KRA cannot “pluck a figure from the air” without a rational basis;The Banking Analysis Method – Permissible but Not Absolute

Case Study:Rumish Limited v Commissioner, Investigations and Enforcement (Tax Appeal E575 of 2025) [2026] KETAT 72 (KLR) (26 March 2026) (Judgment)

Background of the Case

Rumish Limited, a company dealing in interior finishing products, furniture, hardware, and building materials, was investigated by the KRA for the years of income 2019 to 2022. The investigation covered withholding tax, corporation tax, and value added tax (VAT). The KRA issued an assessment of Kshs 29,420,119.00 based largely on a banking analysis – treating almost all credits in the company’s bank accounts as taxable income.

The Appellant objected, provided reconciliations, financial statements, ledgers, and explanations showing that many bank credits were non‑income items (loans, inter‑company transfers, insurance refunds). The KRA confirmed the assessment at Kshs 28,411,792.00, leading to the appeal.

Key Issues for Determination

The Tribunal framed three main issues:

1. Whether the KRA erred in relying on the banking analysis method.
2. Whether the KRA breached the Appellant’s legitimate expectation by failing to raise 2019 VAT assessments on the iTax system.
3. Whether the KRA was justified in confirming assessments on purchases, PAYE, withholding tax, and VAT.

The Banking Analysis Method – Permissible but Not Absolute

The Tribunal affirmed that the banking analysis method is an acceptable tool for assessing tax where a taxpayer’s records are inadequate. It cited its own precedent in Digital Box Limited v Commissioner, Investigations and Enforcement (TAT Appeal No. 115 of 2017), which held that a taxpayer can challenge such analysis by:

• Providing alternative documentation that renders banking analysis inappropriate; and
• Pointing out specific non‑income deposits with supporting documents.

However, the Tribunal also quoted with approval the principle from Republic v Kenya Revenue Authority (Ex parte) Jaffer Mujtab Mohammed (2015) eKLR: a taxing taxing authority cannot “pluck a figure from the air” without a rational basis.

Verdict on this issue: The KRA did not err in using the banking method. The error lay in how it applied that method and ignored the Appellant’s documentary rebuttal.

iTax and Legitimate Expectation

The Appellant argued that the KRA breached its legitimate expectation by imposing VAT for 2019 without raising the assessment on the iTax platform, thereby denying it an opportunity to object online.

The Tribunal rejected this argument, holding:

• iTax is merely an administrative tool, not the source of tax liability.
• Tax becomes due upon communication of an assessment (letter dated 28 January 2025).
• The Appellant had in fact objected to the assessment, so no prejudice arose.

This aligns with the High Court’s decision in Kenya Fluorspar Company Limited v Commissioner of Domestic Taxes [2020] KEHC 7281 (KLR).

Shifting Burden of Proof

The most significant part of the judgment concerns the burden of proof under Section 56(1) of the TPA, which states that “the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

The Tribunal, relying on the High Court’s decision in Commissioner Investigation & Enforcement v Marylebone Properties Limited (Income Tax Appeal E204 of 2023) [2025] KEHC 3314 (KLR), held that this burden is not static. Once a taxpayer produces a prima facie case with supporting documentation, the burden shifts to the KRA to “demolish with precision the evidence availed.”

In Rumish:

• The KRA had initially invalidated the objection for lack of documents.
• The Appellant later provided the requisite documentation, and the KRA validated the objection.
• The Tribunal found that by validating the objection, the KRA admitted receipt of the documents. The burden then shifted to the KRA to specifically rebut that evidence.
• The KRA failed to do so. Its objection decision merely stated that the adjustments had “been adjusted at the investigations stage” without engaging with the new reconciliations, ledgers, and financial statements.

The Tribunal also quoted the Canadian Supreme Court case of Hickman Motors Ltd. v Canada (adopted in Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR): once the taxpayer makes out a prima facie case with unchallenged evidence, the onus shifts to the revenue authority to rebut it.

Because the KRA offered no specific critique of the Appellant’s documents, the Tribunal set aside the objection decision.

Final Orders

• The appeal was allowed.
• The KRA’s objection decision dated 8 May 2025 was set aside.
• Each party was ordered to bear its own costs.

Practical Implications for Taxpayers

1. Burden of proof can shift. Taxpayers should not be intimidated by Section 56(1). By providing credible, contemporaneous documents – audited financial statements, bank reconciliations, purchase ledgers, and schedules of non‑income items – they can force the KRA to justify its assessment with more than general assertions.
2. Banking analysis is not a shortcut for the KRA. While permissible, the KRA cannot ignore specific explanations and documents that identify non‑income credits (loans, transfers, refunds). A blanket assumption that all credits are income is arbitrary and may be set aside.
3. Document every step. The Appellant succeeded because it kept proper books, filed returns, and provided detailed reconciliations. The KRA’s failure to engage with those documents was fatal to its case.
4. iTax absence is not a defence. An assessment communicated by letter is valid. Taxpayers must object within the statutory period regardless of whether the assessment appears on the iTax portal.
5. The KRA must act reasonably. The Tribunal reaffirmed that the KRA’s assessment power under Section 31 of the TPA (best judgment) is not a licence to act capriciously. Where a taxpayer supplies reasonable evidence, the KRA must evaluate it and give a reasoned response.

Conclusion

Rumish Limited v Commissioner, Investigations and Enforcement confirms that while the KRA has powerful tools – including banking analysis – those tools must be exercised reasonably. More importantly, it clarifies that the burden of proof is a flexible concept: a taxpayer who builds a proper documentary record can shift the burden back to the KRA, requiring the revenue authority to demolish that evidence with precision, not mere repetition of earlier findings.