High Court Clarifies Tax Enforcement Powers, KRA loses in the ABB Appeal Case

Case Study: Commissioner of Investigation & Enforcement v Asea Brown Boverthe Court (ABB) Limited (Income Tax Appeal E073 of 2023) [2025] KEHC 2798 (KLR) (Commercial and Tax) (7 March 2025) (Judgment)

Background

The dispute culminating into this Appeal was birthed out of Kenya Power and Lighting Company (KPLC’s) case where it was suspected that the huge inputs claimed by KPLC from ABB may not have been reported as output by the Respondent. On the 25th of November 2020, KRA served ABB  with demand for Kshs 596, 647, 841.00 being an aggregate of Corporate Tax and Value Added Tax [VAT] for the years of income 2014 to 2019 founded on the variance between sales recomputed from the banking and sales reported in the Corporation Tax returns and VAT Returns.

ABB disputed the assessment, providing reconciliation documents, but KRA still confirmed a revised tax liability of Kshs. 264,294,054 (Corporate Tax) and Kshs. 78,146,896 (VAT).

KRA enforced Agency Notices (freezing ABB’s bank accounts) and collected Kshs. 496,331,766.

ABB appealed to the Tax Appeals Tribunal (TAT), which set aside KRA’s decision and ordered a refund.

KRA then appealed to the High Court.

KRA Arguments:

• The notice of tax findings (25th Nov 2020) was issued within 5 years of the 2015 tax return, so the audit was valid.
• ABB’s underreporting of sales (Kshs. 10.5M variance in 2014) amounted to willful neglect.

ABB Arguments:

• the final assessment (9th July 2021) was outside the 5-year window (2014–2019).
• KRA failed to prove wilful neglect—the variance was minor and due to reconcilable accounting differences.
• If KRA had considered all years (2014–2019), the total declared sales (Kshs. 5.44B) exceeded banking records (Kshs. 5.42B)

”It is the Respondent’s case that the Appellant cherry-picked only those instances where the apparent variance favored its case in total disregard of the full facts and that had it considered the entire period of the audit i.e. years of income from 2014 to 2019, it would have found that the aggregate turnover declared by the Respondent in the VAT returns was Kshs 5, 443, 469, 365 and not Kshs 5, 429, 383, 220 derived by the Appellant. As such, the Respondent submits that it declared a higher turnover by Kshs 14, 086, 145; was an uncontroverted fact which the Appellant ignored while issuing the Objection Decision.”

High Court Findings:

• The Tribunal was right: KRA acted unreasonably by ignoring negative variances.

‘In the absence of any further explanation by the respondent as to why the negative amounts were not taken into consideration in arriving at it variance between the reported sales and banking, the tribunal agreed with the appellant that the respondent erred in cherry-picking on apparent variance between estimated turnover derived from bank deposits and the actual turnover”

• Tax assessments must be based on full reconciliation, not selective data.
• The Tribunal correctly ruled that KRA did not prove wilful neglect (no evidence of fraud or intentional evasion).

As such ABB won

https://hisibati-consulting.co.ke/blog/

https://www.linkedin.com/pulse/high-court-rules-kra-cannot-cherry-pick-data-tax-audits-mwangi-8gekf/?trackingId=uEydB%2F73RZenJhbgDF0RYA%3D%3D