High Court Stands With KRA to Tax Bank Deposits of "Nil Filer"

Background

Avery Lounge Limited, a restaurant and lounge business, was registered for tax but consistently filed returns declaring zero income (nil returns) for several years, despite being operational.
Suspecting tax evasion, KRA officers visited Avery Lounge and confirmed it was open and serving customers. Using its legal powers, KRA then obtained the company’s bank statements from its bankers.
The bank statements showed millions of Kenyan Shillings flowing into Avery Lounge’s accounts. Since the company provided no credible records of its sales or expenses, KRA treated all these deposits as taxable sales revenue. Using “Bank Deposit Analysis,” KRA calculated and issued a tax bill for Income Tax, VAT, and PAYE.
Avery Lounge objected, claiming the deposits included non-income items like loans and that business expenses should be deducted. However, when KRA asked for proof—such as invoices, loan agreements, or financial ledgers—Avery Lounge only provided bank statements and a simple summary, not the underlying documents.
KRA confirmed its assessment due to lack of evidence. Avery Lounge appealed first to the Tax Appeals Tribunal (and lost), and then to the High Court.

1. Burden of Proof is on the Taxpayer:

The law (Section 56 of the Tax Procedures Act) clearly states that if you challenge a tax assessment, you (the taxpayer) must prove it is wrong.
The Court found that Avery Lounge failed this duty. Providing only bank statements was insufficient. They needed to provide primary evidence like sales receipts, supplier invoices, and loan agreements to explain what each deposit actually was.

2. KRA’s “Bank Deposit” Method was Lawful and Reasonable:

The Court endorsed KRA’s use of the Bank Deposit Analysis method as a fair “best judgment” tool when a taxpayer is non-compliant.
The logic is simple: if a business is active and money is flowing into its account, but it declares zero income, the bank record is the most reliable evidence available to the taxman.
Avery Lounge had the chance to prove which deposits were not income but failed to do so with documents.

3. No Proof, No Deductions:

The Court agreed with KRA that Avery Lounge could not claim deductions for business expenses or VAT input tax because it did not produce any invoices or receipts to support those claims. In tax law, you must document your expenses.

4. No Constitutional Rights Were Violated:

The Court rejected Avery Lounge’s claim that its right to a fair hearing was violated. KRA followed the proper process: it issued an assessment, asked for documents, and gave the company multiple chances to state its case. Avery Lounge was heard; it just couldn’t support its arguments with evidence.

Avery Lounge Limited’s appeal was dismissed.
The company was ordered to pay the full tax assessment as calculated by KRA, plus KShs 50,000 in legal costs to KRA.

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