https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/207

 REPUBLIC OF KENYA IN THE TRIBUNAL OF KENYA AT NAIROBI COUNTY COURT NAME: TAX APPEALS TRIBUNAL CASE NUMBER: TATC/E1223/2025 CONSOLIDATED BANK OF KENYA LIMITED VS KENYA REVENUE AUTHORITY JUDGMENT # BACKGROUND 1. The Appellant is a commercial bank incorporated in Kenya and duly licensed under the Banking Act to conduct banking business in Kenya. 2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws. 3. Following a compliance audit of Appellant’s records for the years 2019 to 2023, on 30th May 2025, the Appellant was issued with a principal tax liability of Ksh 3,667,435,355.00 inclusive of penalties and interest in relation to Withholding Tax (WHT), Withholding Value Added Tax (WVAT) Corporate Income Tax (CIT), Pay as you earn (PAYE), Value Added Tax (VAT) and Excise Duty (ED). 4. In an email of 19th June 2025, the Appellant responded to queries relating to the year 2019 and on 28th June 2025, the Respondent adjusted tax loss for the year with Ksh 264,941,000.00 relating to bad debts against which the Appellant objected to on 7th August 2025. 5. The Respondent’s Objection Decision dated 18th September 2025 confirmed the adjusted tax loss as previously assessed. 6. Dissatisfied by the Respondent’s Objection Decision, the Appellant lodged its Notice of Appeal dated and filed on 16th October 2025. # THE APPEAL 1. The Appellant’s case was founded upon its Memorandum of Appeal dated and filed on 30th October 2025 wherein the Appellant raised the following grounds: 1. That the Respondent erred in law and in fact law by asserting that the amount written off are loan assets and therefore capital in nature. 2. That the Respondent erred in law and in fact law by asserting that the bad debts written off only relates to the principal loan amount. 3. That the Respondent erred in law and in fact by disallowing the entire amount attributable to bad debts written off. 4. That this Honourable Tribunal has the jurisdiction to hear this appeal. # THE APPELLANT’S CASE 1. The Appellant’s case was anchored upon; 2. Its Statement of Facts dated and filed on 30th October 2025 together with documents attached thereto; and 3. Written submissions dated and filed on 15th April 2026 4. According to the Appellant, the Respondent’s disallowance of bad debts amounting to Ksh 264,941,000 led to the adjustment of tax loss for the year 2019 from Ksh (278,399,903.00) to Ksh (13,458,903.00) despite the Appellant adducing in-evidence bank statements, case-by-case analysis, letters of offer, letters from auctioneers, public notice on auction, memorandum of sale, credit report, and Court Rulings together with various explanations to show effort taken to recover debts. 1. It was the Appellant’s case that this Appeal evokes three key issues for determination. 2. Whether the amounts written off are loan assets and therefore capital in nature. 3. Whether the bad debts written off only relates to the principal loan amount. 4. Whether the bad debts written off satisfied the provisions under Section 15(2)(a) of the Income Tax Act (ITA) as read together with the Commissioner’s guidelines on deductibility of bad debts as provided for under Legal Notice No. 37 of 2011. 5. According to the Appellant whereas it is correct under the accrual basis of taxation that only interest income is recognised as taxable income, this approach does not accurately reflect the commercial and operational reality for money lending institutions, like the Appellant, whose core business is provision of loans. That this act of advancing principal is not merely an investment of capital, but a fundamental part of its revenue-generating operations. 6. The principal amounts advanced are given with the expectation of repayment, together with interest and the inability to recover the principal represents a direct loss arising from the core business activity, rather than a loss of a capital asset held for investment purposes. 7. That in the year under dispute, the Appellant’s liabilities primarily comprised customer deposits funds which the Appellant went on to lend to other individuals and businesses. This process of transforming customer deposits into loans is central to the Appellant’s operations and underpins its entire business model and represents Appellant’s stock-in-trade which even if unpaid by customers remains an obligation to depositors and must be honoured. 1. Therefore, a default directly impacts the Appellant’s financial position as a trading loss rather than a capital asset held for investment purposes. That in provisioning, the entire loan balance comprising principal and interest is recognized as an expense and reduced through the Profit and Loss account which has direct impact on taxable income. That its own credit policy recognizes any debt repayment previously written off as a recovery by crediting bad debt under P& L or the General Ledger for the period it is received. 2. That contrary to Respondent’s assertion, the Appellant’s loan funds are akin to stock-in-trade to a retailer whose goods for resale are held as stock not capital assets and where the same are not recoverable in ordinary course of business are treated as a business loss not capital loss as provided for under Section 15(2)(a) of the ITA. That Legal Notice No. 37 of 2011 was intended for clarification of this provision but not to exclude genuine business losses from deduction and that Paragraph 4 specifically was meant to prevent deduction of debts arising from capital or non-business transactions but not debts arising directly from revenue generating operations. 3. That the Respondent’s actions were inconsistent with international best practice wherein the Appellant buttressed its stance citing Court precedence in United Kingdom, Australia and Malta. The Appellant also relied on local jurisprudence in the case of **Commissioner of Income Taxes vs Kencell** # Communications Limited (now Airtel Kenya Limited) [2016] KEHC 1539 (KLR) and Heritage Insurance Company Kenya Limited v Commissioner of Legal Services and Board Coordination [2024] KETAT 1136 (KLR) in distinguishing capital from revenue expenditure. 1. That a contrary interpretation of the funds would unfairly penalise lending institutions and undermine the principle of tax neutrality and amount to discrimination against financial institutions thus offending Article 27 of the Constitution of Kenya, 2010. 2. As per the Appellant, the International Financial Reporting Standards (IFRS), specifically IFRS 9 (Financial Instruments), accounting for loans advanced by a financial institution is clear and well-established and provides that when a loan is advanced to a customer, the principal amount is recognised as a financial asset (loan receivable) on the balance sheet with a corresponding entry as a credit in the Cash/Bank account. That interest earned is recognized as revenue in the P&L account over the life of the loan as and when it accrues. That IFRS 9 requires entities to assess credit risk of loan assets and recognise expected credit losses using a three-stage model i.e. Performing loans, Loans with significant increase in credit risk and credit-impaired loans. 1. As per the Appellant, when it becomes clear that a loan is irrecoverable, both the principal and any accrued (unpaid) interest are written off by debiting the Allowance for Expected Credit Losses and crediting the loan asset. That this treatment ensures that the balance sheet accurately reflects only recoverable assets, and that the income statement captures the economic loss suffered by the institution. That from a commercial perspective, write-off of a loan represents a real economic loss to the lender. 2. The Appellant asserted that IFRS 9, Banking Act and the Central Bank of Kenya (CBK) Prudential Guidelines provide a clear framework for the recognition, measurement and write off of loan assets thus, the Respondent’s conclusion in regards to principal loan is erroneous and does not reflect the true commercial, accounting or legal position. 3. That support documentation availed notwithstanding, the Appellant asserted that a debt is considered to have become bad if it is proved to the satisfaction of the Commissioner that it is uncollectable after all reasonable steps have been taken to collect it. The Appellant relied on Paragraph 2 of the Respondent’s deduction guidelines which provide as follows; 4. The creditor loses the contractual right that comprises the debt through a court order; 5. No form of security or collateral is realizable whether partially or in full; 6. The security or collateral have been realized but the proceeds fail to cover the entire debt; 7. The debtor is adjudged insolvent or bankrupt by a court order; 8. The cost of recovering the debt exceeds the debt itself; or 9. Efforts to collect the debt are abandoned for another reasonable cause 10. The Appellant asserted that its write-offs passed the deductibility test since it undertook all the reasonable efforts to collect the amounts owed and that it provided the evidence to prove this effort thus satisfied the conditions set out in law under the Respondent’s Guidelines. The Appellant buttressed its position by relying on the cases of **Equity Bank Kenya Limited Vs. Commissioner of** # Domestic Taxes (2021) eKLR and O-Play Kenya Limited v Commissioner of Domestic Taxes [2024] KETAT 1857 (KLR). 1. The Appellant asserted that it bears the objective of ensuring that all debts (principal and interest) are paid on time as instances of debtor’s delinquency adversely affects its profitability because anticipated interest income becomes uncollectable while the Appellant’s liability to depositors must be honoured. That this is exactly why the Appellant’s management is tasked to take reasonable steps to ensure shareholders’ assets are safeguarded by complying with CBK requirements of maintaining a minimum amount known as core capital at any given time. 2. That the Appellant adequately adduced supporting case-by-case analysis supporting the fact that it undertook reasonable efforts towards collecting the amounts owed. 3. The Appellant concluded by stating that the Respondent misinterpreted relevant legislation provisions as well as facts and evidence provided in this case resulting in the issuance of a legally flawed Objective Decision. # The Appellant’s Prayers 1. The Appellant prayed that the Tribunal; 2. Upholds the Appeal as filed by the Appellant. 3. Annuls and sets aside in its entirety the Respondent’s Objection Decision dated 18th September 2025. 4. Awards the costs of and incidental to this Appeal to the Appellant; and, 5. Any other orders that the Honourable Tribunal deems fit and reasonable. # THE RESPONDENT’S CASE 1. The Respondent replied to the Appeal through its: 1. Statement of Facts dated and filed on 15th December 2025; and 2. Written submissions dated and filed on 20th April 2026 2. As per the Respondent, the Government of Kenya fully owns the Appellant at 93.4% with the remaining shareholding spread over twenty-five (25) parastatals and other government related/controlled entities. 3. That on 28th June 2025, the Respondent disallowed bad debts claimed of Ksh 264,941,000.00 for failing to meet the threshold set under Legal Notice 37 of 2011. 4. According to the Respondent, the principal amount written off represent the original funds advanced by the Appellant to its customers in the course of lending and constitute loan assets in the Appellant’s balance sheet thus capital in nature for the following reasons; 1. They had not previously been included in taxable income. 2. Under the accrual basis of taxation, only interest earned on loans is recognized as taxable income when it accrues. 3. The principal advanced is a return of capital; it is not recognized as income when disbursed, and therefore cannot be deducted when written off. 4. Section 15(2)(a) and Legal Notice 37 of 2011. 5. That the principal amount unlike interest on loans is not included in taxpayers income and was not wholly and exclusively incurred in production of taxable income this is because they represent investment or funding outlay not expense incurred in generating income. Thus, failed the deductibility test. 1. That the commercial and accounting treatment of principal amount is that they are recorded as loan receivables (assets) and only interest is recorded as revenue, thus write off principal reduces asset balance but does not constitute a loss of taxable income for tax purposes. That such an act was in contravention of Section 15(2)(a) of the ITA as read with Legal notice 37 paragraph 4 which provides that *“for purposes of these guidelines, a bad debt which is of a capital nature shall not be an allowable expense.”* # The Respondent’s Prayers 1. The Respondent prayed that; 1. The Objection Decision be upheld. 2. The Appeal herein be dismissed for lack of merit with cost to the Respondent. # ISSUE FOR DETERMINATION 1. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions adduced before it notes that the issue that distils for its determination is; **Whether the Respondent erred in disallowing the** # Appellant’s bad-debts **ANALYSIS AND FINDINGS** 1. The Tribunal having established the single issue for determination will proceed to analyse the same as follows; # Whether the Respondent erred in disallowing the Appellant’s bad- debts. 1. The dispute herein relates to disallowed bad debts for the year 2019 which led to adjusted tax losses amounting to Ksh 264,941,000.00. 1. The Tribunal notes the Appellant’s assertion that the written off bad debts amounts related to both principal and interest and were not capital in nature but rather revenue in nature and were incurred in the ordinary banking operations. That even if under the accrual basis only interest income is recognised as taxable income, the commercial reality for lending institutions is that loan amounts are held as stock-in-trade which is the core and fundamental part of revenue generating operations. 2. On its part, the Respondent held a different view that bad debts had a capital component (principal amount) and revenue component (interest on loans). Additionally, that whereas interest on loan can be deducted, hence an allowable expense, the principal amount could not be deductible as it is capital in nature and even in the balance sheet it is recorded as an asset (receivable) and this position was supported by the Commissioner’s Guidelines under Legal Notice No. 37 of 2011. 3. The Tribunal notes the Appellant’s assertion that loan amounts constitute customer deposits (liabilities) that must be honoured whether loans advanced are repaid or not, thus a default has a direct impact on Appellant’s financial position as a trading loss rather than a capital asset held for investment purposes. Further, that its own credit policy recognizes previously written off loans as recovery for the period received. 4. This position was rebutted by the Respondent who held that principal written off constitute customers deposits reported as assets in the balance sheet thus capital in nature and excluded in taxable income whereas interest on loans what is wholly and exclusively incurred in production of income thus a deductible expense that pass the deductibility test. 5. The Tribunal notes the Appellant’s assertion that it undertook all reasonable efforts to collect amounts owed and passed the deductibility test and even adduced before the Tribunal as evidence, bank statements, case-by-case analysis, letters of offer, letters from auctioneers, public notice on auction, memorandum of sale, credit report, and Court Rulings together with various explanations to show effort taken to recover debts. That in compliance with CBK requirements, the Appellant maintains a minimum amount known as core capital at any given time to guard shareholders assets while honouring depositors’ liability as well. 1. The Tribunal notes that Section 15(1) of the ITA provides as follows; *“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to Section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income…”* 1. Additionally, Section 15(2)(a) of the ITA provides that; *“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…”* 1. The Tribunal notes that the crux of the dispute revolves around the splitting of loan amount into capital component and revenue component. It is not disputed that interest amount is revenue in nature, thus a deductible component of the loan amount. It is not also in dispute that the Appellant had incurred bad debts. 2. What is contested is the principal loan amount with the Respondent holding the view that principal loan amount is capital in nature pursuant to Paragraph 4 to the Legal Notice No. 37 of 2011; whereas the Appellant held the view that principal amount formed part and parcel of the entire loan amount as stock-in-trade and any default bore impact on the entire amount not interest alone. 3. The Tribunal finds that Paragraph 2 of the Guidelines is not in issue, thus the Respondent agrees to the existence of bad debts with the residue issue being whether those bad debts were capital in nature and therefore not deductible under Paragraph 4 of the Guidelines, or whether they formed part of the Appellant’s revenue expenses therefore deductible. 4. The Tribunal notes that whereas the definition of a bad debt is provided for under Section 15(2)(a) of the ITA, a bad debt of capital nature is not defined under the ITA. 5. In order to break this impasse, the Tribunal will seek guidance in the holding of the case of [**Grain Bulk Handlers Ltd vs. Commissioner of Investigations &**](https://new.kenyalaw.org/akn/ke/judgment/ketat/2019/11/eng%402019-12-18) [**Enforcement [2019] KETAT 11 (KLR)**](https://new.kenyalaw.org/akn/ke/judgment/ketat/2019/11/eng%402019-12-18) *“Thus, a capital expenditure is:* 1. *Expended on acquisition or upgrade of fixed assets which expected to be productive for a long period of time of at least one year.* 2. *Expenditure expected to upgrade or sustain the competitive posture of a business and* 3. *Is assumed to be consumed during the lifetime of the asset. Revenue Expenditure “any cash that is spent in the generation of revenue" Thus a revenue expenditure is:* 4. *related to revenue transactions or operating periods* 5. *generally incurred to maintain a revenue generating asset or* 6. *generally incurred to generate revenue.’’* 7. The foregoing precedent lays down tests to be applied in determining whether an expenditure is capital or revenue expenditure. 8. The Tribunal notes that whereas the Respondent distinguished as capital the principal amount loaned out to customers and the loan interest and disallowed the principal component as per the Paragraph 4 of the Guidelines. The Appellant argued that the guidelines provided mere clarification not exclusion of genuine business loses noting that the principal loan amount was not capital in nature but constituted a key component in the generation of income, thus revenue in nature and reiterated that the entire loan amount was stock-in-trade that is unique to financial lending institutions. 9. The Tribunal notes that in the case of **Hancock v. General Reversionary and Investment Company (1919) 1K.B. 25** the learned Judge at page 37 observed inter alia; *“...the proper test to apply is this; was the expenditure incurred in order to meet a continuing business demand, in which case it should be treated as an ordinary business expense and an admissible deduction or was it an expenditure incurred once and for all in which case it should be treated as* *capital outlay…”* 1. The Tribunal will not deviate from its prior jurisprudence in the case of **Fourth Generation Capital Limited [E1253 OF 2024],** where it was held; *“Based on the totality of the foregoing, the Tribunal is of the view that the principal amount advanced was stock for trading and the same was not capital expenditure. On this premise, the Tribunal finds and holds that the Respondent erred in disallowing loan write-off.”* 1. It is the finding of the Tribunal that the Respondent erred in disallowing the Appellant’s bad debts. 2. Consequently, the Tribunal finds and holds that the Appellant was entitled to the tax losses as the principal amount was stock-in-trade and the same was not capital expenditure. 3. Having found that the Respondent improperly disallowed the Appellants bad debt deduction, it follows that the corresponding adjustments reducing the Appellants tax losses for the year of income 2019 cannot stand. The Tribunal therefore finds and holds that the Respondent erred in disallowing the Appellants bad debts. # FINAL DECISION 1. The upshot of the foregoing is that the Appeal herein succeeds, and the Tribunal accordingly proceeds to make the following Orders: 2. The Appeal be and is hereby allowed. 3. The Objection Decision dated 18th September 2025 be and is hereby set aside; and 4. Each party to bear its own costs. 5. It is so Ordered. # DATED AND DELIVERED AT NAIROBI ON THIS 6TH DAY OF JULY, 2026 SIGNED BY/FOR: **★ TH E JUDICIAR Y O F KENY A ★** **HON. EUNICE NJERI NGANGA HON. SANKALE SPENCER OLOLCHIKE** **HON. BERNADETTE MUTHIRA GITARI** **HON. BILLY GRAHAM OKUMU MIJUNGU** Tax Appeals Tribunal Tribunal Date: 2026-07-06 17:38:39