Judgment summary
This case concerns an appeal by Consolidated Bank of Kenya Limited against the Kenya Revenue Authority's Objection Decision dated 18th September 2025, which confirmed an adjustment disallowing bad debts of Ksh 264,941,000.00 for the year 2019, thereby reducing the Appellant's tax loss from Ksh (278,399,903.00) to Ksh (13,458,903.00).
The Tribunal found that the Respondent erred in disallowing the Appellant's bad debts, holding that the principal loan amount written off constituted stock-in-trade and not capital expenditure. The Appeal was allowed and the Objection Decision set aside.
Background
The Appellant is a commercial bank incorporated in Kenya and licensed under the Banking Act (para 1). The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, mandated under Section 5 to collect and account for tax revenue (para 2).
Following a compliance audit of the Appellant's records for 2019 to 2023, on 30th May 2025 the Appellant was issued with a principal tax liability of Ksh 3,667,435,355.00, inclusive of penalties and interest, relating to Withholding Tax, Withholding VAT, Corporate Income Tax, PAYE, VAT and Excise Duty (para 3).
After an email exchange on 19th June 2025 concerning the year 2019, the Respondent on 28th June 2025 adjusted the tax loss for that year by Ksh 264,941,000.00 relating to bad debts, against which the Appellant objected on 7th August 2025 (para 4). The Respondent's Objection Decision dated 18th September 2025 confirmed the adjusted tax loss as previously assessed (para 5). The Appellant filed its Notice of Appeal on 16th October 2025 (para 6).
Core dispute
The dispute centred on whether the Respondent erred in disallowing the Appellant's bad debts of Ksh 264,941,000.00 for the year 2019, which led to an adjustment of the tax loss from Ksh (278,399,903.00) to Ksh (13,458,903.00) (paras 9, 36).
The Appellant argued that the amounts written off, comprising both principal and interest, were revenue in nature, forming part of its stock-in-trade as a lending institution, and satisfied the deductibility test under Section 15(2)(a) of the Income Tax Act read with the Commissioner's guidelines under Legal Notice No. 37 of 2011 (paras 10, 15, 22).
The Respondent maintained that the principal amount written off was capital in nature, being a return of capital not previously included in taxable income, and was therefore excluded from deduction under Paragraph 4 of Legal Notice No. 37 of 2011, while only the interest component was deductible (paras 30-32).
Court findings
The Tribunal identified the sole issue for determination as whether the Respondent erred in disallowing the Appellant's bad debts (para 34).
The Tribunal noted that it was not disputed that interest was revenue in nature and deductible, nor that the Appellant had incurred bad debts; what was contested was whether the principal loan amount was capital in nature under Paragraph 4 of the Guidelines or formed part of the Appellant's revenue expenses (paras 44-46).
The Tribunal observed that a bad debt of capital nature is not defined under the Income Tax Act (para 47) and applied the tests for distinguishing capital from revenue expenditure set out in Grain Bulk Handlers Ltd vs. Commissioner of Investigations & Enforcement [2019] KETAT 11 (KLR) (paras 48-49), and the test in Hancock v. General Reversionary and Investment Company (1919) 1 K.B. 25 (para 51).
Following its prior jurisprudence in Fourth Generation Capital Limited [E1253 OF 2024], the Tribunal held that the principal amount advanced was stock for trading and not capital expenditure, and that the Respondent erred in disallowing the loan write-off (paras 52-53). The Tribunal found that the Appellant was entitled to the tax losses as the principal amount was stock-in-trade and not capital expenditure (para 54), and that the corresponding adjustments reducing the Appellant's tax losses for 2019 could not stand (para 55).
Outcome
The Tribunal allowed the Appeal (para 56(a)).
The Objection Decision dated 18th September 2025 was set aside (para 56(b)).
Each party was ordered to bear its own costs (para 56(c)).
Major issues / areas of contention
- Whether the amounts written off by the Appellant as bad debts were loan assets and therefore capital in nature.
- Whether the bad debts written off related only to the principal loan amount or also included interest.
- Whether the bad debts written off satisfied the deductibility requirements under Section 15(2)(a) of the Income Tax Act read with the Commissioner's guidelines under Legal Notice No. 37 of 2011.
- Whether the principal loan amount constituted stock-in-trade or capital expenditure for a lending institution.