Digital Box Lost Its Bank Analysis Challenge Because It Did Not Show Which Entries Were Wrong
- Case
- Digital Box Limited v Commissioner of Investigation & Enforcement
- Decided by
- Tax Appeals Tribunal, 14 August 2020
- Citation
- Tax Appeal No. 115 of 2017
What happened
Digital Box Limited buys and sells electronics. In February 2017, KRA searched its business premises under a court warrant and took records. In April 2017, KRA assessed the company for 2012 to 2016.
The company objected. KRA confirmed a demand of KES 700,548,224, made up of KES 481,521,086 in income tax and KES 219,027,138 in VAT, including penalties and interest. The company appealed, saying its ledgers and bank statements showed far lower sales and that KRA’s figures were unrealistic.
What KRA said
KRA compared the company’s bank statement with the sales it had reported and treated the gap as under-declared sales. It then compared the bankings with sales in delivery notebooks, and treated the difference as unbanked cash sales.
KRA said this “banking analysis” is a legitimate way to check income, because money received is either deposited or spent. It added that the company had not supplied further documents it was asked for, and that the law puts the burden of proving an assessment wrong on the taxpayer.
What the Tribunal decided
The Tribunal ruled that the appeal failed. Its main reasons were:
- A return does not bind KRA. Under section 24(2) of the Tax Procedures Act, KRA may assess using any information available to it. Here, that came from a search authorised by a court.
- Bank analysis is an acceptable method. The Tribunal found no sign that KRA acted dishonestly or capriciously, and no errors in its arithmetic.
- The company did not discharge its burden. Section 56(1) places the burden on the taxpayer. The company disputed the totals, but did not specify which bank entries were wrongly included or why. Saying the result was unrealistic was not enough.
There was one concession: KRA must take into account costs from the company’s records for 2015 and 2016. Each side bore its own legal costs.
What this means for your business
- Reconcile your bank statements to your sales. Know what each deposit is, and keep the paperwork for deposits that are not sales. Keeping business and personal money apart makes this far easier.
- Answer a bank analysis line by line. List the entries you dispute, why each one is not a sale, and the document that shows it.
- Treat every sales record as evidence. KRA relied on manual delivery notebooks here, so they need to agree with what you declare.
- Send what KRA asks for, and make your objection precise. The Tribunal looked past a thin objection in this case, but you should not rely on that. See how to object to a KRA assessment and our KRA audit guide.
These steps do not guarantee a result, because each case turns on its own evidence.
Would your records pass this test?
We go through your returns and records and show you what to fix before KRA asks, so you stay compliant.
A short summary for general information, not legal advice. Read the full decision before relying on it.