KRA Must Specifically Rebut Taxpayer Evidence, Not Just Reject It

Case Study: Commissioner of Investigations and Enforcement v Traneshvi Limited (Income Tax Appeal E142 of 2023) [2025] KEHC 13447 (KLR) (Commercial and Tax) (26 September 2025) (Judgment)

Background:

The dispute originated from additional tax assessments issued by the Commissioner against Traneshvi Limited, a real estate company managing several apartment complexes in Nairobi. The assessments covered the years 2015–2019 and culminated in a revised tax demand of Kshs. 76,369,287.

Traneshvi Limited challenged the demand before the Tax Appeals Tribunal, arguing that it had fully cooperated with the KRA, providing exhaustive records, including tenancy agreements, rent receipts, audited financial statements, payroll evidence, and bank reconciliations.

The TAT sided with the taxpayer, setting aside the Commissioner’s demands on July 14, 2023.

Aggrieved by the Tribunal’s decision, the Commissioner lodged the appeal with the High Court, asserting three primary grounds:

• The Tribunal erred in finding the sufficient taxpayer evidence provided to disprove the assessments.
• The Tribunal wrongly shifted the evidential burden of proof onto the Commissioner, contrary to Section 56(1) of the Tax Procedures Act (TPA).
• The Tribunal erred in finding the assessments unjustified.

High Court’s Analysis:

The Court acknowledged that Section 56(1) of the TPA unequivocally places the initial burden on the taxpayer evidence to prove that a tax decision is incorrect. However, The High court underscored established jurisprudence (citing cases like Trical amp; Hard Ltd and Proto Energy Ltd), which clarifies that the burden is not static; it shifts like a pendulum. The Tribunal was alive to this balance and found that the Respondent had indeed furnished voluminous supporting documentation which the Commissioner did not controvert… The Tribunal cannot be faulted in law for holding that the Respondent had discharged its burden.

The judgment noted that Traneshvi Limited provided an extensive array of documents, including tenancy agreements, receipts, audited accounts, statutory returns, payroll records, and detailed reconciliations supporting a declared income of Kshs. 286,836,500. Conversely, the Commissioners arguments were described as blanket assertions and a failure to specifically identify gaps or inconsistencies.

A crucial element of the appeal was the Commissioners reliance on the banking test to compute expected rental income, which led to the additional tax liability. The Court upheld the Tribunals rejection of this method, citing Republic v KRA Ex parte Jaffer Mujtab Mohamed [2015] eKLR, which warns the Commissioner against arbitrarily plucking figures from the air. The High Court ruled that the banking test was inappropriate and contrary to law in this instance because:

• Primary records (tenancy agreements, receipts) had already substantiated the declared income.
• The deposits treated as income included non-revenue items such as proceeds from the sale of apartments (Kshs. 152,000,000) and refundable security deposits, which were properly accounted for by the taxpayer. Section 6(1) of the Income Tax Act charges tax on income actually received, not on arbitrarily projected expected income.
• The Commissioner had also disallowed substantial deductions for repairs and maintenance (Kshs. 90,663,251) and salaries/wages. The Court confirmed that once the taxpayer provided prima facie evidence—vouchers, receipts, staff rolls, and statutory contribution schedules—to show the expenses were incurred wholly and exclusively in the production of income (as per Section 15(2)(f) of the Income Tax Act), the burden shifted. Since the Commissioner failed to demonstrate that the expenses were fictitious or non-deductible, the Tribunals findings were deemed correct in law

Conclusion

The High Court found no misdirection of law by the Tax Appeals Tribunal.

As such KRA Lost.

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