A Nairobi restaurant that declared zero income while running an active hospitality business has lost its bid to overturn KSh 92.7 million in tax assessments, after the High Court ruled that unexplained bank deposits can be treated as income when a taxpayer keeps no proper records.
- •A decision delivered by the High Court’s Commercial and Tax Division dismissed Avery Lounge Limited’s appeal and upheld the Kenya Revenue Authority’s (KRA) use of bank deposit analysis to reconstruct the company’s income.
- •A field visit in November 2021 had confirmed that the lounge was fully operational and the authority obtained third-party banking records, which found substantial deposits over multiple years.
- •In the absence of credible books of account, it treated those deposits as business income and raised assessments covering corporation tax, VAT, and PAYE.
“A Court cannot aid a taxpayer who, having failed to keep statutory records, seeks to rely on generalities and summaries to defeat a specific, evidence-based assessment. The Bank Deposit Analysis remains a robust and lawful tool for the KRA in such instances,” Justice Helene Namisi ruled.
The company had argued that not all deposits were sales, adding that they could be loans or director advances. It further contended that KRA had acted arbitrarily by taxing gross deposits without factoring in business expenses and input VAT. The lounge provided bank statements for 2021 and a summary analysis but did not produce ledgers, invoices, loan agreements or audited accounts.
The High Court reaffirmed a principle often invoked but rarely welcomed by taxpayers: the burden of proof lies squarely on the taxpayer. Under the Tax Procedures Act, an assessment issued by the Commissioner is presumed correct unless the taxpayer proves otherwise.
“By failing to provide the primary records that would allow the KRA and the Tribunal to interrogate the specific nature of the deposits, the Appellant failed to rise above the level of mere assertion,” the judge explained.
Avery Lounge had also attacked KRA’s “best of judgment” assessment which it said amounted to guesswork. The court disagreed, noting that where a taxpayer files nil returns and fails to keep adequate records, the authority is entitled to rely on the most objective material available. In this case, that meant the full set of credit entries in the company’s bank accounts.
The court rejected the lounge’s argument that taxing gross bank deposits unfairly ignored business expenses, holding that deductions must be proven with invoices and receipts, not assumed. Payments to directors were properly treated as taxable emoluments after the company failed to show they were legitimate reimbursements, and input VAT claims similarly collapsed for lack of valid tax invoices.
