he Dispute: Missing Trader Fraud Allegations
The dispute began when the Commissioner of Domestic Taxes conducted an investigation into Osho Drapers Limited, a textile and drapery importer, covering the period July 2015 to May 2017. Following the inquiry, the Commissioner issued a Notice of Assessment on 7th April 2018, disallowing purchases worth Kshs. 11,224,259 and demanding VAT of Kshs. 1,795,881. This was followed by additional corporation tax assessments on 3rd, 4th, and 7th May 2018, demanding a further Kshs. 3,367,278.
The Commissioner’s investigation had established that four companies from whom Osho Drapers claimed to have purchased goods were “missing traders” – entities that had been investigated and found to be printing and selling fictitious invoices without any actual supply of goods. In the scheme known as “carousel fraud,” fraudsters charge VAT on the sale of goods and then abscond with the money instead of paying it to the government.
Osho Drapers lodged an objection on 20th May 2018, but upon review, the Commissioner confirmed the full liability through a Notice of Confirmation of Assessment dated 11th July 2018.
The Tribunal, High Court, and Second Appeal
Dissatisfied, Osho Drapers appealed to the Tax Appeals Tribunal (Appeal No. 159 of 2018), which dismissed the appeal on 9th October 2020 and upheld the Commissioner’s decision in full. Aggrieved, the company moved to the High Court (HCCOMMITA No. E147 of 2020), arguing that the Tribunal had erred in finding it did not furnish sufficient proof of purchase and had failed to discharge its burden of proof. However, the High Court dismissed the appeal on 18th March 2022, holding that the discrepancies in the documentation, particularly the conflicting modes of payment, meant the company had failed to prove the transactions were genuine.
Undeterred, Osho Drapers filed a second appeal to the Court of Appeal, attacking the High Court’s judgment on several grounds. The Court of Appeal dismissed the appeal on 31st July 2026, affirming that its jurisdiction in a second appeal is confined to matters of law only. It held that the company’s failure to provide additional documents requested by the Commissioner, including stock control records and bank statements, was fatal to its case.
The Court of Appeal’s Findings
The Court of Appeal affirmed several crucial principles:
First, while a taxpayer who provides documentation under Section 17 of the VAT Act initially shifts the evidential burden to the Commissioner, when discrepancies arise, the burden swings back to the taxpayer. The company had provided invoices showing “cash” payments while the invoices were stamped “paid in cheque,” with no cheque details provided.
Second, the Commissioner acted within its powers under Section 59 of the Tax Procedures Act to request additional documentation where doubt existed. Section 43 of the VAT Act requires every registered person to keep full and true records for five years, including stock records and bank statements. The company’s inability to provide these documents suggested they did not exist.
Third, the suspicion was not based merely on the inability to trace suppliers, but on specific discrepancies in the documentation. The varying modes of payment raised legitimate doubts that the company failed to resolve.
Practical Implications for Taxpayers
This case reinforces critical principles that every taxpayer and professional must understand:
1. Documentation Must Be Consistent and Verifiable If you claim purchases, your documents must tell one story. A discrepancy between “cash” and “cheque” payments without supporting bank records will raise red flags. The Commissioner will ask for stock control records, bank statements, and other supporting documents. If you cannot provide them, your claim will fail.
2. The Burden of Proof Swings, But Never Leaves the Taxpayer Entirely Yes, once you provide primary documents, the burden shifts to the Commissioner to show fraud. However, when the Commissioner raises legitimate doubts based on discrepancies, the burden swings back to you to clear those doubts. Failure to provide additional documents requested means you have not discharged your burden.
3. Keep Complete Records for Five Years Section 43 of the VAT Act requires you to keep all records for five years. This includes stock records, bank statements, copies of invoices, credit and debit notes, and tax accounts. If you cannot produce these records, the Commissioner is entitled to draw adverse inferences.
4. The Commissioner Has Powers to Request Additional Information Under Section 59 of the Tax Procedures Act, the Commissioner can request production of additional information if the information given is insufficient. This is not an optional request – failure to comply will be used against you.
5. Engage Qualified Tax Professionals Early Osho Drapers fought this case for eight years through three levels of court. The company lost at every level and is now liable for the original Kshs. 5.1 million plus costs at all levels. Early engagement with qualified tax lawyers or consultants could have helped identify the documentation gaps early and potentially resolved the matter before it escalated.
