Kirin’s Fail Over Insufficient Evidence for Loans and Capital

Case Study: Kirin Pipes Limited v Commissioner Intelligence Strategic Operations Investigations and Enforcement (Tribunal Appeal E1116 of 2024) [2025] KETAT 259 (KLR) (22 August 2025) (Judgment)

The Dispute

The KRA conducted an investigation into Kirin Pipes’ tax affairs for the years 2019 to 2022. Using a banking analysis method (comparing total bank deposits to declared income), the KRA identified variances and issued additional assessments for:

Objection & Decision

Kirin Pipes objected to these assessments. The KRA partially allowed the objection, reducing the total confirmed tax liability to Kshs. 21,638,991 for both Corporation Tax and VAT. Dissatisfied with this partial rejection, Kirin Pipes appealed to the Tribunal.

Kirin’s Arguments

Kirin Pipes argued that the KRA was wrong to treat all credits in its bank accounts as taxable revenue. It claimed the variances were due to:

• Shareholder Capital Injections: Kshs. 29,425,495.45 deposited via a related company, Zhonghao Overseas (China).
• Loan Proceeds: Kshs. 31,697,392 received as a loan from Nanchang Municipal Engineering Development.
• Advance Payments: Kshs. 65,376,000 received in advance from Zhonghao Overseas (Kenya) for future sales, which were later invoiced and declared.
• Inter-account transfers.

They contended that taxing these items was an error because:

• Capital injections and loans are not “income” under the Income Tax Act.
• Advance payments are not Vatable until an invoice is issued; to tax both the advance and the subsequent sale would be double taxation.
• The KRA ignored the evidence they provided and failed to act fairly.

KRA’s Arguments

The KRA defended its assessment, arguing:

• It used its “best judgment” as allowed by law (S.29, Tax Procedures Act) after identifying a significant variance between bank deposits and declared income.
• Kirin Pipes failed to provide sufficient evidence to prove its claims that the deposits were non-taxable.
• The documents provided (e.g., uncertified bank statements, unnotarized translations, an interest-free loan agreement with no repayment date) were inadequate, unclear, and did not conclusively prove the nature of the transactions.
• The burden of proof is on the taxpayer to show an assessment is wrong, and Kirin Pipes did not meet this burden.

Issues for Determination

The Tribunal framed two key issues:

1. Whether the KRA erred in law and fact by treating all bank deposits as taxable income.
2. Whether the KRA erred in confirming the additional tax assessments.

Tribunal’s Analysis & Decision

1. On Treating Bank Deposits as Income

• Capital Injections (Kshs. 54M): The Tribunal found the evidence insufficient. The company provided uncertified bank statements and SWIFT transfers but failed to: link specific deposits to specific shareholders, Provide resolutions or minutes authorizing the capital injections, Show a clear money trail from the ultimate shareholders to Kirin Pipes. Update its official company search (CR12) to reflect the increased share capital.
• Loan Proceeds (Kshs. 31.6M): The Tribunal found the loan agreement not credible. The agreement was interest-free and had no fixed repayment period. Furthermore, no evidence of any loan repayment was provided in the five years since the agreement was signed. The Tribunal agreed with the KRA that these terms were commercially unusual and did not substantiate the claim of a genuine loan.
• Advance Payments (Kshs. 65.3M): The Tribunal found the evidence lacking. Kirin Pipes provided a self-generated account statement listing invoice numbers but failed to provide the actual invoices or a detailed schedule linking specific advance deposits to specific later invoices. Without this, the Tribunal could not verify if the taxes had indeed been paid later, as claimed.

Conclusion :The Tribunal held that Kirin Pipes failed to prove that these deposits were non-taxable. Consequently, the KRA did not err in treating the bank deposits as income in the absence of convincing evidence to the contrary.

2. On Confirming the Assessments

The Tribunal found that Kirin Pipes’ arguments were largely unsubstantiated assertions. Merely making claims without providing robust, verifiable documentation is not enough to discharge this legal burden. The KRA was entitled to make an assessment based on the information available to it (bank deposits) when the taxpayer’s records were inadequate or unpersuasive.

Conclusion : The Tribunal held that Kirin Pipes failed to discharge its burden of proof. Therefore, the KRA’s objection decision was correct and was upheld.

Final Order

The Tribunal dismissed the appeal entirely and upheld the KRA’s objection decision confirming a tax liability of Kshs. 21,638,991.

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