Why KRA looks at firms' bank deposits as taxable income first

In Kenya, one of the most common disputes between businesses and the Kenya Revenue Authority (KRA) is whether money deposited into a company’s bank account should automatically be treated as taxable income. A recent ruling by the Tax Appeals Tribunal in the case of Kirin Pipes Limited versus KRA Commissioner Intelligence Strategic Operations Investigations and Enforcement offers valuable lessons for every business owner. The decision makes it clear that unless businesses can prove otherwise, KRA is entitled to deem every deposit as income and charge tax accordingly.

The case revolved around a fundamental question: In what circumstances can KRA treat deposits as income? Kirin Pipes Limited found itself at the centre of this storm after KRA conducted an investigation into its tax affairs for the years 2019 to 2022. The result was a demand for additional taxes running into tens of millions, Sh34.3 million in income tax and Sh22.6 million in VAT.

Kirin explained that it begun operations in 2019 with ordinary share capital of Sh10 million. As its activities expanded, shareholders injected an additional Sh29.4 million to support the business. According to the company, these were capital injections and not earnings from sales. It also maintained that it secured a loan of Sh31.6 million from Nanchang Municipal Engineering Development, intended to cover operating costs during the early years of growth. Beyond this, the company pointed out that further deposits totalling Sh24.6 million were made by shareholders to meet the company’s running expenses. Despite these arguments, the tribunal was not persuaded.

The members of the tribunal noted that the company had not provided adequate evidence to connect the deposits to capital injections from shareholders. The bank statements and swift confirmation slips that were produced could not, in their view, prove that the money was indeed shareholder capital. What was missing were board resolutions, detailed analyses linking specific deposits to named shareholders, or an updated CR12 showing the resultant shareholding structure after the additional contributions. The tribunal observed that although Kirin produced a CR12, it only reflected the original shareholding of Sh10 million and not the subsequent funds.

On the alleged loan of Sh31.6 million, the tribunal found further weaknesses. The agreement provided showed that the loan was interest-free, repayable at the discretion of the company, and lacked a clear repayment schedule. These terms raised serious doubts as to whether it was a genuine loan. The tribunal stressed that from 2019, when the agreement was signed until 2024, when the assessments were raised, the company had not shown any evidence of repayments. The absence of repayment records and the vague terms of the loan led the tribunal to conclude that Kirin Pipes Limited had failed to prove that the money was indeed a loan and not income.

At the heart of the decision was a simple but powerful principle in tax law: The burden of proof rests on the taxpayer. KRA is entitled to presume that deposits into a bank account represent taxable income. If a company claims otherwise, it must provide credible and detailed evidence to back that claim. In this case, the tribunal held that Kirin Pipes Limited had not met that burden. Consequently, it upheld KRA’s assessment, effectively treating deposits worth Sh54 million as taxable income.

The ruling carries important lessons for Kenyan businesses. First, companies must ensure that shareholder contributions are properly documented. Each capital injection should be backed by resolutions, minutes of meetings, updated CR12s, and clear records linking shareholders to specific deposits. Second, loans must be formalised with agreements that include realistic repayment schedules, interest terms, and supporting evidence of repayments made. Informal arrangements, even if genuine, will not stand the test of scrutiny if challenged by KRA.

Third, companies should avoid mixing operational funds, shareholder contributions, and loans in a way that makes it difficult to trace their origins. Separate accounts or reconciliations can help distinguish revenue from capital. Fourth, businesses must develop a culture of keeping accurate records at all times, not only when audits arise. This case is particularly significant for start-ups and small enterprises, which often rely heavily on shareholder injections and informal financing to stay afloat.

While the intention may be genuine, the failure to document these funds properly exposes them to serious tax liabilities. KRA has increasingly adopted the approach of using bank deposits as a basis for assessments. Without meticulous records, businesses risk having legitimate funding treated as taxable income, leading to hefty assessments and costly disputes. For business owners, the lesson is therefore clear: Do not wait until KRA comes knocking to start organising your records. Every financial transaction, whether it involves shareholders, lenders, or other sources of funds, should be formalised and supported with documentation.

Compliance is best achieved through a culture of transparency and record-keeping that runs from the top leadership down to daily operations. In the end, it is not just about avoiding unnecessary tax burdens but also about building credibility and resilience in the business. The tribunal’s ruling against Kirin Pipes Limited is a timely reminder that when it comes to taxes, documentation is everything.

KRA will always look at deposits as income first. Only strong and credible evidence can prove otherwise. Businesses that embrace this reality will protect themselves from disputes, safeguard their resources, and focus on growth rather than firefighting tax battles. Record it to avoid it!