The Kenya Revenue Authority (KRA) is entitled to treat all money flowing into a taxpayer’s bank account as taxable income, unless the taxpayer explains otherwise, the Tax Appeals Tribunal has ruled.
- •The Tribunal said that KRA may begin from the assumption that unexplained bank deposits represent undeclared income but it must test the evidence if the taxpayer provides a reasonable explanation backed by documents.
- •The ruling came in a dispute between Konchor Kid Ltd, a management consultancy firm, and the tax authority, over a tax demand of KSh 345.7 million covering corporate income tax and VAT for 2022 and 2023.
- •The Tribunal sided with the taxpayer, but not on the basis that KRA lacked authority to analyse bank deposits.
“It is Trite law that the burden of proof in tax matters lies with the taxpayer. However, it has been established by the courts that this burden is not static, it shifts based on the evidence and explanation provided by the parties,” the tribunal stated.
KRA had built its assessment by analysing Konchor Kid’s bank statements and concluding that the company’s declared turnover did not match the volume of deposits flowing through its accounts. On that basis, it treated all bank credits as income and applied an estimated profit margin of 18%, despite the company not charging VAT for much of the period.
KRA argued that the law allows it to rely on bank analysis and third-party data where tax returns appear inaccurate. It said Konchor Kid failed to discharge its burden of proof because it did not provide a full list of clients including their KRA PINs and contact details. Without that information, KRA said it could not verify whether the deposits truly belonged to third parties.
Unexplained deposits may properly be treated as income.
Konchor's Defense
Konchor Kid countered that KRA had misunderstood its business model. The firm said it acted as an agent, collecting money on behalf of clients and earning a commission of just 0.2%. Most of the funds passing through its bank accounts did not belong to the company.
To support its position, Konchor Kid provided bank statements, audited accounts, agency agreements, general ledgers, and transaction analyses. It also argued that it was unfair to impose VAT retroactively, particularly for periods when it had not crossed the statutory registration threshold.
The Tribunal found that Konchor Kid had adequately explained the nature of the deposits and backed that explanation with documents. At that point, the burden shifted to KRA to evaluate the evidence and disprove it if necessary.
Instead, KRA dismissed the material outright and confirmed the assessments in full. That approach, according to the tax tribunal, did not amount to the exercise of reasonable judgment. As a result, the Tribunal set aside the entire tax assessment and nullified KRA’s objection.
“By proceeding to confirm the assessments without analysing available evidence, KRA acted whimsically, unfairly, illegally and capriciously in applying its best judgement in determining Konchor Kid's tax liability,” the tribunal stated.
Why this matters
The decision draws a sharp but balanced line that confirms KRA can begin by treating bank deposits as income where returns are inconsistent or incomplete. Once a taxpayer explains the money, KRA must engage with the explanation.
For businesses that handle client funds especially agents, intermediaries, and commission-based firms, the ruling provides both a warning and a safeguard.
