TAX APPEAL TRIBUNAL OKAY KRA TO TAX UNEXPLAINED BANK DEPOSITS

Summary Of The Tax Appeal No. E029 Of 2025 Virginia Wangari Ng’ang’a -Vs Commissioner Of Legal Services And Board Coordination (Judgemnt 16^th January 2026)

The appellant, Virginia Wangari Ng’ang’a, a sole proprietor in the hotel and hospitality sector in Naivasha, was issued with a tax assessment by the Commissioner of Legal Services and Board Coordination (KRA/ the Respondent), a principal officer under the Kenya Revenue Authority Act, in April 2024. The assessment was based on banking and Mpesa credits and demanded Kshs. 6,548,075.00 in additional taxes. Virginia Wangari Ng’ang’a objected to the assessment, but her objection was rejected, prompting her to file an appeal late; leave to appeal out of time was granted in January 2025.

Facts

KRA applied the banking analysis method to compute the Virginia Wangari Ng’ang’a’s income, treating all deposits as taxable income, and further imposed an industry profit margin of 18.49% for hotel businesses, while charging VAT for 2022 after the Appellant crossed the statutory threshold of Kshs. 5 million. Virginia Wangari Ng’ang’a challenged this approach, arguing that the assessment wrongly treated all bank deposits as income, that the profit margin was arbitrarily applied, that she was subjected to double taxation despite having already paid customs duties, that KRA failed to comply with Section 51(4) of the Tax Procedures Act (TPA) by not responding to her objection within 14 days, and that the assessment violated Section 3(2) of the Income Tax Act as well as Articles 47 and 210 of the Constitution which guarantee fair administrative action and taxation only by law. In response, KRA maintained that banking analysis is a recognized method of assessment, citing Digital Box Ltd v Commissioner, Investigations and Enforcement (Tax Appeal Tribunal Appeal No. 115 of 2017and argued that Virginia Wangari Ng’ang’a failed to provide sufficient documentation to prove non-income deposits, defended the application of the industry margin as consistent with precedent in Silver Chain Ltd v Commissioner Income Tax & 3 Others [2016] EKLR , and asserted that customs duties and domestic taxes are distinct, meaning no double taxation had occurred.

Issues for Determination

1. Whether the Respondent complied with the statutory requirement under Section 51(4) of the TPA.
2. Whether the Respondent erred in treating all bank deposits as taxable income.

Applicable Rules of Law

1. Whether the Respondent complied with the statutory requirement under Section 51(4) of the TPA.

The Tribunal held that, although Section 51(4) of the Tax Procedures Act is couched in mandatory terms, it only applies where an objection is not lodged in a valid manner. Since the Respondent partially allowed the Appellant’s objection after evaluating the evidence, the Tribunal found that the objection was treated as validly lodged, thereby removing it from the scope of mandatory invalidation within fourteen days. It further noted that the Appellant’s argument was contradictory, claiming the objection was void ab initio while simultaneously faulting the Respondent for not invalidating it within the statutory timeframe. The Tribunal emphasised that an objection determined on its merits cannot, at the same time, be deemed invalid from inception.

Additionally, the Tribunal clarified that Section 51(4) grants KRA discretionary power to validate objections but requires mandatory action only when an objection is invalid. Since KRA exercised its discretion by considering and partially allowing the objection, the Tribunal found no procedural defect. It relied on the High Court decision in Commissioner of Investigations and Enforcement v Holwadag Construction Company Ltd [2024], which held that objections failing to meet statutory requirements are void ab initio. In this case, however, the Tribunal concluded that KRA complied fully with statutory requirements under Section 51(4) of the TPA, and therefore the objection decision and assessment remained lawful.

• Whether the Respondent erred in treating all bank deposits as taxable income.

The Tribunal emphasised that, under Section 56(1) of the Tax Procedures Act (TPA), the burden of proof lies squarely with the taxpayer to demonstrate that a tax decision is incorrect. This obligation is reinforced by Section 30 of the Tax Appeals Tribunal Act (TATA), which requires appellants to challenge assessments with credible documentary evidence. IN THIS CASE, THE VIRGINIA WANGARI NG’ANG’A FAILED TO PROVIDE RECONCILIATIONS, LEDGERS, BANK RECORDS, OR OTHER PRIMARY DOCUMENTS TO PROVE THAT THE COMMISSIONER’S BANKING ANALYSIS WAS ERRONEOUS. Her arguments were largely based on contesting methodology rather than producing hard evidence. The Tribunal noted that without such proof, the Commissioner’s assessment enjoys a presumption of correctness, especially where a best judgment assessment under Section 31 TPA has been invoked.

Relying on precedents such as Silver Chain Ltd v Commissioner and Digital Box Ltd v Commissioner, the Tribunal reiterated that taxpayers must specify which bank entries are non-income and substantiate them with evidence. Since the Appellant did not discharge this evidentiary burden, the Tribunal found that the Respondent’s reliance on the banking analysis method was a reasonable, logical, and sufficient basis upon which the correct tax could be ascertained. Furthermore, KRA had partially adjusted the assessment after considering the objection, which the Tribunal viewed as fair and balanced. Ultimately, the Tribunal held that Virginia Wangari Ng’ang’a failed to prove her case and concluded that KRA did not err in treating all bank deposits as taxable income.

The Tribunal thus concluded that Virginia Wangari Ng’ang’a’s appeal lacked merit and dismissed it. It upheld KRA’s assessment decision dated 21st June 2024, finding that the assessment was lawful and properly grounded in the banking analysis method and industry margins applied. In its final orders, the Tribunal directed that each party should bear its own costs, thereby closing the matter without awarding expenses to either side.

This decision reinforces the importance and need of proper record keeping by all tax payers to support all income received or cash flows into the tax payer’s account.

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