Judgment summary
The Appellant, a licensed bank, challenged a Corporation tax assessment for the year of income 2019 issued by the Respondent, which demanded Kshs. 8,658,236.00 comprising principal tax, penalty and interest [4].
The assessment arose from two adjustments: the disallowance of Kshs. 1,339,841.00 in corporate social responsibility costs found within advertising and marketing expenses, and the disallowance of Kshs. 37,703,741.00 in interest and operating expenses attributed to exempt infrastructure bond income of Kshs. 40,738,219.00 through a ratio of 1.14% [5].
The Tribunal framed three issues: whether the assessment was time barred, whether the CSR expenses were correctly disallowed, and whether the attribution of expenses to exempt income was correct [55].
The Tribunal found the assessment was not time barred, upheld the disallowance of the CSR expenses, and set aside the disallowance of the expenses attributed to exempt infrastructure bond income. The Appeal was partially allowed [62, 76, 89, 90].
Background
The Appellant is a limited liability company incorporated in Kenya and licensed by the Central Bank of Kenya to carry on banking business under the Banking Act, Cap. 488 [1].
The Respondent is the principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469, responsible for the assessment, collection, accounting and general administration of tax revenue [2].
The Respondent conducted a compliance check on the Appellant in relation to Corporation tax for the year of income 2019 and notified the Appellant of its intention to audit, requesting records. The Appellant sought and was granted additional time to provide the documents [3].
On 13th June 2025 the Respondent issued a pre-assessment notice, and on 27th June 2025 it issued an assessment notice for Corporation tax for the year of income 2019 demanding Kshs. 8,658,236.00, comprising principal tax of Kshs. 5,247,416.00, a penalty of Kshs. 262,371.00 and interest of Kshs. 3,148,449.00 [4].
The assessment arose from two adjustments: the disallowance of Kshs. 1,339,841.00 being CSR costs found within advertising and marketing expenses, and the disallowance of Kshs. 37,703,741.00 being the portion of interest and operating expenses attributed to exempt infrastructure bond income of Kshs. 40,738,219.00 by applying a ratio of 1.14%, revising taxable income to Kshs. 331,848,672.00 [5].
The Appellant objected by letter dated 25th July 2025 [6]. The Respondent rendered its Objection decision dated 23rd September 2025 fully rejecting the objection and confirming the assessment, tabulating total tax payable of Kshs. 8,920,489.00 inclusive of penalty and interest [7]. The Appellant lodged a Notice of Appeal dated and filed on 4th November 2025 [8].
Core dispute
The dispute centred on three matters. First, whether the assessment dated 27th June 2025 was time barred under Section 31(4)(b)(i) of the Tax Procedures Act, the Appellant contending the five-year period ran from the close of the year of income 2019 and expired on 31st December 2024, and the Respondent contending it ran from the date the self-assessment return was submitted [26, 41, 55].
Secondly, whether the Respondent erred in disallowing advertising and marketing expenses of Kshs. 1,339,841.00 as ineligible CSR or donation costs. The Appellant argued these were bona fide corporate sponsorships incurred for commercial benefit, while the Respondent argued they were donations that failed the applicable threshold [12, 35, 55].
Thirdly, whether the Respondent erred in attributing interest and operating expenses of Kshs. 37,703,741.00 to exempt infrastructure bond income through a 1.14% apportionment ratio. The Appellant argued the exempt income was passive and no expenses were incurred to earn it, while the Respondent argued a portion of expenses had to be apportioned [19, 37, 55].
Court findings
On the limitation issue, the Tribunal held that Section 31(4) of the TPA anchors the five-year period on the date the taxpayer submitted the self-assessment return, not the close of the year of income [57, 58]. It cited Rowlatt J. in Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64 that in a taxing Act one looks merely at what is clearly said [59]. The Objection decision recorded at paragraph 25 that the Appellant submitted its 2019 return on 30th June 2020, a date the Appellant did not controvert, and its own income tax computation was prepared on 30th June 2020 [60]. The five-year window ran to 30th June 2025, and the assessment issued on 27th June 2025 was within the window, being 4 years, 11 months and 28 days from submission. The assessment was therefore not time barred [61, 62].
On the CSR expenses, the Tribunal accepted in principle that marketing and advertising expenditure does not cease to be deductible merely because incurred through a public-facing or charitable platform, and noted the Respondent's witness conceded that corporate sponsorship is a recognized form of advertisement [67]. However, that concession did not prove each expenditure was in fact a sponsorship for reciprocal commercial benefit [68]. The Appellant's own ledgers described the transactions as CSR, and a taxpayer who asserts its records mislabel a transaction bears the burden of demonstrating the true nature by cogent documentation, none of which was placed before the Tribunal [69, 70]. The only substantiated item, the Mater Heart Run, was evidenced by a cheque, a certificate of participation and an invitation to advertise, which did not evidence a completed marketing transaction [71, 72].
The Tribunal rejected the Respondent's alternative reclassification of the CSR expenses as donations, finding it unfairly evaluated the Appellant against donation documentation rules under Section 15(2)(w) when the costs were claimed as marketing and advertising [73, 74]. Applying Man Diesel, the Tribunal found the Appellant did not produce competent and relevant evidence to displace the presumption of correctness, and the Respondent did not err in disallowing the Kshs. 1,339,841.00 [75, 76].
On the expenses attributed to exempt income, the Tribunal affirmed that infrastructure bond interest is exempt under the First Schedule to the ITA and that expenditure incurred to produce exempt income is not deductible under Sections 15(1) and 16(1)(a) [77]. However, the burden lay first on the Appellant, which discharged its evidentiary burden by adducing purchase notes showing the bonds were acquired in 2009, 2011 and 2018, audited accounts, schedules of non-interest bearing and cost-free sources of funds, the bond interest schedule, and the Central Bank custody statement [79]. Per Man Diesel, this caused the presumption of correctness to vanish [80].
The Tribunal found the Respondent's case rested on assertion rather than demonstration, that its industry-practice comparison was illustrative and unquantified, and that its witness confirmed no specific expense attributable to the bond income was identified [81, 82, 83]. The methodology was flawed because the 1.14% ratio derived from income proportions was applied to total net expenses of Kshs. 3,315,033,000.00, including operating costs with no demonstrated nexus to bonds acquired in prior years [84, 85, 86]. Guided by Family Signature Ltd, Seroney and Prime Capital and Credit Limited, the Tribunal found the attribution speculative and without factual foundation [86, 87, 89].
Outcome
The Tribunal held that the Appeal was partially merited and partially allowed it [90].
The Objection decision dated 23rd September 2025 was varied. The disallowance of interest and operating expenses of Kshs. 37,703,741.00 attributed to exempt infrastructure bond income was set aside, while the disallowance of CSR expenses of Kshs. 1,339,841.00 claimed within advertising and marketing expenses was upheld [90(b)].
The Respondent was directed to revise the Objection decision accordingly within thirty days of the date of the Judgment, and each party was to bear its own costs [90(c), 90(d)].
Major issues / areas of contention
- Whether the assessment dated 27th June 2025 was time barred under Section 31(4)(b)(i) of the Tax Procedures Act.
- Whether the five-year amendment period runs from the date of submission of the self-assessment return or from the close of the year of income.
- Whether the Respondent erred in disallowing advertising and marketing expenses of Kshs. 1,339,841.00 as ineligible CSR or donation costs.
- Whether the Respondent erred in attributing interest and operating expenses of Kshs. 37,703,741.00 to exempt infrastructure bond income through a 1.14% apportionment ratio.
- Whether the Appellant discharged its burden of proof under Section 56 of the Tax Procedures Act.