Patel v Commissioner for Legal Services & Board Co-ordination Services (Tax Appeal E628 of 2025) [2025] KETAT 420 (KLR) (28 November 2025) (Judgment)
Neutral citation:
[2025] KETAT 420 (KLR)
Republic of Kenya
Tax Appeal E628 of 2025
CA Muga, Chair, T Vikiru, B Gitari, DK Rono & B Mijungu, Members
November 28, 2025
Between
Vijay Kumar Shamji Patel
Appellant
and
Commissioner For Legal Services & Board Co-Ordination Services
Respondent
Judgment
1.The Appellant is a taxpayer who carries out rental business.
2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 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 a tax verification exercise on the Appellant after detecting inconsistencies and under-declarations in the Appellant’s income tax filings for the years 2019 to 2022.
4.On 22nd June 2020, the Respondent initiated another audit for 2015–2018 years of income for which it issued a verification notice on 28th April 2023 in respect of the 2021–2023 years of income.
5.On 5th October 2020, the Respondent commenced verification of the Appellant’s rental income for the 2014–2020 years of income and requested extensive documents, including bank statements, agreements, ledgers, and asset schedules.
6.On 30th July 2024, the Respondent initiated another review for the 2020–2023 years of income. On 25th February 2025, the Respondent issued an assessment for Kshs. 67,932,696.00 in respect of the 2019–2022 based on disallowance of carried-forward losses amounting to Kshs. 191,894,600.00. The Appellant lodged an objection to this assessment on 19th March 2025 and on 12th May 2025, the Respondent confirmed the assessment.
7.The Appellant being dissatisfied with the Respondent decision filed his notice of appeal dated 4th June, 2025 on 5th June, 2025.
The Appeal
8.The Appeal was based on the Memorandum of Appeal dated 10th June, 2025 was filed on 17th June 2025 wherein the Appellant raised the following as his grounds of appeal:i.The Respondent erred in law and in fact in disallowing the Appellant's tax losses brought forward from the financial year 2014 contrary to the provisions of section 31(4)(b) of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).ii.The Respondent erred in law and in fact by thwarting the Appellant's legitimate expectation and right to fair administrative action contrary to Article 47 of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) and the provisions of the Fair Administrative Action Act, CAP 7L of the Laws of Kenya (hereinafter “FAAA”).iii.The Respondent erred in law and in fact by assessing the Appellant to tax in total disregard of court orders issued in Civil Case No. 1108 of 2011.
Appellant’s Case
9.The Appellant’s case was premised on the statement of facts dated 10th June, 2025 and filed on 17th June 2025.The Appellant stated that through a letter dated 5th October 2020, the Respondent notified him of its intention to verify the rental income declared for the accounting period 2014 to 2020.
10.The Appellant stated that he was required to furnish a wide range of documents, including bank account details, audited financial statements, tax computations, general ledgers, sale agreements, rent schedules, cost of repairs, property purchase agreements, foreign and local loan agreements and repayment schedules, revaluation and reclassification reports, fixed asset schedules, and lists of creditors and debtors.
11.The Appellant further stated that among the documents requested were loan agreements and repayment schedules predating 2011. The Appellant drew attention to the fact that, on 25th March 2015, the Chief Magistrate’s court in Civil Case No. 1108 of 2011 had issued an order restraining the Respondent from demanding any documents dated prior to 5th April 2011. These documents had been seized and carted away from the Appellant’s premises during an illegal raid carried out by the Respondent’s officers on 5th April 2011.
12.The Appellant also stated that the Respondent had previously been cited for contempt in a ruling delivered on 26th October 2011, arising from the unlawful raid.
13.The Appellant stated that he considered the Respondent’s request of 5th October 2020 for pre-2011 loan agreements and repayment schedules as an act of contempt of existing court orders. Nevertheless, the Appellant averred that he complied with the information request to the extent possible and furnished all documents within its possession and control. The final outstanding request by the Respondent concerned an expense listing, which the Appellant duly provided through an email dated 26th October 2020.
14.The Appellant stated that after furnishing all requested documentation, the Respondent issued no audit findings or assessment relating to the 2014–2020 review.
15.The Appellant averred that despite the Appellant’s follow-ups, the Respondent neither communicated non-compliance nor requested additional documents and he therefore reasonably presumed that his business income declarations for the period 2014–2020 had been reviewed and found compliant.
16.The Appellant averred that the Respondent issued another letter dated 22nd June 2020, notifying the Appellant of its intention to verify rental income for 2015–2018. This period overlapped with the audit period previously reviewed in the 2014–2020 verification, which had produced no adverse findings.
17.The Appellant stated that the Respondent sought additional documents: rental receipts, tenant agreements, audited accounts, bank statements, and schedules of disposed and acquired rental properties and that in a letter dated 25th June 2020, he confirmed his willingness to cooperate and requested the Respondent to conduct an audit at his business premises due to the bulky nature of the documents.
18.The Appellant stated that at a physical verification exercise followed but that however, as with the earlier review, the Respondent neither issued an assessment nor findings and there was no further communication. The Appellant again justifiably believed that its declarations for 2015–2018 had been found compliant.
19.The Appellant further stated that through a letter dated 28th April 2023, the Respondent’s rental income division initiated a third rental income verification, this time covering the period 2021 to 2023, and requested property schedules, monthly rent schedules, and certified bank or M-Pesa statements.
20.The Appellant stated that he responded on 5th May 2023, providing all requested documents. Once again, no assessment or communication followed, creating a third legitimate presumption that the Appellant had no compliance issues for 2021–2023.
21.The Appellant averred that the Respondent issued yet another iTax-generated audit notice on 25th January 2024, indicating that the Appellant was scheduled for audit on income tax and PAYE in respect of the 2018–2022.
22.The Appellant stated that the notice identified two officers but conspicuously omitted contact information, including phone numbers, electronic mail addresses and office locations. It also cited the repealed Customs and Excise Act as the governing law.
23.The Appellant stated that he wrote to the Respondent on 18th April 2024, highlighting the difficulties caused by the lack of contact details and explaining that he had made several futile visits to the Respondent’s offices seeking clarity. The Appellant nevertheless enclosed all requested information and urged the Respondent to conclude the audit, noting the disruption caused by the numerous overlapping audits. The Appellant also reiterated its pending refund claim of Kshs. 20,280,233,00 which remained unresolved.
24.The Appellant stated that through a letter dated 30th July 2024, the Respondent commenced a further tax return review for 2020–2023 years of income which had already covered in the previous audits. The Respondent requested bank statements, expense support documentation, and asset schedules.
25.The Appellant responded on 7th August 2024, pointing out that the periods had already been audited and that all relevant documents had previously been supplied.
26.In an electronic mail dated 26th August 2024, the Respondent observed that the Appellant had claimed allowable deductions of Kshs. 178,050,184.00 and realized exchange loss of Kshs. 95,185,927.00 in 2014, resulting in a loss of Kshs. 229,885,439.00 which had been carried forward for subsequent years. The Respondent requested support documentation, despite the fact that the request concerned documents over a decade old and outside the statutory retention period under the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).
27.The Appellant stated that he responded on 4th September 2024, explaining that due to the lapse of more than 10 years and in view of the 5-year statutory retention period, it could not locate the requested documents. The Appellant again reminded the Respondent of its pending refund of Kshs. 20,280,233.00. Through a letter dated 16th September 2024, the Appellant reiterated the same concerns and urged the Respondent to expedite the refund.
28.The Appellant stated that in a further letter dated 30th September 2024 he requested the Respondent to finalize the audit for 2019–2023 since the statutory completion period had lapsed and all documents had been furnished.
29.The Appellant stated that on 25th February 2025, the Respondent issued an income tax assessment (i-Tax Order No. KRA202567888554) demanding Kshs. 67,932,696.00 in respect of the period 2019–2022, consisting of principal tax of Kshs. 46,725,935.00 and interest of Kshs. 21,206,761.00.
30.The Appellant stated that the assessment disallowed his carried-forward tax losses of Kshs. 191,894,600.00 originating from 2014 and duly declared and carried forward each year.
31.The Appellant stated that he objected on 19th March 2025, providing detailed reasons why the assessment was erroneous and was then issued with an objection decision dated 12th May 2025, confirming the assessment wherein the following were stated:a.The migration public notice covered the Appellant (which it did not),b.The 2014 loss was not protected by the 2015 court order,c.The Appellant had engaged in gross or willful neglect under Section 31(4)(a) of the TPA, andd.Legitimate expectation did not apply.
Appellant’s Prayers
32.The Appellant sought the following reliefs from the Tribunal:a.That the Appeal be allowed;b.That the Respondent’s objection decision dated 12th May 2025 be set aside in its entirety;c.That the Respondent's assessment order number KRA202567888554 issued on the Respondent's i3fix system be expunged; andd.That the costs of the appeal be awarded to the Appellant.
Respondent’s Case
33.The Respondent’s case was outlined in its statement of facts dated 18th July 2025 and filed on even date wherein the Respondent stated that the Appellant was subjected to a tax verification and compliance exercise after the Respondent noted under-declaration of income in his income tax returns for the 2019–2022 years of income and that after conducting a detailed tax audit and engaging in extensive correspondence with the Appellant, the Respondent issued additional income tax assessments on 25th February 2025 totaling Kshs. 67,932,696.00.
34.The Respondent further stated that the assessments covered four periods—2019, 2020, 2021, and 2022 and comprised principal tax and interest. Specifically, the Respondent assessed principal tax of Kshs. 6,859,024.00 (2019), Kshs. 10,641,744.00 (2020), Kshs. 14,959,721.00 (2021), and Kshs. 14,265,446.00 (2022). Interest was charged as follows: Kshs. 4,595,541.00 (2019), Kshs. 5,852,958.00 (2020), Kshs. 6,363,877.00 (2021), and Kshs. 4,394,386.00 (2022). The total assessment amounted to Kshs. 67,932,696.00.
35.The Respondent stated that in the course of the verification, it established that the Appellant had been carrying forward tax losses since 2014 and that upon reviewing the origin of these losses, it found that they arose from two expense claims made in 2014: “other allowable expenses” amounting to Kshs. 178,050,184.00 and a “realised exchange loss” of Kshs. 95,185,927.00, which were offset against rental income declared that year.
36.The Respondent observed that the Appellant did not provide any explanation or supporting documents for the claimed expenses of Kshs. 178,050,184.00 and that the Appellant responded that the information requested related to prior years and was not available. Consequently, the Respondent disallowed the entire amount and rejected the loss brought forward.
37.The Respondent stated that similarly, the Appellant failed to provide documentation supporting the claimed exchange loss of Kshs. 95,185,927.00, reiterating that the information could not be traced. The Respondent therefore disallowed this claim in full and rejected the related losses.
38.The Respondent averred that for each year from 2019 to 2023, it re-calculated taxable profits by adding back the disallowed losses brought forward. The annual taxable profits were therefore restated as Kshs. 22,863,414.00 (2019), Kshs. 42,566,974.00 (2020), Kshs. 49,865,736.00 (2021), Kshs. 47,551,486.00 (2022), and Kshs. 51,379,832.00 (2023). Based on this, the Respondent computed tax payable and penalties, confirming liabilities for each respective year.
39.The Respondent stated that the Appellant filed an objection to the additional assessments but failed to provide adequate documentation to justify any variations. Accordingly, it issued an objection decision on 12th May 2025, confirming the assessments.
40.The Respondent stated that through a public notice dated 30th July 2024, taxpayers were informed of the migration of VAT and income tax ledger balances from the legacy system to the i-Tax platform. These migrated balances were communicated to taxpayers at their registered i-Tax electronic mail addresses and were subject to adjustment based on additional information that may not have been available during migration.
41.The Respondent stated that validated credit balances qualifying as tax overpayments could be utilized in accordance with Section 47(1)(a) of the TPA. The Respondent emphasized that migrated debit balances did not constitute new assessments, nor did they amount to tax decisions capable of objection or appeal.
42.The Respondent noted that taxpayers were advised to lodge any issues on the migrated balances by 31st December 2024 and contended that all actions undertaken complied with constitutional principles and the FAAA.
43.The Respondent noted that the orders issued on 25th March 2015 in Civil Case No. 1108 of 2011 restrained the tax authority from imposing tax based on documents dated 4th April 2011 until certain documents taken from the Appellant were returned.
44.The Respondent asserted that the assessments were not based on the referenced 4th April 2011 documents and did not concern periods predating 2011 and that as part of the verification, it reviewed the Appellant’s self-assessment returns in respect of the period 2010 to 2023.From the review, the Respondent established that accumulated losses first appeared in the 2014 i-Tax return. Prior returns from 2010 to 2013 did not reflect such losses, and the Appellant was consistently in a tax-payable position in those years.
45.The Respondent noted that the Appellant’s first i-Tax return was filed in 2014, and the last legacy system assessment was for 2013.The Respondent therefore concluded that the losses brought forward were introduced for the first time in 2014 and were unsupported by prior declarations. As the earlier returns showed no accumulated losses and indicated tax payable positions, the Respondent rejected this ground.
46.The Respondent noted the Appellant’s argument that it was barred from assessing losses predating 5th April 2011 or losses older than five years. The Respondent agreed that Section 31(4)(b) of the TPA restricts certain amendments but asserted that the Appellant introduced non-existent losses in the 2014 return amounting to Kshs. 229,885,438.73. The Respondent therefore disallowed the losses under Section 31(4)(a), citing gross or willful neglect, and rejected the objection on this ground.
47.The Respondent explained that legitimate expectation is derived from principles of natural justice and requires a lawful administrative basis. The Respondent asserts that previous audits were limited to documents examined at the time, and no assurance could have been given contrary to law.
48.The Respondent posited that the Appellant did not identify any specific documentation allegedly ignored by the Respondent, and the burden of proof rests with the Appellant. The Respondent relied on the Appellant’s i-Tax returns and the objection decision dated 12th May 2025.
49.The Respondent stated that it acted in full compliance with Section 15(4) of the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) and Sections 23(1), 31(4)(b), 51, and 59 of the TPA.
50.The Respondent maintained that the additional income tax assessments were lawful and properly issued. The Respondent asserted that the Appellant failed to discharge the statutory burden of proof under Section 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) and Section 56 of the TPA.
Respondent’s Prayers
51.The Respondent prays that the Tribunal would:a.Uphold its objection decision dated 12th May 2025; andb.Dismiss the appeal with costs to it as the same was without merit
Parties’ Submissions
52.Parties complied with the Tribunal’s directions in filing their respective submissions. The Appellant’s submissions filed on 11th September 2025 were adopted by the Tribunal as were those of the Respondent dated and filed on 24th September 2025.
Appellants Submissions
53.The Appellant began by reiterating its statement of facts, which the Tribunal will not re-hash and proceeded to raise the following as the issues for determination in the matter:a.Whether the Respondent is statutorily barred from assessing and disallowing tax losses declared in periods dating back more than five years from the date of declaration of the losses;b.Whether the Respondent’s tax assessment thwarts the Appellant’s legitimate expectation;c.Whether the Respondent’s tax assessment violates the Appellant’s right to Fair Administrative Action; and,
54.The Appellant submitted that in his 2014 tax returns, he declared a loss of KES 229,885,439 as demonstrated by its 2014 tax returns, the loss amount was arrived at in the normal and typical manner of considering the Appellant’s income, factoring in the Appellant’s expenses/costs that qualified as allowable deductions with the ultimate resulting outcome depicting a loss incurred by the Appellant in its business.
55.The Appellant submitted that following incurrence and declaration of the tax loss in 2014, the Appellant carried forward the tax losses and have always treated the losses as an allowable deduction pursuant to Section 15(4) of the ITA which states as follows:
56.The Appellant stated that there was no exception for the period 2019 to 2022 wherein the Appellant utilised his carried forward tax losses in accordance with Section 15(4) of the ITA having declared and utilised the same in its 2019 to 2022 tax returns.
57.The Appellant stated that the Respondent had a chance to challenge or seek for information on how the 2014 losses declared by the Appellant arose within the document retention timelines specified for the appellant under Section 23(1) and (3) of the TPA which states as follows:
58.The Appellant affirmed that prior to 25th February 2015, the Respondent had never challenged the Appellant’s losses carried forward from 2014. Therefore, having filed its 2014 tax return on 25th April 2017 and noting the provisions of Sections 23(1) (c) and 23(3) of the TPA, the Respondent’s tax assessment dated 25th February 2025 requiring the Appellant to support its tax losses declared in 2014 places the Appellant at a very onerous and arduous position that Section 23(1)(c) of the TPA sought to prevent.
59.The Appellant submitted that the Respondent’s attempt to request for documents in support of how the Appellant’s 2014 losses arose was an attempt to circumvent the 5-year document retention period provisions of the TPA, without any justifiable cause within the permitted exemptions.
60.Similarly, the Respondent’s attempt to disallow the Appellant’s carried forward losses in the assessment orders dated 25th February 2025 amounts to violation of statute of limitation provisions under the TPA.
61.The Appellant stated that disallowing losses it accumulated in 2014 amounted to assessing the said losses outside the 5-year limitation period contrary to Section 31(4)(b) of the TPA which provides as follows:
62.The Appellant stated that at paragraph 31 of its statement of facts, the Respondent had attempted to justify its conduct of assessing his losses outside 5 years following the reporting period in which they were declared by making an averment that the Appellant engaged in gross or willful neglect in its declaration of its 2014 losses. On that basis, the Respondent averred that it was entitled to invoke Section 31(4)(a) of the TPA to assess the Appellant to taxes outside the five-year period.
63.The Appellant submitted that other than making a wild and baseless averments, no evidence had been tendered to prove willful neglect and to demonstrate that the entries in the Appellant’s 2014 tax return were not genuine entries as regards the Appellant’s declared income, expenses or any other entry in respect thereof.
64.The Appellant submitted that the Respondent cannot casually invoke the provisions of Section 31(4)(a) of the TPA without observing the higher level of caution and diligence that the said section demands.
65.The Appellant cited the decision in Coxwell Express Company Limited v Commissioner Investigations & Enforcement (Tax Appeal 1053 of 2022) [2024] KETAT 348 (KLR), where the Tribunal stated as follows in a case where the respondent herein had attempted to casually invoke Section 31(4)(a) of the TPA:
66.The Appellant further stated that the High Court has upheld the enhanced threshold of the caution to be exercised by the Respondent in issuing assessments outside the five-year timeline. In the case of Commissioner of Investigation & Enforcement v Asea Brown Boverthe Court (Abb) Limited (Income Tax Appeal E073 of 2023) [2025, the High Court stated as follows:
67.The Appellant submitted that in the instant case, the Respondent had not made any attempt to demonstrate how any of the declarations by the Appellant in its 2014 tax returns was tainted with gross or willful neglect. This is having regard to the fact that the Appellant’s 2014 tax loss was a function of the declarations by the Appellant. The Appellant did not just pluck out figures from the air in arriving at its 2014 declared tax loss of Kshs.229,885,439.00.
68.The Appellant further submitted that the exclusion to the 5-year statute of limitation on account of gross or willful neglect is ranked together with evasion or fraud, which is criminal in nature. The test of gross or willful neglect is thus pari passu with that required for fraud under Section 31(4)(a) of the TPA.
69.The Appellant submitted that he has not been tried or adjudged guilty in a criminal proceeding as was held in Kenya Revenue Authority vs. Jimmy Mutuku Kiamba, Miscellaneous suit No. 285 of 2015 where the Respondent was trying to assess a taxpayer outside the statutory timelines set by statute alleging willful neglect. In that case, the court stated as follows:
70.The Appellant submitted that the Respondent had no justification to assess him outside the 5-year limitation period prescribed in law and on that basis, the Tribunal should vacate the Respondent’s i-Tax assessment order dated 25th February 2025.
71.The Appellant submitted that the Respondent had in the past conducted various audit exercises on the Appellant’s affairs in their quest to ascertain the Appellant’s rental income declarations as below:a.Audit exercise covering the period 2014 to 2020 which was triggered by the Respondent’s letter dated 5th October 2020;b.Audit exercise covering the period 2015 to 2018 which was triggered by the Respondent’s letter dated 22nd June 2020;c.Audit exercise covering the period 2021 to 2023 which was triggered by the Respondent’s letter dated 28th April 2023; andd.Audit exercise covering the period 2020 to 2023 which was triggered by the Respondent’s letter dated 30th July 2024.
72.The Appellant submitted that all the above verification exercises were undertaken by the Respondent to confirm the correctness of the Appellant’s rental income declarations on a full basis – from rental income, expenses and taxes payable (where applicable).
73.The Appellant submitted that none of the audit exercises culminated in any adverse findings. In fact, no responses or tax assessments were issued by the Respondent following the audit exercises. The Respondent never challenged the deductibility of the expenses and items declared in the Appellant’s 2014 tax returns. In fact, the Respondent never challenged the carrying forward of the Appellant’s tax losses from the 2014 year of income through to the subsequent years of income. This led the Appellant to believe and legitimately expect that its tax declarations during the period 2014 to 2023 were correct and above board.
74.The Appellant cited the decision in Keroche Industries Limited v Kenya Revenue Authority & 5 Others [2007] eKLR, the High Court stated as follows regarding the concept of legitimate expectation:
75.The Appellant submitted that the Respondent’s conduct in not issuing any adverse findings or assessment regarding the Appellant’s loss carried forward from 2014 and utilised in the subsequent years despite the various verification exercises created a legitimate expectation in favour of the Appellant that the Appellant’s declarations and more so, carried forward loss, was above board. The Appellant stated that this legitimate persisted for almost ten years and is unconscionable for the Respondent to thwart the accretion of the legitimate expectation.
76.The Appellant cited the High Court in the case of Republic v Kenya Revenue Authority; Proto Energy Limited (Ex-parte) [2022] KEHC 5 (KLR) where it was held that legitimate expectation ought to create legal certainty stating as follows:
77.The Appellant submitted that the Respondent’s disallowance of his tax loss that was accumulated in 2014 almost ten years after the accumulation flies in the face of certainty viewed from the perspective of the various audit exercises conducted by the Respondent on the affairs of the Appellant.
78.The Appellant submitted that in its objection decision, the Respondent averred that the Appellant’s claim for legitimate expectation could not stand since it was pegged on the unlawful introduction of losses and that in any event, the Respondent reserves the right to review a person’s tax affairs if/where new information becomes available.
79.In response, the Appellant avowed that first, the Respondent had not demonstrated what new information has become available that was not available in its past four audit verification exercises which that crystallized/occasioned the appellant’s legitimate expectation claim. Secondly, the Appellant’s losses arose on account of legitimate business transactions and, other than making a wild and unsubstantiated allegation, the Respondent has not proven that the Appellant’s losses did not arise on account of legitimate business affairs/transactions.
80.The Appellant submitted that at paragraph 37 of its statement of facts, the Respondent seemingly stated that his claim for legitimate expectation cannot stand on account of the Respondent’s officials involved in the prior audit exercises having acted unlawfully or contrary to statutory provisions. As outrageous and absurd as that sounded, no proof or particulars had been availed by the Respondent to anchor such a claim. In any event, the various audit exercises alluded to in the foregoing were conducted by different offices of the respondent. The position that the Respondent seemed to suggest cannot stand and the legitimate expectation created in favor of the appellant on account of the previous audit verification exercises cannot be impugned on the basis of such hollow allegations.
81.The Appellant submitted that the Respondent’s disallowance of the Appellant’s losses accumulated in 2014 and carried forward in subsequent years violates the Appellant’s legitimate expectation. On this basis the Appellant submitted that the Tribunal should vacate the Respondent’s i-Tax assessment order dated 25th February 2025.
82.The Appellant submitted that in disallowing his tax losses through issuance of the assessment dated 25th February 2025, the Respondent has expressly and conveniently disregarded the special circumstances obtaining from and leading to the issuance of its tax assessment. Most importantly, the Respondent disregarded the fact that it had conducted four previous audits on the Appellant’s rental income declaration affairs without identifying or communicating any single adverse findings to the Appellant.
83.The Appellant further submitted that the recurrent and cyclic nature of the various and separate tax audits that the Respondent has subjected the appellant to, violates its right to a fair administrative action under Article 47 of the Constitution and the FAAA. Article 47(1) of the Constitution guarantees to every person the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair stating as follows:
84.The Appellant posited that FAAA was enacted to give effect to Article 47 of the Constitution of Kenya which requires that every administrative action must be “expeditious, efficient, lawful, reasonable and procedurally fair.
85.The Appellant buttressed its position by citing the decision in the case of Republic v Principal Secretary, Ministry of Transport, Housing and Urban Development Ex parte Soweto Residents Forum CBO [2019] KEHC 10312 (KLR), the court, while contextualizing the concept of fair administrative action stated as follows:
86.The Appellant submited that the various audit/verification exercises that it had been subjected to by four different teams and offices of the Respondent with each team/office not having regard to the information requests, documents and clarifications availed to the previous audit/verification teams violates the Appellant’s rights to fair administrative action. This occasioned the Appellant being subjected to administrative action that was unfair and unreasonable since the Appellant is expected to honor information requests from each of the teams. This has consistently disrupted the Appellant’s business as the Appellant grapples with honouring the information requests made during the separate audit/verification processes.
87.The Appellant submitted that the various stations/divisions within the Respondent are for administrative purposes only and should not unfairly cause hardships and inconveniences on taxpayers as has happened in the Appellant’s case. Whether dealing with the Investigation and Enforcement Department, Taxbase Expansion Project at Wilson Airport, Rental Income Division and/or West of Nairobi Tax Service Office, the Respondent’s internal administrative bureaucracies should not impede the Appellant’s right to fair administrative action as has happened in the instant case.
88.The Appellant further submitted that the Respondent’s decision to disallow his losses carried forward from 2014 violates his rights to fair administrative action since at no one time did the Respondent ever raise an issue on the disallowed losses. The Respondent only issued a tax assessment disallowing the losses without according the Appellant a chance to justify the losses and defend its position.
89.The Appellant submitted that in its objection decision and its statement of facts, the Respondent averred that it adhered to the provisions of the Constitution and the FAAA since it had issued a public notice on 31st July 2024 informing taxpayers of migration of income tax ledger balances from the Legacy system to the iTax system and taxpayers were notified to raise any concerns that they might have latest by 31st December 2024.
90.In response the Appellant submitted that the Appellant’s 2014 tax loss did not fit within the scope of the said public notice since it was not migrated from Legacy to iTax. The Respondent cannot therefore rely on its public notice dated 31st July 2024 to defeat the Appellant’s right to a fair administrative action.
91.In light of the foregoing, the Appellant urged the Tribunal to vacate the respondent’s iTax assessment order dated 25th February 2025 for want of compliance with the dictates of Article 47 of the Constitution and the provisions of the FAAA.
92.The Appellant submitted that the documents (loan agreements) upon which the loss amounts disallowed by the Respondent are anchored, formed part of the documents seized and carted away from the Appellant’s business premises by the Respondent’s officials during an illegal raid on 5th April 2011 and which documents are still in possession of the Respondent.
93.The Appellant submitted that on 25th March 2015, the court issued an order in Civil Case No. 1108 of 2011 restraining the Respondent’s officials from demanding from the Appellant any documents dated prior to 5th April 2011, including the loan agreements occasioning the Appellant’s 2014 loss accumulation
94.The Appellant charges that the assessment order dated 25th February 2025 violates the said court order since it seeks to disallow losses which can only be proven through loan documents that were part of the documents carted away by the Respondent’s officials during the illegal raid on the Appellant’s business premises. The said documents remain illegally in the Respondent’s possession. It is absolutely unfair for the Respondent to aver that the Appellant had not supported the loss declared in 2014 while the Respondent is illegally holding onto the documents that support the said loss.
Respondent’s Submissions
95.The Respondent submitted that it acted within statutory timelines when disallowing tax losses for 2014. It points out that taxpayers, including the Appellant, were informed through a public notice of 31st June 2024[sic] that VAT and income tax ledger balances had been migrated from the legacy system to iTax. These migrated balances were communicated to each taxpayer through their registered i-Tax electronic mail.
96.The Respondent explained that migrated debit/credit balances were subject to adjustment where new information had not been considered earlier. Validated credits were available for utilization under section 47(1)(a) of the TPA. Crucially, migrated debit balances were not new tax assessments and therefore not subject to the objection/appeal framework.
97.The Respondent submitted that the Appellant himself admitted to filing its 2014 return on 25th April 2017. The Respondent therefore argued that, under Section 31(4)(b) of the TPA, the five-year period runs from the date the return was submitted, not from the year relating to the income. This interpretation was upheld in Nakuru Cement Supplies Ltd v Commissioner of Investigations & Enforcement (Tax Appeal E038 of 2021) [2022].
98.The Respondent reiterates that its review showed the Appellant created the 2014 loss by claiming:a.Kshs. 178,050,184.00 as “other allowable expenses” andb.Kshs. 95,185,927.00 as “realized exchange losses.”
99.The Respondent submitted that the Appellant failed to provide documentation for either figure, stating that the documents related to prior years and could not be traced. Both deductions and the resulting carried-forward losses were disallowed entirely.
100.The Respondent added that the losses had already been disallowed under the legacy system and therefore were properly rejected in the iTax review. It submits that it acted lawfully, in line with the Constitution, the FAAA and tax statutes. It cited Nyaga v Housing Finance Co. Ltd (Civil Appeal No. 134 of 1987) for the proposition that courts should not interfere with statutory powers unless exercised oppressively.
101.The Respondent therefore maintained that the Tribunal had no basis to interfere with its disallowance of the 2014 losses and submitted that no legitimate expectation arose. It argued that legitimate expectation requires clear, consistent and lawful representations made by a public authority. Decisions such as Republic v KRA ex parte Shake Distributors Ltd [2012] eKLR, R (Bibi) v Newham LBC [2001], and R v Jockey Club ex parte RAM Racecourses [1993] are cited.
102.The Respondent stressed its submission that it never promised the Appellant that losses claimed in 2014 would be accepted without supporting evidence. A public body cannot create expectations contrary to statute. The Appellant, it argues, failed to show how the Respondent acted unlawfully or ultra vires. Since no lawful promise was made, no expectation could arise.
103.The Respondent denied any violating Article 47 of the Constitution and reiterates that the public notice of 31 June 2024 [sic] informed taxpayers of the migration of their ledger balances, and that the migrated balances were emailed to them. Taxpayers including the Appellant were given until 31st December 2024 to raise any issues.
104.The Respondent argued that the Appellant cannot claim unfairness when it had full opportunity to clarify or contest the migrated balances. The Respondent acted within the law, as confirmed in Republic v KRA & 2 Others ex parte Arrow Hi-Fi (E.A.) Ltd, where the court held that actions taken within statutory authority cannot be invalidated on grounds of perceived unfairness.
105.The Respondent argued that contempt does not arise. The court order in question prohibited assessments based on documents dated 4 April 2011 until certain documents were returned to the Appellant. The Respondent states that its assessment did not rely on any 2011 documents and did not relate to periods prior to 2011.
106.To verify the losses, the Respondent reviewed the Appellant’s self-assessment returns for 2010 to 2023 using both the legacy system and iTax. Its findings showed that:a.The Appellant’s first iTax return was filed for 2014, andb.Its last legacy-system self-assessment return was for 2013.
107.The Respondent’s posited that the analysis showed that no accumulated losses existed in the legacy returns up to 2013. In all years from 2010 to 2013, the Appellant declared taxable profits and paid the resulting tax liabilities. However, in 2014 the Appellant introduced a carried-forward loss exceeding Kshs 229 million despite no such loss being present in the legacy records.
108.The Respondent submitted that this confirmed that the disputed loss first appears only in 2014; the legacy-system returns contain no such loss; and the assessment did not rely on any documents referenced in the 2011 court order.
109.The Respondent therefore maintained that the 2011 orders are irrelevant to the present assessment and submitted that the Appellant bears a constitutional obligation under Article 210 to pay taxes lawfully due. It cited Republic v KRA ex parte Bata Shoe Co. (Kenya) Ltd [2014] eKLR, reaffirming that while taxpayers need not pay more than is due, the tax authority is entitled to collect every coin lawfully owed.
110.The Respondent maintained that the losses were “non-existent,” were introduced through willful neglect, and were therefore properly disallowed pursuant to Section 31(4)(a) of the TPA.
Issues For Determination
111.The Tribunal identifies the following issues for determination:a.Whether the assessments in respect of the period 2014 to 2018 were statutorily time barred under Section 31(4)(a) of the TPA.b.Whether the Respondent decision to disallow the carried-forward losses was justified.c.Whether the objection decision dated 12th May 2025 was justified.
Analysis And Findings
Whether the assessments in respect of the period 2014 to 2018 were statutorily time barred under Section 31(4)(a) of the TPA.
112.The Tribunal reaffirms that the statutory limitation governing amendments to assessments is contained in Section 31(4) of the TPA, which provides as follows:
113.The Tribunal notes that Section 31 of the TPA empowers the Commissioner to amend an assessment referred to as the “original assessment” to ensure that a taxpayer is assessed for the correct amount of tax payable, including accuracy relating to deficits carried forward under the ITA or excess input VAT carried forward. Such amendments may be made based on available information and to the best of the Commissioner’s judgment. A taxpayer who has submitted a self-assessment may similarly apply for amendment of its self assessment return within the mandatory statutory timelines and if rejected, the Commissioner is required to provide reasons for refusal within 30 days.
114.The Tribunal further notes that Section 31(4) of the TPA introduces a limitation period on the Commissioner’s power to amend assessments. Except in cases involving gross or wilful neglect, evasion, or fraud where amendments may be made at any time the Commissioner’s power is restricted to five years from the date the self-assessment was submitted or, for other assessments, from the date the Commissioner notified the taxpayer. This five-year time limit reinforces principles of certainty and finality in tax administration, unless exceptional circumstances justify departure.
115.The Tribunal is of the considered view pursuant to the provisions of Section 31(4) of the TPA the Respondent is prohibited from amending assessments for taxes the period whereof is beyond 5 years. The Respondent’s assessments were issued on 25th February 2025 for taxes arising from the years 2018, which is beyond the statutory time limit of 5 years.
116.The Tribunal notes that the law provides grounds upon which the Commissioner can rely to make assessments beyond the statutory period. The following provisions of Section 31 (4) (a) of the TPA empowers the Commissioner to amend an assessment beyond the statutory time limit of 5 years under certain conditions:
117.The Tribunal notes that in order for the Respondent to issue an assessment beyond the statutory time limit of 5 years, it ought to have demonstrated that the Appellant acted with gross or willful neglect, evasion or fraud by or on his own behalf. The Tribunal also notes the Respondent’s position that the Appellant acted with gross and wilful neglect by grossly under declaring the income earned in the period under review.
118.The view of the Tribunal is that the Respondent was required to demonstrate and tender evidence as well as particulars in support of its averment that the Appellant acted with gross and wilful neglect. The Tribunal is guided by the case of Africa Oil Kenya BV vs. Commissioner of Domestic Taxes (Tax Appeal No. E024 & E051 of 2020 (Consolidated)) [2022] KEHC 15967 (KLR), where the court held as follows:
119.The Tribunal did not find any action by the Appellant amounting to wilful or gross neglect nor did the Respondent place before the Tribunal evidence of such conduct on the Appellant’s part. The Appellant’s position on various tax liabilities were consistent and at no point did it admit liability or demonstrate that it willfully neglected to pay the taxes demanded by the Respondent.
120.The Tribunal is of the view that the Respondent ought to have demonstrated that the Appellant was negligent and his intent was to execute and achieve the mischief he was accused of. The Tribunal however finds that no evidence was led to prove wilful neglect and therefore there was no basis to find that the Appellant had been in wilful neglect of his assessment obligations. Pursuant to the provisions of Sections 107 and 108 of the Evidence Act, CAP 80 of the Laws of Kenya (hereinafter “Evidence Act”) it is always incumbent upon the Respondent to demonstrate that the Appellant acted in a way that can legally and factually be considered to wilful or negligent. On that duty, the Respondent failed to discharge its legal duty in proving what the law expected of it.
121.The Tribunal proceeds from the appreciation that tax statutes must be construed strictly on the true and natural meaning of the words used by the legislature. The Tribunal is bound to strictly enforce the provisions of tax statutes. That obligation is drawn from the words of the court in Partington vs. AG [1869] LR 4 HL where the court rendered itself and stated the following:
122.The Tribunal relies on the case of Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 Others NRB CA Civil Appeal No. 164 of 2013 [2019] eKLR, where the Court of Appeal observed the following:
123.The Tribunal also relies on the case of Coxwell Express Co. Ltd v Commissioner (TAT Appeal No. 560 of 2021) where the following was held:
124.The Tribunal also relies on the case of Fabro Ltd v Commissioner [TAT Appeal No. 132 of 2023], where the following was emphasised:
125.The Tribunal notes that the Respondent had conducted several prior audits and verifications between 2020 and 2024, covering the same periods (2014–2019), all concluding without adverse findings. The Tribunal therefore finds that the Respondent lacked statutory authority to reopen time-barred years and that such re-opening failed the strict conditionalities imposed by the provisions of Section 31(4)(a) of TPA.
126.Its trite law that although Section 56(1) of the TPA places the initial burden on a taxpayer to demonstrate that a tax decision is erroneous. In instances where the Commissioner contends fraud, willful or gross neglect under the provisions of Section 31(4)(a) of TPA as read in tandem with Sections 107-109 of the Evidence Act the burden shifts to the Commissioner. In Africa Oil Kenya BV v Commissioner [TAT Appeal No. 03 of 2021], the Tribunal held as follows:
127.The Respondent relied on, missing documentation from 2014; ledger migration anomalies; and unexplained expenses from 11 years prior. None of these matters demonstrate deliberate evasion, intentional misrepresentation, or any fraudulent scheme. No suppressed income, falsified invoices, or undisclosed bank accounts were shown. The Tribunal is of the firm view that absence of documents from 2014, especially after system migrations and the passage of more than a decade, was not indicative of wilful neglect. Consequently, the Tribunal finds that the assessments in respect of the period 2014 to 2018 were statutorily time barred under Section 31(4)(a) of the TPA.
Whether the Respondent decision to disallow the carried-forward losses was justified.
128.The Tribunal notes that the treatment of tax losses pursuant to Section 15(4) of the ITA has undergone significant changes over the years. The Finance Act of 2014 introduced a 5-year limit for the carry forward of losses and the same was later extended to 10 years in 2015. In 2021, the restriction was removed entirely, allowing indefinite carry-forward of losses. However, the Finance Act, 2025 reintroduced the 5-year cap, providing for possible extension under Section 15(5) of the ITA and additionally disallowed offsetting of capital losses against future gains.
129.The Tribunal is of the view that despite this statutory amendment, the 2025 provision cannot apply retrospectively in the absence of an express transitional clause. Both legal certainty and the principle of non-retrospectivity dictate that losses incurred under the prior indefinite regime remain governed by that law. The Court of Appeal in Madison Insurance v Commissioner of Domestic Taxes affirmed that, unless expressly stated, amendments should not extinguish vested rights, noting that statutes “should not take away rights actually vested at the time of their promulgation.” The courts have recognised legitimate expectation, as seen in Transmara Sugar Company Ltd v Commissioner of Domestic Taxes, (Income Tax Appeal E009 of 2024) [2025] KEHC 15504 (KLR) (Commercial and Tax) (27 October 2025) where the taxpayer relied on earlier law in strategic planning.
130.Therefore, while the Finance Act 2025 now imposes a 5-year limit prospectively, it should not operate to extinguish pre-existing loss entitlements accumulated under the former indefinite regime. A view that losses incurred prior to 2020 are deemed expired would therefore arguably inconsistent with principles of fairness, statutory interpretation, and the presumption against retrospectivity. This position is reinforced by the lack of transitional provisions and the commercial recognition, as highlighted in Kenya Revenue Authority v Export Trading Company Limited (Petition 20 of 2020) [2022] KESC 31 (KLR) (17 June 2022) (Judgment) that tax law should not penalise legitimate operational arrangements.
131.With regard to the instant appeal, the Tribunal notes that the relevant period in dispute (2020–2023) which fell within the 10-year and later indefinite regimes. The Respondent could therefore not apply the Finance Act 2025 provisions retroactively this view is in line with the High Court decision in Keroche Industries Ltd v KRA [2007] 2 KLR 240 where it was held as follows:
132.The Tribunal notes that the position in the preceding paragraph was reinforced in the case of Creative Consolidated Systems Ltd v Commissioner (TAT Appeal No. 172 of 2024), where the Tribunal held the following:
133.The Tribunal also notes that the Appellant’s losses were accepted by the Respondent during multiple audits over four years and with due regard to the following holding by the Tribunal in the case of Mugwetwa v Commissioner [TAT Appeal No. 004 of 2024], the Tribunal is of the view that no new evidence was adduced by the Respondent and further that the disallowing the losses based on applying the law retroactively the Respondent acted in an unlawful manner and in effect and violated the Appellant’s legitimate expectations:
134.Consequently, the Tribunal finds that the decision by the Respondent to disallow the carried forward losses was unjustified.
Whether the objection decision dated 12th May 2025 was justified.
135.The Tribunal is of the view that the assessments were entirely premised on the rejection of 2014 losses and therefore their validity depends on the legality of that foundational adjustment. In Fabro Ltd, (Supra) the Tribunal held as follows:
136.Given its prior findings, the Tribunal concludes that the assessments in respect of the 2020–2023 years of income were invalid and that accordingly the confirmation of the assessments was unjustified. The Tribunal is of the further view that the objection decision dated 12th May, 2025, which was the subject of this appeal, was founded on an unlawful re-opening of barred periods; unproven contentions of willful neglect; disregard of prior audits and retroactive application of the tax statutes.
137.Accordingly, the Tribunal finds and holds that the objection decision dated 12th May 2025 was not justified.
Final Decision
138.The upshot of the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 12th May 2025 be and is hereby set aside.c.Each party to bear its own cost.
139.It is so Ordered.
DATED AND DELIVERED AT NAIROBI ON THIS 28TH DAY OF NOVEMBER, 2025.CHRISTINE A. MUGA - CHAIRPERSONDR. TIMOTHY B. VIKIRU - MEMBERBERNADETTE GITARI - MEMBERDOMINIC K. RONO - MEMBERBILLY MIJUNGU - MEMBER