Kirin Pipes Limited v Commissioner Intelligence Strategic Operations Investigations and Enforcement (Tribunal Appeal E1116 of 2024) [2025] KETAT 259 (KLR) (22 August 2025) (Judgment)
Neutral citation:
[2025] KETAT 259 (KLR)
Republic of Kenya
Tribunal Appeal E1116 of 2024
CA Muga, Chair, T Vikiru, B Gitari, DK Rono & B Mijungu, Members
August 22, 2025
Between
Kirin Pipes Limited
Appellant
and
Commissioner Intelligence Strategic Operations Investigations and Enforcement
Respondent
Judgment
Background
1.The Appellant is a limited liability company incorporated in Kenya under the Companies Act, CAP 486 of the Laws of Kenya (hereinafter “Companies Act”) whose main business is in the manufacturing and selling of a wide range of pipes.
2.The Respondent is established under the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (hereinafter “the Act”). Under Section 5 (1), the Respondent is an agency of the Government for the collection and receipt of all revenue. Further, under section 5(2) with respect to the performance of its function under subsection (1), the Respondent is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.
3.The Respondent conducted an investigation into the Appellant's tax affairs for the years 2019 to 2022 where upon it issued additional assessments on 10th June 2024 and 11th June 2024 for income tax of Kshs. 34,300,288.00 and VAT of Kshs. 22,687,105.00.
4.The Appellant objected to the assessments on 9th July 2024; the Respondent partially allowed the objection vide its objection decision dated 6th September 2024 confirming a principal tax liability of Kshs. 21,638,991.00 for Corporation tax and VAT.
5.Aggrieved by the Respondent’s decision, the Appellant filed the instant Appeal on 4th October, 2024.
The Appeal
6.The Appeal was premised on the following grounds as contained in the Memorandum of Appeal dated and filed on 17th October 2024:a.That the Respondent erred in law and in fact in demanding Income Tax and Value Added Tax of Kshs. 21,638,991.00 for the years of income 2019 to 2021 as the said demand is excessive, punitive and is not based on law and any material facts that have been provided by the Appellant.b.That the Respondent erred in law and fact in its impugned decision to bring to charge all bank deposit entries appearing in the Appellant's bank statements as sales and revenue and charging VAT and Corporation Tax contrary to the clear provisions of the Income Tax Act Cap 470 of the Laws of Kenya (hereinafter “ITA”) and Value Added Tax Act Cap 476 of the Laws of Kenya (hereinafter “VATA”).c.That the Respondent erred in law and in fact in failing to recognize that not all the Appellant's bank deposits are income of the Appellant as the Appellant had capital injection from its shareholders and loans to the Appellant deposited in the Appellant's bank accounts.d.That the Respondent erred in law and fact in failing to appreciate that the sales that had been made to Zonghao Overseas Constructions Engineering Kenya Ltd had already been declared and brought to tax and therefore the decision to subject the said amounts to tax will result to double taxation.e.That the Respondent erred in law and fact in disregarding and ignoring the evidence, explanations and supporting documentations provided by the Appellant and proceeding to issue its objection decision dated 6th September 2024.
Appellant’s Case
7.The Appellant pleaded its case vide its Statement of facts dated and filed on 17th October, 2024 together with the documentary evidence attached thereto. The Appellant also filed its written submissions dated 8th July, 2025 on 15th July, 2025 and the same were adopted by the Tribunal during the hearing on 23rd July, 2025.
8.The Appellant averred that the Respondent's assessment and objection decision demanding income tax and VAT amounting to Kshs. 21.638,991.00 was erroneous.
9.The Appellant stated that the Respondent carried out a reconciliation the bank credits in its bank accounts and established variances as a result of which it resorted to subjecting all the credits therein to income tax. The Appellant averred that the Respondent fell into error by assuming that every deposit made into its bank accounts amounted to income capable of being charged tax.
10.The Appellant stated that the variance between gross deposits and the turnover declared in its returns comprised of:i.Shareholder capital injections Kshs. 29,425,495.45;ii.Loan proceeds Kshs. 31,697,392.00 advanced by Nanchang Municipal Engineering Development Group Co. Ltd;iii.Inter-account transfers; andiv.Advance customer payments later invoiced and declared.
11.The Appellant contended that capital deposit by the company’s shareholders through Zhonghao Overseas Construction Eng Co. Ltd China credits do not fall within the definition of income as stipulated in the ITA and therefore should not be subjected to income tax.
12.The Appellant averred that it commenced its operations in the year 2019 during which year the shareholders injected share capital and that in accordance with its Official Company Search (CR 12), the ordinary share capital was Kshs. 10,000,000.00 but it required further capital to ensure the success of the venture as it was commencing.
13.That pursuant thereof, its shareholders injected capital into it through depositing the total sum of Kshs. 29,425,495.45 into Zhonghao Overseas Construction Engineering Company Limited (China) and the said Zonghao Company Ltd (China) thereafter deposited the said amounts to the Appellant.
14.That from the foregoing, it is evident that the amount deposited into the Appellant's bank accounts in the year 2019 by Zonghao Overseas Construction Eng Co Ltd China treated as income is not income but part of the capital injection paid to the Appellant through deposit of funds by its shareholders through Zonghao Overseas Construction Eng Co Ltd China.
15.The Appellant averred that during its formative years it required funds to help cover the initial setup costs and operating expenses and sought for a loan from Nanchang Municipal Engineering Development to fund its operations.
16.The Appellant stated that Nanchang Municipal advanced it a loan in the sum of Kshs. 31,697.392.00 to be repaid at a later date which ought not be subjected to income tax and it further asserted that the loans did not constitute profits or gains which would be subjected to income tax as per Section 3(2) of the ITA.
17.The Appellant averred that it received funds from its shareholders through Zhonghao Overseas Construction Eng Co. Ltd China totaling to the sum of Kshs. 24.619.662.00 to fund its operations and further stated that the said amounts were not income but shareholders deposits. The Appellant averred that the credits were clearly demonstrated by the swift bank transfers, its bank statements, audited accounts and further through the banking analysis.
18.The Appellant averred further that in the year 2020 it received an advance payment from Zhonghao Overseas Construction Eng Co Ltd Kenya in the sum of Kshs. 38,000,000.00 for sales that were to be made at a later date and that the said advance payments were made by Zhonghao Overseas Construction Eng Co Ltd Kenya in support of its business noting that the Appellant was at its formative years. That the said amounts were therefore paid in anticipation of sales that were to be made at a later date.
19.The Appellant averred that in the year 2021, it received an advance payment from Zhonghao Overseas Construction Eng Co Ltd Kenya in the sum of Kshs. 27.376,000.00 for sales that were to be made at a later date and that the said advance payments were made by Zhonghao Overseas Construction Eng Co Ltd Kenya in support of the Appellant's business noting that the Appellant was at its formative years. Further, the Appellant stated that the said amounts were similarly paid in anticipation of sales that were to be made at a later date.
20.In its submissions, the Appellant identified the following as the issues on which it sought determination namely:a.Whether the Respondent erred in law and fact by equating all bank account credits with taxable income and sales revenue, and whether the resultant assessment was a valid exercise of its powers under the "best judgment" principle;b.Whether deposits constituting shareholder capital injections and loans can be lawfully subjected to corporation tax and VAT;c.Whether the Respondent’s decision to tax advance payments for sales that were subsequently declared and taxed amounts to double taxation; andd.Whether the Appellant has discharged its burden of proof under Section 56 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).
21.The Appellant in analyzing the issues it identified for submissions avowed that the Respondent failed to take into consideration the explanation and documentation it provided, demonstrating that the said sums received from Overseas Construction Eng Co Ltd Kenya were advance payments for sales that were made at a later date and had already been brought to tax and that therefore, the decision by the Respondent to bring these amounts to tax would result in double taxation.
22.The Appellant posited that the said sales were eventually made. invoices issued and duly declared on i-Tax. That the misunderstanding was therefore brought due to the timing difference between the invoices and the payment slips.
23.The Appellant propounded that having demonstrated that the said deposits by Nanchang Municipal Engineering Development and Zonghao Overseas Construction Eng Co. Ltd China were not income but capital injection by the shareholders and loans advanced to the Appellant. The Respondent could not therefore purport to charge VAT as the same were not sales.
24.The Appellant contended that the decision taken by the Respondent is materially influenced by an error of the applicable tax law, was not rationally connected to the information provided to the Respondent and violates the legitimate expectations of the Appellant. The Appellant submitted that in arriving at the erroneous findings contained in the objection decision, the Respondent failed to consider the provisions of the law and in doing so, acted beyond the jurisdiction or power conferred under the tax laws.
25.The Appellant contended that the assessments are unlawful, unreasonable, excessive and arrived at in violation of Articles 47 and 201 of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) , the TPA, ITA and the VATA.
26.The Appellant submitted that the Respondent’s assessments were fundamentally flawed as they are premised on a manifest error of law: equating gross bank deposits with taxable income and this approach flagrantly disregards Section 3(1) of the ITA, which unequivocally imposes tax on “income,” and not on gross receipts, and ignores the critical legal distinction between capital and income.
27.The Appellant submitted that while Section 29 of the TPA, grants the Respondent power to assess tax to the "best of his or her judgment," this power is not a license to act arbitrarily as the discretion is strictly circumscribed by the principles of rationality and proportionality enshrined in Article 47 of the Constitution and an assessment must be an honest and fair estimate based on all material available.
28.The Appellant submitted that the Tribunal previously offered guidance on how the best judgement of the Respondent can be applied in the case of TAT No. E016 OF 2023 – Agrochemicals and Food Company Limited –Vs- Commissioner of Domestic Taxes and again in the case of Superserve Limited v Commissioner, Investigation and Enforcement (Tax Appeal E931 of 2023) [2024] KETAT 1082 (KLR) where the Tribunal cited and relied on Saima Khalid vs The Commissioner for Her Majesty’s Revenue & Customs Appeal No. TC/2017/02292 where the Court observed as follows:
29.The Appellant submitted that it was clear from this decision that even in cases where the Respondent has exercised its best judgment, it is still required to consider the evidence placed before it by the taxpayer and it cannot ignore the evidence placed before it and proceed to consider external factors under the guise of ‘best judgment’ doctrine.
30.The Appellant, in buttressing its case submitted that similarly, the court in Raghubar Mandal Harihar Mandal vs The State of Bihar AIR 1952 PAT 235, held that the officer must not act vindictively or capriciously but must make what they honestly believe to be a fair estimate.
31.The Appellant contended that the Respondent had failed the test, faced with detailed schedules, bank statements, a loan agreement, and SWIFT confirmations provided by the Appellant, the Respondent chose to ignore this body of evidence. That it instead proceeded with a blanket equation of all bank deposits to turnover. That this is not the "honest guesswork" permitted by law; it is a willful disregard of available material.
32.The Appellant submitted that the Respondent refused to share its reconciliation statement or working papers with the Appellant, a direct contravention of the duty to provide written reasons under the Fair Administrative Action Act, CAP 7L of the Laws of Kenya (hereinafter “FAAA”) and the principles of procedural fairness articulated in Republic v KRA ex-parte Style Industries Ltd [2020] KEHC 167 (HC).
33.The Appellant posited that a shareholder's capital contribution is the quintessential capital receipt as it increases a company's share capital and not its distributable profits. The Appellant relied on the Court of Appeal’s affirmation in Pili Management Consultants Ltd vs. Commissioner of Income Tax [2010] eKLR where it was held as follows:
34.The Appellant submitted that the Court in Commissioner of Domestic Taxes v Total Touch Cargo Holland BV [2017] eKLR recognized that such capital inflows are not income.
35.The Appellant stated that the Respondent’s contention that a lack of immediate repayment negates the existence of the loan is a commercial and legal non-sequitur, especially for a nascent business in its initial operational phase and that the character of a transaction is determined at its inception, and that the Respondent has offered no evidence to prove the loan was a sham.
36.The Appellant submitted that the Respondent's demand for a specific form of evidence (contracts) is an unreasonably high and legally unsupported standard of proof and that the Appellant provided an official search (Form CR-12), swift transfer confirmations, and a plausible explanation for the transaction flow via a third party due to financial restrictions in China which the Respondent cannot simply dismiss as insufficient without providing its own evidence to prove the transactions were a sham.
37.The Appellant submitted that VAT is not applicable to capital or financial transactions and therefore the Respondent’s imposition of VAT on these capital and loan receipts is patently erroneous.
38.The Appellant submitted that Sections 2 and 5 of the VATA impose VAT only on the consideration received for a taxable supply. That both capital injections and loans are purely financial transaction which entirely lack the requisite "supply-consideration nexus" that is the precondition for a VAT charge. The Appellant averred that this principle was confirmed by the Court of Appeal in Commissioner of Domestic Taxes v Barclays Bank of Kenya Ltd [2019] KECA 13.
39.The Appellant reiterated that these transactions do not involve the supply of any goods or services by the Appellant and therefore fall completely outside the scope of VAT.
40.The Appellant submitted that the funds received in 2020 and 2021 from Zhonghao Overseas Construction Eng Co Ltd, were prepayments for future sales and that these sales were subsequently invoiced, and the resultant income and VAT were fully declared and paid in the proper tax periods and hence, to tax both the initial receipt and the final declared sale is to tax the same income stream twice.
41.The Appellant avowed that double taxation is a flagrant violation of law and established principle and that the prohibition against double taxation is not merely a concept of fairness; it is codified in Section 30 of the ITA and Section 19(4) of the VATA.
42.The Appellant submitted that the Respondent’s failure to appreciate the fundamental timing difference between an advance receipt and the final supply was a clear error of law that the Tribunal should reject and the Respondent’s attempt to tax these amounts is therefore unlawful under the ITA and VATA unconstitutional, and is contrary to a clear line of precedent from the Tribunal and superior courts.
43.The Appellant contended that while Section 56 (1) of the TPA places the burden of proof on the taxpayer, this burden must be reasonable and a central flaw in the Respondent’s objection decision was its attempt to impose an evidential standard on the Appellant that is found nowhere in statute. The Appellant’s contention was that the Respondent’s dismissal of the Loan Agreement because there was no immediate proof of repayment, or its demand for 'contracts' to validate shareholder capital injections, are self-created requirements without legal basis.
44.The Appellant submitted that it had demonstrated a prima facie case that discharges its burden and the onus then shifted back to the Respondent to prove that the evidence was fraudulent or that the transactions were shams, a burden it has failed to discharge.
Appellant’s prayers:
45.The Appellant made the following prayers:i.The appeal be and is hereby allowed;ii.That the Respondent's assessment and objection decision dated 6th September 2024 be and are hereby set aside;iii.That the Respondent, its employees, agents or other person acting under their authority be and are hereby restrained from demanding or taking any further steps towards enforcement or recovery of principal tax, penalties and interest arising from the Respondent's tax demand herein;iv.The costs of this appeal; andv.Any other remedies that the Tribunal deems just and reasonable.
Respondent’s Case
46.The Respondent relied on its Statement of facts filed on 26th November, 2024. The Respondent also filed written submissions dated and filed on 22nd July, 2025 which were adopted by the Tribunal on 23rd July, 2025.
47.The Respondent averred that it computed the expected banking income, which was then compared with the Appellants income as declared in the VAT returns and IT2c returns to establish variations in incomes. That based on the variances, the Respondent computed income tax and VAT payable totaling Kshs. 34,300,288.00 and Kshs. 22,687,105.00 respectively.
48.The Respondent averred that its investigation also revealed that one of the directors together with other three expatriates working for the Appellant received monies in form of cash withdrawals and mobile money transfer to their M-pesa accounts. That due to lack of documentation to support the transfers and withdrawals, the same were treated as emoluments and subjected to PAYE.
49.The Respondent submitted that it carried out an analysis of the transfers to the M-pesa accounts from the Appellants bank statements and computed the director’s income totaling Kshs. 63,791,689.00.
50.The Respondent stated that regarding the withdrawals made by the director and employees and the transfers to M-pesa accounts, the Appellant submitted various purchase receipts for the period under review but that however, the Appellant failed to establish that the cash withdrawals corresponded to the payments for the purchases reflected in the submitted receipts.
51.The Respondent submitted that the Appellant also contended in its objection that it received shareholder injections from Zhonghao Overseas Engineering Co. Ltd but that however, the Appellant failed to substantiate that the said deposits constituted shareholder injections that therefore it was unable to classify and treat the deposits as such.
52.The Respondent averred that the Appellant's assertion of having received both shareholder injections and a loan from the same entity, Zhonghao Overseas Engineering Co. Ltd, remained unsupported by adequate documentation, rendering the claim untenable.
53.The Respondent posited that the Appellant attached its Certificate of Incorporation and made reference to a Form CR-12 which it failed to attach and noted that the Certificate of incorporation only speaks to the legal status of the Appellant and does not prove ownership or directorship status.
54.The Respondent stated that with respect to the bank statements that the Appellant relied on to demonstrate deposit of capital by the Appellant’s shareholder into Zhonghao, the said bank statements only show that monies were deposited into the Zhonghao Overseas Construction Engineering Company Limited and that there was no narration of the said funds tying the same to the issue averred to by the Appellant nor was there a narration showing the same funds deposited in the said account being transferred into the Appellant’s account.
55.The Respondent averred that the Appellant did not provide satisfactory evidence to demonstrate that it received funds from Zhonghao Overseas as capital injection and that while the Appellant adduced Financial Statements to show that it received funds as deposit of shares in 2019, the same was not evident in its bank statements but that however, what was evident was simply bankings that did not allude to the fact that the same were capital injections.
56.That the swift bank transfers only show that money was deposited by Zhonghao Overseas, but did not indicate a reason for the deposit and the explanation given by the Appellant did not demonstrate that the same was a capital injection, that without form CR12 showing the shareholders of the Appellant there was no way to tie the bankings to show that the same was a capital injection.
57.The Respondent stated that in so far as the Kshs. 10,000,000.00 capital is concerned; the Appellant had not discharged its burden as provided for under Section 56(1) of the TPA. The Respondent stated that the bank statements that the Appellant sought to rely on were not certified bank statements and that further, the translated documents had not been notarized and as such, they could not be relied upon.
58.The Respondent submitted that while the Appellant stated that it received Kshs. 29,425,495.45 from Zonghao Ltd (China) and attached an unverified bank statement, the Appellant did not attempt to analyze the said bank statement to show that indeed, if there are any deposits made by the said Company to the Appellant, the said deposits amounted to the said amounts. That further, the attached documents do not show the money trail of the shareholders having deposited monies into Zhonghao Overseas, who then transferred the same into the Appellant.
59.The Respondent submitted that its investigations revealed that the taxpayer had borrowed loans from foreign sources but had not paid WHT on the same. That deemed interest was calculated on the said amounts and WHT totaling to Kshs. 4,092,353.00 assessed.
60.The Respondent averred that the Appellant submitted a loan agreement dated 31st January 2019, executed between the Appellant and Zhonghao Overseas Engineering Co. Ltd under which the lender agreed to extend a loan of Kshs. 60,000,000.00 with an additional Kshs. 24,000,000.00 to be advanced after one year stating that it had erroneously captured the loan as foreign when it was locally acquired.
61.The Respondent contended that the Appellant introduced a loan agreement with Nanchang Municipal Development, a new averment not averred to the Respondent during the objection stage and that the same was not presented to the Respondent on appeal, contrary to the provision of the TPA and the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) on what forms part of an Appeal at the Tribunal.
62.The Respondent contended further that while the Appellant claimed that it received Kshs. 31,697,392.00 as a loan from Nanchang Municipal Engineering Development, the agreement attached was a very interesting agreement which indicates that the loan is interest free with no repayment period and this raised concern as to whether it is a loan. In addition to the said Ioan agreement, the Appellant ought to have adduced evidence of loan repayment together with interest repayment, which would have shown that the same was a loan from Nanchang.
63.The Respondent stated that while the Appellant attached copies of swift bank transfers, the said transfers are of a different currency, do not state the date of the transfer and no effort had been made by the Appellant to connect the said swift RGTS transfers to Kshs. 24,419,662.00.
64.The Respondent posited that the Appellant’s averment that it received an advance payment from Zonghao Overseas Construction Eng. Co. Ltd in the sum of Kshs. 38,000,000.00 for sales that were made later were only supported by an account statement for Overseas Construction Eng Co Ltd Kenya. The Respondent contended that the annexed document was simply printed on the Appellant's letterhead showing purported invoice numbers without attaching the said invoices and that without the actual invoices, one cannot verify the veracity of the said invoice numbers and as to whether indeed there was a sale between the Appellant and Zhonghao Overseas Construction Engineering Co. Ltd.
65.The Respondent postulated that the Appellant's averments have not been sufficiently proven and as such remain unfounded and further that the Appellant failed to specify and particularize the non-revenue items and how they were not taken into account.
66.The Respondent noted that with respect to VAT, the Appellant relied on letters of exemption given after the supply has been known and that further, the said exemptions relate to only three invoices, while the invoice numbers adduced by the Appellant are way more. The Respondent averred that the documents provided by the Appellant did not meet the threshold of Section 17(1) of the VATA.
67.The Respondent submitted that contrary to the Appellant's contention that it failed to consider the evidence provided, it considered all the supporting documents in support of the Appellant's objection, reviewed the contentions and information therein and took all of it into consideration in establishing the correct tax liability.
68.The Respondent reiterated that the Appellant's averments lack the necessary supporting documentation and sufficient clarity to shift the evidentiary burden to the Respondent. The Respondent stated that a review of the Record of Appeal revealed that the Appellant did not identify any specific documentation supposedly ignored or overlooked by the Respondent in determining the taxes due and that consequently, the averment was unfounded, as the burden of proof rests with the Appellant, which has not substantiated the claim by presenting documents or facts which were disregarded by the Respondent in arriving at the contested objection decision.
69.The Respondent stated that it employed its best judgment in determining the taxes due, taking into consideration all the supporting documents provided by the Appellant, in accordance with Section 29 of the TPA.
70.The Respondent submitted that it was carefully guided by all relevant laws and followed due procedure and that it afforded the Appellant adequate opportunity to defend its position but it failed to do so as the evidence provided was not sufficient.
71.The Respondent stated that based on the provisions of Section 56 of the TPA and Section 30 of the TATA, the Appellant failed to discharge its burden of proof by failing to provide documentation to prove its assertions and further that the Appellant failed to adduce evidence of the said exemption for the period under review and as such, the same remained mere averments.
72.The Respondent relied on the following holding in the High Court case of Ushindi Limited v Commissioner of Investigation and Enforcement Kenya Revenue Authority [2020] eKLR:
73.The Respondent submitted that the Appellant has the burden of proving that the assessment made by the Respondent is incorrect and/or that the documents and/or information relied upon by the Respondent in disallowing the tax credits claimed and/or in making the assessment was wrong. That the assessment made by the Respondent is presumed to be correct unless and until otherwise proven, through documentary evidence, by the Appellant.
74.The Respondent further relied on the case of Republic V KRA: Proto Energy Limited where the Court stated as follows:
75.The Respondent asserted that it is empowered to use its best judgment in arriving at a tax assessment as explained in the case of Mulherin vs Commissioner of Taxation (2013) FCAFC 115. That it used all the information available to it in arriving at its final decision.
76.The Respondent stated that it complied with all the relevant laws in its application of the banking analysis and that the Appellant was given adequate opportunity to defend its position but failed to do so and therefore the Appellant failed to provide supporting documents and or to prove its case as is required under Section 56 of the TPA. That it was thus justified to issue its objection decision.
Respondent’s prayers:
77.The Respondent sought the following reliefs:i.That the Tribunal would dismiss the Appeal;ii.That the Tribunal would uphold the Respondent's objection decision dated 6th September 2024; andiii.That the Tribunal would award the Respondent the costs of the Appeal.
Issues For Determination
78.The Tribunal having considered the pleadings, documentation and submissions of both parties is of the view that the following two (2) issues that call for its determination:i.Whether the Respondent erred in treating all bank deposits as income.ii.Whether the Respondent erred in confirming the additional tax assessments.
79.Having identified the issues that call for its determination, the Tribunal will proceed to analyse the same as hereunder:
Whether the Respondent erred in treating all bank deposits as income.
80.The dispute at hand arose from Respondent’s tax assessments which were arrived at using the banking analysis method. The Appellant decried that the Respondent erroneously treated all deposits in its bank accounts as income.
81.In the Tribunal’s analysis, the following are the deposits in dispute which the Appellant contended were not income chargeable to tax:a.Loans from Nanchang Municipal Engineering Development of Kshs. 31,697,392.00.b.Capital injection by Shareholders through Zhonghao Overseas Construction Engineering Company Limited (China) in 2019 and 2020 of Kshs. 54,045,101.45.c.Advance payment for purchases by Zhonghao Overseas Engineering Company Limited (Kenya) in 2020 and 2021 be supplied later of Kshs. 65,376,000.00.
82.The Tribunal observed that the Appellant contended that the Respondent ignored and or failed to consider the documents and explanations it proffered to show that the said deposits were not income chargeable to tax. The Tribunal also notes that the Respondent on the other hand stated that the Appellant failed to discharge its burden of proving that the tax assessments were inaccurate or unjustified. The view of the Respondent was that the Appellant was afforded the opportunity to provide evidence in support of its objections, however what was submitted by the Appellant was insufficient hence the assessments were confirmed.
83.The Tribunal pored through the documents submitted by the parties and analysed the information availed concerning the deposited amounts in dispute as follows:
Capital injection by shareholders through Zhonghao Overseas Construction Engineering Company Limited (China) in 2019 and 2020 Kshs. 54,045,101.45.
84.The Tribunal considered the Appellant’s claim that some of the deposits in its accounts related to capital injection by its shareholders paid into its account through Zhonghao Overseas Construction Engineering Limited (China). The Tribunal noted that the Appellant failed to provide an analysis of the specific deposits which related to capital injections and to link the deposits to the shareholders who are indicated in the Official Company Search (formerly known as form CR12) of the Appellant.
85.The Tribunal observed that the Appellant provided uncertified bank statements and swift confirmation slips which could not be attributed to capital deposits in the absence of other corroborative documents such as; an analysis and description of the deposits, Meeting Minutes/Resolutions or any other document to demonstrated that indeed the amounts in question were capital injections in the Appellant.
86.The Tribunal opines that since the Appellant stated that Zhonghao Overseas Engineering Company Limited (China) was not its shareholder but that its shareholders made deposits through it, it was incumbent upon the Appellant to demonstrate the flow of capital from its shareholders to Zhonghao Overseas Engineering Company Limited (China) and how the same was eventually accounted for by the Appellant.
87.The Tribunal also observes that the Appellant failed to provide evidence of the resultant shareholding structure after deposits by the said shareholders, the Appellant attached an official search (formerly, form CR12) dated 7th October 2024 a current official search. The official search of the Appellant only showed the initial capital of Kshs. 10,000,000.00 before the said additional capital injection.
88.Based on above analysis, the Tribunal finds that Appellant failed to prove that deposits worth Kshs. 54,045,101.45 in its bank accounts during the period under review were attributable to capital injection from its shareholders.
Loans from Nanchang Municipal Engineering Development Kshs. 31,697,392.00.
89.The Tribunal notes that the Appellant had avowed that Kshs. 31,697,392.00 from the deposits under review were proceeds from loans obtained locally to finance its operations and that in order to support its claim, the Appellant attached a loan agreement dated 12th June, 2019 signed with Nanchang Municipal Engineering Development.
90.The Tribunal notes the Respondent’s contention that the loan agreement with Nanchang Municipal Development Corporation was a new averment which had not been made at the objection stage. The Tribunal noted that the Appellant did not counter this contention in its submissions.
91.Further, the Tribunal notes that the Respondent challenged the veracity of the loan agreement noting that the loan agreement with Nanchang Municipal Development Corporation indicated that the loan was interest free and further there were provisions for a repayment period. Instead the clauses in the loan agreement stated that the same could be repaid at any time at the discretion of the Appellant (the borrower).
92.The view of the Tribunal is that such open terms in the loan agreement made it difficult to verify whether the amount was indeed a loan, given that there is no interest charged and neither is there a repayment date/period. Further, the Tribunal noted that from the date the loan agreement was signed in 2019 to the date of assessments in 2024, 5 years later the Appellant did not provide proof of any repayments it made towards the loan.
93.The Tribunal is of the further view that it was incumbent upon the Appellant to provide corroborative evidence to demonstrate that indeed the said amount was a loan and the Appellant failed to do so.
94.The Tribunal also noted that the Respondent submitted having sighted a loan agreement between the Appellant and Zhongao Overseas Engineering Co. Ltd dated 31st January 2019 for a loan of Kshs. 60,000,000.00. The Respondent contended that there was no evidence of disbursement of the said loan. The Tribunal noted that the Appellant did not make submissions concerning this loan and further, the said loan agreement was not adduced before the Tribunal, the Tribunal could therefore not peruse and review this loan agreement in making its determination on the same.
95.In view of the above, the Tribunal finds that the documents adduced by the Appellant to support its claim that Kshs. 31,697,392.00 of the deposits in its accounts were proceeds of a loan advanced by Nanchang Municipal Engineering Development were insufficient and did not meet the evidential threshold of disproving that the loan was income chargeable to tax.
Advance payment for purchases to supplied later by Zhonghao Overseas Engineering Company Limited (Kenya) in 2020 and 2021 amounting to Kshs. 65,376,000.00.
96.It was the Appellant’s averment that it had received Kshs. 27,376,000.00 and Kshs. 38,000,000.00 in 2020 and 2021 respectively as payment for future supplies which were eventually made and taxes paid.
97.The Tribunal notes the Respondent’s contention that in support of its averment, the Appellant only attached a document printed on its letterhead showing purported invoice numbers without attaching the said invoices. It was the Respondent’s further contention that without the actual invoices it was not possible to ascertain the veracity of the said invoice numbers and as to whether indeed there was a sale between the Appellant and Zhonghao Overseas Construction Engineering Co. Ltd.
98.The Tribunal analysed the bank statements attached by the Appellant and noted that the Appellant did not highlight the specific transactions or deposits which constitute the advance payments for future supplies. In addition, the bank statements provided were not certified hence their authenticity was not verifiable.
99.The Tribunal further noted that the Appellant attached a statement of account for Zhonghao Overseas Construction Engineering Co. Ltd which listed the invoices for the sales that had supposedly been paid for in advance. The Appellant however failed to attach copies of the said invoices for verification purposes. Therefore, the Tribunal could not ascertain if indeed the listed invoice numbers related to the sales said to have paid for in advance and if taxes had been properly accounted for.
100.The Tribunal finds that the Appellant failed to provide a schedule comprising the specific deposits for the advance payments, the copies of invoices and evidence of the resultant tax payments and that therefore the Appellant cannot be said to have discharged its burden of proof.
101.The Tribunal also finds that the Appellant did not provide sufficient evidence to show that the said amounts were indeed advance payments for purchases and not income, and that the applicable VAT had been charged and remitted as averred.
102.Accordingly, the Tribunal finds that the Respondent’s did not err in treating all bank deposits as income.
Whether the Respondent erred in confirming the additional tax assessments.
103.The Tribunal noted that Appellant argued that its constitutional right to a fair hearing had been violated and avowed that the Respondent ignored the evidence it provided.
104.The Tribunal observed upon a review of the parties’ pleadings, the Respondent demonstrated that it had considered the evidence and this resulted in a review of the confirmed assessment from Kshs. 34,300,288.00 (corporation tax) and Kshs. 22,687,105.00 (VAT) to Kshs. 21,638,991.00 (both income tax and VAT). The confirmed assessment was therefore less than the initial assessment. The Tribunal also observed that the Respondent in its objection decision outlined the evidentiary gaps thereby challenging the Appellant’s documentary evidence.
105.It is trite law that once the Respondent has made the objection decision, the burden becomes that of the Appellant to prove that the decision of the Respondent is erroneous. This pursuant to the provisions of Section 56(1) of the TPA which provides as thus:
106.The Tribunal also notes the following provisions of Section 30 of the TATA:
107.It is the firm view of the Tribunal the burden of proving that the Respondent’s assessment was erroneous or inaccurate lies on the Appellant. This burden is statutorily mandated as outlined by the provisions of Statute at paragraphs 105 and 106 hereof. In the instant appeal, the Appellant fell short of discharging this statutorily mandated burden of proving that the objection decision made by the Respondent was incorrect. Indeed, without supporting documents, the Appellant’s contentions remained mere averments. The Tribunal is guided by the following holding in the case of Alfred Kioko Muteti V Timothy Miheso & Another (2015) eKLR:
108.A taxpayer’s statutorily mandated burden of proving that the decision of the Commissioner is incorrect has been determined in the cases of Tumaini Distributors [K] Ltd -vs- Commissioner of Domestic Taxes [2020] eKLR and Otieno Odongo & Partners -vs- Commissioner of Domestic Taxes TAT No. 290 of 2019.
109.It is in view of the foregoing analysis, authoritative precedents and pursuant to the provisions of Section 56(1) of the TPA and Section 30 of the TATA, that the Tribunal finds and holds that Appellant failed to discharge its burden of proving that the objection decision of the Respondent dated 6th September, 2024 was incorrect.
110.Accordingly, the Tribunal finds that the Respondent did not err in confirming the additional tax assessments.
Final Decision
111.The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 6th September, 2024 be and is hereby upheld.c.Each party to bear its own costs.
112.It is so Ordered.
DATED AND DELIVERED AT NAIROBI ON THIS 22ND DAY OF AUGUST, 2025.CHRISTINE A. MUGA - CHAIRPERSONDR. TIMOTHY B. VIKIRU- MEMBER BERNADETTE GITARI - MEMBER DOMINIC K. RONO - MEMBERBILLY MIJUNGU - MEMBER