[2025] KETAT 191 (KLR)

Branch International Limited v Commissioner of Domestic Taxes (Tax Appeal E850 of 2024) [2025] KETAT 191 (KLR) (28 February 2025) (Judgment)

Neutral citation: [2025] KETAT 191 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E850 of 2024

RO Oluoch, Chair, Cynthia B. Mayaka, AK Kiprotich & G Ogaga, Members

February 28, 2025

Between

Branch International Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company and its principal business is the provision of financial services majorly mobile lending using its mobile app called Branch.

2. The Respondent is an agent of the Kenya Revenue Authority, appointed under Section 13 of the KRA Act, and charged with the responsibility of assessing, collecting, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent conducted a compliance check on the Appellant’s tax affairs and subsequently issued a Pre-assessment Notice through a letter dated 20th March 2024. The letter required the Appellant to respond within 7 days.

4. The Appellant replied vide a letter dated 26th March 2024 requested for additional 30 days to respond. The Respondent wrote back vide an email on 27th March 2024 declining additional time for the 2018 returns and allowed additional 7 days for the period 2019 to 2022.

5. The Respondent thereafter issued Assessment Order for Corporation tax on iTax for Income tax on 28th March 2024 for the period 1st October 2017 to 30th September 2018. The Respondent further shared analysis of reverse VAT with the Appellant on 29th March 2024 for the period ending December 2018.

6. The Appellant objected to the Corporation tax and VAT assessments through a letter dated 25th April 2024.

7. Through an email on 17th May 2024, the Respondent forwarded to the Appellant a letter dated 20th March 2024 titled partial notice of assessment for the period 2018.

8. The Appellant objected to the partial notice of assessment through a letter dated 24th May 2024. The Respondent subsequently issued its objection decision vide a letter dated 21st June 2024.

9. The Appellant dissatisfied with the Respondent’s objection decision lodged a Notice of Appeal to the Tribunal on 19th July 2024.

The Appeal 10. The Appellant has premised its Appeal on its Memorandum of Appeal dated and filed on 2nd August, 2024. Its grounds of Appeal were as follows:a.That the Respondent erred in law by issuing two assessments in respect of the 2018 tax period contrary to principles of fair administration.b.That the Respondent's additional assessment dated 28th March 2024 did not comply with the provisions of the law requiring tax decisions to provide reasons for an assessment.c.That the Notice of Assessment dated 21st March 2024 is issued beyond the 5-year statutory limitation and is thus invalid.d.That the Respondent erred in law and fact in disallowing legal expenses amounting to Kshs 32,411,070. 00 claimed by the Appellant for the period 2018. e.That the Respondent erred in law and fact by disallowing cash loss expenses amounting to Kshs 796,715,271. 00 claimed by the Appellant for the period 2018. f.That the Respondent erred in law and fact by disallowing fraud expenses amounting to Kshs 43,459,101. 00 claimed by the Appellant for the period 2018. g.That the Respondent erred in law and fact by disallowing costs that it alleges were incurred on interest free loans to related parties amounting to Kshs 8,934,151 for the period 2018.

Appellant’s Case 11. The Appellant premised its case on the Statement of Facts dated and filed on 2nd August, 2024, the witness statement of Betty Mugera filed on 2nd October, 2024 and adopted in evidence under oath on the 12th November, 2024 and Written Submissions dated and filed on 26th November 2024.

12. The Appellant stated that the Respondent carried out an audit on its tax affairs and subsequently issued a Letter of Findings dated 20th March 2024 covering the years of income 2018 to 2022.

13. That in the letter of findings, the Respondent issued findings relating to Corporate Income tax, Withholding tax and Value Added Tax and requested the Appellant to provide responses, reconciliations and explanations in connection thereto.

14. That the Appellant through its tax agents, responded to the Respondent's findings by a letter dated 26th March 2024 requesting for extension of time to put together the responses, requisite information, supporting documents and explanations.

15. That in response to the Appellant's letter, the Respondent granted the extension for the years of income 2019 to 2021. That however, the Respondent issued a CIT assessment dated 28th March 2024 and a VAT working schedule on 29th March 2024 for the year of income 2018. It averred that the Respondent informed the Appellant to consider the VAT workings as formal assessments.

16. That in the assessments, the Respondent assessed the Appellant additional CIT in the sum of Ksh 593,930,027. 63 inclusive of penalties and interest. That the VAT working schedule assessed Ksh 41,706,822. 24 which was computed on imported services worth Ksh 260,667,639. 01.

17. That the taxes demanded by the Respondent in the CIT Assessment and VAT working schedule is summarized in the table below:Tax head Principal tax (KES) Interest (KES) Total (KES)

Tax (CIT) 343,312,154. 70 250,617,872. 93 593,930,027. 63

Value Added Tax(VAT) 41,706,822. 24 - 41,706,822. 24

Total 385,018,976. 94 250,617,872. 93 635,636,849. 87

18. That even though the CIT Assessment and VAT working schedule did not provide any reasons to support the assessments, it lodged a notice of objection dated 25th April 2024.

19. It submitted that by an email dated 17th May 2024, the Respondent issued another notice of assessment dated 21st March 2024 covering the tax period 2018. That in the assessment, the Respondent notified it of CIT assessments amounting to Kshs 562,629,746. 00 inclusive of penalties and interest. That the Appellant was also notified of VAT assessments amounting to Kshs 67,982,120. 00 inclusive of penalties and interest.

20. The Appellant set out the summary of the taxes demanded by the Respondent in the partial notice of assessment in the table below:Tax head Principal tax (KES) Penalty (KES) Interest (KES)Total (KES)

Corporate IncomeTax 345,171,624 17,258,581 200,199,542 562,629,746

Value Added Tax 41,706,822 2,085,341 24,189,957 67,982,120

Total 386,878,644 19,343,922 224,389,499 630,611,867

21. The Appellant submitted that the Respondent issued an Objection decision dated 21st June 2024 confirming partially a tax liability of Ksh 264,455,878. 00 inclusive of principal tax. That notably, the Objection decision responds to the notice of objection dated 25th April 2024 and merely acknowledges the notice of objection dated 24th May 2024

22. That in the said Objection decision, the Respondent allowed the marketing expenses of Kshs 260,667,639. 00 on the basis that the Appellant demonstrated that only the portion relating to Kenya was claimed. That in addition, the reverse VAT assessment of Kshs 41,706,822. 00 was allowed on the basis that the Appellant was not obliged by the VAT legislation to account for VAT on imported services.

23. That the total tax liability confirmed is as shown in the table below:Description Amount in Ksh Principal tax in Ksh

Legal expenses 32,411,070 9,723,321

Cash loss and fraud 840,174,372 252,052,312

Related party expense 8,934,151 2,680,245

Total 881,519,593 264,455,878

24. The Appellant itemized and expounded on its grounds of appeal as hereunder:i.That the Respondent erred in law by issuing two assessments in respect of the 2018 tax period contrary to principles of fair administration.

25. The Appellant submitted that the Respondent issued a CIT assessment dated 28th March 2024 for the year of income 2018.

26. That the Appellant lodged a notice of objection dated 25th April 2024 that in the notice of objection, the Appellant in detail outlined the legal inadequacies of the assessments key among them the failure to provide reasons.

27. That it would seem that as an attempt to mitigate and correct the faults in the previous assessments as highlighted by the Appellant, the Respondent issued another notice of assessment on 17th May 2024. That the notice of assessment issued on 17th May 2024 conveniently provides reasons, but it is issued outside the statutory timelines of 5 years.

28. The Appellant contended that the Respondent's Objection decision responded to the notice of objection dated 25th April 2024 (responding to the first assessment) and merely acknowledges the notice of objection dated 24th May 2024.

29. That it has a Constitutional right to fair administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair as provided in Article 47(1) of the Constitution of Kenya, 2010.

30. The Appellant asserted that the Constitution requires the Respondent to be efficient and reasonable in, among others, issuance of assessments. That the Respondent's assessments do not meet the Constitutional threshold above for the reasons that:a.The Respondent provided reasons for the assessment dated 28th March 2024 after the Appellant had filed a notice of objection challenging the assessment on the basis that it did not have reasons.b.The Respondent's assessment issued on 17th May 2024 has been conveniently dated 21th March 2024 as an attempt to fit within the 5-year statutory timeline for assessments covering the period 2018. c.The reasons adduced by the Respondent in its assessment issued on 17th May 2024 were outside the 30-day timeline for the Appellant to file its notice of objection for the assessment dated 28th March 2024. d.Despite the position that the two assessments issued by the Respondent are for the same issues and period, there is clearly a difference in the principal taxes assessed. The assessment dated 28th March 2024 had principal Corporate income taxes of Kshs 343,312,154. 70 while the assessment dated 17th May 2024 had principal Corporate income taxes of Kshs 345,171,624. 00. e.The Respondent issues a notice of assessment in response to the filing of a notice of objection by the Appellant contrary to the provisions of Section 51 of the Tax Procedures Act.

31. The Appellant stated that tax administration should be certain and predictable. That the Respondent ignored these tenets of tax administration and opted to take the Appellant through what can best be described as a house of mirrors where the Respondent issues assessment which are really not assessments and where the Appellant attempts to object to the assessment, is met with further assessment for the same issues.ii.That the Respondent's additional assessment dated 28th March 2024 did not comply with the provisions of the law requiring tax decisions to provide reasons for an assessment.

32. The Appellant stated that the Respondent in its Objection decision averred that it issued the CIT assessment on iTax on 28th March 2024 based on the pre-assessment notice.

33. That the Respondent claimed that the CIT assessment dated 28th March 2024 is a valid assessment in accordance with Section 31(8) of the TPA and the reverse VAT assessment was validly served on email in accordance with Section 74 of the TPA and that it was within the statutory limit of 5 years.

34. The Appellant contended that on 28th March 2024, the Respondent issued a CIT Assessment Order against the Appellant for Ksh 593,930,027. 63 inclusive of penalties and interest. The Appellant noted that the Respondent did not provide reasons for the taxes demanded thus limiting the Appellant's ability to respond satisfactorily in its notice of objection.

35. That the Assessment Order provided the assessment details (assessment period, assessment type and tax obligation, liability details (tax payable, interest and payment date)) and the summary of the changed fields during assessment. That the Assessment Order does not provide any further details on what issues the additional tax assessment related to or the reasons for the additional assessment.

36. That the Respondent did not provide any additional supporting documents to enable the Appellant to discern what the issues in contention were. That tax decisions must have reasons.

37. It was the Appellant's position that the failure to provide adequate reasons for an assessment violates the Appellant's Constitutional right to fair administrative action under Article 47(1) and (2) of the Constitution of Kenya, 2010.

38. That the right to fair administrative action is further provided for in Sections 4 and 6 of the Fair Administrative Action Act, 2015.

39. The Appellant submitted that an inherent aspect of Article 47 of the Constitution is the obligation placed on administrative bodies to provide written reasons for administrative action that is likely to adversely affect any person.

40. It added that the right to a fair hearing under Article 50 of the Constitution of Kenya, 2010 and the right to fair administrative action not only envisages reasons being given but expects that the reasons given are substantive and adequate. That this was the position in the cases of Gideon Omare v Machakos University [2020] eKLR and Geothermal Development Company Limited v Attorney General & 3 others [2013] eKLR.

41. The Appellant further asserted that the assessments were not based on the Pre-assessment notice. That an attempt to demonstrate that reasons for the assessments were provided to the Appellant, the Respondent alleged that the CIT assessment on iTax on 28th March 2024 was based on the pre- assessment notice.

42. It averred that in its Assessment Order dated 28th March 2024, the Respondent does not make any reference to the Pre-assessment notice. That the Assessment Order did not refer the Appellant to the Pre-assessment for reasons of the assessment.

43. The Appellant stated that it was likely that the Respondent's position that the assessment was based on the Pre-assessment notice was meant to align with the gamble that the Appellant took when filing the notice of objection on the basis of the Pre-assessment notice.

44. It further contended that principles of fair administration action contained in Sections 4 and 6 of the Fair Administrative Action Act, 2015 require that the reasons for a decision accompany the decision.

45. That furthermore, nothing would have been easier than for the Respondent to refer the Appellant in writing to the Pre-assessment notice if indeed the reasons for the assessment were as per the Pre-assessment notice.

46. To further demonstrate that the assertion by the Respondent that the assessment was as per the Pre-assessment notice was erroneous, it averred that certain issues addressed by the Appellant in the notice of objection dated 25th April 2024 on the basis of the Pre-assessment notice, such as Day-1 adjustment was not included in the subsequent assessment notice dated 21st March, 2024 which was sent to the Appellant via email on 17th May 2024. That this would not have been the case if the assessments were based entirely and solely on the Pre-assessment notice.

47. It was further the Appellant’s position that the assessments were not in conformity with tax law hence Section 78 of the Tax Procedures Act does not apply. That the Respondent cannot rely on the provisions of Section 78 of the Tax Procedures Act as a basis for failure to issue reasons for the assessment.

48. The Appellant submitted that the provisions of Section 78 of the Tax Procedures Act require that a defect may not affect the validity of a notice of assessment only if the assessment is in substance and effect in conformity with the tax law.

49. That failure to issue a statement of reasons is fatal for a notice of assessment and it cannot be deemed to be an issue of form as it is not in compliance with Section 49 of the TPA.

50. The Appellant reiterated that the assessment dated 28th March 2024 did not have reasons. That the Respondent had acknowledged this fact and attempted to explain that the reasons were contained in the Pre-assessment notice which it had demonstrated was not referenced in the assessment. That the consequence of this lapse was that the assessment had no standing in law.iii.The Respondent erred in law and fact in issuing the Notice of Assessment dated 17th May 2024 against the Appellant which is beyond the 5-year statutory limitation.

51. That the Respondent averred in its Objection decision, that the letter sent on 17th May 2024 did not vary the assessment issued on 28th and 29th March 2024. That the Respondent also stated that it considered the correspondence consistent with the provisions of Section 31(6)(b) that allows the Commissioner to further amend an amended assessment one year after the Commissioner served notice of the amended assessment.

52. It was the Appellants’ position that the assessment issued on 17th May 2024 was issued outside statutory timelines. That the Respondent issued an assessment on 17th May 2024 in respect of the 2018 year of income for which the Respondent had already issued an Assessment Order.

53. The Appellant submitted that in the email sharing the assessment on 17th May 2024, the Respondent noted that:-“Good afternoon Team Branch, Please find the attached Notice of Assessment for the period 2018 which was an oversight from our end.”

54. That in the email above, the Respondent acknowledges that there was an oversight committed.

55. It averred that Section 31 of the Tax procedures Act ("TPA”) provides for the Respondent's power to issue additional assessments by making alterations or additions to the original assessment lodged by a taxpayer.

56. The Appellant maintained that pursuant to the provisions of Section 31(4)(b) of the TPA, the Respondent was only liable to issue additional assessment like the one it did within a period of 5 years from the date of the submission of the self-assessment.

57. The Appellant explained that it filed its 2018 Corporation tax return on 29th March 2019. That the statutory timeline for the amendment of the 2018 year of income lapsed on 28th March 2024 being 5 years from 29th March 2019 the date the tax return was filed.

58. That the timelines prescribed in Section 31 of the TPA are not procedural technicalities that can be ignored. That these statutory timelines were binding upon the Respondent as held in the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021] eKLR.

59. The Appellant insisted that the Respondent could not purport to sidestep provisions of the law and seek to enforce collection of taxes after the 5-year period without compliance with the provisions of the law. That the provisions of Section 31(4)(b) of the TPA were not enacted in vain as stated in the case of Paragon Electronics Limited v Commissioner of Domestic Taxes TAT 207 of 2015.

60. The Appellant averred that as much as the Respondent had been bestowed with the powers to collect taxes due from all taxpayers in the Country, that power is expected to be exercised judiciously and in accordance with the law. That the Respondent is not expected to use the power to the detriment of the taxpayers by acting without legal authority to collect taxes, outside the lawful timelines.

61. The Appellant further insisted that the assessment issued on 17th May 2024 varied the assessment dated 28th March 2024. That despite the fact that the assessment dated 17th May 2024 was issued outside statutory timelines, the Respondent noted that assessment dated 17th May 2024 did not vary the assessment issued on 28th March 2024.

62. That this was far from the truth. It submitted that although the two assessments issued by the Respondent were for the same issues allegedly and the same period, there was a difference in the principal taxes assessed. That the assessment dated 28th March 2024 had principal Corporate income taxes of Kshs 343,312,154. 70 while the assessment dated 17th May 2024 had principal Corporate income taxes of Kshs 345,171,624.

63. The Appellant asserted that the assessment issued on 17th May 2024 does not comply with Section 31(6) of the Tax Procedures Act

64. That the Respondent further alleged that the assessment dated 17th May 2024 was issued pursuant to Section 31(6) of the Tax Procedures Act.

65. That Section 31(6) of the Tax Procedures Act provides that the Respondent may issue a further assessment within one year after the issuance of an original assessment amending the original assessment.

66. The Appellant stated that the further assessment to be issued under Section 31(6) is an amendment to the original assessment issued by the Respondent. That however, it is important to note that the notice of assessment issued on 17th May 2024 does not make reference to the assessment dated 28th and 29th March 2024. That instead, it refers to the Respondent's letter dated 7th December 2020 requesting additional information and the subsequent provision of the documents via emails and meetings by the Appellant which have formed the basis of the assessment that is issued therein.

67. The Appellant explained that if the assessment dated 17th May 2024 was indeed a further assessment under Section 31(6)of the Tax Procedures Act:a.There would have been reference to Section 31(6) of the Tax Procedures Act granting the Respondent the power to make further amendments to the additional assessment.b.There would be reference to the assessments dated 28th & 29th March 2024 given that they would be the original assessment. That instead, the Respondent references the Pre-assessment notice.c.The further assessment would be amending adjustments made in a prior assessment as provided in Section 31(7) of the Tax Procedures Act instead the purported further assessment contains a replica of the original assessment without any modifications whatsoever.d.The further assessment would be a clear amendment to the original assessment contrary to the statement by the Respondent that the assessment of 17th May 2024 did not vary the assessment of 28th March 2024.

68. That the Respondent could not salvage the defective Assessments dated 28th and 29th March 2024 and the assessment of 17th May 2024 which had been sunk under the overwhelming weight of the illegalities committed by the Respondent.

69. The Appellant submitted that in the alternative to the above submissions and without prejudice to the earlier grounds of appeal it advanced the following additional grounds;iv.That the Respondent was misguided in law and fact in disallowing legal expenses amounting to Ksh 32,411,070 claimed by the Appellant for the period 2018.

70. The Appellant averred that the Respondent disallowed legal expenses amounting to Ksh 32,411,070. 00 in its Objection decision stating that the Appellant had failed to adduce sufficient evidence to support these expenses. That specifically, the Respondent asserted that there were no transaction documents detailing the requisitioning, delivery, invoicing and settlement of bills.

71. That the breakdown of the legal expenses was as follows:a.Legal and professional fees of Ksh 31,994,595. 22b.Licenses of Ksh 364,969. 14c.Consultants & Advisory of Ksh 2,136,627. 51. d.Secretarial services of Ksh 138,282. 51

72. The Appellant noted that the legal expenses claimed in the tax return was Ksh 31,597,686. 96 whereas the KRA had disallowed Ksh 34,597,686. 96 (including Ksh 2,186,617. 00 that was allowed during the Objection phase).

73. In regard to provision of documents, the Appellant’s position was that the pre-assessment notice dated 20th March 2024, and the partial notice of assessment dated 21st March 2024, the Respondent on review of the audited accounts and the supporting invoices availed to them, disallowed legal fees on the basis that the expenses were not wholly and exclusively incurred for the production of the Appellant's income. That this implies that the Appellant had furnished the Respondent with supporting documentations.

74. That further, in the notices of objection dated 25th April 2024 and 24th May 2024, the Appellant resubmitted the legal ledger and supporting invoices. That therefore, the Respondent’s allegation that no transaction documents detailing the requisition, delivery, invoicing and settlement of the bills is grossly erroneous. That the Appellant provided all the relevant supporting documents and has reattached the invoices in this Appeal.

75. On fees incurred in respect of the Microfinance loan it averred that as noted earlier, the Appellant was engaged in the business of micro-lending to businesses and individuals through mobile loans. That in order to shore up capital that it will lend to its customers, it must borrow money to top up to the capital contribution by shareholders.

76. That during the period under audit, the Appellant entered into a Microfinance Loan Facility with Victory Park Capital Advisors LLC (VPC) dated 4th December 2017. That the loan facility was guaranteed by Branch International Inc. That the particulars of the facility were that:a.The Appellant was to borrow funds from VPC Onshore Specialty Finance for USD 25,000,000 to finance the existing portfolio as well as future microfinance loans to customers.b.Victory Park Management LLC was engaged as the administrative and collateral agent.c.The Appellant was to pay for all out-of-pocket and documented costs and expenses (including legal fees of one counsel for each Relevant Jurisdiction) reasonably incurred by any of them (and, in the case of the Security Agent, by any Receiver) in connection with the negotiation, preparation, printing, execution, syndication and perfection of the facility agreement.

77. The Appellant submitted that it incurred legal and professional fees in respect of the drawing, review and advice on the financing instrument. That as a result, it incurred the legal and professional fees that the Respondent was seeking to disallow.

78. The Appellant contended that it incurred legal expenses relating to payments for the legal services of, drafting and review of its legal agreements on its facilities and transactions, legal opinions and due diligence on the operation of the business. That these expenses were necessary for the efficient conduct of the Appellant's business operation. It averred that the legal expenses related to international financing. That the breakdown is as follows:-Legal service provider Narration Amount in KES Invoice

Victory Park Legal fee for Houlihan Okey 8,556,564. 68 Invoice50427

VictoryParkManagement Legal fee for Katten 10,301,392. 17 VPM- Inv1301414766

Victory Park Legal service for branch Loan 5,871,000. 00 Invoice VPMInv 32807

Kaplan &Stratton Kaplan and Stratton Legal Fees 43,911. 58 Invoice33714

Total 24,772,868. 43

77. On fees incurred in respect of the commercial paper facility, the Appellant averred that as part of its local fund-raising activities, it raised funds through the issuance of a commercial paper facility. That a commercial paper facility is a type of unsecured, short-term debt instrument issued by companies used for the financing of short-term liabilities.

78. That the Commercial paper facility was evidenced by the Debt Placement Agreement dated 7th March 2018 between the Appellant and Barium Capital Limited.

79. That the Appellant incurred legal and professional fees in respect of the drawing, review and advice on the financing instrument. It stated that in the arrangement, the Appellant incurred fees associated with advancement of the commercial papers, such as placement fees.

80. That all these fees were necessary to enable the Appellant raise funds to sustain its operations. It provided the summary of legal fees in relation to the commercial paper facility in the table below:-Legal serviceprovider Narration Amount in KES Invoice

Barium CapitalLimited Placement Fees for theCommercial paper 4,000,362. 32 Invoice 0009

Morrison Foerster Barium Commercial Paper,services and disbursements 442,652. 72 Invoice 5724665

Total 4,443,015. 04

81. As regards the Coulson Harney and Halliday Finch Ltd fees the Appellant noted that the Respondent allowed for the deduction of expenses in respect of Coulson Harney and Halliday Finch of Kshs 2,186,617. 00 having satisfied itself that the expenses were eligible for deduction and had been supported.

82. That the amount allowed and found as supported was not the complete amount. It averred that the entire amount of expenses was Kshs 2,725,173. 46 being Ksh 1,791,141. 46 in respect of Coulson Harney and Kshs 934,032. 00 in respect of Halliday Finch Ltd. It provided the breakdown of the amount as follows:Legal service provider Narration mount in KES Invoice

Coulson Harney Legal fee issuance of unsecuredCommercial paper 1,603,200 Invoice K6039298

Coulson Harney Trademark registration 187,941. 46 Invoice 6040025 andInvoice K6040148

Halliday Finch Ltd Halliday Finch 50%invoice fraud investigation fees 934,032 Invoice 120618016

Total 2,725,173. 46

83. It submitted that the Respondent ought to have allowed the deduction of the entire Ksh 2,725,173. 46 having been satisfied that the expenses were supported with the invoices.

84. Regarding the consultants & advisory costs, the Appellant asserted that these expenses include professional fees for provision of professional services and are deductible pursuant Section 15 of the ITA. It provided the breakdown as follows;Service provider Narration Amount in Kshs Invoice

Nabo Capital Limited Mobilization fee due upon signing of fundraising contract 1,160,000. 00 Debt placementagreement between the Appellant and Nabo Capital Limited

CP2 - Morris Foerster Consultancy fees 55,208. 50

Barium Capital Limited Withholding TaxPlacement Fees for theCommercial paper 475,000 Invoice 0009

PKF Taxation Services PKF Professional fees: Change of accountingperiod from Sep To Dec 265,000 INV 1087/2018 and INV A082/2018

Being current year audit fees adjustment done 181,419

Total 2,136,627. 50

85. The Appellant submitted that it entered into a Debt Placement Agreement with Nabo Capital Limited to raise debt (fundraising). That the work carried out by Nabo Capital was mainly to perform due diligence in connection with the fundraising, develop marketing material for the Fundraising, organize and conduct roadshows with potential investors and facilitate onboarding of subscribers.

86. That further, the Appellant engaged PKF to provide professional services in relation to accounting services for the period 2018. It added that part of the consultancy fees includes Withholding taxes that were incurred by the Appellant when paying out the legal and professional fees.

87. The Appellant posited that the consultancy and advisory fees including Withholding taxes are deductible under Section 15 of the ITA as they were wholly and exclusively incurred in the generation of income.

88. On License fees, the Appellant stated that a portion of the legal fees consisted of license fees incurred by the Appellant. That business licenses ensures that businesses operate within the confines of applicable laws and regulations. That these licences give the Appellant the right to operate a business in a specific jurisdiction and the right to sell products or services especially in the case of marketing materials such as billboards and banners.

89. The Appellant averred that its ability to operate with the mandate of the County Government was very critical in the generation of income. That without the licenses the Appellant would not be able to maintain its premises open without threat of closure from the County Government. That any interference with the business operation at the business premises would mean that the Appellant is not able to generate income.

90. It was the Appellant's position that the license fees were used to acquire business permits that are very crucial in conducting a business in Kenya. Thus, the license fees were incurred in the furtherance of the Appellant's business and as such are allowable for tax purposes.

91. On secretarial services the Appellant submitted that these expenses incurred by the Appellant related to the engagement of a company secretary. That company secretarial work plays a crucial role in the management and coordination of a company including ensuring that the business complies with all relevant laws, rules, and corporate governance principles, promoting corporate governance practices and facilitating communication between the board of directors, management, and shareholders, the company secretary serves as a crucial point of contact and collaborating closely with internal teams to create efficient risk management frameworks.

92. That the professional services costs incurred ensured that the operations of the Appellant were in compliance with good corporate governance. It stated that when corporate governance structures are operational, there is oversight of the management by the board preventing instances of fraud among other things in the business.

93. That a company that lack a corporate governance structure would be unable to establish policies and frameworks that assist it grow and develop business income. That these costs were thus necessary in the generation of income.

94. The Appellant noted that secretarial services relate to payments made by the Appellant to ensure that it is compliant with the laws and regulations that govern the operations of companies/businesses in Kenya. That the secretarial fees were deductible in accordance with Section 15 of the ITA as they are wholly and exclusively incurred in the generation of income.

95. Regarding fees incurred in respect of funding, the Appellant submitted that this was incurred wholly and exclusively in the generation of its income. That the legal and professional fees incurred in the microfinance loan and the commercial paper facility were incurred wholly and exclusively in the generation of income.

96. That Section 15 of the ITA provides that any expense incurred by a taxpayer in the generation of income is deductible against the taxpayer's income.

97. That the test applicable in determining whether a deduction is allowable or not is whether the expenditure was incurred in order to meet a continuing business demand. To support its case the Appellant relied on the case of Income Tax Appeal No 6 2018 Mars-Logistics-Ltd-Vs-Commissioner-of-Domestic-Taxes.

98. That financial institutions, such as the Appellant, in their ordinary course of business acquire financing to fund their operations. It pleaded that the legal and professional expenses incurred by the Appellant were all necessary to meet this business need.

99. That guided by the aforementioned case laws and the evidence adduced, the Appellant prayed that this Tribunal rule in favor of the Appellant and set aside the Respondent's assessment in relation to legal expense as the expenses were incurred by the Appellant in the ordinary course of its business.v.The Respondent erred in law and fact by disallowing cash loss expenses amounting to Ksh 796,715,271 claimed by the Appellant for the period 2018.

100. The Appellant stated that the Respondent disallowed cash loss amounting to Ksh 769,715,271. 00 in its Objection decision stating that the Appellant had failed to adduce sufficient evidence to support these expenses. That the Respondent further stated and demonstrated discrepancies in the data provided vis a vis the bad debts written off.

101. That the Respondent also noted that the Appellant failed to demonstrate that revenue from loans written off had been recognized and reported for that to qualify as a deduction.

102. The Appellant stated that its principal activity is to provide mobile-based financial credit facilities to mobile users via its flagship product, the Branch lending application (the “Branch App"). That digital credit has unique attributes that differentiates it from traditional credit products. That these powerful attributes include the services being instant, automated and remote.

103. It averred that in the course of its business, it advances digital micro-loans to its borrowers of varied amounts and charges a fee on the amounts advanced. That the loans were for a pre-agreed period of time (usually twenty-eight days in 2018) after which the borrower is expected to repay the principal amount advanced plus the attendant fees charged.

104. The Appellant stated that it had a formalized digital lending process. That the digital lending process refers to the sequence of activities performed by the Appellant to provide credit from acquiring and onboarding a customer, evaluating the customer and disbursing the loan, to receiving repayments and following up on past due loans. That throughout the lending process, the Appellant builds customer engagement and loyalty through high-touch interactions that adapt to client needs and preferences.

105. On lending process, the Appellant stated that it acquires customers using a mix of digital marketing tools and digital onboarding channels, enhanced by strategically designed physical touch points and referrals. That some of the digital marketing tools include SMS blasts, search engine optimization, online banners, and social media advertising campaigns.

106. The Appellant added that it uses its digital lending platform to onboard its new clients. That for mobile phone users to access the Branch App, it must download it from an application store and then create a profile on the application by filling in their personal details to create an account.

107. That the Appellant then utilizes machine learning algorithms to automate the customer approval process. These algorithms utilize over 2,000 data points to build a credit score. That some of the data points that are used to assess loan applications and create tailored loan offers for each customer include handset details, SMS logs, social network data, national databases, GPS Data, contact lists, credit reference bureaus data, mobile money usage, performance with the company's competitors, and repayment history.

108. That after the credit score is calculated, eligible loan offers are displayed on the screen for the mobile phone user to select. It explained that the potential borrower then selects the desired loan from the options offered and receives the funds via mobile money. That additionally, repayment schedules are set for the borrower to adhere to. That as the borrower continues to transact and repay the loan amount, the succeeding loan size, terms and interest rates applied are adjusted as per individual credit profiles.

109. On loan repayment, the Appellant stated that to enhance repayment, it sends repayment reminders via SMS, in-app message and pop-up notifications. That all the messages are continuously tested, evaluated and improved to make sure they are most effective with the least cost possible.

110. The Appellant added that it had three major categories of repayment reminders. That these were before an installment is due, on the installment due date and after a missed installment. That to encourage prompt settlement of the outstanding liability, messages sent in the earlier days are more friendly reminders with increase of firmness and warnings on the later stages.

111. That in the event a borrower has missed paying the installments, it takes several steps to recover the outstanding amount including sending regular reminders and warnings to defaulters as well as engaging professional debt collection firms.

112. Regarding debt collection, the Appellant stated that it incurs losses where some of its customers default. That the Appellant had procedures and practices in place used to arrive at writing off the cash loss as bad debts.

113. That first, before the loan is advanced, the Appellant utilizes the machine learning algorithms to determine customer eligibility. That the algorithms take into consideration a variety of factors that determine a customer's capacity to pay back a loan such as credit reference bureau data and repayment history. It averred that for example, defaulters cannot qualify for further loans. That in addition to this, SMS reminders are also sent before the due date of an installment, on the due date of an installment and after a missed installment.

114. That secondly, after default, the Appellant engages the services of professional debt collectors. It submitted that all loans with balances 7 days after the final due date are sent to the outsourced debt collection agencies. That the Appellant pays the debt collectors a commission based on the amount collected. The Appellant stated that it closely monitors the performance of the debt collectors against targets, and this determines the number of accounts allocated to the debt collectors in the subsequent years.

115. That thirdly, the Appellant sends SMS reminders to its borrowers upon default and reports the defaulters to credit refence bureau.

116. On loan write off and recovery, the Appellant stated that if the professional debt collectors are unable to collect any loan that has been outstanding for more than ninety (90) days, then the loan is written off from the Appellant's financials.

117. That where a loan has been written off by the Appellant after the 90 days and a customer resumes repayment of the debt, then the amount recovered is recorded against the loan written off and the recovered amount declared by the Appellant as income in the year that it was recovered.

118. It pleaded that the bad debts claimed amount to 41% of the total revenue generated for the 2018 year of income. That this indicates that the Appellant remained in a profitable position despite the bad debts, as they represent a reasonable percentage of the total revenue.

119. According to the Appellant, the bad debts were written off pursuant to the provisions of the ITA and Legal Notice No. 37 on Guidelines on Allowability of Bad Debts

120. The Appellant explained that it operates a unique business model different from the traditional financial institutions. That all of the loans that it issued to customers were unsecured, are for amounts less than an average of Ksh 2,000 and the details of the beneficiaries of the loans kept by the Appellant were only the mobile number, identity card number and the unique identifier of the handset used to borrow the loans.

121. That pursuant to Section 15(2)(a), bad debts are allowable for deduction against a taxpayer's income where the Commissioner is satisfied that the debt has become bad. That the Commissioner's determination that a debt has become bad is circumscribed by objective parameters issued as Guidelines on Allowability of Bad Debts pursuant to Section 15(2)(a) of the ITA.

122. It averred that the Guidelines set out the criteria for deducting bad debts in establishing income chargeable with tax. That Paragraph 1 of the Guidelines provides that, a "debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it." That these circumstances under which such a debt is considered uncollectable are enumerated under Paragraph 2.

123. It stated that in Equity Bank Kenya Limited v Commissioner of Domestic Taxes [2021] eKLR, the court observed that in order to benefit from a tax deduction on account of a bad debt, the taxpayer need only establish one of the grounds set out in Paragraph 2 of the Guidelines.

124. The Appellant further analysed to demonstrate its compliance with the Guidelines as below:a.No form of security or collateral is realisable whether partially or in full

125. It averred that it was important to note that on account of the low value of the individual debts, no security or collateral is provided to the Appellant by the individual borrowers. That the Appellant, therefore, had no form of security or collateral to realize for purposes of recovering the debts.b.The cost of recovering the debt exceeded the debt itself

126. According to the Appellant the loan amounts written off by the Appellant related to large volumes of individual loan balances whose value ranged between Kshs 250. 00 and Kshs 50,000. 00. That the costs of recovering each of these loan advances through institution of legal proceedings for each individual account holder and on account of the low loan balances would clearly exceed the debt amounts. That this is because the process of pursuing such debts would entail hiring lawyers for each unpaid debt.

127. It stated that the fee payable to such lawyers and the court fees would certainly exceed the value of the low value debts themselves. That in order to determine the costs of collecting the debt, the Appellant objectively evaluated the cost of engaging professionals such as Advocates to institute recovery proceedings or pursue recovery vis a vis the value of the debt in question. That it would therefore have been uneconomical to institute recovery proceedings for the debts.c.Reasonable steps to collect the debt

128. The Appellant submitted that it deployed all reasonable efforts to collect the debts without success. That the efforts deployed by the Appellant included making follow ups with the borrowers via calls and sending SMS reminders as demonstrated above. That the Appellant made attempts to collect the debts by engaging professional debt collectors. That it was only when all the these fail and the debt collectors are unable to fully collect the outstanding amounts, that the Appellant writes off the debt. It stated that considering the efforts to collect the debts did not yield much fruit, it was only reasonable for the Appellant to write off the debts.

129. It submitted that in its Objection decision, the Respondent did not challenge the Appellant's rationale regarding whether the cash loss expense meet the Commissioners Guidelines on allowability of bad debts. Consequently, the Appellant asserted that the cash loss satisfy the required criteria.

130. On discrepancies between recoveries, the Appellant averred that the Respondent claimed there were discrepancies in the provided data, noting that Ksh 381,071,894. 24 in principal taxes and interest had been repaid and written off. That additionally, and as per the recovery schedule provided, Ksh 304,921,676. 68 from written-off loans was recovered.

131. The Appellant stated that cash losses/bad debts are written off at the end of the financial year, specifically and in the Appellant's case, on 31st September 2018. That any recoveries post this date are accounted for in the year they occur.

132. According to the Appellant, the write off ledger provided for the period 2018 indicated that the total write offs for the year were Kshs 902,393,363. 00. That whereas the ledger indicates an amount of Kshs 902,393,363. 00, the ledger also takes into account the amount repaid including principal and interest of Kshs 381,071,894. 24.

133. The Appellant noted that at the point of extracting the ledgers for the period 2018 upon request by the Respondent, the Appellant's system automatically updates the write-offs ledger to take into account the amount paid by the defaulters up to date. That this was because when a loan that has been written off by the Appellant after lapse of 90 days, is repaid by the customer, the amount recovered is recorded against the loan written off and the recovered amount declared by the Appellant as income in the year that it is recovered.

134. It averred that the recoveries were;a.The total amount of cash loss written off in 2018 that were recovered in the same year; andb.Any amounts written off in 2018 that were recovered in subsequent years.

135. That therefore, the system picked the recoveries made in 2018 amounting to Ksh 86,026,699. 21 from the total loans written off in 2018 and the recoveries of Ksh 295,045,179. 24 made post 30th September 2018 totaling to Ksh 381,071,894. 24 as demonstrated in the write off ledger.

136. The Appellant stated that during the working meeting with the Respondent's team on 11th June 2024, and by an email of even date, the Respondent requested the Appellant to demonstrate the tax treatment of the subsequent recoveries of write offs. That the email below is extract form the Respondent;“Good evening,We appreciate you making time for a meeting with us today and the fruitful discussion held. As agreed, kindly provide us with the following documents by Friday 14th June 2024;1. GL aligning with the accounting period2. Full detailed listing-Marketing and legal expenses3. Cash loss expense-Subsequent recoveries of written off debts-Demonstration of recovery efforts- Debt policy-write-offs-Detailed cash loss listing with dates advanced and amount4. Fraud loans-Investigation report"

137. That in response, it furnished the Respondent with a recovery ledger demonstrating some of the amounts that had been written off were recovered in the subsequent period. That the total amount per the recovery's ledger totaled up to Ksh 304, 921,677. 00. That it was worth noting that these amounts were unrelated to the 2018 recoveries as they were recovered in the period from 2019 onwards.

138. That further, in 2018, the Appellant recovered the total amount of Ksh 105,678,094. 00 as indicated in the 2018 Corporate tax return. That these amounts include write offs for the period before 2018. It stated that the amounts were recognized in the Appellant’s books as income and taxed in 2018.

139. The Appellant noted that the recoveries of Ksh 105,678,094. 00 reduced the total write-offs of Ksh 902,393,365. 14 for 2018 resulting in a net write-off of Ksh 796,715,271. 14. That this was recorded as an operating expense in the financial statements having met the Commissioner's Guidelines on bad debts.

140. The Appellant prayed the Tribunal to allow the cash loss of Ksh 796,715,271. 14 as there were no discrepancies in the provided data.vi.The Respondent erred in law and fact by disallowing fraud expenses amounting to Ksh 43,459,101 claimed by the Appellant for the period 2018.

141. The Appellant posited that the Respondent stated in its Objection decision that from a review of the ledgers and report provided by the Appellant, the amount indicated as having been supported as fraud loss is Kshs 26,000,000. 00. That despite this, the Respondent concluded that the documents provided do not support the expense of Kshs 43,459,101. 00 and proceeded to disallow the whole amount.

142. It was the Appellant’s position that it was a microfinance company in the business of provision of financial services, mainly fast and affordable loans through a mobile application. That this makes the business susceptible to the risk of fraud by malicious actors willing to take advantage of the ease of acquiring loans via the Appellant's digital platform.

143. That in this case, the Appellant uncovered thousands of fraudulent loans in the first quarter of 2018. It averred that the velocity of the fraud was high, and the fraud was not unique to the Appellant. That other digital lenders were also affected. To support its case the Appellant provided the statement by the Digital Lenders Association of Kenya's CEO in a newspaper article which stated in part as follows;“Fraud is very common and a large source of our non-performing loans and write-offs. What they do is take your ID and name, which are easy to find and that is all they need to obtain an extra SIM card and use it to borrow," said DLAK Chief Executive Robert Masinde.They can easily borrow from six lenders in a short time and throw away the SIM card. It is a big problem for us. Every player has complained about it as being the biggest challenge they have had in lending because being able to distinguish who is genuine and who is not."

144. The Appellant stated that it believed that thousands of SIM cards were issued to individuals with stolen identities, which were then used to register fake accounts on the Branch App. That it reported the case to the Parklands Police Station via OB Number 41/20/03/18 on 20th March 2018. That the investigating officer assigned was Ms. P. C. Halake.

145. That on 21st March 2018, the Appellant reported the fraud to Safaricom. That the Appellant approximated the total value of the fraud to be approximately Ksh 30,000,000 over a span of 2-3 weeks.

146. That Safaricom proceeded to conduct an investigation with the assistance from Branch. That however, vide an email dated 27th April 2024, the head of the Ethics and Compliance at Safaricom told the Appellant that the police needed to formally subpoena the information discovered by Safaricom. That this was to enable them to provide the police with the requisite evidence required to conclude the law enforcement proceedings.

147. That between May and July 2022, the Appellant, via Halliday Finch, battled with Safaricom to release information. That Safaricom even failed to adhere to a court order issued in early August 2018 to release the information. That however, a letter was issued by the police on 18th September 2018 demanding Safaricom to release the requisite documents to enable the police to conclude its investigation.

148. It submitted that as demonstrated, the conclusion of the investigations was frustrated by Safaricom's failure to avail the requisite documents demonstrating the fraud. That for this reason, as per the fraud investigation chronology, the investigations concluded after the police letter was issued on 18th September 2018. That thus, there was no final report on the findings on the investigations.

149. That further, it was the initial findings provided on 10th April 2018 (as per the fraud investigation chronology) that stated approximately Kshs 26,000,000. 00 had been stolen. That this Kshs 26,000,000. 00 constituted the first batch of the Kshs 43,459,101. 00. That it was apparent that there were more fraudulent transactions that occurred from that date that were not uncovered due to the frustration of the investigations. That the Respondent's Fraud Write Offs Listing ledgers that detail the fraud losses for the assessment period of the year 2018 supplemented by the Safaricom Fraud List for the period 20th February 2018 to 19th March 2018 combinedly demonstrate that the total fraud losses amount to Ksh 43,459,101.

150. Regarding losses due to fraud, the Appellant stated that the Kshs 43,459,101. 00 was an expense wholly and exclusively incurred in the production of income hence deductible in accordance with Section 15(1) of the ITA and thus allowable for tax purposes.

151. That in the South African case of COT v Rendle 1965 (1) SA 59 (SRAD), it was found that expenditure could either be designed or fortuitous. That money could be voluntarily and designedly spent by the taxpayer for the purpose of his trade or spent because of some mischance or fortune which has overtaken the taxpayer. That it was added that in deciding whether a fortuitous payment is deductible, the inquiry must be whether the chance of such expenditure or loss being incurred is sufficiently closely connected with the business operation.

152. That the position in COT v Rendle was further fortified in the South African case of ITC 952(1961) 24 SATC 547 (F) where it was stated that in determining whether fortuitous expenditure is deductible, the essential factor is whether the dishonest removal of funds is a 'reasonable incidental risk' to the production of income. It averred that the assessment focuses on whether the taxpayer's particular type of business is at risk of embezzlement or fraud. That the risk should be a familiar and recognizable hazard so as to be considered inseparable and inherent in the business. That furthermore, in the case of ITC 1383 (1978) 46 SATC 90 (T), it was found that the risk of loss to a bank as a result of theft was an ever-present factor.

153. That for these reasons, it prayed that the Tribunal allows the entire fraud loss amount of Kshs 43,459,101. 00. That the amount was duly supported in the evidence provided by the Appellant.vii.The Respondent erred in law and fact by disallowing costs amounting to Ksh 8,934,151 relating to related party receivables.

154. The Appellant stated that in its Objection decision, the Respondent disallowed an amount of Kshs 8,934,151. 00 that it alleged was incurred towards expenses relating to related parties without charging interest hence the costs were not wholly and exclusively incurred in the production of income for the Appellant.

155. That particularly, the Respondent disallowed an amount of Kshs 2,735,922. 00 as the portion of interest expense relating to related party receivables and Kshs 6,198,229. 00 being the actual receivables due from Branch Nigeria and Branch Mexico. That the resultant amount of tax assessed is Kshs 2,680,245. 00 as per the table below;Details Amount

Apportioned interest 2,735,922

Related party receivables 6,198,229

Total 8,934,151

Corporate income tax 2,680,245

156. It was the Appellant’s position that in its assessment, the Respondent alleged that the Appellant incurred costs on behalf of related entities. That it then proceeded to determine that since these costs were paid out of the borrowing received by the Appellant, it would disallow a proportionate cost of the interest expense paid on the borrowing. That this was done as follows:Receivable from related parties X Interest expenseBorrowings

157. The Appellant averred that it was financed by a shareholder loan, a commercial paper and other borrowings. That the purpose of the loans taken by the Appellant was to finance its working capital, that is to finance capital available for lending to customers, to pay existing debts for the company and to finance its day-to-day operations.

158. That the financing received by the Appellant was not exclusively for onward lending to derive interest income. The Appellant stated that it needed to sustain backend business operations which include among other things paying for the human capital (employees), regulatory costs (costs of licenses and permits) and office space and office running costs.

159. The Appellant explained that the receivables in the books of the Appellant relate to payments made by the Appellant under group contracts for services provided to other Group entities (being the "related parties”). That where the Appellant negotiates contracts for the provision of services to related parties, the Appellant makes payments for such services on their behalf and accrues a receivable due from the respective related party as appropriate.

160. That the fact that the Appellant incurred costs on behalf of related entities does not mean that the portion of the working capital incurred for such purposes ceases to be part of the borrowings and interest is no longer due and payable.

161. That the Respondent's position was also unreasonable because it would be akin to arguing that because part of the working capital was used to pay rent and employees there was no interest generated from the costs and the interest payable in respect of that working capital was not allowable for deduction against income.

162. That if the concern of the Appellant was that the costs were incurred on behalf of related parties, the Respondent was empowered under Section 18 of the ITA to examine the relationship between the Appellant and the related parties to determine if it was conducted at arm's length that is as if it were undertaken with a third party.

163. On related party receivables disallowed of Kshs 6,198,229. 00, the Appellant averred that it disputes the Respondent's attempt to disallow these costs not claimed against the Appellant's income. That the general principle on deduction of expenses is provided in Sections 15 and 16 of the ITA which the Appellant cited.

164. That pursuant to the these provisions of the ITA, the mandate of the Respondent was to verify that all deductions made against income were expenses wholly and exclusively incurred in the generation of the income in accordance with the generally accepted principles of accounting. That in Odeon Associated Theatres Ltd v Jones [1971] 1 WLR 442 it was established that the profit of a taxpayer's trade is to be determined in accordance with “ordinary principles of commercial accountancy".

116. It averred that the amount of Ksh 6,198,229 disallowed by the Respondent relates to receivables due to the Appellant from Branch Nigeria and Branch Mexico where the Appellant negotiated group contracts on behalf of Branch Nigeria and Branch Mexico and the Appellant made payments to third parties under the group contracts on behalf of Branch Nigeria and Branch Mexico.

167. That this amount was not an expense to the Appellant, but the related parties were invoiced by the Appellant to be refunded the costs. That hence, the amount was recorded as receivable on the balance sheet and not claimed as an expense against the Appellant's income. It averred that once the invoices are settled by the related parties, the receipt of the funds will be recorded as cash and may be disbursed to customers as loans.

167. That none of the expenses that are described in Sections 15 and 16 of the ITA are intended to be paid back hence receivables would never be expenses.

168. It asserted that Corporate tax is a tax on a gain. That the gain in reference is the variance between expenses incurred and the income generated from the deployment of capital. It averred that items such as receivables that are outside the income and expense realm (Statement of Profit and Loss) are not subject to Corporate income tax. That it therefore beats logic for the Appellant to try to disallow an amount not claimed as an expense. It stated that the Respondent was cognizant of this fact. That the Respondent stated as follows in part C of the notice of assessment:“Although these costs have been shown as balance sheet items, they have an impact on the cash flow of the business..”

169. The Appellant submitted that there was no provision of law that empowers the Respondent to monitor and raise taxes based on the Appellant's representation of its cash flow.

170. To support this argument the Appellant relied on the High Court case of SBI International Holdings Ag Kenya v Commissioner, Customs and Border ControI, of Kenya Revenue Authority,(JR Mis. Civil Application No. E009 of 2021)

171. That it was therefore erroneous for the Respondent to seek to disallow the interest expense incurred in respect of the borrowings, claiming they related to related party expenses from which no interest was generated.

172. Regarding loans that were advanced to Branch Nigeria and Mexico, the Appellant stated that on part 3. 5 of the Objection decision, the Respondent state that;“Costs incurred towards advancing loans to Nigeria and Mexico were apportioned and disallowed by the Commissioner as they were not wholly and exclusively incurred for Branch Kenya."

173. The Appellant stated that the Kshs 6,198,229. 00 was paid out on behalf of the Appellant's related parties (Branch Nigeria, Tanzania and Mexico) for Infobip SMS costs. That these costs were not paid out to the related parties as loans.

174. It submitted that despite alleging that the amounts paid out to the Appellant's related parties were loans, the Respondent had not provided any evidence to rebut the Appellant's position that indeed the amounts provided were not loans.

175. To support its case, the Appellant made reference to The Black's Law Dictionary which defines a loan to mean "a sum of money lent at interest”.

176. That further, Section 10. 12 of the OECD TP Guidelines addresses the accurate delineation of funding transactions. That this Section provides guidance on the identification of economically relevant characteristics that may serve as indicators as to whether an arrangement is indeed a loan. That these are as highlighted below:i.The presence or absence of a fixed repayment date;ii.The obligation to pay interest;iii.The right to enforce payment of principal and interest;iv.The status of the funder in comparison to regular corporate creditors;v.The existence of financial covenants and security;vi.The source of interest payments;vii.The ability of the recipient of the funds to obtain loans from unrelated lending institutions;viii.The extent to which the advance is used to acquire capital assets; andix.The failure of the purported debtor to repay on the due date or to seek a postponement.

177. The Appellant asserted that based on the these provisions, related party receivables were not loans, considering that the arrangement does not have a defined tenure or fixed repayment period, the arrangement did not envisage any obligation for the related parties to pay any interest on the amounts due and there is no financial agreement and security to these receivables.

178. That in this regard, it prays that the Tribunal to find the entire Kshs 8,934,151. 00 as the assessment was erroneous and excessive.Appellant’s Prayer40 The Appellant prayed that the Tribunal considers the grounds and finds that:a.This Appeal be allowed;b.The Respondent's assessment dated 21st March 2024 be vacated in its entirety for being issued contrary to Section 31 of the Tax Procedures Act;c.The Respondent's decision dated 21st June 2024 be set aside and annulled;d.The costs of and incidental to this Appeal be awarded in favor of the Appellant; ande.Any other orders that the Tribunal may deem fit.

Respondent’s Case 179. The Respondent relied on its Statement of Facts dated 3rd September 2024 and filed on 4th September 2024 together with its written submissions dated and filed 26th November 2024 to defend this Appeal.

180. The Respondent stated that it conducted a compliance check on the Appellant's tax affairs and issued the Appellant with a letter of preliminary findings for the years 2018 to 2022 on 20th March 2024. That the Appellant confirms receipt of the same in Paragraph 3 of its Statement of Facts.

181. It averred that in that letter, the Respondent gave the Appellant 7 days to respond to the findings, failure to which it would issue additional assessments based on the findings.

182. That the Appellant responded to the Respondent's letter of findings vide a letter dated 26th March 2024 requesting the Respondent to give it more time to respond to the pre-assessment notice. That the Appellant refers to the same in Paragraph 4 of its Statement of Facts.

183. The Respondent posited that it issued the Appellant with Income tax assessment for the year 2018 on iTax based on the pre-assessment notice on 28th March 2024 and thereafter issued the Appellant with the reverse VAT assessment via email on 29th March 2024. That the Appellant confirms receipt of the same in Paragraph 6 of its Statement of Facts.

184. That the Appellant lodged its notice of objection on 25th April 2024 against the Corporation tax and VAT assessments. That the Appellant refers to the same in Paragraph 9 of its Statement of Facts.

185. The Respondent submitted that it further shared the notice of assessment having the same details as the pre-assessment notice on 17th May 2024. That the Appellant confirms receipt of the same in Paragraph 10 of its Statement of Facts.

186. The Respondent stated that it reviewed the Appellant's Objection and issued a "partially accept” Objection decision dated 21st June 2024 amending its assessment from Kshs. 386,455,878. 00 to KShs. 264,455,878. 00 being principal tax.

187. The Respondent further replied to each ground of Appeal as follows;i.Whether the Respondent erred in issuing two assessments in respect to the 2018 tax period.

188. The Respondent submitted that it issued the Appellant with Income tax assessment for the year 2018 on 28th March 2024 and followed up with a letter sent on 17th May 2024.

189. The Respondent stated that its mandate in law is to collect taxes and to that extent, it is granted the right to issue assessment and where it is of the considered opinion, make amendments on filed tax returns or its own amendments to the said filed tax returns.

190. That it was therefore the Respondent's place to raise assessments in furtherance of its legal mandate and in the exercise of its functions and powers. The Respondent stated that it cannot be faulted for issuing two assessments where it finds it necessary for purposes of correction of error, mistake or its best judgement.

191. That the letter sent on 17th May 2024 did not vary the assessment as issued on 28th March 2024.

192. That the Kenyan tax laws stipulates that taxes due are a debt to the State and as such, the Respondent, carrying the mandate to collect all taxes due, is obligated to ensure such collection.

193. That a reading of Section 4 of the Tax Procedures Act stipulates the Respondent's functions and powers and responsibility with regard to the collection of taxes.

194. That Section 5(2) of the Kenya Revenue Authority Act, lays out the Respondent's mandate in performing functions including, the collection of taxes and any other functions in accordance with the Kenyan tax laws.

195. The Respondent stated that it therefore in conducting its investigation on the tax affairs of the Appellant and issuing its assessment, acted within its set legal parameters in consideration of the information available to it and its best judgement.

196. The Respondent noted and stated that the law on assessments is set out under Part VI of the Tax Procedures Act.

197. The Respondent averred that it has a duty to amend its own assessment which is done with a view of making sure that its legal mandate is achieved and satisfied, which is the collection of all rightful taxes.

198. That without prejudice to the Respondent's position that the assessments were issued on 29th March 2024, the Respondent still considers the correspondence of 17th May 2024 to be consistent with the provisions of Section 31(6) (b) of the Tax Procedures Act.

200. That under the provision, the Respondent may further amend the original assessment one year after the Respondent served notice of the amended assessment on the Appellant. To support its arguments, the Respondent relied on the provisions of Section 79 of the Tax Procedures Act.

201. It stated that the letter of 17th May 2024 was therefore rendered within one year following the amendment done on 28th March 2024 and 29th March 2024.

202. It was the Respondent's argument that the Appellant cannot claim that the Respondent's amendment was in error.ii.Whether the Respondent's additional assessment dated 28th March 2024 failed to comply with the provisions of the law requiring tax decisions to provide reasons for the assessment.

203. The Respondent stated that a casual glance of the pre-assessment letter dated 20th March 2024, it was clear that the Respondent throughout the investigation period, had been receiving and reviewing the documents availed by the Appellant before issuing its notices on the Appellant.

204. That this was evidenced by the logical review of the taxes originally arrived at in the pre-assessment notice until the point of issuing its objection decision dated 21st June 2024 where the Appellant's objection was partially accepted.

205. The Respondent further stated that the law on assessments as set out under Section 31(8) of the Tax Procedures Act states that:-“When the Commissioner has made an amended assessment, he or she shall notify the taxpayer in writing of the amended assessment and specify-a.the amount assessed as tax or the deficit or excess input tax carried forward, as the case may be;b.any amount assessed as late payment penalty payable in respect of the tax assessed;c.any amount of late payment interest payable in respect of the tax assessed;d.the reporting period to which the assessment relates;e.the due date for payment of any tax, penalty or interest being a date that is not less than thirty days from the date of the taxpayer received the notice; and the manner of objecting to the assessment”

206. That the iTax assessment raised by the Respondent satisfied the legal requirements set out and therefore, the Appellant cannot be heard to claim that the assessment was contrary to law.

207. It pleaded that the iTax assessment issued by the Respondent on 28th March 2024 was a valid assessment in accordance with Section 31 (8) of the Tax Procedures Act.

208. The Respondent stated that the detailed basis of the assessment was communicated via the pre-assessment notice of 20th March 2024 and the letter of 17th May 2024.

209. The Respondent stated that Kenya is a self-assessment regime, as such, the burden of keeping documents falls on the taxpayer under Section 23 of the Tax Procedures Act.

300. That in the circumstances, the Appellant failed in its responsibility to avail documents to support its objection, which documents, the Appellant was mandated to keep.

301. That the Respondent's additional assessment was not among the tax decisions mandated to have reasons subject to the law. It stated that at the point of raising assessments and additional assessments, the Respondent only had in its possession the documents availed by the Appellant and subject to Section 31 it had to employ its best judgement based on such available documents.

302. That it was therefore the Respondent's position that the Appellant failed at satisfying its onus of proof that the assessment was wrong.iii.Whether the Respondent's Notice of assessment dated 21st March 2024 was issued beyond 5 years statutory limitation and is thus invalid

303. The Respondent stated that it issued its additional assessment for CIT for the assessment period 1st October 2017 to 30th September 2018.

303. That the Income Tax Act Cap. 470 defines an accounting period to mean, the period for which the person makes up the accounts of his business. To support this argument the Respondent cited the provisions of Section 52B of the Income Tax Act.

304. That the Appellant filed its 2018 Corporation tax return on 29th March 2019. It stated that the I-Tax assessment issued by the Respondent on 28th March 2024 was within 5 years of the Appellant's return and hence valid. That the Appellant confirmed the same in Paragraph 52 of its Statement of Facts.

305. That the Respondent in raising its assessment dated 28th March 2024 was within the five (5) years statutory timelines for raising an assessment.iv.Whether the Respondent erred in disallowing: -a.legal expenses amounting to KES 32,411,070 claimed by the Appellant for the period 2018,

306. That the Appellant provided ledgers and invoices to support its grounds.

307. That according to the documentation provided, the legal expense was billed to and paid for Victory Park Management, among other entities.

308. That there were no transaction documents detailing the requisitioning, delivery, invoicing and settlement of the bills.

309. That this information would have assisted in evaluating the relevance of the expenses to the operations as well as the accuracy of the amount claimed.

400. That the Appellant failed to support and/or demonstrate that legal expenses claimed were incurred wholly and exclusively for production of business income in accordance with Section 15 of the Income Tax Act.

401. That legal expenses paid to Coulson Harney and Halliday Finch amounting to Kshs.2,186,616. 99 were supported and allowed.b.Cash loss expenses amounting to Ksh 796,715,271 claimed by the Appellant for the period 2018,

402. The Respondent stated that the Appellant took a deduction of bad debts written off of Kshs.902,393,365. 00 in its IT2C returns.

403. That this amount was declared as 'cash loss' of Kshs. 796,715,271. 00 in its audited accounts and it is this item that the Respondent disallowed.

404. That to support its grounds that the amount was bad debts written off and allowable in accordance with Section 15 of the Income Tax Act, the Appellant provided the following documents: -i.Bad debts write off listing,ii.Bad debts write off recoveries,iii.Debt policy andiv.Revenue recognition.

405. That from a review of the debt write offs data provided, it was noted that loans amounting to Kshs.381,071,894. 24 (principal and interest had been repaid and also written off, and from the recoveries data, Kshs.304,921,676. 68 of the written off loans were recovered in the same year.

406. It averred that from these details, Kshs. 685,993,571. 00 of the total debts claimed by the Appellant had been repaid or recovered.

407. That from the revenue recognition data provided, the Appellant failed to demonstrate that revenue from loans written off had been recognized and reported for that to qualify for deduction.

408. That as demonstrated, there were clear discrepancies in the data provided vis-a-vis the bad debts written off and hence the integrity of the data was questionable.

409. It was the Respondent's position that the Appellant failed to support and justify cash loss (bad debt) expense taken in the year 2018. c.Fraud expenses amounting to KES 43,459,101 claimed by the Appellant for the period 2018.

500. The Respondent submitted that from a review of the ledgers and report provided, the amount indicated as having been lost was Kshs.26 million.

501. That the investigation report provided was a chronology of the steps taken towards investigating the fraud but no report of findings of the investigation.

502. That the documents provided did not support the expense of Kshs.43,459,101. 00 and that investigation was incomplete and pending hence the expense had not crystallized.d.Disallowing costs that the Appellant alleged were incurred on interest free loans to related parties amounting to Ksh 8,934,151 for the period 2018.

503. The Respondent stated that the costs (interest expense) incurred towards advancing loans to Nigeria and Mexico were apportioned and disallowed by the Respondent as they were not wholly and exclusively incurred for generating the Appellant's taxable income.

504. That it was the Respondent's finding that only costs incurred wholly and exclusively in the production of the Appellant's income were allowable.

505. The Respondent asserted that it was right in disallowing costs incurred on interest free loans to related parties.

506. The Respondent further stated that its review of the Appellant’s documents and records was not sufficient in demonstrating the claims of the Appellant.

507. The Respondent also noted that at the objection stage, the Appellant failed to substantiate all its claims and therefore, the review resulted in a partial confirmation of the assessment issued on 28th March 2024.

508. It was also the Respondent's averment that the burden of proof lays squarely with the Appellant to prove that the Respondent's assessment and resultant objection decision is wrong and unfair.

509. To support its case the Respondent further placed reliance on the following provisions of the lawa.Section 24(2) of the Tax Procedures Actb.Section 56 of the Tax Procedures Actc.Section 30 of the Tax Appeals Tribunal Act

510. The Respondent averred that it considered all the available information from the documents availed by the Appellant and its findings were limited to the information available during the review and verification.

Respondent’s Prayers 511. The Respondent's prayers that the Tribunal: -i.Upholds the Objection decision dated 21st June 2024ii.Dismisses the Appeal with costs to the Respondent as it lacks merit.

Issues For Determination 512. The Tribunal upon due consideration of the pleadings, documents and written submissions separately filed by the parties is of the view that the following issues have precipitated for its determination: -a.Whether the Respondent’s assessments for Income tax were in contravention of the provisions of Section 31(4)(b) of the TPA.b.Whether the Respondent was justified in disallowing the Appellants expenses.

Analysis And Determination 513. The Tribunal having ascertained the issues that crystallizes for its determination shall proceed to analyse the identified issues separately as hereunder:-a.Whether the Respondent’s assessments for Income Tax were in contravention of the provisions of Section 31(4)(b) of the TPA.

514. It was the Appellants’ position that the assessment issued on 17th May 2024 was issued outside statutory timelines. That the Respondent issued an assessment on 17th May 2024 in respect of the 2018 year of income for which the Respondent had already issued an Assessment Order.

515. It averred that Section 31 of the Tax procedures Act ("TPA”) provides for the Respondent's power to issue additional assessments by making alterations or additions to the original assessment lodged by a taxpayer.

516. The Appellant maintained that pursuant to the provisions of Section 31(4)(b) of the TPA, the Respondent was only liable to issue additional assessment like the one it did within a period of 5 years from the date of the submission of the self-assessment.

517. According to the Appellant it filed its 2018 Corporation tax return on 29th March 2019. That the statutory timeline for the amendment of the 2018 year of income lapsed on 28th March 2024 being 5 years from 29th March 2019 the date the tax return was filed

518. The Respondent on its part submitted that it issued the Appellant with Income tax assessment for the year 2018 on 28th March 2024 and followed up with a letter sent on 17th May 2024.

519. The Respondent stated that its mandate in law is to collect taxes and to that extent, it is granted the right to issue assessment and where it is of the considered opinion, make amendments on filed tax returns or its own amendments to the said filed tax returns.

560. That it was therefore the Respondent's place to raise assessments in furtherance of its legal mandate and in the exercise of its functions and powers. The Respondent stated that it cannot be faulted for issuing two assessments where it finds it necessary for purposes of correction of error, mistake or its best judgement.

561. That the letter sent on 17th May 2024 did not vary the assessment as issued on 28th March 2024.

562. The Tribunal perused through the documents presented with the pleadings of the parties and noted the following chronology of events in this dispute;a.On 20th March 2024, the Respondent served the Appellant with a letter of Pre-assessment notice. The letter required the Appellant to respond within 7 days.b.The Appellant replied vide a letter dated 26th March 2024 requesting for additional 30 days to respond.c.The Respondent vide an email on 27th March 2024 declined additional time for the 2018 returns and allowed additional 7 days for the period 2019 to 2022. d.The Respondent thereafter issued Assessment Order for Income Tax on 28th March 2024 for the period 1st October 2017 to 30th September 2018. e.The Respondent shared analysis of reverse VAT with the Appellant on 29th March 2024 for the period ending December 2018. f.The Appellant objected to the Assessment Order for Income tax and the VAT assessment through a letter dated 25th April 2024. g.Through an email on 17th May 2024, the Respondent forwarded a letter dated 20th March 2024 to the Appellant titled ‘Branch International Ltd Partial Notice Of Assessment For The Period 2018’.h.The Appellant objected to the partial notice of assessment through a letter dated 24th May 2024. i.The Respondent issued its objection decision vide a letter dated 21st June 2024. j.The Appellant lodged a Notice of Appeal to the Tribunal on 19th July 2024.

563. Section 31(4)(b) of the Tax Procedures Act provides as follows regarding the timelines within which the Respondent may amend an assessment:-“The Commissioner may amend an assessment—a.in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; orb.in any other case, within five years of—i.for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; orii.for any other assessment, the date the Commissioner notified the taxpayer of the assessment:…”

564. The parties agree that the Appellant filed its Income tax returns for the year 2018 on 29th March 2019. As provided for under the provisions of Section 31 of the TPA cited above, the latest date the Respondent was allowed by law to amend the Appellant’s self- assessment for Corporation tax was on 28th March 2024.

565. In the instant case it was not in dispute that the Respondent issued the Income tax assessment online on iTax on 28th March 2024.

566. From the correspondences sighted by the Tribunal it was clear that the Assessment Order of 28th March 2024 for Corporation tax was within time, which indeed the Appellant went ahead to object to on 25th April 2024. The Tribunal further notes that the Respondent’s Objection decision was in response to the Appellant’s Objection of 25th April 2024.

567. The Tribunal notes that the only ingredients in law for amended assessments by the Respondent is provided for in Section 31(8) of the TPA. The Section provides as follows;“When the Commissioner has made an amended assessment, he or she shall notify the taxpayer in writing of the amended assessment and specify—a.the amount assessed as tax or the deficit or excess input tax carried forward, as the case may be;b.any amount assessed as late payment penalty payable in respect of the tax assessed;c.any amount of late payment interest payable in respect of the tax assessed;d.the reporting period to which the assessment relates;e.the due date for payment of any tax, penalty or interest being a date that is not less than thirty days from the date of the taxpayer received the notice; andf.the manner of objecting to the assessment.”

568. It is the view of the Tribunal that once these ingredients are met then the assessment is valid. In this case it was not disputed that the Respondent’s Assessment Order dated 28th March 2024 met these ingredients as prescribed in law.

569. In the circumstances, the Tribunal finds that the Respondent’s assessments for Corporation Income tax were not in contravention of the provisions of Section 31(4)(b) of the TPA.b.Whether the Respondent was justified in disallowing the Appellants expenses.

570. The Tribunal notes that the dispute arose from the decision of the Respondent to uphold the assessment for Corporation tax relating to disallowed legal and marketing expenses, related party expenses, disallowed cash loss and fraud loans,

Disallowed legal and marketing expenses 571. The Appellant averred that the Respondent disallowed legal expenses amounting to Kshs 32,411,070. 00 in its Objection decision stating that the Appellant had failed to adduce sufficient evidence to support these expenses. That specifically, the Respondent asserted that there were no transaction documents detailing the requisitioning, delivery, invoicing and settlement of bills. That the breakdown of the legal expenses was as follows:a.Legal and professional fees of Ksh 31,994,595. 22b.Licenses of Ksh 364,969. 14c.Consultants & Advisory of Ksh 2,136,627. 51. d.Secretarial services of Ksh 138,282. 51

572. The Appellant noted that the legal expenses claimed in the tax return was Ksh 31,597,686. 96 whereas the KRA has disallowed Ksh 34,597,686. 96 (including Ksh 2,186,617 that was allowed during the Objection phase).

573. In regard to provision of documents, the Appellant’s position was that the pre-assessment notice dated 20th March 2024, and the partial notice of assessment dated 21st March 2024, the Respondent on review of the audited accounts and the supporting invoices availed to them, disallowed legal fees on the basis that the expenses were not wholly and exclusively incurred for the production of the Appellant's income. That this implies that the Appellant had furnished the Respondent with supporting documentations.

574. The Respondent on its part submitted that the Appellant provided ledgers and invoices to support its grounds.

575. That according to the documentation provided, the legal expense was billed to and paid for Victory Park Management, among other entities. That there were no transaction documents detailing the requisitioning, delivery, invoicing and settlement of the bills.

576. That this information would have assisted in evaluating the relevance of the expenses to the operations as well as the accuracy of the amount claimed.

577. The Tribunal notes that the Appellant in its pleadings had avered that it incurred these legal expenses relating to payments for the legal services of, drafting and review of its legal agreements on its facilities and transactions, legal opinions and due diligence on the operation of the business. That these expenses were necessary for the efficient conduct of the Appellant's business operation. It averred that the legal expenses related to international financing.

578. In support of its case the Tribunal further noted that the Appellant had provided the invoices and the agreements in relation to each of these costs as incurred as follows;a.Fees incurred in respect of the microfinance loan.b.Fees incurred in respect of the Commercial paper facility.c.All the agreements with all these consultants

579. The Respondent does not dispute having been served with these documents but challenged that there were no documents detailing the requisitioning, delivery, invoicing and settlement of the bills.

600. Section 54A (1) of the Income Tax Act provided as follows regarding keeping of records;“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax. “

601. Additionally, the Section 23(1) of the Tax Procedures Act states as follows regarding provision of documents;“A person shall—a.maintain any document required under a tax law, in either of the official languages;b.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andc.subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

602. In the instant case, the Tribunal notes that subsequent to the Appellant’s objection where it provided supporting documents, there was no evidence that at any given time the Respondent requested for additional documents and the Appellant failed to provide. Further the Respondent has not stated any document under Section 54A of the Income Tax Act that the Appellant failed to produce during the assessment and objection stage.

603. The Tribunal reiterates the finding by the Supreme Court of Canada’s in Hickman Motors Ltd- vs- Canada, 1997 CanLII 357 (SCC), where the court held that:“The taxpayer’s initial onus of “demolishing” the Minister’s exact assumptions is met where the appellant makes out at least prima facie case… Where the Minister’s assumptions have been “demolished by the appellant, “the onus…. shifts to the Minister to rebut the prima case” made out by the appellant and to prove the assumptions…The law is settled that unchallenged and uncontradicted evidence “demolishes” the Minister’s assumptions; …Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed; and even if the evidence contained “gaps in logic, chronology, and substance”, the taxpayer’s appeal will be allowed if the Minister fails to present any evidence as to the source of income.”

604. In the view of the Tribunal the Respondent ought to have specifically challenged the documents the Appellant provided or specifically requested for additional documents it wished to have in order to ascertain the Appellant’s income.

605. Consequently, the Tribunal finds and holds that the documents provided by the Appellant were sufficient to support the expenses incurred and therefore the Respondent erred in disallowing the legal expenses and marketing by the Appellant

Disallowed cash loss(bad debts) 606. In regards to loans the Appellant extends to its clients, the Appellant averred that in the event a borrower has missed paying the installments, it takes several steps to recover the outstanding amount including sending regular reminders and warnings to defaulters as well as engaging professional debt collection firms.

607. That the Appellant incurs losses where some of its customers default. That the Appellant had procedures and practices in place used to arrive at writing off the cash loss as bad debts.

608. The Appellant stated that if the professional debt collectors are unable to collect any loan that has been outstanding for more than ninety (90) days, then the loan is written off from the Appellant's financials.

609. Legal Notice No. 37 of 2011 states as follows regarding provision for bad debt;1. A debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it.2. A debt shall be deemed to have become uncollectable under paragraph (1) wherea.the creditor loses the contractual right that comprises the debt through a court order;b.no form of security or collateral is realisable whether partially or in full;c.the securities or collateral have been realized but the proceeds fail to cover the entire debt;d.the debtor is adjudged insolvent or bankrupt by a court of law;e.the costs of recovering the debt exceeds the debt itself; or (1) efforts to collect the debt are abandoned for another reasonable cause.3. A bad debt shall be a deductible expense only if it is wholly and exclusively incurred in the normal course of business.”

700. In addition, Section 15(2)(a) of the Income Tax Act provides as follows regarding deduction of bad debt in the process of ascertainment of the total income of a person.“(2) Without prejudice to sub-section (1) of this section, in computing for a year of income the gains or profits chargeable to tax under section 3(2)(a) of this Act, the following amounts shall be deducted:a.bad debts incurred in the production of such gains or profits which the Commissioner considers to have become bad, and doubtful debts so incurred to the extent that they are estimated to the satisfaction of the Commissioner to have become bad, during such year of income and the Commissioner may prescribe such guidelines as may be appropriate for the purposes of determining bad debts under this subparagraph;”(Emphasis added)

701. It was not in dispute that the Appellant was in the business of digital lending and therefore any bad debt arising from any failure by its clients to repay a loan is directly related to its income. The Tribunal notes that in the Objection decision the Respondent is not challenging whether the bad debt provision meets the Guidelines of the Legal Notice No. 37 of 2011, rather it raised issues regarding discrepancies in the data provided when it stated in part as follows;“… As demonstrated above, there are clear discrepancies in the data provided vis a vis the bad debts written of and hence the integrity of the data is questionable

From the revenue recognition data provided, you failed to demonstrate that revenue from loans written off had been recognized and reported for that to qualify for deduction

In light of the foregoing, it is our finding that the Branch failed to support and justify cash loss (bad debt) expense taken in the year 2018 and as such the assessment is upheld as issued by the Commissioner”

702. The Appellant in its pleadings stated that where a loan has been written off by the Appellant after the 90 days and a customer resumes repayment of the debt, then the amount recovered is recorded against the loan written off and the recovered amount declared by the Appellant as income in the year that it was recovered.

703. It pleaded that the bad debts claimed amount to 41% of the total revenue generated for the 2018 year of income. That this indicates that the Appellant remained in a profitable position despite the bad debts, as they represent a reasonable percentage of the total revenue.

704. According to the Appellant, the bad debts were written off pursuant to the provisions of the ITA and Legal Notice No. 37 on Guidelines on Allowability of Bad Debts

705. In the Respondent’s view, the Appellant failed to demonstrate that revenue from loans written off had been recognized and reported for that to qualify for deduction.

706. That as demonstrated, there were clear discrepancies in the data provided vis a vis the bad debts written off and hence the integrity of the data was questionable.

707. The Appellant on its part stated that it furnished the Respondent with a recovery ledger demonstrating some of the amounts that had been written off were recovered in the subsequent period. That the total amount per the recovery's ledger totaled up to Kshs 304,921,677. 00. That it was worth noting that these amounts were unrelated to the 2018 recoveries as they were recovered in the period from 2019 onwards.

708. That further, in 2018, the Appellant recovered the total amount of Kshs 105,678,094. 00 as indicated in the 2018 corporate tax return. That these amounts include write offs for the period before 2018. It stated that the amounts were recognized in the Appellant books as income and taxed in 2018.

709. The Appellant noted that the recoveries of Kshs 105,678,094. 00 reduced the total write-offs of Kshs 902,393,365. 14 for 2018 resulting in a net write-off of Kshs 796,715,271. 14. That this was recorded as an operating expense in the financial statements having met the Commissioner's Guidelines on bad debts.

800. The Tribunal perused the documents provided by the Appellant and noted that the Appellant attached the ledger it averred had provided to the Respondent during a working meeting on 11th June 2024 prior to the issuance of the objection decision. In the ledger, the Tribunal notes that all items and the amount mentioned to explain the discrepancies as identified by the Respondent in the bad debts recoveries were provided in the schedule/analysis.

801. The Respondent does not dispute receiving this document and does not challenge the contents of it in its pleadings.

802. The Tribunal is of the view that once the Appellant had provided the documents in support of its objection and pleadings in this Appeal, it was upon the Respondent to directly challenge these documents provided or further evidence that has not been challenged by the Appellant. The absence of which the Appellant’s evidence stands unchallenged.

803. The Tribunal therefore finds and holds that since the Respondent was not justified in disallowing cash loss(Bad debts)

Disallowed fraud loans 804. It was the Respondent’s assertion that from a review of the ledgers and report provided, the amount indicated as having been lost was Kshs.26 Million.

805. That the investigation report provided was a chronology of the steps taken towards investigating the fraud but no report of findings of the investigation.

806. That the documents provided did not support the expense of Kshs.43,459,101. 00 and that the investigation was incomplete and pending hence the expense had not crystallized.

807. The Appellant on its part averred that it uncovered thousands of fraudulent loans in the first quarter of 2018. It averred that the velocity of the fraud was high, and the fraud was not unique to the Appellant. That other digital lenders were also affected.

808. The Appellant stated that it believed that thousands of SIM cards were issued to individuals with stolen identities, which were then used to register fake accounts on the Branch App. That it reported the case to the Parklands Police Station via OB Number 41/20/03/18 on 20th March 2018.

809. That on 21st March 2018, the Appellant reported the fraud to Safaricom. That the Appellant approximated the total value of the fraud to be approximately Ksh 30,000,000. 00 over a span of 2-3 weeks.

810. That Safaricom proceeded to conduct an investigation with the assistance from Branch. That however, vide an email dated 27th April 2024, the Head of the Ethics and Compliance at Safaricom told the Appellant that the police needed to formally subpoena the information discovered by Safaricom. That this was to enable them to provide the police with the requisite evidence required to conclude the law enforcement proceedings.

811. That between May and July 2022, the Appellant, via Halliday Finch, battled with Safaricom to release information. That Safaricom even failed to adhere to a court order issued in early August 2018 to release the information. That however, a letter was issued by the Police on 18th September 2018 demanding Safaricom to release the requisite documents to enable the police to conclude its investigation.

812. That the conclusion of the investigations was frustrated by Safaricom's failure to avail the requisite documents demonstrating the fraud. That for this reason, as per the fraud investigation chronology, the investigations concluded after the police letter was issued on 18th September 2018. That thus, there was no final report on the findings on the investigations.

813. The Tribunal notes from the documents attached that the letter relied upon by the Appellant to demonstrate that the investigations had been concluded and the debt resulting from fraud had crystalized as bad debt states in part as follows;“…The purpose of this letter therefore, is to request your good office to expedite the releasing the said documents to enable us finalize our investigations”

814. From the contents of the above mentioned letter dated 18th September 2018, the investigations had not closed. The police were still requesting for documents that could enable them conclude the investigations.

815. It follows therefore that the Appellant cannot rely on this letter to demonstrate that the debt relating to fraud had crystalized owing to failure to recover the debt. The Tribunal therefore is inclined not to allow this since the process had not concluded.

816. The Tribunal in the circumstances finds and hold that the Respondent was justified in disallowing expenses in relation to loss as a result of fraud.

Disallowed related party expenses, 817. It was the Appellant’s contention that the Respondent disallowed an amount of Kshs 2,735,922. 00 as the portion of interest expense relating to related party receivables and Kshs 6,198,229. 00 being the actual receivables due from Branch Nigeria and Branch Mexico.

818. The Appellant averred that it was financed by a shareholder loan, a commercial paper and other borrowings. That the purpose of the loans taken by the Appellant was to finance its working capital, that is to finance capital available for lending to customers, to pay existing debts for the company and to finance its day-to-day operations.

819. That the financing received by the Appellant was not exclusively for onward lending to derive interest income. The Appellant stated that it needed to sustain backend business operations which include among other things paying for the human capital (employees), regulatory costs (costs of licenses and permits) and office space and office running costs.

820. The Appellant explained that the receivables in the books of the Appellant relate to payments made by the Appellant under group contracts for services provided to other Group entities. That where the Appellant negotiates contracts for the provision of services to related parties, the Appellant makes payments for such services on their behalf and accrues a receivable due from the respective related party as appropriate.

821. On related party receivables disallowed of Kshs 6,198,229. 00, the Appellant averred that it disputes the Respondent's attempt to disallow these costs not claimed against the Appellant's income. That the general principle on deduction of expenses is provided in Sections 15 and 16 of the ITA.

822. The Respondent on the other hand contended that the costs (interest expense) incurred towards advancing loans to Nigeria and Mexico were apportioned and disallowed by the Respondent as they were not wholly and exclusively incurred for generating the Appellant's taxable income.

823. That it was the Respondent's finding that only costs incurred wholly and exclusively in the production of the Appellant's income were allowable.

824. The Respondent further stated that its review of the Appellants documents and records was not sufficient in demonstrating the claims of the Appellant.

825. The Tribunal perused the documents attached by the Appellant and noted that in support of its arguments it attached a schedule showing the trade receivables from related parties and the disallowed interest. The Appellant further attached the agreements titled “Debt Placement Agreement” between it and Barium International showing the terms of the loans.

826. The Appellant however did not provide any agreement with its Nigerian and Mexico branches that can demonstrate the purpose and the terms of the amounts involved. The Appellant further did not demonstrate the portion of the funds that were used in its running expenses as averred and the amounts that went to its trading activities of lending.

827. In matters tax, an Appellant has the responsibility to adduce documentary evidence to support its arguments, so as to discharge its burden of proof as provided under Section 56(1) of TPA and Section 30 of the Tax Tribunal’s Act (TATA).

823. Section 56 (1) of the TPA which provides as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

824. Additionally, Section 30 of the TATA provides that:“In a proceeding before the Tribunal, the appellant has the burden of proving—a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

825. It thus follows that failure to adduce documentary evidence means that the Appellant cannot succeed in discharging the burden of proof. This was laid down in the case of Singapore Motors Limited v Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR) where the High Court held that:-“This Court has remained emphatic that under section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the Tax Procedures Act (TPA), the burden of proving that an assessment is wrong or excessive remains upon the taxpayer.”

826. Accordingly, the Tribunal finds that the Respondent was justified in disallowing expenses in relation to related party expenses.

Final Decision 827. The upshot of the foregoing analysis is that the Appeal is partially merited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent's objection decision dated 21st June 2024 is varied in the following terms;i.The Income tax assessments relating to disallowed legal expenses be and is hereby set aside.ii.The Income tax assessment relating to related party expenses be and is hereby upheld.iii.The Income tax assessment relating to disallowed cash loss (bad debt) be and is hereby set aside.iv.The Income tax assessment relating to fraud loans be and is hereby upheld,c.The Respondent is hereby directed to recompute the taxes taking into consideration Orders in (b) (i) to (iv) above.d.Each party is to bear its own costs.

829. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 28TH DAY OF FEBRUARY, 2025DR. RODNEY O. OLUOCHCHAIRPERSONCYNTHIA B. MAYAKA ABRAHAM K. KIPROTICHMEMBER MEMBERGLORIA A. OGAGAMEMBER