Case Reference:Nyoro Construction Limited v Commissioner of Domestic Taxes (Tax Appeal E479 of 2025) [2026] KETAT 290 (KLR) (7 August 2026) (Judgment)
Background
Nyoro Construction Limited is a Kenyan limited liability company engaged in the construction industry, undertaking road and infrastructure projects across the country, including the Kaseve Road (RWC152), Muranga-Gitugi Road, and Elementaita-Mau Narok (RWC188) projects. The Kenya Revenue Authority undertook an audit of the company’s tax affairs and, on 29th January 2024, issued additional assessments for VAT and income tax totaling Kshs 211,433,282.
The Appellant lodged a notice of objection dated 9th January 2025. Following consideration, the Respondent issued an objection decision on 1st April 2025 confirming the additional assessments. Aggrieved, Nyoro Construction filed an appeal on 14th May 2025, later amending its Memorandum of Appeal on 30th September 2025.
Nyoro Construction’s Arguments
Nyoro Construction presented a multi-faceted appeal before the Tax Appeals Tribunal, raising several key arguments:
First, on the statutory limitation period, the Appellant contended that the assessments for the years 2017 and 2018 were time-barred under Section 31(4) of the Tax Procedures Act, which restricts the Commissioner to a five-year limitation period from the date of self-assessment. The company argued that the Respondent failed to establish any evidence of willful neglect, tax evasion, or fraud that would justify extending beyond the statutory period.
Second, the Appellant asserted that the Respondent wrongly disallowed purchases and expenses that were wholly and exclusively incurred in the production of taxable income, contrary to Section 15 of the Income Tax Act. The company maintained that it had provided invoices and supporting documentation for purchases from Harmony Enterprises Limited, Gosteen Enterprises Limited, Dakimah Hardware & Paints, Super Ideal Hardware Limited, and Bedmak Holdings Limited, but these were ignored.
Third, regarding PAYE assessments on casual workers, Nyoro Construction argued that the nature of road construction requires engagement of casual labourers on a need basis, and that wages paid to these workers are allowable expenses under Section 15 of the Income Tax Act. The company provided over 755 pages of wage records signed by the respective labourers, yet the Respondent subjected these wages to PAYE, inflating the tax liability.
Fourth, on work in progress (WIP) , the Appellant explained that in construction contracts, projects ordinarily extend over several years before completion, resulting in substantial investments in work in progress at any given time. The company submitted that WIP represents costs already incurred for labour and raw materials utilized in ongoing projects, but these jobs are usually not billed or paid for, and therefore do not constitute a supply under the VAT Act. The Appellant maintained that billing is effected only upon project assessment and approval, at which point VAT becomes due and payable under Section 12(1) of the VAT Act.
Fifth, the company argued that the Respondent failed to take into account losses carried forward amounting to Kshs 14,671,350 from the year 2016 when computing taxable income for 2017, contrary to Section 15(4) of the Income Tax Act which permits such losses to be set off against profits of the succeeding year.
Sixth, Nyoro Construction invoked the doctrine of legitimate expectation, arguing that the Respondent had already assessed the year 2017 and issued VAT additional assessments which the Appellant settled. The company maintained that once a taxpayer has been assessed and complied with tax obligations for a given year, the taxpayer is entitled to rely on the finality of that assessment.
Finally, the Appellant contended that the additional assessments were issued before the Appellant was informed of the issues giving rise to the said assessments, thereby violating the principles of fair administrative action and denying the company the right to be heard.
KRA’s Arguments
The Kenya Revenue Authority defended its objection decision on several grounds:
First, the KRA explained that the assessments were based on multiple independent verification tests, including banking analysis, IFMIS analysis, withholding tax certificate analysis, VAT return analysis, and Income Tax return analysis.
Second, on the statutory limitation period, the Respondent contended that the assessments for 2018 were lawful because the Appellant filed its 2018 Income Tax returns on 26th June 2019. Regarding 2017, the KRA asserted that the Appellant was guilty of willful neglect, which entitled the Commissioner to go back beyond the five-year period under Section 31(4) of the Tax Procedures Act.
Third, the Respondent maintained that the purchases were properly disallowed because the Appellant failed to provide invoices, receipts, delivery notes, or other supporting records relating to the purchases from the named suppliers. The total unsupported purchases amounted to Kshs 163,560,992. The KRA noted that the documents later produced by the Appellant related to different entities—Radhe Transport Limited and Colas East Africa Limited—which were not among the suppliers whose purchases had been disallowed.
Fourth, concerning the PAYE assessment, the Respondent argued that the variance of Kshs 26,956,169 was confirmed because no payroll records, attendance registers, payment schedules, contracts, vouchers, bank transfers, or acknowledgements from the alleged casual employees were provided.
Fifth, the KRA emphasised that the Appellant was requested to provide supporting documentation to validate its objection but failed to do so, thereby failing to discharge its burden of proof under Section 56 of the Tax Procedures Act. The Respondent relied on the principle that “there is a world of difference between assertion and proof,” as affirmed in National Social Security Fund Board of Trustees v Commissioner of Domestic Taxes [2016] eKLR.
TAT Observations
On Time-Barred Assessments
The Tribunal conducted a careful analysis of Section 31(4)(b)(ii) of the Tax Procedures Act, which provides that the Commissioner may amend an assessment within five years of the date that the self-assessment taxpayer submitted the return. The Tribunal also considered Section 23 of the TPA, which requires taxpayers to retain documents for a period of five years from the end of the reporting period.
The Tribunal found that the VAT assessments for 2017 and 2018 were time-barred. The assessment was issued on 29th January 2024. VAT is a monthly tax assessment, due and declared on the 20th of each succeeding month. Consequently, lawful VAT assessments could only run backward to December 2018. Similarly, income tax assessments for 2017 were time-barred.
Critically, the Tribunal rejected the Respondent’s claim of willful neglect. The Commissioner was obliged to show, or at the very least table evidence, to support its claim of fraud, negligence, or evasion. The Tribunal held that a party can only respond to accusations that have been made clear and discernible, and it would be unfair to cause a party to respond to mere averments unsupported by evidence. Quoting National Social Security Fund Board of Trustees v Commissioner of Domestic Taxes [2016] eKLR, the Tribunal stated: “There is a world of difference between an assertion and proof”. The High Court in Commissioner of Investigation & Enforcement v Asea Brown Boverthe Court (Abb) Limited [2025] KEHC 2798 (KLR) had similarly held that the duty to prove willful neglect or evasion was upon the Commissioner. Having failed to tender any evidence, the Tribunal found the VAT assessments for 2018 and 2017 and the Income Tax assessments for 2017 time-barred.
On Disallowance of Input VAT
The Tribunal examined the applicable version of Section 17(2) of the VAT Act, which provided that input tax is only deductible when a registered person holds valid documentation stipulated in Section 17(3). The Appellant provided invoices from Harmony, Gosteen, Dakimah, Super Deal, and Colas East Africa in its Supplementary Statement of Facts. The Respondent was granted leave to file a supplementary statement of facts on 21st April 2026 to respond to these documents but failed to do so. The Tribunal found that the Appellant discharged its burden of proof by showing that it provided the documents expected under Section 17(3) of the VAT Act, and in the absence of a plausible cause from the Respondent, the Appellant was entitled to the input tax claimed.
On Disallowance of Expenses
The Tribunal noted that the Respondent pleaded that it applied its best judgment to arrive at a fair assessment because documents supporting allowable expenses were not provided. However, having established that the Appellant proved it had provided documents including receipts showing purchases used wholly and exclusively in its business, the Tribunal found in favour of the Appellant. The Tribunal cited its previous decision in Superserve Limited v Commissioner of Investigation and Enforcement (TAT E931 of 2023), holding that the Commissioner is not at liberty to invoke and apply its best judgment option arbitrarily. Where the Appellant provided invoices and receipts to support its objection, the Respondent was not justified in ignoring said documents and applying its best judgment.
On PAYE Assessments
The Tribunal observed that the assessment proceeded on the basis that the Appellant had not provided relevant documentation. However, the Tribunal noted that the Appellant provided evidence of a casual wage bill signed by respective labourers in its list of documents running from pages 420 to 1175—over 755 pages of evidence of wage bill expenses incurred in the execution of its road contracts. This evidence was ignored by the Respondent without providing a plausible reason. The Tribunal acknowledged that the documents covering the wage bill may have been too many and cumbersome to allow consideration, given work demands, but stated: “Unluckily, that is what the law requires of the Respondent to ensure that it serves justice on the Appellant and causes it to only pay its fair share of tax where the same is due. Not an approximation of tax”. The Tribunal found that the Respondent erred when it failed to consider the Appellant’s casual labourer costs.
On Double Taxation of Rental Income
The Tribunal noted that the Appellant declared net rental income and charged tax at the rate of 30% on said income in its Financial Statement for 2017. The Respondent had not disputed payment of tax by the Appellant arising from its financial statement. The Tribunal held that causing the company to pay tax inclusive of rental income tax that had already been accounted for would amount to double taxation. The Respondent’s decision to use its best judgment when it had been provided with sufficient documents led to an erroneous assessment in which it ended up charging VAT on rental income because it relied on a variance that included the rental income.
On the Pendulum Principle
The Tribunal applied the principle established in Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR), where Justice Majanja stated: “The burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer”. The Tribunal held that the Appellant had provided sufficient evidence to support its position, and the Respondent’s failure to file a supplementary affidavit meant it failed to provide any reasons or evidence to enable the pendulum to swing back to the taxpayer. Consequently, the presumption of correctness of the Respondent’s assessment vanished.
On Work in Progress
The Tribunal noted that although the Appellant extensively submitted on the issue of Work-in-Progress, this issue was not raised in the Appellant’s objection to the assessment and only appeared at the appeal stage. The Tribunal held that its mandate is to analyze the evidence, documents, information, and material produced for the Commissioner, and it has no power to issue a determination on a new issue that arose at the appeal stage. Citing the High Court decision in Commissioner of Investigation & Enforcement v Wamunyinyi [2026] KEHC 379(KLR), the Tribunal stated: “Guided by the above, I find that the Tribunal erred in law by admitting and relying on evidence that was not placed before the Commissioner at the objection stage”.
Final Orders
After thorough analysis, the Tribunal delivered the following orders on 7th August 2026:
- The appeal was allowed in its entirety.
- The objection decision dated 1st April 2025 was set aside.
- Each party was ordered to bear its own costs.
Practical Lessons
This landmark judgment offers several valuable lessons for taxpayers and tax practitioners:
1. Documentation is everything. Nyoro Construction’s success was not merely that its arguments had merit, but that it produced the specific documents requested by the KRA. The Tribunal emphasised that there is a world of difference between assertion and proof. Taxpayers must ensure they can produce invoices, proof of payment, wage records, and all relevant correspondence to support their objections. The company provided over 755 pages of wage evidence, and this tipped the scales in its favour.
2. The burden of proof is not stationary. The pendulum principle, as established in Trical and Hard Limited, demonstrates that the burden swings between taxpayer and taxman. Once a taxpayer produces competent and relevant evidence, the presumption of correctness of the Commissioner’s assessment vanishes. The case must then be decided upon the evidence presented.
3. Time limits are real and enforceable. The five-year limitation period under Section 31(4) of the TPA is not a mere formality. The Commissioner cannot go beyond five years without evidence of fraud, willful neglect, or evasion. Mere allegations are not enough.
4. Best judgment has limits. The Commissioner cannot invoke and apply best judgment arbitrarily. This method can only be applied where the taxpayer has failed to provide relevant documents or has provided inapplicable documents. Where documents have been provided, the Commissioner must consider them and provide a plausible reason for any disallowance.
5. PAYE compliance requires more than schedules. Excel schedules and muster rolls are not sufficient to prove wages were paid to casual workers. Taxpayers must maintain and produce bank statements, mobile money transfer records, or cashbook entries evidencing actual payment. However, where such evidence exists and is produced, the Commissioner must consider it.
6. Raise all issues at the objection stage. New issues cannot be raised for the first time on appeal. The Tribunal’s mandate is limited to analyzing evidence and material produced before the Commissioner. Taxpayers must ensure all grounds of objection are properly raised during the objection process.
7. When the taxpayer produces evidence, the presumption vanishes. The High Court in Trical and Hard Limited affirmed that a presumption of correctness arises from the Commissioner’s determination, but when the taxpayer comes forward with competent and relevant evidence, the presumption vanishes and the case must be decided upon the evidence presented.
Conclusion
The Nyoro Construction case is a powerful reminder that in tax disputes, evidence wins. Nyoro Construction had compelling explanations for every variance, and unlike many taxpayers who fail to produce documentation, this company came prepared with voluminous evidence—over 755 pages of wage records, invoices, receipts, and financial statements. When the Commissioner failed to respond to this evidence or provide reasons for disregarding it, the pendulum of proof swung decisively in the taxpayer’s favour.
The Tribunal’s judgment affirms that the KRA’s assessments are presumptively correct, but that presumption is not permanent. It endures only until the taxpayer produces competent and relevant evidence to demolish it. The KRA is not required to accept explanations at face value, but it is entitled to demand—and must consider—the underlying documentation. And when that documentation is provided and ignored without reason, the Tribunal will set aside the assessment.
For businesses operating in Kenya, this case underscores the critical importance of maintaining comprehensive, accessible, and organised tax records. The difference between victory and defeat often comes down to a single document—a proof of payment, a signed wage sheet, a ledger entry. Nyoro Construction learned this lesson well, and the reward was the setting aside of a Kshs 211 million tax bill.
