Commissioner of Investigations and Enforcement v Traneshvi Limited Income Tax Appeal E142 of 2023 (2025)
Background
Traneshvi Limited operates a real estate business generating rental income through 11-month renewable tenancy agreements.
- 2018: KRA conducted an audit covering tax years 2015-2017 which reconciled with the company’s declared rental income and verified claimed expenses. No issues were raised.
- May 2020: KRA commenced fresh investigations, conducting impromptu site visits, tenant interviews and extensive document requests.
- May 2021: KRA issued preliminary audit findings computing a corporate income tax liability of Kshs. 43,879,331 for the years 2015-2019.
- January 2022: KRA confirmed a revised assessment of Kshs. 76,369,287 despite Traneshvi’s objections and detailed reconciliations.
- March 2022: KRA issued an objection decision confirming the assessment.
- July 2023: The Tax Appeals Tribunal ruled in favor of Traneshvi Limited, setting aside KRA’s assessment.
- September 2023: KRA appealed to the High Court, which dismissed the appeal on 26 September 2025.
KRA’s Argument
- The Tribunal erred in finding that Traneshvi had provided sufficient evidence to disprove the tax assessments as the evidence did not satisfactorily displace the assessments.
- The Tribunal wrongly shifted the evidential burden onto KRA contradicting section 56(1) of the Tax Procedures Act that places the burden of proof on the taxpayer.
- The Tribunal fell into error by requiring KRA to provide additional evidence to justify the assessments.
- The assessments were properly raised based on KRA’s statutory mandate under the Tax Procedures Act and Income Tax Act.
- The Tribunal failed to appreciate the statutory framework supporting the assessments.Traneshvi’s Argument
- The appeal was defective as it improperly sought to reopen factual findings of the Tax Appeals Tribunal contravening section 56(2) of the TPA that restricts appeals to questions of law only.
- KRA’s reliance on the banking test was arbitrary and misleading because bank deposits included apartment sales, refundable security deposits and cash receipts already accounted for but subsequently banked.
- Section 6(1) of the Income Tax Act clarifies that rental tax is chargeable only on rent received not on “expected”; income derived from bank deposits.
- KRA made bare allegations without identifying specific gaps or discrepancies.
The High Court’s Ruling
The High Court dismissed KRA’s appeal in its entirety. The key findings were:
- Section 56(1) places the initial burden on the taxpayer to prove a tax decision is incorrect.
- Once the taxpayer produces credible evidence, the evidentiary burden shifts to the Commissioner to rebut it.
- Traneshvi furnished voluminous supporting documentation which KRA did not effectively controvert.
- KRA failed to specifically identify gaps or inconsistencies in the documentation presented.
- Traneshvi’s rental income was already evidenced through primary records.
- Section 15(2)(f) of the Income Tax Act allows deductions for expenses incurred in the production of income, including repair and maintenance.
- Traneshvi produced prima facie evidence which KRA failed to demonstrate that the expenses were fictitious or outside the scope of allowable deductions.
- Once a taxpayer produces prima facie evidence, the burden shifts to the Commissioner to rebut the same.
- The High Court found that the appeal lacked merits and upheld the Tax Appeals Tribunal’s decision.Conclusion
This landmark ruling has significant implications for taxpayers and tax administration in Kenya:
- Taxpayers should maintain comprehensive records of all income sources and expenses.
- Taxpayers bear the initial burden to prove an assessment is incorrect (Section 56(1) TPA).
- Banking Test has Limitations and KRA cannot automatically treat all bank deposits as taxable income.
- The law taxes actual income received not “expected” income derived from banking analysis.
- Taxpayers should retain all supporting documents that support expenses for income-generating properties as they are deductible under Section 15(2)(f) ITA.
- When taxpayers present prima facie evidence, KRA must specifically identify and prove discrepancies.
Recommendation
- Taxpayers are advised to conduct documentation audits across all tax heads
- Taxpayers should prepare detailed bank reconciliations that clearly identify the nature of all deposits.
- Taxpayers should maintain copies of all submissions with acknowledgment receipts during tax audits.
When facing Tax appeals in the High Court or the Tax Appeals Tribunal, taxpayers should engage the services of professional tax lawyers and tax advisers to ensure the proper framing of legal issues and to effectively challenge tax appeals and tax assessments.
At Intelpoint Consulting, Your Tax Lawyers with a Personal Touch, we specialize in representing taxpayers in disputes with KRA.
Our professional team possess deep technical expertise with a proven track record in tax dispute resolution and give you client centric service making strategic decisions collaboratively with our clients.
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Disclaimer: This alert is for informational purposes only and does not constitute legal or tax advice.
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