Avery Lounge Limited v Commissioner of Domestic Taxes (Tax Appeal E523 of 2023) [2024] KETAT 842 (KLR) (28 June 2024) (Judgment)

In the absence of any evidence to the contrary by a taxpayer, the Kenya Revenue Authority (KRA) is justified in using bank statements to determine taxable income. 

Background  

Avery Lounge Limited (“Avery Lounge”) is a limited liability company duly incorporated under the Companies Act, 2015 and a registered taxpayer. The Appellant operates a lounge along the Eastern Bypass Road in Nairobi. 

 The KRA carried out investigations into the tax affairs of the Appellant for the period 2020 to 2021 on the basis that the Appellant was a nil filler and thus failed to disclose sales and income made under the years of review. After various correspondences between the parties, the KRA relied on the information acquired and raised assessments for income tax and VAT through the letter dated 5th of May 2023. 

Avery Lounge’s Submissions  

Avery Lounge submitted that the KRA fell into error by purporting to treat all the bank deposits  to income tax. In doing so, the KRA erroneously assumed that every deposit made into Avery Lounge’s bank account amounted to income capable of being charged to tax.  

Avery Lounge contended that during its formative years, the company relied  heavily on capital injections from its directors , which were deposited  to the Company’s bank account  and the same were deployed to reduce cash flow  challenge. 

It further contended that the KRA fell into error  by purporting to subject all the deposit to income tax, because in doing so it made the assumption that every deposit in the account amounted to income  capable of being charged to tax.  

KRA’s Submissions  

The KRA argued that, due to Avery Lounge being a nil-filer, it had to rely on available information and exercise its discretion in formulating the assessment. This authority, the KRA contended, is granted under Section 29(1) of the Tax Procedures Act. 

Furthermore, the KRA asserted that Avery Lounge bore the responsibility to demonstrate its actual income to effectively contest the assessment. According to the KRA, this burden of proof is explicitly mandated by Section 56 of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, which Avery Lounge failed to meet. 

The KRA also stated that it had requested Avery Lounge to provide audited books of account that would have substantiated the capital deductions claimed by the appellant. However, Avery Lounge did not furnish these documents in support of either the Notice of Objection or the subsequent Appeal. 

Tribunal’s Analysis and Determination  

The Tribunal referred to Section 13(2) of the Tax Appeals Tribunal Act, which mandates Appellants to submit a statement of facts expanding upon the contents of the Memorandum of Appeal and detailing why and how the KRA decision is incorrect. Additionally, Rule 5 of the Tax Appeals Tribunal (Procedure) Rules specifies that the Statement of Facts should specifically reference documentary evidence, which must be annexed to the Statement of Fact. 

During its review, the Tribunal examined the documents submitted by Avery Lounge, which included a letter of findings from the KRA, a Notice of Assessment, a Notice of Objection, and bank statements. Avery Lounge also provided written submissions accompanied by a collection of legal precedents. 

The Tribunal observed that although bank statements were included, they were accompanied by a summary of banking analysis indicating total deposits and adjustments. However, crucially, this summary lacked necessary details such as a supporting schedule or highlighted transactions on the bank statements for the Tribunal’s reference. 

Consequently, the Tribunal concluded that Avery Lounge had failed to present sufficient documentary evidence to substantiate its appeal. Therefore, the Tribunal determined that Avery Lounge had not met its statutory burden of proof in the matter. 

How we can assist  

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