https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/133

Louize Holdings (K) Ltd v Commissioner for Domestic Taxes (Tax Appeal E879 of 2025) [2026] KETAT 133 (KLR) (3 July 2026) (Judgment) Neutral citation: [2026] KETAT 133 (KLR) Republic of Kenya In the Tax Appeal Tribunal Tax Appeal E879 of 2025 RM Mutuma, Chair, JM Malla, G Ogaga & T Vikiru, Members July 3, 2026 Between Louize Holdings (K) Limited Appellant and Commissioner For Domestic Taxes Respondent Judgment Background 1.The Appellant is a company duly incorporated under the laws of Kenya and is the registered proprietor of property from which rental income is derived. 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.The Respondent conducted an audit of the Appellant's records relating to Income Tax, VAT, and Withholding Tax for the period January 2019 to December 2023, and communicated the audit findings by a letter dated 28th March 2025. 4.The Appellant lodged a Notice of Objection dated 27th April 2025. 5.The Commissioner issued an Objection Decision dated 25th June 2025 confirming assessments totalling Kshs. 34,252,436 being the principal tax. 6.Aggrieved by the Objection Decision, the Appellant filed this Appeal vide Notice of Appeal dated 25th July 2025. The Appeal 7.The Appellant lodged memorandum of appeal dated 12th August 2025 and filed on 15th August 2025 wherein it raised the following grounds of appeal:a.That the Commissioner erred in fact and law by disallowing interest expenses incurred wholly and exclusively in the production of taxable income, contrary to the provisions of Section 15 of the Income Tax Act Cap 470(ITA).b.That the Commissioner erred in law by applying the 30% EBITDA restriction on interest expense deductions to borrowings not subject to such limitation under the ITA.c.That the Commissioner erred in fact and in law by treating residential rental income received from tenants as commercial income subject to VAT without taking consideration of the appellant explanations and documents provided.d.That the Commissioner erred in fact and law by disallowing Input VAT claimed on a mixed-use development without apportionment as per Section 17 of the VAT Act Cap 476(VATA). The Appellant’s Case 8.The Appellant lodged its statement of facts dated 12th August 2025 and filed on 15th August 2025. 9.In support of the position that the Commissioner erred in fact and law by disallowing interest expenses incurred wholly and exclusively in the production of taxable income, contrary to the provisions of Section 15 of the ITA, the Appellant stated that on 25th August 2019, it entered into a construction agreement with Endeavor Construction Limited for the development of a mixed-use property located in the Pangani area of Nairobi County, at a contract sum of Kshs 852,969,200. To finance this project, the Appellant secured a commercial loan from Equity Bank alongside additional funding from related parties. 10.The Appellant stated that in the course of filing income tax returns, it claimed a deduction for interest expenses incurred on the loan from Equity Bank. However, during the audit, the Commissioner disallowed this interest expenses based on International Accounting Standard 23 (IAS 23), which according to the Commissioner, requires the capitalization of borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets. 11.The Appellant averred that it disputed this position, submitting that IAS 23 is an accounting framework formulated to guide financial reporting and does not possess binding authority for tax purposes unless expressly incorporated into tax legislation. 12.It argued that in the Kenyan context, tax computations are governed by the provisions of the ITA which prevails over accounting standards in determining taxable income. Therefore, it asserted that the capitalization requirement under IAS 23 does not dictate or override the deductibility of interest expenses under Kenyan tax law. 13.The Appellant stated that it did not submit any nil tax returns throughout the audit period and that the audited financial statements and bank records provided demonstrate that the Appellant derived rental income from the project amounting to Kshs 12,864,810 in 2019 and Kshs 11,411,204 in 2020. It argued that this income arose as some units were leased even during the construction phase. Accordingly, the Appellant asserted that the Respondent's basis for disallowing the interest expense is mistaken and should be rejected by the Tribunal. 14.The Appellant contended that despite the above Respondent's assertions regarding application of IAS 23, the financial year 2021 was not a construction year for the Appellant and indeed the property in question was already yielding rental income thereby invalidating the Respondent's own position. It relied on audited financial statements for the period 2021 and the rental income schedules for the same period, which according to it, demonstrates increment in rental income from Kshs 11,411,204 in 2020 to Kshs 29,023,226 in 2021. Therefore, the Appellant contended that the Respondent's assertion that the interest expenses for the years 2019 to 2021 were disallowed on the ground that the project was not generating taxable income is factually and legally incorrect. 15.The Appellant relied on Section 15 of the ITA which allows any person who incurs expenditure to deduct expenses wholly and exclusively incurred for ascertainment of taxable income. It cited the case of Edge Worth Properties Limited v Commissioner of Legal Services and Board Coordination (Tribunal Appeal E993 of 2024) where it was stated as follows regarding the requirements of an expense to be allowable under Section 15 (1) of the ITA;a)That the expenditure was incurred in such year of income; andb)That the expenditure was wholly and exclusively incurred by him in the production of that income. 16.The Appellant contended that for it to generate rental income, it had to invest in the building through a bank loan, thereby incurring interest expenses as part of the loan repayment. As such, by virtue of this provision, the expenditure was incurred in the years of income. 17.With regards to the Second threshold of whether the interest expense was wholly and exclusively incurred in production of taxable income, the Appellant argued that the matter was dealt with by the Court of Appeal in the United Kingdom in the case of Bentleys, Stokes & Lowless v Beeson (1952) 33 TC 491, where the court was tasked to determine if entertainment expenses were supposed to be allowed in ascertaining the taxable income. That in answering this question, the Court adopted two techniques to solve the dispute i.e. Motive and purpose of the expenditure and stated as follows;“The sole question is whether the expenditure in question was 'exclusively' laid out for business purposes, that is: What was the motive or object in the mind of the two individuals responsible for the activities in question? It is well established that the question is one of fact ... Was the entertaining undertaken solely for the purposes of business, that is, solely with the object of promoting the business or its profit earning capacity?” 18.According to the Appellant, the basis for an expense to be deductible as wholly and exclusively incurred in the production of taxable income hinges on the motive and purpose behind the expenditure being strictly for business objectives. In the present case, the Appellant asserted that it took a commercial loan to finance the construction of mixed-use property, with the clear intention that the funds would be used to erect a building which would subsequently generate taxable income subject to the Commissioner's assessment. 19.Further, the Appellant noted that the Second Schedule to the ITA disallows the deduction of investment allowances on residential buildings. It contended that for investors in residential apartments, particularly those exceeding the simplified tax regime threshold, the only practical method to account for financing costs is to expense the interest in the profit and loss account. It was of the view that should the Tribunal adopt the Commissioner's view to disallow this interest expense, it would unfairly prejudice investors in the residential building sector who rely on loan financing, effectively preventing them from claiming legitimate interest expenses in their financial statements and tax computations. 20.The Appellant argued that its position aligns with the established legal principle that expenses wholly and exclusively incurred for business purposes and in this context being the financing of income-generating property are allowable deductions under Section 15 of the ITA, consistent with the motive and purpose test affirmed in case law. It asserted that denying such deductions based on the Commissioner's interpretation would lead to an inequitable outcome contrary to the statute's object and intent. 21.While the Commissioner argued that the interest expense should have been capitalized because the building did not generate income during the construction phase, the Appellant contended that this argument fundamentally misconstrues the matching principle under tax law and misapplies the "wholly and exclusively" test under Section 15(1) of the ITA. It averred that the fact that significant revenue was not immediately realized does not negate the fact that the expense was wholly and exclusively incurred in the production of that future income. 22.According to the Appellant, it is a well-accepted commercial and tax principle that expenditure may be incurred in one accounting period while the related income is earned in another. The Appellant was of the view that this principle is explicitly acknowledged under Section 15(7)(b) of the ITA, which allows for the carry-forward of business losses. It averred that the existence of such provisions confirms the legislature's recognition that income and expenditure do not always arise in the same year, and tax law accommodates this through mechanisms such as loss carry-forwards, not capitalization of legitimate income-generating expenses. The Appellant was of the view that it should not be subjective to expenses that are wholly and exclusively incurred in the generation of income. 23.The Appellant asserted that based on the foregoing, the Respondent was not justified in disallowing interest expense for the period 2019 to 2021 and further even if the Respondent was to disallow them, the same cannot be capitalized as they are operating expenses which can only be deferred through carried forward of tax losses as per Section 15 (7) of the ITA, an action the Respondent failed to take into account. As such, the Appellant prayed that the resultant additional taxes amounting to Kshs 4,527,010 inclusive of penalties and interest be vacated in entirety. 24.In support of the position that the Respondent erred in law by applying the 30% EBITDA restriction on interest expense deductions to borrowings not subject to such limitation under the ITA, the Appellant asserted that the Respondent’s interpretation of Section 16(2)(iii), introduced via the Finance Act, 2021, is legally and contextually flawed. The Appellant argued that the provision restricts the deductibility of gross interest paid or payable to related persons and third parties where it exceeds 30% of the borrower's EBITDA. It however pointed out that the loan in question was obtained from Equity Bank, a licensed Kenyan financial institution, which is neither a related person nor appropriately categorized as a third party within the meaning and spirit of the provision. 25.The Appellant noted that the Act expressly exempts banks and financial institutions licensed under the Banking Act from the application of Section 16(2)(j)(iii) which provides that ‘‘...this paragraph shall not apply to(A) banks or financial institutions licensed under the Banking Act..." 26.According to the Appellant, a clear legislative intent was to exclude interest payable to banks from the ambit of interest limitation, recognizing the essential role of the banking sector in business financing. The Appellant asserted that by attempting to include a licensed financial institution under the term "third party," the Respondent expanded the scope of the provision beyond its statutory limits. Furthermore, the Appellant argued that had the Parliament intended to include financial institutions within the term "third party" it would have done so explicitly, particularly since the Fourth Schedule of the Income Tax Act defines financial institutions with specificity. 27.The Appellant further contended that the bank in question is not a related party as it does not meet the definition provided in the Income Tax Act which provides that; related person" means, ‘in the case of two persons, either of the persons who participates directly or indirectly in the management, control or capital of the business of the other person, and in the case of more than the two persons.’ 28.The Appellant asserted that Kenyan courts have emphasised that ambiguity in tax statutes must be resolved in favour of the taxpayer, and that double taxation is disfavoured unless clearly and unequivocally authorised. It relied on the case of Keroche Industries Ltd v KRA and aligned authorities to state that the courts caution that a taxpayer should not be taxed twice over the same matter due to absence of clear words. That further, in Keroche Industries Ltd (Supra) Justice J.G. Nyamu held that: "In the presence of ambiguity, the interpretation must be construed in favour of the taxpayer." 29.The Appellant maintained that any ambiguity about third party" cannot override the express definition of financial institutions which includes banks that are explicitly exempt from the thin capitalization rule. That the Respondent’s reading converts a narrow profit shifting anti-avoidance rule into a broad levy on ordinary bank finance, breaching Article 201(b)(0) (fair sharing of tax burdens). 30.The Appellant noted that the Finance Act, 2023, repealed the reference to "third parties," in Section 16 (2) (iii) of the ITA, thereby providing clarity of interest limitation rules to related-party and cross border financing arrangements. It argued that this amendment supports the view that the initial inclusion of "third parties" was ambiguous and unclear and its deletion provides the much-needed clarity that interest restriction applies to cross-border borrowings from related parties only. The Appellant pointed out that the current definition states as follows:“gross interest paid or payable to a non-resident in excess of thirty per cent of earnings before interest, taxes, depreciation and amortization of the borrower in any financial year.” 31.The Appellant contended that denying the deduction of interest paid to Equity Bank results in juridical double taxation, whereby the same income is taxed in the hands of both the payer and the recipient within the same jurisdiction. It averred that Equity Bank, as a resident financial institution, includes the interest income in its taxable income and pays corporate tax accordingly. It argued that if Louize Holdings is simultaneously denied the deduction of this interest, the same amount becomes subject to tax twice; once as income to the lender and again as non-deductible expense to the borrower. The Appellant maintained that this violates the core tax principle of avoiding double taxation and undermines fairness, neutrality, and consistency in the tax system. 32.The Appellant also contended that under Section 15 of the ITA, a deduction is available where the expense is incurred wholly and exclusively in the production of income. The Appellant was of the view that the interest paid on the bank loan clearly satisfies this test, as it relates to the financing of an income-generating rental property. It argued that disallowing the deduction of such an expense, despite its commercial necessity and linkage to taxable income, inflates the company's tax base and erodes legitimate business expenditure. 33.The Appellant relied on Article 201(b)(i) of the Constitution of Kenya which mandates that: "...the burden of taxation shall be shared fairly." the Appellant therefore argued that restricting deductions for interest incurred on local borrowing contradicts this constitutional principle, as it imposes a disproportionate tax burden on businesses undertaking strategic and productive investment using lawful financing channels. 34.It stated that Kenyan appellate courts have not hesitated to strike down tax measures incompatible with the Constitution or the statute's structure. It noted that the Court of Appeal invalidated Minimum Tax (Section 12D) as unconstitutional; and a three-judge bench of the High Court struck down the Affordable Housing Levy (as initially framed) for constitutional infirmities. It argued that these holdings reinforce that fiscal expediency cannot trump the rule of law. 35.According to the Appellant, interest expense on financial institutions was not subject to interest restriction and the Commissioner was not justified in disallowing interest expense in excess of 30% of EBITDA. The Appellant therefore, prayed that the additional assessments of Kshs 35,860,915 inclusive of penalties and interest be vacated in entirety. 36.With regard to international context of thin capitalization and best practice, the Appellant asserted that the thin capitalization rules under Section 16(2)(j) were introduced as part of Kenya's alignment with international tax standards, particularly the OECD's BEPS Action Plan 4, which targets base erosion through excessive interest deductions and profit shifting to low-tax jurisdictions. The Appellant noted that the intent was to curb tax avoidance by multinational enterprises, where related-party cross-border loans are used to reduce taxable profits in Kenya. It however noted that applying these rules to interest incurred on loans from Kenyan resident banks undermines this foundational objective and results in an unjustified restriction on domestic borrowing. The Appellant contended that the enforcement of thin capitalization rules against legitimate local borrowing is thus contrary to international tax policy objectives and counterproductive to economic recovery and investment. 37.It was of the view that Adam Smith's classical canons of taxation require that taxes minimise interference with market allocation and impose the least excess burden consistent with raising revenue. By penalising mainstream bank finance, the Appellant contended that the Respondent's reading distorts business financing choices, discriminates against debt-funded investment, and raises the cost of capital without a BEPS rationale contrary to the canon of economy/efficiency and neutrality. 38.The Appellant pointed out that a comparative (EU) jurisprudence underscores that anti-avoidance rules restricting interest deductions must be proportionate and properly targeted. It stated that in Case C-524/04, Test Claimants in the Thin Cap Group Litigation, the CJEU held that thin-capitalisation rules, while potentially justifiable to prevent avoidance, must include an arm's-length escape and cannot operate as a blanket restriction. The Appellant also noted that in Case C-324/00, Lankhorst-Hohorst, rules that discriminated against cross-border debt were struck as contrary to freedom of establishment. The Appellant asserted that these authorities map onto the same organising principles of neutrality and proportionality that Kenya's framework as clarified in 2023 now reflects, and that the Respondent’s interpretation offends. 39.Apart from the foregoing, the Appellant argued that the Respondent erred in fact and in law by treating residential rental income received from tenants as commercial income subject to VAT without taking consideration of the Appellant explanations and documents provided. The Appellant contended that the Commissioner, upon reviewing the bank statements, identified certain deposits received under business names and treated them as commercial income, thereby subjecting them to VAT, which resulted in a tax assessment of Kshs. 2,963,098.00 40.The Appellant contended that during the objection stage, it explained that the income in question did not constitute commercial income but rather residential rental income paid individual tenants through Equity Bank agents who deposit the funds to the Appellant’s account which is a common practice in the real estate industry. To support this position, the Appellant contended that it provided a detailed list of all such deposits, indicating the corresponding house numbers and the individual tenant names for which the payments were made. 41.It asserted that the Respondent wrongly assumed that the agents named in the bank statements are the tenants. However, it pointed out that an analysis of the income trends in the bank statements shows that some agents deposited money multiple times on the same day which according to the Appellant, clearly suggests that the agents were collecting rent from several tenants and depositing it on their behalf. Accordingly, the Appellant reiterated that the Respondent's treatment of the said income as commercial is both factually and legally erroneous. Based on the foregoing, it stated that it did not under-declare any commercial income. 42.The Appellant emphasised that the Respondent erred in fact and law by disallowing Input VAT claimed on a mixed-use development without apportionment as per Section 17 of the VATA. It stated that the construction project in question was for a mixed-use development, comprising both residential and commercial components. It stated that under Section 17(1) of the VATA, a registered person is entitled to deduct input tax incurred in the course of making taxable supplies. It argued that the commercial portion of the mixed-use development constitutes taxable supplies for which VAT is charged and duly accounted for in the VAT returns already filed. 43.The Appellant stated that as a result, input VAT attributable to the taxable portion of the property is fully deductible. It raised a concern that blanket disallowance of input VAT without apportionment is inconsistent with the VATA’s requirement to allow deduction where taxable supplies are made. 44.The Appellant argued that the Respondent contradicted itself by acknowledging the receipt of commercial rent, yet proceeded to disallow the entire input VAT without proving that taxable supplies were less than 10%. The Appellant also pointed out that for the years 2020 and 2021, based on the Respondent's own assertions, the ratio of exempt sales did not exceed 90% and as such the Commissioner was not entitled to disallow the same. 45.Further, the Appellant underscored that should the property be sold, VAT would be chargeable on the entire transaction value, covering both land and buildings, by prevailing VAT law and judicial precedent. It cited the case of National Bank of Kenya Limited v Commissioner of Domestic Taxes to argue that the High Court clarified that for VAT purposes, land and the commercial structures erected thereon are to be treated as a single taxable supply. Consequently, the Appellant maintained that any VAT incurred in the construction of such a property directly relates to a taxable supply. It therefore, asserted that denying the taxpayer the deduction of input VAT incurred on construction would contravene Section 17 of the VATA, which guarantees registered person the right to claim input VAT relating to taxable supplies. 46.The Appellant cited Section 17(5) of the VATA to note that where input tax deductible exceeds output tax in any given tax period, the excess shall be carried forward to the next tax period as a credit. It therefore, argued that the VAT credit balance of Kshs 112,284,651.77 as at 30th November 2022 arose in accordance with this statutory provision and is valid. The Appellant maintained that no legal basis exists to disallow it under the grounds cited by the Respondent, particularly when the input VAT relates to taxable supplies. 47.The Appellant also filed written submissions dated 22nd April 2026 wherein it submitted that the Commissioner was not justified in disallowing the interest expense claimed in the generation of taxable income. 48.It submitted that micro and small enterprises registered under the Micro and Small Enterprises Act, 2012, were exempted from the interest capping. It also submitted that since the Appellant took the loan from Equity Bank Kenya Limited, a financial institution licensed by the Central Bank of Kenya, the Respondent was not justified in limiting the interest expense for the period 2022 and 2023. 49.In relation to the intention of Parliament in enacting the legislation amending section 16(2)(j) of the ITA, the Appellant submitted that the legislation was never intended to affect Kenyan taxpayers who were making interest payments to Kenyan resident taxpayers, as this was not profit shifting, and the Income would be Subject to Corporation tax in Kenya. 50.The Appellant also submitted that the appearance of corporate names on the Appellant’s bank statement were not commercial rent income subject to VAT. 51.The Appellant relied on the case of Rwenzori Commodities Limited v Uganda Revenue Authority, TAT No 36 of 2024 to support its case. Appellant’s Prayers 52.The Appellant prayed for the following reliefs:i.That the Commissioner's objection decision dated 25th June be set aside in its entirety;ii.The costs of the Appeal be awarded to the Appellant. The Respondent’s Case 53.The Respondent lodged a Statement of facts dated 2nd December 2025 and filed on 18th December 2025. 54.The Respondent’s case was that it issued the Appellant with an audit notice dated 23rd August 2024. Based on the review and meetings held, the Respondent observed as follows with respect to tax heads: A. Corporation Tax Loan Interest Expense 55.The Respondent observed that between August 2019 - November 2021, the company constructed residential apartments in the Pangani area, Nairobi County. As per the construction contract dated 15th May 2019, signed between the Appellant and Endeavour Construction Company Limited, the total construction cost amounted to Kshs 852,969,200. The majority of these construction costs were funded through a loan of Kshs 667,022,228 from Equity Bank Limited, with the remaining balance financed by loans from related parties. 56.The Respondent averred that as per the Income Tax Returns filed, the company claimed interest expense relating to the Equity bank loan amounting to Kshs 1,089,478 for year 2019, Kshs 35,033,321 for the year 2020, Kshs 77,500,779 for the year 2021, Kshs 87,364,785 for the year 2022, and Kshs 91,643,550 for the year 2023. 57.The Respondent argued that the interest expense incurred during the construction period (2019 to 2021) was expensed and treated as tax-deductible expense. However, during the construction phase, no income was generated from leasing the apartments, therefore, the interest expense was not wholly and exclusively incurred in the production of any income during the period from August 2019 to October 2021. 58.The Respondent stated that the provisions of Section 15(1) of the ITA provides only for the deduction of expenses that are wholly and exclusively incurred in the generation of the taxable income. 59.It stated that IAS23 on borrowing costs provides that:IAS 23.8. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset and, therefore, should be capitalized. 60.It stated that IAS 23.5 defines a qualifying asset as asset that takes a substantial period of time to get ready for its intended use or sale. 61.On Cessation of Capitalization, the Respondent averred that lAS 23.22 provides that an entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. 62.The Respondent contended that given that the Appellant did not generate any income from the apartments during the construction phase, the interest expense on the loan should not be treated as a tax-deductible expense. Instead, the interest on the loan should have been capitalized and included as part of the building cost. It argued that this approach aligns with Section 15 of the ITA and is in compliance with IAS 23 regarding borrowing costs. As a result, the Respondent disallowed the loan interest expense that was deducted from August 2019 to October 2021, as it did not meet the requirements for tax deduction purposes. 63.With regards to the interest expense restriction as per Section 16(2)(j) of the ITA, the Respondent asserted that Section 9 of the Finance Act 2021 amended Section 16(2)(j) of the ITA as follows:Section 16(2) Notwithstanding any other provision of this Act, no deduction shall be allowed in respect ofa)....j)gross interest paid or payable to related persons and third parties in excess of thirty per cent of earnings before interest, taxes, depreciation, and amortization of the borrower in any financial year:Provided that-This paragraph shall apply to-(A)Interest on all loans 64.The Respondent asserted that the effective date of Section 9 of the Finance Act 2021 was 1st January 2022. The provision was later amended by Section 12 of the Finance Act 2023, with an effective date being 1st January 2024. It therefore, pointed out that for the period from 1st January 2022 to 31st December 2023, the interest expense deductible by a company should have been limited to a maximum of 30% of its earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). 65.According to the Respondent, during the review process, it observed that the company did not adhere to the restriction on deductible interest expenses for the period as outlined in Section16(2)(j) of the ITA. Instead, the full interest expenses of Kshs 87,364,785 in 2022 and Kshs. 91,643,550 in 2023 were deducted. As a result, the Respondent computed the interest expense eligible for tax deduction during the years 2022 and 2023 in accordance with the provisions of the law. B. VAT a) Commercial rent received 66.The Respondent asserted that a review of the bank statements provided from January 2020 to December 2023 showed that the Appellant had received commercial rental income from businesses. Subsequently, the Respondent compared the deposits listed as commercial rent in the bank statements with the commercial rent declared in the VAT returns and observed that there was a variance. The Respondent thus subjected the variance to VAT. 67.With regard to Input VAT Credit of Kshs. 112,284,651.77 as at 30th November 2022, the Respondent averred that upon reviewing the Appellant's records, it noted that the Appellant's effective date of VAT registration was on 1st August 2019. In addition, a review of the VAT returns filed indicated that the Appellant had been submitting returns with credit balances, with the cumulative credit balance as of 30th November 2022 amounting to Kshs 112,284,651.77. 68.The Respondent averred that further review of the VAT returns was conducted to understand the reasons for the huge VAT credit balances upon which the Respondent found that the company claimed input VAT related to the cost of constructing apartments in the Pangani area of Nairobi County. 69.The Respondent noted that leasing of residential premises is considered an exempt supply under Paragraph 8 of Part II of the First Schedule of the VATA. In addition, the Respondent averred that Section 17(1) of the VATA allows for the deduction of input VAT only on supplies or imports acquired by a registered person for the purpose of making taxable supplies. 70.The Respondent took note that in cases where a registered person incurs input VAT on purchases made to provide both taxable and exempt supplies, such as in this case, Section 17(6) of the VATA provides formula for apportioning the deductible input VAT. It averred that Section 17(7) of the same Act outlines the ratios for determining which input VAT is deductible and which is not allowable. It pointed out that sub-section (b) stipulates that if the proportion of taxable supplies is less than 10% of all supplies made by a registered person in a given period, no input VAT credit will be allowed. 71.From the foregoing, the Respondent disallowed the cumulative input VAT credit of Kshs. 112,284,651.77 as at 30th November 2020 which amount was incurred in the construction of residential apartments and since the leasing of residential premises in an exempt supply, the input VAT on these costs was not allowable pursuant to the provisions of Paragraph 8 of Part II of the first schedule of the VATA. C. Withholding Tax Commissions, professional & audit fees 72.On this issue, the Respondent asserted that during the review, it noted that the Appellant engaged in various transactions whose payments attracted Withholding Tax as provided for under Section 35 of the ITA, either as management or professional fees. Subsequently, the Respondent computed the tax payable in these expenses and compared it with the tax that was paid. It was also noted that the Appellant did not fully deduct the Withholding Tax on all the expenses and the underpaid tax. 73.The Respondent then issued its assessment to which the Appellant filed notice of objection. The Respondent stated that it considered the objection and noted as follows:i.The Appellant validated its objection by making payment of the tax not in dispute of Kshs 577,479 on 9th May, 2025.ii.On Corporation Tax - Interest expense - the Commissioner disallowed interest expense claimed in your income tax returns for the period August 2019 to October 2021 since the project which was funded by the loan was not generating any income over the period hence the interest did not meet the condition for allowability set under Section 15(1) of the ITA.iii.While the Appellant in its objection argued that interest expense was incurred in financing the construction of a rental building, an income generating asset for the company, the Commissioner noted that the plain reading of Section 15(1) of the ITA reveals that the allowable expenses are those wholly and exclusively incurred in generating the income in a particular year of income.iv.Given that in the period August 2019 to October 2021 no income was generated from the project, the expenses relating to the interest cannot therefore be allowed. From the forgoing, the Commissioner therefore, asserted that it correctly disallowed the interest expense in the period the project was not generating any income.v.With regards to Interest expense restriction as per Section 16(2) of the ITA, the Respondent noted that the amendment to Section 16(2) of the ITA made through the Finance Act 2021 clearly states that the interest restriction is applicable to all loans. The exemption to local loans was passed through the Finance Act of 2023. Thus, the Respondent argued that the Commissioner was correct in disallowing the excess interest in the period January 2022 to 31st December 2023.vi.With regards to VAT on commercial rent, the Respondent noted that commercial rent was vatable under the VAT Act. It was also observed that the Appellant failed to demonstrate how the rent paid by business entities was not commercial rent. In the absence of documentary evidence to support these averments, the Respondent upheld its assessment.vii.With regards to Input VAT Credit, the Appellant argued that the construction project in question was for a mixed-use development comprising both residential and commercial components and that the commercial portion of the development constitutes taxable supplies for which VAT is charged and duly accounted for in the VAT returns and thus input VAT was deductible. In Response, the Respondent stated that input VAT is allowable but only to the extent that the same was incurred in making taxable supplies. Moreover, the Respondent stated that where the input VAT relates to making both ratable and exempt supplies, the input VAT is to be apportioned as provided for under Section 17(6) of the VATA. The Respondent averred that Subsection (7) provides that where the proportion of the exempt supplies exceeds 90% of the total supplies, then the input VAT is not allowable in its entirety.viii.The Respondent concluded that in the period under examination, the input VAT totalling to Kshs. 112,284,651.77 was incurred in making both taxable and exempt supplies with the proportion of the exempt supplies being more that 90% in all the tax periods. The Respondent thus asserted that the Commissioner was correct in disallowing the input VAT claimed. 74.The Respondent asserted that having made the foregoing findings, it disallowed the Appellant's Notice of Objection and the principal tax liability of Kshs 34,252,436 together with the accrued penalty and interest was thus due and payable. 75.The Respondent stated that the Appellant failed to provide the supporting documents, therefore, it failed to discharge the burden of proof contrary to Section 56 (1) of the TPA. 76.The Respondent noted that under Section 23 of the TPA, the Appellant has an obligation to keep documents to enable determination of tax liability but the Appellant failed to do so. 77.The Respondent also relied on written submissions dated 22nd April 2026. It submitted that the loan interest expense claimed by the Appellant did not meet the criteria of an allowable expense under Section 15(1) of the ITA. 78.It submitted that it lawfully disallowed the Appellant’s excess interest in the period January 2022 to 31st December 2023 pursuant to section 16(2)(j) of the ITA. It also submitted that the rental income earned by the Appellant was taxable as commercial rental income. 79.The Respondent also submitted that it did not err by disallowing input VAT claimed on a mixed-use development without apportionment as per Section 17 of the VATA. It also submitted that the Appellant did not discharge the burden of proof. 80.It relied on the cases of Edge Worth Properties Limited v Commissioner of Legal Services and Board Coordination [2025] KETAT 187 (KLR); and Mars Logistics Limited v Commissioner of Domestic Taxes [2021] KEHC 13348 (KLR) to support the position that for an expense to be allowable, the taxpayer must prove that the expenditure was incurred in such year of income and that the expenditure was wholly and exclusively incurred by him in the production of income. 81.It cited the case of Kenya Revenue Authority v Maluki Kitili Mwendwa [2021] eKLR to support the position that the taxpayer has a duty to demonstrate that the Respondent’s decision is incorrect but the Appellant failed to do so. Respondent’s Prayers 82.The Respondent prayed that:i.The Objection Decision issued on 25th June 2025 demanding for taxes amounting to Kshs. 34,252,436 be upheld.ii.This Appeal be dismissed with costs to the Respondent Issues For Determination 83.The Tribunal having examined the parties’ pleadings, puts forth the following issues for determination.a)Whether the Respondent erred in disallowing interest expense for the period 2019 to 2021;b)Whether the Respondent erred by applying the 30% EBITDA restriction on interest expense deductions to borrowings not subject to such limitation under the Income Tax Act.c)Whether the Respondent erred by treating residential rental income received from tenants as commercial income subject to VAT; andd)Whether the Respondent erred by disallowing Input VAT claimed on a mixed-use development without apportionment as per Section 17 of the VATA. Analysis And Findings a. Whether the respondent erred in disallowing interest expense for the period 2019 to 2021 84.Whereas the Appellant asserted that the Respondent erred by disallowing interest expenses incurred wholly and exclusively in the production of taxable income, the Respondent countered that the Appellant constructed residential apartments in the Pangani area, Nairobi County between August 2019 to November 2021, and that during the construction phase, no income was generated from leasing the apartments, therefore, the interest expense was not wholly and exclusively incurred in the production of any income during the period from August 2019 to October 2021. 85.Section 15(1) of the ITA provides for deduction of expenses properly incurred. It provides that:15.Deductions allowed(1) 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, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income. 86.Under section 15(1) of the ITA, the burden is on the taxpayer to prove, that it incurred deductible expenditure, that the expenditure was incurred wholly and exclusively in the production of that income, and that the expense is deductible. In the case of Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] KEHC 8118 (KLR), the High Court stated as follows in relation to section 15(1) and section 54A(1) of the ITA:“The only way the Commissioner could have allowed deductions of expenses as per section 15(1) of the ITA is if they were supported to its satisfaction. This is in line with section 54A(1) of ITA which provides as follows:54A Keeping records of receipts, expenses, etc(1)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.’’ 87.The expense must be deductible. Section 16(1) of the ITA provides for expenditures that are not deductible. It provides that:-16.Deductions not allowed(1)Save as otherwise expressly provided, for the purposes of ascertaining the total income of a person for any year of income, no deduction shall be allowed in respect of—(a)any expenditure or loss which is not wholly and exclusively incurred by him in the production of the income;(b)any capital expenditure, or any loss, diminution or exhaustion of capital. 88.The Appellant stated in its notice of objection that it incurred interest expense amounting to Kshs 1,089,478 for the year 2019, Kshs 35,033,321 for the year 2020, Kshs 77,500,779 for the year 2021, Kshs 87,364,785 for the year 2022, and Kshs 91,643,550 for the year 2023. It appears that the Appellant was aggrieved by disallowance of the interest expense running from the year 2019 to 2021. In the statement of facts, the Appellant asserted that the Respondent was not justified in disallowing interest expense claimed for the period 2019 to 2021. Therefore, the Tribunal focused on the said period. 89.The Respondent asserted that the interest expense incurred during the construction period 2019 to 2021 was expensed and treated as tax-deductible expense by the Appellant. However, the Respondent submitted that during the construction phase, no income was generated from leasing the apartments, therefore, the interest expense was not wholly and exclusively incurred in the production of any income during the period from August 2019 to October 2021. The Respondent disallowed this interest expenses based on International Accounting Standard 23 (IAS 23), which requires the capitalization of borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets. 90.The Appellant in support of its position that the interest expense was incurred exclusively in generation of income, maintained that it did not submit any nil tax returns throughout the audit period; that the audited financial statements and bank records provided demonstrate that the Appellant derived rental income from the project amounting to Kshs 12,864,810 in 2019 and Kshs 11,411,204 in 2020 which income arose as some units were leased even during the construction phase. The Appellant also stated that the financial year 2021 was not a construction year for the Appellant and indeed the property in question was already yielding rental income. 91.The Tribunal examined these arguments and counter arguments carefully. Whereas it is not disputed that the Appellant borrowed a loan, the Appellant did not file loan statement or any evidence showing that it took a loan. As such, the Tribunal was not able to verify key terms of the loan such as the interest charged on the loan. Therefore, the Tribunal could not ascertain the figures that the Appellant claimed to be interest expense. 92.To demonstrate generation of income for the period under review, the Appellant stated that it did not file nil returns and that it derived rental income from the project amounting to Kshs 12,864,810 in 2019 and Kshs 11,411,204 in 2020 which income arose as some units were leased even during the construction phase. At this point, it is vital to recall that the interest expense that the Appellant claimed must be wholly and exclusively incurred in the production of the income. This is the yard stick. In other words, there must be direct relationship between the expense and the income. 93.The Tribunal examined the audited accounts that the Appellant filed and noted that indeed for the year 2019 and 2020, the Appellant’s revenue was Kshs 11,411,204 and Kshs 12,864,810 respectively. Whereas the Appellant claimed that the income arose as some units were leased even during the construction phase, the Appellant did not provide any lease agreement to demonstrate that the property was leased therefore, generated income. 94.The Appellant also stated that the construction agreement with Endeavor Construction Limited was made on 25th August 2019 yet the Appellant had made income of Kshs. 12,864,810 in 2019 on the basis that the property was leased even during construction. The Appellant did however demonstrate by way of said leases that this income actually arose from the leasing transactions for this property. 95.We have pointed out above that the yard stick is that the expense must be wholly and exclusively incurred in the production of the income and that there must be direct relationship between the expense and the income. So far, from the Appellant’s assertion that the 2019 income was Kshs 12,864,810, it is the Tribunal’s view that the said income did not relate to the construction agreement with Endeavor Construction Limited made on 25th August 2019. As such, we have no difficulty in finding that that the Appellant did not demonstrate nexus between the expenses and the income claimed. 96.The Appellant filed rent income schedules from individual tenants deposited through bank agents. The Tribunal carefully examined the said evidence and there was nothing therein linking those schedules to the construction agreement with Endeavor Construction Limited made on 25th August 2019. The Appellant did not describe the property that was constructed under the said agreement to match the documentary evidence filed relates to that specific property. The Tribunal was unable to find income schedules of any value. 97.The Appellant at paragraph 1 of the statement of facts stated that, ‘‘the Appellant is a company duly incorporated under the laws of Kenya and is the registered proprietor of certain property from which rental income is derived.’’ Similarly, the Appellant’s audited accounts provides that, ‘the principal activity of the company is that of real estate.’’ Bearing in mind that the Appellant’s principal activity is that of real estate, it had a duty to demonstrate that the income schedules from individual tenants exclusively related to the property constructed pursuant to the agreement with Endeavor Construction Limited made on 25th August 2019 and not any other property. Consequently, the Tribunal was unable to verify whether the rent income schedules together with bank slips related to the property constructed pursuant to construction agreement with Endeavor Construction Limited or related to other clients of the Appellant. 98.We have noted above that the Appellant did not file lease agreements. Therefore, the Appellant did not establish nexus between rent income schedules together with bank slips to the property that was constructed. 99.Further, Since the issue of occupancy of the property and completion of construction was in issue, the Appellant should have filed a construction certificate of completion and certificate of occupancy to demonstrate the dates when the property was certified as complete and ready for occupation. 100.The totality of the foregoing is that whereas it is not disputed that it took a loan, the Appellant failed to demonstrate the key terms of the loan especially in relation to interest rates, and failed to demonstrate that it incurred expenditure wholly and exclusively in the production of the income. It was doubtful whether the income that the Appellant made reference to related to the expenses claimed. 101.Consequently, the Tribunal finds and holds that the Appellant failed to demonstrate the Respondent erred in disallowing interest expense for the period 2019 to 2021 under Section 15(1) of the ITA. Whether the respondent erred by applying the 30% ebitda restriction on interest expense deductions to borrowings not subject to such limitation under the income tax act. 102.The Appellant asserted that the Commissioner's interpretation of Section 16(2)(j) of the ITA, introduced via the Finance Act, 2021, was flawed on the basis that the provision restricts the deductibility of gross interest paid or payable to related persons and third parties where it exceeds 30% of the borrower's EBITDA. The Appellant maintained that the loan in question was obtained from Equity Bank, a licensed Kenyan financial institution, which is neither a related person nor appropriately categorized as a third party within the meaning and spirit of the provision. 103.On the other hand, the Respondent stated that Section 16(2)(j) of the ITA was amended therefore, for the period from 1st January 2022 to 31st December 2023, the interest expense deductible by a company should have been limited to a maximum of 30% of its Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). 104.Section 16(2)(j) of the ITA has undergone several amendments. The Tribunal consider the provisions of the said law as the time of the assessment which provided as follows:(2) Notwithstanding any other provision of this Act, no deduction shall be allowed in respect of–(j)gross interest paid or payable to a non-resident in excess of thirty per cent of earnings before interest, taxes, depreciation and amortization of the borrower in any financial year:Provided that–(i)any income which is exempt from tax shall be excluded from the calculation of earnings before interest, taxes, depreciation and amortization; and(ii)this paragraph shall apply to–A. interest on all loans;B. payments that are economically equivalent to interest; andC. expenses incurred in connection with raising the finance.(iii)this paragraph shall not apply to-(A) banks or financial institutions licensed under the Banking Act (Cap. 488);(B) micro and small enterprises registered under the Micro and Small Enterprises Act (Cap. 493C);(C) microfinance institutions licensed and non-deposit taking microfinance businesses under the Microfinance Act (Cap 493C);(D) entities licensed under the Hire Purchase Act (Cap. 507);(E) non-deposit taking institutions involved in lending and leasing business;(F) companies undertaking the manufacture of human vaccines;(G) deleted by Act No. 4 of 2023, s. 12(b)(iii);(H) deleted by Act No. 4 of 2023, s. 12(b)(iii);(I) holding companies that are regulated under the Capital Markets Act (Cap. 485A). 105.Under Section 16(2)(j) (ii)(A), interest on all loans paid or payable to a non-resident in excess of thirty per cent of earnings before interest, taxes, depreciation and amortization of the borrower in any financial year is not allowed. However, Section 16(2)(j) (iii)(A) of the ITA expressly excluded banks or financial institutions licensed under the Banking Act (Cap. 488) from the provisions of paragraph (j). 106.The Tribunal is of the view that there is no ambiguity between Section 16(2)(j) (ii)(A) and Section 16(2)(j) (iii)(A) of the ITA. This is so because Section 16(2)(j) (iii)(A) provides an express exception and clarity to the general rule under Section 16(2)(j) (ii)(A). 107.It is not disputed that the Appellant took a loan from equity bank which is a resident entity therefore it is not covered under paragraph 16(2)(j) of the ITA which addresses ‘‘non-residents.’’ The Respondent erred in relying on Section 16(2)(j) (ii)(A) as the said section was not applicable in relation the loan advanced by Equity Bank Limited. 108.Whereas the Respondent in its statement of facts stated that, ‘the majority of these construction costs were funded through a loan of Kshs 667,022,228 from Equity Bank Limited, with the remaining balance financed by loans from related parties,’’ the Respondent did not pinpoint the ‘‘related parties.’’ 109.Based on the foregoing, the Tribunal has no difficulty in finding that the Appellant was able to demonstrate that the Respondent erred by applying the 30% EBITDA restriction on interest expense deductions to borrowings not subject to such limitation under the Income Tax Act. Whether the respondent erred by treating residential rental income received from tenants as commercial income subject to VAT 110.On this issue, the Respondent stated that the Commissioner, upon reviewing the bank statements, identified certain deposits received under business names and treated them as commercial income, thereby subjecting them to VAT, which resulted in a tax assessment of Kshs. 2,963,098. The Appellant explained that the income in question did not constitute commercial income but rather residential rental income paid by individual tenants through Equity Bank agents who deposit the funds to the Appellant’s account which is a common practice in the real estate industry. To support this position, the Appellant provided a list of such deposits, indicating the corresponding house numbers and the individual tenant names for which the payments were made. 111.Conversely, the Respondent stated that it reviewed of the bank statements provided from January 2020 to December 2023 and found that the Appellant had received commercial rental income from businesses. It stated that it compared the deposits listed as commercial rent in the bank statements with the commercial rent declared in the VAT returns and observed that there was a variance which it subjected to VAT tax. 112.The Tribunal examined evidence of rent deposits, indicating the corresponding house numbers and the individual tenant names for which the payments were made. However, the Appellant did not file bank statement for the Tribunal to verify that the deposit therein relates to the evidence contained in the list of rent income schedule from individual tenants deposited through Equity Bank agents. The Appellant failed to provide entire evidence that would have enabled the Tribunal to determine whether the Respondent erred. 113.Based on the foregoing, the Tribunal finds and holds that the Appellant failed to demonstrate that the Respondent erred by treating residential rental income received from tenants as commercial income subject to VAT. d. Whether the respondent erred by disallowing input vat claimed on a mixed-use development without apportionment as per section 17 of the VATA. 114.The Appellant asserted that under Section 17(1) of the VATA, a registered person is entitled to deduct input tax incurred in the course of making taxable supplies. It stated that the commercial portion of the mixed-use development constitutes taxable supplies for which VAT is charged and duly accounted for in the VAT returns already filed. It therefore, submitted that input VAT attributable to the taxable portion of the property is fully deductible and that the blanket disallowance of input VAT without apportionment is inconsistent with the VATA’s requirement to allow deduction where taxable supplies are made. It submitted that denying the taxpayer the deduction of input VAT incurred on construction would contravene Section 17 of the VATA, which guarantees registered person the right to claim input VAT relating to taxable supplies. 115.On the other hand, the Respondent stated that it reviewed the VAT returns to understand the reasons for the huge VAT credit balances after which the Respondent found that the company claimed input VAT related to the cost of constructing apartments in the Pangani area of Nairobi County. The Respondent also pointed out that leasing of residential premises is considered an exempt supply under Paragraph 8 of Part II of the First Schedule of the VATA. 116.Section 17(1) of the VATA allows deduction of input VAT subject to the exceptions. It provides that: 17.Credit for input tax against output tax (1)Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies. 117.Section 17(6) of the VAT provides the formula for apportioning the deductible input VAT in cases where the supply is made of both the taxable and non-taxable supply. In particular, It provides as follows:(6)Subject to this Act, if a taxable supply to, or a taxable import by, a registered person during a tax period relates partly to making taxable supplies and partly for another use, the input tax deductible by the person for acquisitions made during the tax period shall be determined as follows—(a)full deduction of all the input tax attributable to taxable supplies;(b)no deduction of any input tax which is directly attributable to other use; and(c)deduction of input tax attributable to both taxable supplies and other uses calculated according to the following formula:A x BCwhere—A is the total amount of input tax payable by the person during the tax period on acquisitions that relate partly to making taxable supplies and partly for another use;B is the value of all taxable supplies made by the registered person during the period; andC is the value of all supplies made by the registered person during the period in Kenya. 118.Further, before deletion by the Tax Laws (Amendment) Act, 2024, Section 17(7) provided as follows:(7)If the fraction of the formula in subsection (6) for a tax period—(a)is more than 0.90, the registered person shall be allowed an input tax credit for all of the input tax comprising component A of the formula; or(b)is less than 0.10, the registered person shall not be allowed any input tax credit for the input tax comprising component A of the formula. 119.The Tribunal considered the Appellant’s claim in relation to the foregoing provisions of the law. While the Appellant asserted the construction project in question was for a mixed-use development, comprising both residential and commercial components and that the commercial portion constitutes taxable supplies for which VAT is charged and duly accounted for in the VAT returns already filed, the Appellant did not clearly define or describe the scope of commercial portion. It did not point out what commercial portion entailed. 120.Be that as it may, we deduce from pleadings from both parties that the Appellant leased some units for residential purposes since the Appellant filed income schedules from individual tenants. It was upon the Appellant to point out if there was any other commercial use apart from residential leasing. It did not. 121.It should be noted that leasing residential premises is exempt from VAT. In this regard, Paragraph 8, part II of the first Schedule to VATA provides as follows:“The supply of the following services shall be exempt supplies—8. Supply by way of sale, renting, leasing, hiring, letting of land or residential premises;"residential premises" means land or a building occupied or capable of being occupied as a residence, but not including hotel or holiday accommodation;Provided that this paragraph shall not apply where such services are supplied in respect of—(a)car park services; or(b)conference or exhibition services, except where such services are provided for educational institutions as part of learning. 122.From the Appellant’s pleadings and the availed documents, the Appellant failed to demonstrate that the turnover from leasing commercial premises exceeded 10% of the total turnovers in the respective years, thereby, did not prove that it was allowed to claim any input tax. 123.Consequently, the Appellant failed to demonstrate that the Respondent erred by disallowing input VAT claimed on a mixed-use development without apportionment as per Section 17 of the VAT Added Tax Act. Final Determination 124.The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is partially meritorious and makes the following orders:a.The Appeal be and is hereby partially allowed;b.The Objection decision dated 25th June 2025 be and is hereby varied as follows:i.The VAT assessment be and is hereby upheld.ii.The Corporation tax assessment in respect of disallowed interest expense under Section 16(2)(j) of the Income Tax Act (EBITDA) be and is hereby set aside.iii.The Corporation tax assessment in respect of the balance of the disallowed interest expense be and is hereby upheld.c.Each party to bear its own cost. 125.It is so ordered. DATED AND DELIVERED AT NAIROBI THIS 3RD DAY OF JULY 2026.……………………………..….ROBERT M. MUTUMACHAIRMAN……………………………… ……JIMMY M. MALLA.MEMBER..….……..……………..GLORIA A. OGAGA MEMBER………………………………DR. TIMOTHY VIKIRUMEMBER