Vijay Kumar Shamji Patel v Commissioner for Legal Services & Board Co-ordination Services (Tax Appeal E628 of 2025) KETAT 420 (KLR).
The treatment of tax losses pursuant to Section 15(4) of the ITA has undergone significant changes over the years. The Finance Act, 2014 introduced a 5-year limit for the carry forward of losses and the same was later extended to 10 years in 2015. In 2021, the restriction was removed entirely, allowing indefinite carry-forward of losses. However, the Finance Act, 2025 reintroduced the 5-year cap, providing for possible extension under Section 15(5) of the ITA.
Despite this statutory amendment, the 5-year limit applies prospectively, it should not operate to extinguish pre-existing loss entitlements accumulated under the former indefinite regime. A view that losses incurred prior to 2020 are deemed expired is therefore inconsistent with principles of fairness, statutory interpretation, and the presumption against retrospectivity.
Background
The parties to the dispute are Vijay Kumar Shamji Patel (“the Taxpayer”), and the KRA for Legal Services & Board Co-ordination Services (KRA “the KRA”).
The dispute originated from an assessment issued by the KRA on 25th February 2025, demanding Kshs. 67,932,696.00 for the period between 2019–2022. The Taxpayer lodged an objection on 19th March 2025, which the KRA confirmed via an objection decision on 12th May 2025. Dissatisfied, the Taxpayer filed a Notice of Appeal on 5th June 2025, followed by a Memorandum of Appeal on 17th June 2025.
Brief Facts
Between the years of 2020 and 2024, the KRA initiated multiple, overlapping tax verification exercises covering various periods from 2014 to 2023. In the year 2014, the Taxpayer declared a tax loss of Kshs. 229,885,439.00, composed of “other allowable expenses” and “realized exchange losses”, being terms used in tax and financial related affairs.
This loss was carried forward and utilized to offset income in subsequent years, including 2019–2022. On February 25, 2025, the KRA issued an assessment for Kshs. 67,932,696.00 in respect of the period between 2019–2022 based on disallowance of carried-forward losses amounting to Kshs. 191,894,600.00 on the basis that the Taxpayer failed to provide supporting documentation for the original 2014 claims.
Summary of Taxpayer’s Submissions
The Taxpayer argued that the documents were over a decade old, exceeding the 5-year statutory retention period under the Tax Procedures Act (TPA). Additionally, the Taxpayer cited a 2015 court order (Civil Case No. 1108 of 2011) that restrained the KRA from demanding documents dated prior to April 2011 following the KRA’s illegal raid at his premises.
The Taxpayer contended that the KRA’s failure to issue adverse findings over ten years and across four separate verification exercises created a legal certainty. Relying on Republic v KRA; Proto Energy Limited (Ex Parte) (2022) KEHC 5 (KLR), the Taxpayer argued it was unconscionable for the KRA to suddenly disallow losses after a decade of implied or explicit acceptance.
The Taxpayer challenged the KRA's claim that new information justified the review, noting that the KRA failed to identify any information that was not already available during the prior four audits. The Taxpayer argued that being subjected to recurrent and cyclic audits by different internal divisions, each ignoring the documents provided to the previous one, was inefficient, unreasonable and disruptive to business. The Taxpayer asserted that the very documents, needed to support the 2014 loss were among those carted away by the KRA during the illegal 2011 raid. Therefore, the KRA was penalising the Taxpayer for lacking documents that the KRA itself was illegally withholding in violation of the 2015 court order.
Summary of the KRA’s Submissions
The KRA argued that the 5-year limitation period under Section 31(4)(b) of the TPA was not breached because the Taxpayer only filed the 2014 return on April 25, 2017. It further invoked Section 31(4)(a), claiming the “non-existent” losses were introduced through willful neglect, which permits assessments at any time. The KRA highlighted a public notice regarding the migration of ledger balances from the Legacy system to iTax. It argued that since the Taxpayer was given until December 2024 to contest these balances and failed to provide documentation for the Kshs. 178,050,184.00 and Kshs. 95,185,927.00 deductions, the disallowance was lawful.
The KRA maintained that a public body cannot be bound by an expectation that is contrary to statute. It argued no lawful promise was ever made that the 2014 losses would be accepted without evidence. The Respondent denied being in contempt of the 2011/2015 court orders, asserting that the current assessment did not rely on any documents from 2011, but was based on a review of self-assessment returns from 2010 to 2023. It noted that the 2013 legacy return showed a tax-payable position, making the 2014 loss unsupported.
Issues for Determination
The Tribunal settled on the following three core issues to resolve the dispute:
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Whether the assessments in respect of the period 2014 to 2018 were statutorily time barred under Section 31(4)(a) of the TPA.
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Whether the KRA’s decision to disallow the carried-forward losses was justified.
Analysis and Findings
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Statutory Limitation
The Tribunal addressed whether the KRA could legally issue assessments for the period 2014–2018, given the five-year limitation period in Section 31(4) of the Tax Procedures Act (TPA). The KRA can only amend an assessment after five (5) years if there is evidence of gross or willful neglect, evasion or fraud.
The Tribunal ruled that while the taxpayer generally bears the burden of proof in tax disputes, when the KRA alleges fraud or willful neglect to reopen closed years, the burden shifts to the KRA. The KRA failed to provide any evidence of intentional wrongdoing. The Tribunal noted that missing documents from 2014, especially after a decade and multiple system migrations did not constitute willful neglect. Consequently, the assessments for 2014–2018 were statutorily time-barred.
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Disallowance of Carried-Forward Losses
The Tribunal examined whether the KRA was justified in rejecting the losses carried forward from 2014 into the 2020–2023 period. Although the Finance Act 2025 reintroduced a five-year limitation on carrying forward losses, the Tribunal held that tax laws cannot be applied retrospectively to extinguish vested rights accrued under previous regimes which allowed indefinite carry-forwards. The Tribunal noted that the Taxpayer’s losses had been reviewed in multiple previous audits without objection. Under the principle of legitimate expectation, the taxpayer was entitled to rely on the KRA's consistent past practice. The disallowance was deemed unjustified and unlawful.
Final Decision
The Tribunal found the appeal to be meritorious in its entirety and gave orders setting aside the KRA’s Objection Decision dated 12th May 2025.
Conclusion
The Tribunal’s judgment underscores the sanctity of the five-year limitation period and the constitutional protection against the retrospective application of tax laws. By ruling that the Finance Act 2025 cannot be utilized to claw back or extinguish tax losses accrued under previous, more permissive regimes, the Tribunal has fortified the principle of vested rights, ensuring that legislative amendments only operate prospectively unless an express transitional mandate exists. Furthermore, the decision serves as a stern check on the KRA’s power to reopen closed years; it clarifies that the willful neglect exception under Section 31(4)(a) of the TPA requires concrete, cogent evidence of intentional misconduct rather than a mere absence of decade-old records. Moving forward, this precedent guarantees that the Finance Act 2025 limitation on loss carry-forwards will not be applied to periods beyond the five-year statutory window for pre-existing losses, thereby upholding legal certainty, protecting the taxpayer’s legitimate expectations and ensuring that the KRA adheres to the strict dictates of the Constitution and Fair Administrative Action Act.
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Amos Lekakeny
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