Case Reference: Bemarc Limited v Commissioner of Domestic Taxes (Tax Appeal E136 of 2020) [2022] KEHC 18123 (KLR) (Commercial and Tax) (24 June 2022) (Judgment) Tax Appeal E136 of 2020
Background
In September 2015, the Kenya Revenue Authority (KRA) issued a notice to Bemarc Limited, a tyre trading company incorporated in 2012, indicating its intention to conduct an audit for the periods 2012–2015. The requested documents included financial statements, bank records, VAT returns, sales and purchase ledgers, and customs import documentation.
The audit did not proceed as scheduled. KRA officers were unable to secure a meeting with the company’s director. Several follow‑ups, reminders, and an invitation for an interview did not result in the production of the requested records.
KRA’s Use of Third‑Party Information
Unable to obtain the taxpayer’s own books, the Commissioner invoked statutory powers under Section 73(2)(b) of the Income Tax Act (since repealed and replaced by the Tax Procedures Act, 2015) to obtain information from third parties. On 3 February 2016, customs data was requested. On 8 February 2016, the Commissioner wrote to Equity Bank Limited and obtained the company’s bank statements.
Based on this third‑party information, the Commissioner issued an additional assessment on 23 March 2016, raising a tax liability of KSh 30,362,937, comprising corporation tax, VAT, and PAYE, inclusive of penalties and interest. After an objection and a meeting with the taxpayer on 9 June 2016, the Commissioner confirmed the assessment at KSh 31,489,319, with a minor reduction on PAYE relating to a motor vehicle benefit.
Taxpayer’s Response
During the meeting of 9 June 2016, Bemarc Limited stated that its financial records had disappeared with a team of employees who were dismissed for fraud, and that the same employees had crashed the company’s QuickBooks accounting system. No evidence – such as a police report, forensic analysis, or any supporting documentation – was provided to substantiate this claim.
Proceedings Before the Tax Appeals Tribunal
The taxpayer appealed to the Tax Appeals Tribunal. The Tribunal framed a single issue: whether the Commissioner’s assessment was proper in law given the taxpayer’s failure to produce the requested documents and books of account.
The Tribunal cited the relevant statutory provisions:
- Section 23(1) of the Tax Procedures Act, 2015 – duty to maintain documents for five years.
- Section 43(1) of the VAT Act, 2013 – duty to keep full and true records.
- Section 54A(1) of the Income Tax Act – duty to keep records adequate for computing tax.
- Section 59(1) of the Tax Procedures Act – Commissioner’s power to require production of documents.
The Tribunal found that the Commissioner had demonstrated considerable patience, granting extensions and multiple reminders. The taxpayer had failed to discharge its burden of proof under Section 56(1) of the Tax Procedures Act. The Tribunal dismissed the appeal and upheld the Objection Decision.
High Court Appeal
On a further appeal to the High Court (Tax Appeal No. E136 of 2020), the court’s jurisdiction was limited to questions of law under Section 56(2) of the Tax Procedures Act. Justice D. S. Majanja delivered judgment on 24 June 2022, holding as follows:
- Every taxpayer has a statutory duty to maintain and produce records upon request.
- Where a taxpayer fails to provide records, the Commissioner is entitled to make a default assessment under Section 29 of the Tax Procedures Act using the best information available, including bank statements and customs data.
- Once an assessment is issued, the burden falls on the taxpayer to prove that it is excessive or incorrect.
- The taxpayer’s unsubstantiated claim of lost records and a crashed accounting system did not discharge that burden.
The High Court dismissed the appeal. No further appeal to the Court of Appeal has been recorded.
Key Takeaways for Taxpayers
PrincipleApplicationStatutory record‑keeping obligationMaintain full and accurate records for a minimum of five years.KRA’s third‑party information powersThe Commissioner may obtain bank statements, customs data, and other third‑party information without the taxpayer’s consent.Default assessmentWhere a taxpayer does not provide records, the KRA may assess tax based on available information using its best judgment.Burden of proofUnder Section 56 of the Tax Procedures Act, the taxpayer bears the burden of proving that an assessment is wrong.Unsubstantiated claims are insufficientA claim of lost, stolen, or destroyed records must be supported by independent evidence (e.g., police report, forensic audit).
Conclusion
The Bemarc Limited case serves as a clear precedent in Kenyan tax law. It confirms that non‑cooperation with an audit, combined with a failure to maintain and produce records, entitles the Commissioner to assess tax using third‑party data. Once such an assessment is issued, the taxpayer cannot successfully challenge it without producing its own primary records or credible evidence to rebut the Commissioner’s figures.
Business owners, tax advisors, and finance professionals are advised to ensure robust record‑keeping systems, prompt responses to KRA notices, and proper documentation of any genuine loss of records to avoid a similar outcome.
