common knowledge that every deposit in an account is not necessarily income to the account owner. …”

152. As it stands, the Respondent’s confirmed assessment in this case could result in it collecting more than is due from the Appellant, which is an outcome the Tribunal does not wish to perpetuate.

153. Consequently, the Tribunal finds and holds that the loan amounts from the entities that the Appellant had loan agreements should have been excluded in determining the Appellant’s income.

Disallowed Expenses 154. The Respondent in its assessment and objection decision disallowed expenses relating to certain purchases.

155. On purchases, the Appellant stated that the Respondent in the objection decision, disallowed the expenses claimed because the same could not be traced from the i-Tax profile.

156. That throughout the objection process, the Appellant diligently presented a comprehensive bundle of invoices, meticulously reproduced within the Appeal.

157. The Respondent averred that the Appellant herein failed to validly lodge the objection by providing documents to reconcile the variances contrary to Section 51(3)(c) of the Tax Procedures Act and consequently, it confirmed the assessments raised against the Appellant.

158. Section 23(1) of the Tax Procedures Act provides as follows regarding record keeping;“A person shall—a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and …”

159. Further Section 17(3) of the VAT Act provides as follows regarding documents a person doing business on vatable goods and services ought to keep;“The documentation for the purposes of subsection (2) shall be—a.an original tax invoice issued for the supply or a certified copy;b.a customs entry duly certified by the proper officer and a receipt for the payment of tax;c.a customs receipt and a certificate signed by the proper officer stating the amount of tax paid, in the case of goods purchased from a customs auction;d.a credit note in the case of input tax deducted under section 16(2); ore.a debit note in the case of input tax deducted under section 16(5).”

160. It was not in dispute that the Appellant was engaged in a business that is vatable. The Appellant therefore ought to have kept its records and produced them in conformity with TPA and VAT Acts.

161. The Tribunal notes that in support of its case, the Appellant attached copies of invoices complete with ETR receipts to demonstrate that it made the purchases. The Tribunal further notes that the Appellant has attached several letters from suppliers indicating that the Appellant made most of the payments in cash. The Appellant had stated in its pleadings that it provided these documents to the Respondent during the assessment and objection process.

162. The Respondent has neither challenged these documents nor provided evidence that it requested for additional documents which the Appellant failed to provide.

163. The Tribunal reiterates the finding in McMillan v. Canada 2012 FCA 126 where the Court of Appeal held that:“In our respectful view, it is settled law that the initial onus on an appellant taxpayer is to "demolish" the Minister's assumptions in the assessment. This initial onus of "demolishing" the Minister's assumptions is met where the taxpayer makes out at least a prima facie case. Once the taxpayer shows a prima facie case, the burden is on the Minister to prove, on a balance of probabilities, that the assumptions were correct.”

164. The Tribunal in the circumstances finds on a balance of convenience that the Appellant had provided evidence to challenge the Respondent’s assessment. The Respondent was thus required to consider these documents to arrive at the correct assessment of the Appellant’s tax liability without resorting to the bank deposit to charge to tax the variances established.

165. The Respondent was obliged to consider all material facts and evidence put before it, and based on that material make a decision that is reasonable and not arbitrary. It could thus only resort to the bank deposits or its best judgement after demonstrating that the material placed before it was insufficient or irrelevant.

166. This view was affirmed in Van Boeckel v C&E QB [1981] STC 290; VAEC1420 where the court established the following:-“The Respondent: is not required to do the work of the taxpayer; must perform its duties honestly and above board; must fairly consider all material put before it and based on that material make a decision that is reasonable and not arbitrary; must be in possession of some material upon which it can base its best judgment.”

167. The Tribunal has also previously discussed the circumstances when the Respondent can exercise an alternative method of determining tax liability in Nairobi TAT No. 25 of 2016 Family Signature Limited vs. The Commissioner of Investigations & Enforcement where one of the issues for determination was "whether the Respondent was justified in employing an alternative and indirect method of assessing the Appellant's estimated tax liability." The Tribunal held that:“When the Respondent is prompted to resort to an alternative method of determining the income and in assessing the tax liability of a taxpayer. It has the onerous responsibility to act reasonably by exercising best judgement informed by pragmatic and reasonable considerations that do not in any manner result in a ridiculously high-income margin”

168. The Tribunal also stated as follows when the Commissioner applied the banking analysis in Usafi Services Limited v Commissioner of Domestic Taxes (Tax Appeal 1094 of 2022) [2023] KETAT 875 (KLR) (24 November 2023) (Judgment):“The Appellant, having provided documents to support its averments, discharged its burden of proof and the onus lies on the Respondent to review the documents provided in making a decision as to what tax liability sits with the Appellant.”

169. It is the Tribunal’s position that the safeguards discussed in the foregoing cases are placed to protect taxpayers to ensure that they are taxed on income and not on anything else.

170. Whereas the banking deposits method is an acceptable method of tax assessment, the Tribunal guided by the afore-cited cases has no reason to depart from the same in arriving at its decision that the Respondent had sufficient documents before it to carry out a proper assessment based on the documents that the Appellant had provided.

171. It follows therefore that the Respondent’s confirmed assessment which heavily relied on bank deposits and disregarded the Appellant’s expenses, explanations and evidence was not justified.

172. Accordingly, the Tribunal finds and holds that the Respondent was in error in confirming the assessments by charging to tax bank deposits and disallowing the Appellant’s expenses.

Final Decision 173. Based on the foregoing analysis the Tribunal determines that the Appeal is merited. The Orders that accordingly recommend themselves are as follows: -i.The Appeal be and is hereby allowed.ii.The objection decision dated 15th March, 2024 be and is hereby set aside.iii.Each party to bear its own costs.

174. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 14TH DAY OF MARCH, 2025. ERIC NYONGESA WAFULACHAIRMANDR. RODNEY O. OLUOCH GLORIA A. OGAGAMEMBER MEMBERABRAHAM K. KIPROTICH CYNTHIA B. MAYAKAMEMBER MEMBER