In The Absence Of Proper Records, KRA Uses Banking Analysis

Case Study: Ng’ang’a (Virginiah Wangari Ng’ang’a) v Commissioner of Legal Services and Board Coordination (Tax Appeal E029 of 2025) [2026] KETAT 11 (KLR) (16 January 2026) (Judgment)

Background & Core Dispute

Wangari, a sole proprietor in the hotel and hospitality sector in Naivasha, was subjected to a tax audit. KRA issued an additional tax assessment of Kshs. 18,044,066 on 8th April 2024, based on a banking analysis method. KRA found a significant variance between the income declared by Wangari (she was largely a nil-filer) and the total credits (deposits) in her bank and M-Pesa statements from 2018-2022.

After Wangari objected, KRA reviewed the case and issued an Objection Decision on 21st June 2024, which partially allowed the objection. KRA adjusted for some non-income items and applied an industry profit margin of 18.49% to account for costs. This reduced the confirmed tax liability to Kshs. 6,548,075. Wangari, still aggrieved, filed this appeal (out of time, with leave).

Wangaris’s Key Arguments

Wangari raised numerous grounds, which the Tribunal distilled into two main issues. Her key complaints were:

• Procedural Impropriety: The KRA failed to invalidate her objection within 14 days as required by Section 51(4) of the Tax Procedures Act (TPA) if it was deemed invalid, and instead proceeded directly to an Objection Decision.
• Substantive Errors

1. KRA erroneously treated all bank deposits as taxable income without distinguishing non-income items (e.g., loans, transfers).
2. The application of an 18.49% profit margin was arbitrary and unfair.
3. She argued she was being taxed on income that had already suffered customs duty at importation.
4. KRA disregarded her explanations and documentary evidence about her business model (acting as an agent for others).
5. The assessment went beyond the charging provisions of the Income Tax Act and violated her right to fair administrative action under Article 47 of the Constitution.

KRA Defense

The KRA defended its position vigorously:

1. Cited the case of Digital Box Limited to affirm that banking analysis is a recognized method for determining undeclared income, especially where a taxpayer files nil returns. The burden shifts to the taxpayer to prove which deposits are not income.
2. Since Wangari failed to provide sufficient records of her actual costs, the KRA used its best judgment under Section 31 TPA and applied a researched industry-average profit margin of 18.49% for the hotel sector, citing Silver Chain Limited v Commissioner of Income Tax.
3. Clarified that customs duty and domestic taxes (Income Tax & VAT) are distinct. Duty paid on imports is a cost, and the profit from selling those goods is separately subject to income tax.
4. Argued that Section 51(4) TPA grants discretion to invalidate an objection. Since the KRA engaged with and partially allowed the objection, it was treated as valid. Citing Holwadag Construction, they argued a defective objection is “void ab initio” (from the outset).
5. Emphasized that under Section 56(1) TPA and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies squarely on the Appellant to demonstrate the assessment is incorrect. The Appellant provided insufficient documentary evidence to discharge this burden.

Tribunal’s Analysis & Findings

The Tribunal framed its decision around two key issues:

1. Whether the KRA complied with Section 51(4) TPA:

• The Tribunal held that the 14-day invalidation notice is only mandatory if the objection is invalid. By partially allowing the objection and issuing a decision on the merits, the KRA implicitly validated the objection. Wangari’s argument was contradictory and untenable. The Tribunal agreed with the KRA’s discretionary power under this section and found no procedural defect.

2. Whether the KRA erred in treating all bank deposits as income:

• This was the core of the appeal. The Tribunal’s reasoning was anchored on the burden of proof:

1. The law (Sections 56 TPA & 30 TATA) places a legal and evidential burden on the taxpayer to prove an assessment is wrong.
2. An assessment enjoys a presumption of correctness.
3. Wangari failed to discharge this burden. She provided arguments and assertions but not the primary documentary evidence (complete records, reconciliations, ledgers) needed to contradict the KRA’s figures.
4. Where records are absent, the KRA is entitled to use indirect methods like banking analysis and best judgment.
5. The Tribunal affirmed the principles in Silver Chain Limited and Digital Box Limited, noting that it is for the account holder to explain why deposits are not income.
6. The fact that the KRA partially allowed the objection and adjusted the tax downward was seen as evidence of a fair, reasoned, and restrained assessment.

Final Decision & Orders

The Tribunal DISMISSED the Appeal entirely and made the following orders:

1. The Appeal is dismissed.
2. The Respondent’s Objection Decision dated 21st June 2024 (confirming tax of Kshs. 6,548,075) is upheld.