Case reference:Commissioner of Investigations and Enforcement v London Distillers (K) Limited (Income Tax Appeal E096 of 2022) [2026] KEHC 6857 (KLR) (Commercial and Tax) (14 May 2026) (Judgment)
Background
The Respondent, London Distillers (K) Limited, is a Kenyan manufacturer of spirits and allied products. Following an investigation into the company’s tax affairs for the 2015–2019 period, the Commissioner issued a notice of assessment on March 18, 2021, for KSh 2,055,304,414, covering Corporation tax, Excise Duty, and Value Added Tax (VAT).
The Respondent objected on April 16, 2021. The Commissioner issued its objection decision on June 9, 2021, raising the assessment to KSh 3,022,728,615.
The Respondent appealed to the Tax Appeals Tribunal, which on November 4, 2022, set aside the Commissioner’s decision. The Commissioner thereafter appealed to the High Court on questions of law.
The Commissioner’s Assessment Methodology
The Commissioner’s investigation relied on three analytical methods.
First, Excise Stamps Reconciliation. The Commissioner compared stamps activated against stamps delivered. The Respondent activated 1,610,150 stamps, equivalent to 527,250 liters of finished product after stock adjustments. However, the Respondent declared and paid taxes on only 359,162 liters. This left an unexplained variance of 168,088 liters, forming the basis for additional Excise Duty and VAT assessments totaling KSh 22,187,616.
Second, Input-Output (Bottle) Analysis. The Commissioner tracked bottle purchases from the Respondent’s suppliers, Vivek Investments Ltd and Milly Glass Works Ltd, to estimate equivalent production volumes. The analysis revealed significant variances totaling 9,970,441 liters that the Respondent could not account for.
Third, Banking Analysis. The Commissioner reconciled the Respondent’s bank deposits against declared turnover. Total deposits exceeded KSh 23 billion, which was inconsistent with the Respondent’s filed annual returns. This supported the conclusion that turnover had been understated.
The Commissioner contended that the unexplained variances across these three independent data streams justified the assessment under Section 12 of the Excise Duty Act and Section 31 of the Tax Procedures Act.
The Tribunal’s Findings
The Tribunal set aside the Commissioner’s decision on several grounds.
The Tribunal held that the bottle method was not a conclusive basis for assessment without consideration of actual production data, flow meter readings, and resident officer reports. It further found that the Commissioner did not conduct a physical verification at the Respondent’s premises before issuing the objection decision. The Tribunal also suggested that the overall basis of the assessment appeared to be illicit financial flows and tax evasion, which would shift the burden of proof to the Commissioner. Finally, the Tribunal concluded that the Respondent had provided sufficient clarifications on bottle purchases and stamp wastage above the permitted 1%.
The High Court’s Analysis
Justice F. Gikonyo allowed the Commissioner’s appeal. The following legal principles emerge from the judgment.
Burden of Proof Rests on the Taxpayer
The Court reiterated the statutory framework under Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act. Section 56(3) provides that the taxpayer shall rely only on the grounds stated in the objection. The burden of proof lies on the taxpayer to prove that an assessment is excessive or a tax decision is incorrect.
Citing Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) [2022] KEHC 5 (KLR), the Court observed that the most significant justification for placing the burden of proof on the taxpayer is the practical consideration that the Commissioner cannot sustain the burden because he does not possess the needed evidence. Under the system of self-reporting tax liability, the taxpayer possesses the evidence relevant to the determination of tax liability.
The Court found that the Respondent did not submit all relevant documents during the objection stage. Consequently, the evidential burden never shifted to the Commissioner.
Indirect Assessment Methods Are Legitimate
The Court rejected the Tribunal’s dismissal of the bottle method as an assessment tool. Input-output analysis of bottles is a valid method for quantifying unexplained production variances, particularly where a taxpayer cannot account for procured bottles. The Commissioner is entitled to use reasonable estimation methods under Section 12 of the Excise Duty Act where direct records are unavailable or unreliable.
Physical Verification Is Not a Prerequisite
The Court found that the Tribunal erred by requiring a site visit before the objection decision was issued. The assessment was based on documentary evidence—bank statements, purchase ledgers, invoices, and excise stamp data. A physical verification after the objection decision was redundant to the tax dispute and could not retroactively invalidate a properly raised assessment. The Court noted that the site visit was potentially relevant only to a separate criminal matter, not the tax appeal.
Tribunals Must Not Introduce Unpleaded Issues
The Court strongly criticized the Tribunal for introducing issues of “tax evasion” and “fraud” on its own motion. These matters were neither pleaded by the parties nor part of the objection decision under appeal. An appeal to the Tribunal is confined to the grounds stated in the objection. Importing criminal standards of proof beyond reasonable doubt into a civil tax dispute exceeds the Tribunal’s mandate under Section 56(3) of the Tax Procedures Act.
Excise Stamps Reconciliation Upheld
The Court found that the Respondent did not adequately account for stamp wastage above the permitted 1% under the Excise Duty Act. The variance of 168,088 liters, resulting in additional Excise Duty and VAT of KSh 22,187,616, was properly assessed.
Final Orders
The High Court made three orders. First, the Tribunal’s judgment dated November 4, 2022, in Tax Appeal No. 408 of 2021 was set aside. Second, the Commissioner’s objection decision dated June 9, 2021, was upheld in its entirety. Third, no order was made as to costs.
