Bank Deposits As Taxable Income, Wrong KRA Approach

Case Study: Konchor Kid Limited v Commissioner of Domestic Taxes (Tax Appeal E162 of 2025) [2026] KETAT 4 (KLR) (16 January 2026) (Judgment)

Konchor Kid Limited, a private company in management consultancy.
The KRA conducted a bank statement analysis for 2022-2023 and identified discrepancies, leading to additional assessments for Corporate Income Tax (CIT) and Value Added Tax (VAT) totaling Kshs. 345,710,556.
Konchor objected, but the KRA upheld the assessment via an objection decision dated 24 January 2025. Konchor appealed to the Tribunal.

Konchor argued the KRA erred by:

Disallowing/rejecting supporting documents for VAT and CIT.
Not considering detailed proof documents provided.
Backdating VAT 18 months retrospectively, contrary to Section 34 of the Tax Procedures Act (TPA).
Applying an arbitrary 18% gross profit margin without evidence (actual margin was 0.2%).
Applying VAT to amounts not collected and during a period Konchor was not VAT-registered (turnover below Kshs. 5 million threshold).
Transferring tax obligations of Konchor’s customers to Konchor due to lack of customer PIN/contact details.
Condemning Konchor to pay tax on money belonging to customers (agency funds).
Making erroneous calculations based on withdrawals instead of net profit.
Failing to consider submitted bank statements and audited reports.
Violating data protection laws by demanding customer personal data.

Provided documents including audited reports, bank statements, agency agreements, and reconciliation statements.
Argued that bank deposits were largely customer funds held in an agency capacity, with the company earning only a 0.2% commission.
Contended that the KRA ignored this explanation and treated all bank deposits as taxable income.
Asserted that the KRA’s decision was procedurally unfair and violated its right to be heard.

Relied on its authority under the TPA to assess tax based on available information (Sections 24, 31).
Argued Konchor failed to provide requested documents (client list with PINs and contacts), thus failing to discharge its burden of proof under Section 56(1) TPA.
Maintained the assessments were legally issued and the objection was duly considered.

The Tribunal identified two key issues:

The Tribunal found Konchor provided sufficient prima facie evidence (audited accounts, bank statements, agency agreements, ledgers, receipts) to show that not all deposits were income.
The KRA disregarded this evidence and insisted on client PINs/contacts as the sole basis for verification.
The burden of proof shifted to the KRA after Konchor’s prima facie case. The KRA failed to rebut this evidence or use its own data systems to verify Konchor’s claims.
The KRA did not exercise “best judgement” as required by Section 31 TPA, as its approach was not pragmatic or reasonable.

The Tribunal held that the KRA acted whimsically, unfairly, and illegally by confirming the assessments without analyzing the evidence provided.
Citing precedent (Kenya Revenue Authority v Man Diesel & Turbo), the Tribunal emphasized that once a taxpayer makes a prima facie case, the burden shifts to the tax authority. The KRA here failed to discharge that shifted burden.
The confirmation of the assessment was therefore unjustified.