TAX LENS: ARE YOUR BANK DEPOSITS INCOME, FOR TAX PURPOSES?
“If it hits your account, prove it or lose it.”
Introduction
On 22nd August 2025, the Tax Appeals Tribunal took a clear stand in Kirin Pipes Limited v Commissioner, Intelligence Strategic Operations Investigations and Enforcement [2025] KETAT 259. Its position was unambiguous:
‘Every deposit into the taxpayer’s bank account is taxable income, unless proven otherwise.‘
This position strikes the heart of corporate finance and governance. While Kenyan tax law remains anchored on taxing gains or profits, not mere bank deposits, the Tribunal places the evidentiary burden squarely on taxpayers. For Kirin Pipes, this stance swept millions in alleged capital injections, loans, and advance payments into the tax net.
The Tribunal, in its judgment, was unpersuaded by explanations, supporting documents, and claims of double taxation. The taxpayer lost this case.
The Digest
The Power and Peril of Banking Analysis
Banking analysis has been a part of KRA’s investigative tool, mirroring global practice. By matching the bank deposits against declared turnover, the assessing officers can raise variance or underdeclarations.
In Kirin’s case, deposits exceeding Kshs. 150 million was treated as income. Explanations pointing to shareholder funding, loans, and advance payments collapsed under scrutiny because the company was unable to demonstrate them in a manner the Tribunal considered credible and complete.
Among others, the Tribunal cited that Kirin failed to satisfy its burden of proof as;-
Shareholder capital injections were unsupported by resolutions or capital structure updates.
The loan agreement lacked commercial substance.
Customer advances had no matching invoices or VAT declarations.
For the above reasons, the deposits were reclassified as taxable income.
Capital Contributions. Substance Without Form
Kenya’s tax law is clear. Capital injections are not income. The Court of Appeal in Pili Management Consultants v Commissioner of Income Tax [2010] eKLR affirmed as much. Yet, Kirin could not tie the contested deposits to shareholder decisions or changes in its capital structure. In the absence of persuasive corporate evidence, the amounts were treated as taxable income.
The takeaway for Kenyan businesses: corporate governance records are key, as substance is not enough; form matters just as much.
Loans Without Commercial Flesh
Kirin pointed to a loan of Kshs. 31 million. However, according to the Tribunal’s analysis, the terms of the agreement did not reflect any commercial DNA of a loan. The amount was treated as taxable income.
Advance Payments and the Double Taxation Trap
The company also argued that some of the deposits were advance payments, later invoiced and taxed. In practice, this should have raised a genuine double taxation issue. However, the Tribunal found no invoices, no VAT declarations, and no certified schedules.
The principle against double taxation is universal. However, without supporting documentation, a sound legal argument collapses.
A Constitutional Undercurrent
The taxpayer invoked Articles 47 and 201 of the Constitution, arguing that the Commissioner’s approach was arbitrary and inequitable. The Tribunal brushed this aside, grounding its reasoning in the statutory burden of proof. Once again, the constitutional shield crumbled against weak documentation.
Conclusion
Kirin may have lost this appeal, but the lessons for CEOs, CFOs, Boards and Senior Management are clear:-
Tax risks are now at the Boardroom table; Taking money from shareholders with no supporting documentation risks the injection being characterised as taxable income, eroding both shareholders’ value and the company’s capital
Governance and Compliance cannot be separated; Funding, lending, and trading arrangements must withstand scrutiny, not just in substance but in form.
Documentation is always the silent defender; Without the right structure and trails, even the most rational explanation collapses!
Contact us: info@wmcoadvocates.co.ke Disclaimer –This Article is in general terms for guidance only and is not intended to substitute professional advice. While due diligence has been undertaken, in ensuring the accuracy of information provided herein, Waithira M. & Co. Advocates is not responsible for any actions or omissions undertaken as a result of the same.
