https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/284

**REPUBLIC OF KENYA** **IN THE TAX APPEALS TRIBUNAL AT NAIROBI** **TAX APPEAL NUMBER NO. E1138 OF 2025** **IMARIKA SAVINGS AND CREDIT** **COOPERATIVE SOCIETY LIMITED ............................................................. APPELLANT** **VERSUS** **COMMISSIONER OF DOMESTIC TAXES.................................................. RESPONDENT** **JUDGMENT** **BACKGROUND.** 1. The Appellant is a Savings and Credit Cooperative Organization (SACCO) registered under the Cooperative Societies Act Cap 490 Laws of Kenya and licensed by the Sacco Societies Regulatory Authority (SASRA) with a core business activity of providing financial services. 2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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, concerning 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 Parts 1 & 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 an audit of the Appellant, the Respondent issued an assessment dated 28th June 2025. 4. On 15th July 2025, the Appellant objected to the assessments. 5. The Respondent rendered its objection decision dated 29th August 2025. 6. Aggrieved by the Respondent’s decision, it lodged its Notice of Appeal. **THE APPEAL** 1. The Appeal was anchored upon an Amended Memorandum of Appeal dated 12th March 2026, wherein the Appellant laid out the following grounds of appeal: 1. That the Respondent confirmed the assessments without due regard to all records, documents, explanations, and information provided and thereby failed to appreciate all the issues presented and raised by the Appellant. 2. That the Respondent erred in law and fact by disqualifying the Appellant as a designated primary co-operative society in one instance and ignoring several Acts and the Supreme Constitution of Kenya (2010) as highlighted in the statement of facts. 3. That the Respondent erred by subjecting to tax interest income earned from members, in violation of the well-established doctrine of mutuality recognized in tax law, and the fact that the taxable income was derived from allowable business expenses as provided by the Income Tax Act. 4. That the Respondent's actions undermined the doctrine of legitimate expectation and failed to meet the standards of fairness and administrative propriety required by public authorities. 5. The Respondent failed to consider the ambiguity and confusion arising from the various laws and, particularly, the absence of clear provisions on the classification of a society constituted as the Appellant’s membership. This omission disregarded the facts presented in the Statement of Facts, the by-laws, and the supremacy of the Constitution of Kenya, and thus did not administer fair tax administration. 6. The Respondent failed to consider the provisions of Section 16, 17, 14, 5, 4, and 2 of the Cooperative Societies Act, which recognizes non-individual members as bona fide members of the Appellant. 7. The Respondent failed to consider the composition of the Appellant, whereby over 97% are individual members and about 3% are the member CBOs formed in the strength of the Cooperative Societies Act, but proceeded to punish the extreme majority in the presence of diverse and contradictory laws against constitutional provisions on economic rights, thus unfairly administering tax justice. 8. The Respondent disregarded the fact that the volume of business of the Appellant with its non-individual members in the year was minimal and remained below 0.39% 9. The Respondent failed to consider that the Appellant fulfilled all requirements of Section 16 of the Cooperative Societies Act by registering by-laws that included non-individuals as members of the Appellant, and that the said non-individuals are fully paid-up members of the Appellant. 10. The Respondent disregarded the fact that non-members are merely formations of the individual members of the Appellant. 11. The Respondent should have noted the many case laws, some of which are in the statement of facts, and which should have enabled them to determine the objections made by the Appellant positively in order to respect all the laws and the Constitution without ambiguity. 12. The Respondent's decision violates Articles 10, 27, 36, 40, and 47 of the Constitution of Kenya, 2010, by acting in a manner that is discriminatory, unreasonable, and inconsistent with fair administrative action. 13. That the assessments as contained in the notice of assessment dated 28th June 2025 and confirmed in the objection decisions dated 29th August 2025 are far-reaching, unlawful, unjustifiable, and excessive in any event. **APPELLANT’S CASE** 1. The Appellant’s case was based on its amended statement of facts dated 12th March 2026 and its written submissions dated 12th June 2026. 2. The Appellant stated that its membership is made up of 96.68% and 97.45% individual and non-individual members, which accounts for 2.55% to 3.32% of the total membership. 3. The Appellant averred that its operations are fundamentally structured around the cooperative principle of mutuality, cooperative principles, and key cooperative characteristics, including: 1. democratic member control. 2. member economic participation. 3. and distribution of benefits based on member participation rather than capital ownership. 4. It was its view that the Respondent disregarded the mutual nature of its operations and focused solely on membership classification, thereby expanding its scope of taxation under the Income Tax Act and contrary to the principle articulated in ***Cape Brandy Syndicate v Inland Revenue Commissioners.*** 5. That it had a legitimate expectation that the Respondent would act fairly, reasonably, consistently, and in accordance with the established legal framework as was advised in ***Republic v Kenya Revenue Authority ex parte Aberdare Freight Services Ltd.*** 6. That its legitimate expectation has been breached by the Respondent's unilateral decision to reclassify it for taxation purposes, while disregarding its lawful registration and operational framework under the governing statute when it disqualified it as a primary society. It supported its position with the following cases: 7. ***Keroche Breweries Limited v Commissioner of Domestic Taxes & 5 others 200712KLR 240*** 8. ***Kenya Bankers Association v Kenya Revenue Authority [2018] eKLR.*** 9. ***Republic v Commissioner of Domestic Taxes (Large Taxpayers’ Office) and another Ex parte British Tobacco Kenya Limited.*** 10. ***Republic v Kenya Revenue Authority ex parte Aberdare Freight Services Ltd.*** 11. That the Cooperative Societies Act recognizes non-individual members as members under Section 16, 17, 14, 5, 4 and 2, and, on the other hand, Section 19A of the Income Tax Act recognizes designated societies. 1. That the Respondent applied Section 19A (2) which did not consider the doctrine of mutuality in the taxation of Saccos as an established principle that distinguishes income earned from members. 2. That the principle of mutuality has been recognized in judicial consideration of SACCO taxation, including: ***Newfortis Savings and Credit Co-operative Society v Commissioner of Domestic Taxes*** (presently known as Nyeri Teachers Sacco). 3. That these characteristics reinforce the mutual nature of cooperative societies and further demonstrate that the Appellant's activities are fundamentally different from those of profit-oriented commercial enterprises. 4. That when the Act is interpreted holistically and purposively, the definitions reveal that the principal basis for the classification of co-operative societies is the institutional composition of their membership, whether a society is comprised of individual persons, primary co-operative societies, or national-level organizations, as shown in Section 5 of the Cooperative Societies Act, which governs the process of registration. 5. That there is no ambiguity in the law on what constitutes a primary society that should have been interpreted in favour of the taxpayer, considering that Section 19A of the Income Tax Act recognizes designated societies unlike the Cooperative Societies Act. That the Appellant is, by all means and legally, a primary society registered as such in 1974. 6. It is asserted that the Tribunal in ***Invest and Grow Sacco v the Commissioner of Domestic Taxes*** affirmed that income for primary and designated societies must be separately taxed. That is to say, income from individual members under Section 19A (4) and for non-individual members under Section 19A (2) of the ITA. 7. That this approach aligns with the co-operative sector's historical and policy framework in Kenya, which recognizes the inclusivity of membership to enhance financial inclusion and community empowerment. 8. The Appellant stated that the Respondent erred both by issuing the additional assessment dated 28th June 2025 and confirming the assessment vide the objection decision dated 29th August 2025, respectively, by, *inter alia*: (a) Failing to consider the Income Tax Act (470), the Cooperative Societies Act (490), the SASRA Act 2008, the Banking Act, and the lens of the supremacy of the Constitution of Kenya. (b) Ignoring the ambiguity brought about by the various Acts as stated herein and applying it to its convenience by only considering a single section of the laws that favours them, and further failing to apply decisions in determined cases as a basis for its decision. (c) The Respondent did not apply fair administration of tax justice by ignoring the costs of funds, which wholly and exclusively facilitated the taxable business income that it taxed. (d) Allowing the expenses would mean that there would be no income to subject to tax. 1. The Appellant asserted that there is a need for predictability, certainty, uniformity, and stability in the application of the law, as was explained in ***Jasbir Singh Rai & 3 others v Tarlochan Singh Rai Estate of & 4 others (2013) eKLR.*** 2. It stressed that the High Court in ***Nyeri Teachers Sacco*** and ***Invest & Grow Sacco*** re-affirmed that its income derived from its primary/individual/human members must be taxed only in accordance with the provisions of section 19A (4) of the ITA and not section 19A (2) of the ITA. **Appellant’s Prayer** 1. The Appellant prays that the Tax Appeals Tribunal allows this appeal and orders that: 1. The Respondent’s objection decisions dated 29th August 2025 and the assessments dated 28th June 2025 be and are hereby set aside in their entirety. 2. The Appellant’s objection that was lodged with the Respondent be upheld. 3. Costs of this appeal to be awarded to the Appellant. **RESPONDENT’S CASE** 1. The Respondent opposed the appeal with the support of its: 1. Statement of Facts dated 6th November 2025; 2. Written submissions dated 9th March 2026; and 3. Supplementary written submissions dated 12th June 2026. 2. The Respondent stated that its audit of the Appellant showed that the Appellant had undeclared revenue, leading to additional assessments. 3. That the assessment was lawful and in line with due process. 4. The Respondent was of the view that the main issue for determination was whether the Respondent was justified in assessing additional Corporation Tax on the Appellant’s income. 5. It was its view that Section 19A (2) of the Income Tax Act applies to the Appellant because, even though the Appellant is a designated primary society, the Appellant is not a designated primary society. 6. It stated, without citing the case, that Section 19A of the Income Tax Act had been declared unconstitutional by the Constitutional Division of the High Court of Kenya pursuant to Article 165 (3) (d) (i) of the Constitution of Kenya. 7. That a strict reading of the law required the Respondent to comply with the law by effecting Section 19A (2) of the Income Tax Act, as was supported in **Cape Brandy Syndicate v I.R.C 1KB 64 and TATC/E822/2024 BAT Co-operative Savings and Credit Society Limited.** 8. The Respondent stated that the Appellant had not discharged its burden of proof in this case as was expected of it under Section 56 (1) of the Tax Procedures Act, **Nairobi** **TAT No. 25 of 2016, Family Signature Limited v. The Commissioner of Investigations & Enforcement** and **TAT NO. 28 OF 2018- Joycott General Contractors Limited –VS– Kenya Revenue Authority**. 9. That based on the foregoing, the Respondent was correct in taxing the Appellant under Section 19A (2) of the Income Tax Act, since the Appellant had registered non-individual members and thereby was found not to be in compliance with the conditions set out for designated primary societies under Section 19A (3) or (4) of the Income Tax Act, as supported by the case of **TATC/E822/2024 BAT Co-operative Savings and Credit Society Limited.** 10. The Respondent argued that it applied its best judgment appropriately in this appeal, as was explained in **TAT NO. 28 of 2018- Joycott General Contractors Limited -VS- Kenya Revenue Authority,** because the Appellant had failed to provide documents or to show that the assessment was erroneous. **Respondent’s Prayers** 1. The Respondent prayed that the Tribunal 2. Dismiss the appeal in its entirety; 3. Uphold the tax assessment as confirmed by the objection decision; and 4. Orders the Appellant to pay the costs of the appeal. **ISSUES FOR DETERMINATION** 1. The Tribunal having considered the parties’ pleadings, documentation, and submissions notes that four issues call for the Tribunal’s consideration and determination are: 1. *Whether the Respondent was justified in classifying the Appellant as a primary designated cooperative society;* 2. *Whether the Respondent’s objection decision dated 29th August 2025 was justified.* **ANALYSIS AND DETERMINATION** 1. The Tribunal having identified four issues for determination, it shall analyze the same as herein under; 2. ***Whether the Respondent was justified in classifying the Appellant as a designated co-operative society.*** 3. The crux of this dispute is the disagreement between the parties on the interpretation of the term “primary society” and the subsequent characterization of the Appellant. Whereas the Appellant held the view that it is a primary society, the Respondent asserted that the Appellant is a designated co-operative society. 4. Section 19A (7) of the ITA defines a primary society and a designated co-operative society in the following terms: *“primary society’ means a co-operative society registered under the Co-operative Societies Act (Cap. 490) the membership of which is restricted to individual persons.* *‘designated co-operative society’ means a co-operative society registered under the Co-operative Societies Act (Cap. 490);”* 1. Primary and designated societies are taxed differently under sections 19A (2) and (4) which is expounded below: *“19A(2) In the case of every designated co-operative society, other than a designated primary society, the income on which tax shall be charged shall be its total income for the year of income, deducting therefrom an amount equal to the aggregate of bonuses and dividends declared for that year and distributed by it to its members in money or an order to pay money; but the deduction shall in no case exceed the total income of the society for that year of income.* *(3)…* *(4) In the case of a designated primary society which is registered and carries on business as a credit and savings co-operative society, its total income for any year of income shall, notwithstanding any other provisions of this Act, be deemed to be the aggregate of–* 1. *fifty per centum of its gross income from interest (other than interest from its members);* 2. *its gross income from any right granted for the use or occupation of any property, not being a royalty, ascertained in accordance with the provisions of this Act;* 3. *gains chargeable to tax under section 3(2)(f);* 4. *any other income (excluding royalties) chargeable to tax under this Act not falling within paragraph (a), (b) or (c) ascertained in accordance with the provisions of this Act.”* 5. The Appellant has admitted that its membership was composed of individual membership of about 97% and non-individual memberships of about 3%. 6. A strict reading of the law would impose the position that both section 19A(2) and (4) of the ITA should be applicable to the Appellant because it would be unlawful and inequitable to subject individual members of the co-operative society to section 19A(2) of the ITA, the same way that the corporate members of the Appellant should not be subject to section 19A(4) of the ITA. This would be consistent with the settled principle that a party should only be taxed based on what the law provides, and that taxation should not be implied, crafted, or imputed based on equity or what is not inscribed in law. 7. This position aligns with the decision of the court in ***Keroche Industries Limited v. Kenya Revenue Authority & 5 others [2007] 2 KLR 240,*** where Justice Nyamu held that: *“Taxation can only be done on clear words and cannot be on intendment. Linked to this is that a penalty must be imposed in clear terms. Finally, even where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation that imposes a burden, tax, or duty on the subject.”* 1. Similarly, in ***Republic v. Kenya Revenue Authority & Another Ex-Parte Kenya Nut Company Limited [2014] eKLR,* the court held that it was its duty for parties to** have a duty to assign the true meaning of words in any law but not to interpret the same to suit the unique circumstances of its case. 2. Based on the foregoing, the Tribunal finds that the Appellant is a mishmash of both designated primary and designated co-operative societies because of the mixed rank of individual and non-individual memberships in its ranks. This model of taxation is encapsulated under the mutuality principle; was explained in [***Muramati District Tea Growers Sacco Society Ltd (Unaitas Sacco) v Kenya Revenue Authority [2015] KEHC 5055 (KLR)***](https://new.kenyalaw.org/akn/ke/judgment/kehc/2015/5055/eng%402015-03-23),where the Judge stated that: *“...the court found itself in agreement with the Respondent that it was not all income that was generated by a co-operative society that could be deemed to be for the mutual benefit of its members.”* 1. Similarly, in **Nyeri Teachers Sacco v. Commissioners of Domestic Taxes [2016] (Income Tax Appeal No. 6 of 2013)** the court stated thus; *“… a mutual society (such as a SACCO) may have commercial activities, and that income from those commercial activities is taxable.”* 1. It is thus settled that income from a mishmash entity like the Appellant is capable of being severed into two divisible parts, and that the correct interpretation of the law would be to ensure that the respective members of the society are exposed to taxation as required under Section 19A (2) and (4) of the ITA. 2. The path taken by the Respondent to subject the Appellant, irrespective of its mixed membership, to taxation under Section 19A(2) was accordingly erroneous and unlawful, as it would subject the Appellant to payment of tax that was not due or payable by it, contrary to the dicta that had been adopted by the courts that a tax authority ought not to collect a penny more or a penny less than the tax owed, as stated in the case of **Republic v. Kenya Revenue Authority Ex parte Bata Shoe Company (Kenya) Limited [2014] eKLR** where the Court held as follows: “*Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than is due to the taxman. The taxman, on the other hand, is entitled to collect up to the last coin that is due from a taxpayer.”* 1. See also the recent Tribunal case of ***Judgment TAT Appeal No. E812 of 2025,*** ***The County Government of Kiambu v The Commissioner of Domestic Taxes*** confirming the same position. 2. The finding of the Tribunal that a mixed membership cooperative society cannot be taxed strictly under Section 19A (2) of the ITA was recently affirmed by the Tribunal in ***Judgment- TAT Appeal No. E024 of 2025, Invest & Grow Sacco v Commissioner of Domestic Taxes,*** where it held that: *“Flowing from the Tribunal’s finding is that the Appellant’s income derived from primary members should be taxed at rates provided under Section 19A (4) of the ITA, whereas income derived from corporate membership should be brought to charge as provided under Section 19A (2) of the ITA.”* 1. The Tribunal sees no reason to depart from this position. 2. In conclusion, the Tribunal has noted its previous decision in ***Judgment – TAT No. E822 of 2024 BAT Co-Operative Savings and Credit Society Limited –Vs- Commissioner of Domestic Taxes***, where it held that a mixed cooperative society would be taxed under Section 19A (2) of the ITA. The Tribunal is of the view that it misapprehended and misinterpreted the meaning of a designated and primary society in that decision. Additionally, it also failed to appreciate that a strict reading of the law ought to have led it to the conclusion that a mixed membership society is capable of being severed into two and each segment taxed under the correct provision of the ITA under Section 19A (2) for non-individual members and 19A(4) for individual members. 3. Accordingly, the Respondent acted in error in classifying the Appellant as a designated cooperative society and in encumbering individual members of the SACCO with tax that was not legally applicable to them under Section 19(2) of the ITA. 4. Moreover, the High Court in the ***Nyer***i ***case***has confirmed that the taxation of both individual and non-individual members is capable of being severed to ensure that each group of taxpayers is taxed as per the provisions of the law. To uphold and retain the BAT Case would amount to exposing members to taxation and the erosion of their savings, when the law is clear that they ought not to be taxed in the same manner as non-individual members. 5. The Respondent therefore fell into error when it reclassified the Appellant as a designated co-operative society and thereafter proceeded to tax it as such under Section 19A (2) of the ITA, when the Appellant was actually a mix of a primary co-operative society and a designated co-operative society. 6. ***Whether the Respondent’s objection decision dated 29th August 2025 was justified.*** 7. The corporation tax that arose from the Respondent’s decision was pegged on the premise that the applicable tax law was Section 19A (2) of the ITA. 8. Having found that the Respondent fell into error when it reclassified the Appellant as a designated co-operative society and thereafter proceeded to tax it as such under Section 19A(2) of the ITA, when the Appellant was actually a mix of a primary co-operative society and a designated co-operative society, it follows that the tax premise upon which the Appellant was taxed and an Objection decision issued thereof was erroneous. 9. The Respondent ought to have been more judicious when carrying out the assessment by taking into consideration the fact that the Appellant had two different income streams, each with its distinct membership, requiring separate tax treatment, as opposed to a blanket assessment, which was detrimental to the majority of individual primary members, standing at about 97% of the entire membership. 10. On this finding, the Tribunal is guided by its decision in ***Invest and Grow,*** where it held that: *“...the well-established principle of mutuality in SACCOs provides that, whereas certain expenses are deducted from the entire mutual income of the SACCO, other expenses are not subject to this treatment.” Analogously, income derived from different categories of membership should be taxed separately as in the present Appeal.”* 1. Based on this finding and the foregoing analysis by the Tribunal, it is clear that the Appellant applied the wrong law and methodology in its disallowance of expenses and its demand for corporation tax from the Appellant. 2. Moreover, having found that the assessment of corporation tax against the Appellant arose from the Respondent’s misapplication of the law, it follows that the ‘fruits of the poisonous tree’ cannot have any validity to sustain an assessment that is drawn from the same tree or any of its branches. 3. From the foregoing, the Tribunal finds and holds that the Respondent’s Objection Decision dated 29th August 2025 was not justified in the circumstances. **DISPOSITION** 1. Consequently, for the reasons aforesaid, the Tribunal finds and holds that the appeal is meritorious and shall proceed to make the following Orders: 2. The appeal be and is hereby upheld. 3. The objection decision dated 29th August 2025 be and is hereby set aside. 4. The Respondent is at liberty to re-compute corporation tax only for non-individual members, as per the composition of the membership of the Appellant. 5. Each party shall bear its costs. 6. It is so ordered. **DATED and DELIVERED at NAIROBI this ……7th .….... day of ………August....… 2026** **..........................……………………….** **DR. RODNEY ODHIAMBO OLUOCH** **CHAIRPERSON** **.…..….……………………. ..….……………………….** **CYNTHIA B. MAYAKA DR. ERICK KOMOLO** **MEMBER MEMBER** **………………………………** **ABDULLAHI DIRIYE** **MEMBER**