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The Kenya Revenue Authority (KRA) frequently relies on the bank statement analysis method when raising additional tax assessments, particularly in cases of alleged undeclared income. Under this method, deposits reflected in a taxpayer’s bank accounts are treated as indicative of taxable income unless adequately explained by the taxpayer.
However, jurisprudence from the Tax Appeals Tribunal has firmly established that bank statements, by themselves, are not conclusive proof of taxable income. The Tribunal has emphasized that an assessment must be supported by a clear and demonstrable nexus between the impugned banking entries and an identifiable revenue-generating transaction.
This position is anchored in Section 107(1) of the Evidence Act, which places the burden of proof on the party asserting the existence of a fact. Where KRA alleges that specific bank deposits constitute undeclared income, it must lead evidence showing how those deposits arose from taxable activities. An assessment based solely on unexplained deposits, without tracing them to underlying transactions, is evidentially deficient.
Equally, the Tribunal has cautioned that documents do not speak for themselves. Bank statements merely record the movement of funds; they do not, without more, reveal the nature, source, or tax character of the transaction. As such, it is incumbent upon the taxpayer, at both the objection stage and on appeal, to demonstrate the linkage between the banking entries and their true commercial character—whether capital injections, loans, refunds, or other non-revenue receipts.
This principle was succinctly articulated in Osho Drapers Limited v Commissioner of Domestic Taxes, Appeal No. 159 of 2018, where the Tribunal held that “documentation must be supported by an underlying transaction and the taxpayer must furnish that there was an actual purchase.” The decision reinforces the broader principle that tax liability must be grounded in verifiable commercial reality, not inferred merely from the presence of banking records.
In practice, this jurisprudence underscores the need for both KRA and taxpayers to move beyond mechanical reliance on bank statements. Tax assessments must be transaction-based, evidence-driven, and legally sustainable, while taxpayers must maintain proper documentation that clearly explains the nature of funds passing through their accounts.
