High Court Ruling on Missing Traders & Burden of Proof

Commissioner of Domestic Taxes v Dinesh Construction Limited (2025) KEHC 17058 (KLR)

Background

In 2021, KRA audited Dinesh Construction Limited for the years 2016–2021 and flagged risks in corporation tax, VAT, PAYE and Withholding Tax.

KRA issued a confirmed assessment claiming:

Missing Traders: Dinesh claimed VAT inputs from suppliers who were “missing traders” entities that exist on paper to issue invoices but do not actually supply goods.
Banking Variance: There were huge deposits in Dinesh’s bank accounts that were not declared as sales.
Undeclared PAYE on vehicle benefits and Withholding Tax.

The Tribunal Stage

Dinesh appealed to the Tax Appeals Tribunal and it ruled in Dinesh’s favor finding that:

The 2016 assessment was time-barred (too old).
The taxpayer had invoices and ETRs, which was enough proof for VAT claims.
KRA failed to prove fraud.

The High Court Appeal

KRA appealed to the High Court, arguing the Tribunal made serious legal errors.
The High Court agreed with KRA and reinstated the full tax assessment.

Issues in the High Court Appeal

Jurisdiction and the “Undisputed Tax” Trap

Section 52(2) of the TPA says you must pay any “tax not in dispute” before appealing.
Dinesh objected to the big items (VAT, Corp Tax) but forgot to address smaller items (PAYE, WHT) in their objection letter.
KRA argued that because they did not object to them, those smaller items became “undisputed” and payable immediately and since they were not paid, the whole appeal was invalid.
The High Court agreed that the Tribunal erred by hearing the case without proof of payment for the un-objected items.

The 5-Year Time Bar

KRA generally has 5 years to amend an assessment.
Dinesh argued that it filed its tax return for 2016 on 15 December 2017 and the assessment by date was 14 December 2022 The Tribunal said the time had expired.
The High Court overruled this.
The High Court claimed that the clock starts ticking from the date the return was submitted and not the due date.
KRA issued the assessment on 14 Dec 2022 exactly one day before the 5 years expired.

Missing Traders

Dinesh had valid Tax Invoices and ETR receipts from suppliers.
KRA said these suppliers were fake “missing traders” and disallowed the input VAT.
The Tribunal had said, “It’s KRA’s job to prove the taxpayer knew about the fraud.”
The High Court reversed the Tribunal’s decision, citing the Galaxy Tools

Once KRA does a forensic audit and casts doubt on a supplier (e.g., they have no physical address), the burden shifts back to the taxpayer.
You cannot prove a supply happened just by showing the invoice as the invoice is the very document being questioned
A real business buying millions of shillings of construction materials must have a “commercial footprint.”

Banking Analysis

KRA found Kshs 187M in deposits not declared as income.
Dinesh argued these were “contra entries” (transfers between own accounts) and “director loans.”

The High Court ruled that

You cannot just say it is a loan. You must prove it.
Required Proof

A signed loan agreement.
Bank reconciliation statements showing the money leaving Account A and entering Account B.

Recommendations

Taxpayers that do not specifically list an item in their objection letter legally accepted and it cannot revive the dispute later at the Tribunal.
Taxpayers that delay their filing extend the KRA audit period.
Without proper documentation, all unexplained deposits are treated as taxable income.

At Intelpoint Consulting, we help taxpayers with comprehensive tax health checks, banking reconciliation and analysis and tax dispute resolution strategies.