Judgment summary
The Appellant, a savings and credit cooperative society (SACCO), appealed against a Commissioner of Domestic Taxes objection decision dated 7th October 2025 confirming a PAYE additional assessment and a corporation tax additional assessment totaling Kshs 876,099,098 (para 3).
The dispute centred on whether the Appellant, whose membership comprised about 97% individual members and about 3% non-individual members such as CBOs, churches and schools, should be classified as a 'primary society' or a 'designated co-operative society' under Section 19A(7) of the Income Tax Act (paras 11, 12, 42).
The Tribunal found that the Appellant was a mishmash of both a designated primary society and a designated co-operative society because of its mixed membership, and held that its income should be severed and taxed separately, individual members' income under Section 19A(4) and non-individual members' income under Section 19A(2) (paras 63, 65, 71, 73).
The Tribunal upheld the appeal, set aside the objection decision, and permitted the Respondent to re-compute corporation tax only in respect of non-individual members (para 83).
Background
The Appellant is a Savings and Credit Cooperative Organization (SACCO) registered under the Cooperative Societies Act Cap 490 and licensed by the Sacco Societies Regulatory Authority (SASRA), providing financial services (para 1).
Following a review of the Appellant's declared income, the Respondent issued a PAYE additional assessment of Kshs 202,415.31 and a corporation tax additional assessment of Kshs 591,982,443, together totaling Kshs 876,099,098 (para 3).
The Appellant objected to the assessments, and the Respondent rendered an objection decision dated 7th October 2025, which the Appellant then appealed to the Tribunal (paras 4 to 6).
The Appellant was registered as a primary cooperative society on 14th September 1974 and, at the time of the appeal, had over 180,000 members, of whom individual members ranged between 96.68% and 97.06% of total membership during the years under review (2020 to 2023), with non-individual members such as Community-Based Organizations ranging between 2.94% and 3.32% (paras 10 to 12).
Core dispute
The parties disagreed on whether the Appellant should be classified as a 'primary society' under Section 19A(7) of the Income Tax Act, taxed under Section 19A(4), or as a 'designated co-operative society' taxed under Section 19A(2), given its mixed membership of individual and non-individual persons (paras 56 to 58).
The Appellant argued that it was a primary society under the Cooperative Societies Act, that the doctrine of mutuality applied to interest income earned from members, and that the Respondent had wrongly disallowed deductible expenses under Section 15 of the Income Tax Act, failed to apply capital allowances, relied on the trial balance rather than finalised financial statements, and wrongly recomputed PAYE despite settlement and statutory exemptions (paras 14, 15, 33, 36, 39).
The Respondent maintained that, because the Appellant's membership included churches, schools and community-based organizations which were not natural persons, the Appellant did not meet the definition of a 'primary society' restricted to individual persons, and its income should be taxed under Section 19A(2) rather than Section 19A(4) (paras 42 to 47).
Court findings
The Tribunal held that a strict reading of Section 19A(2) and 19A(4) of the Income Tax Act meant both provisions applied to the Appellant, since it would be unlawful to subject individual members to Section 19A(2) or corporate members to Section 19A(4) (para 60).
The Tribunal found that the Appellant was a mishmash of both a designated primary society and a designated co-operative society due to its mixed individual and non-individual membership, and that under the mutuality principle its income was capable of being severed into two divisible parts for taxation purposes (paras 63, 65).
The Tribunal held that the Respondent erred in classifying the Appellant solely as a designated co-operative society and taxing it entirely under Section 19A(2), thereby subjecting individual members to tax that was not legally applicable to them (paras 66, 71, 73).
On PAYE, the Tribunal noted that the payment had already been settled, as evidenced by a payment slip dated 30th June 2025, and that the Respondent had not raised the PAYE issue in its pleadings or submissions, leaving only the corporation tax assessment for determination (paras 74, 75).
Having found the corporation tax and PAYE assessments were premised on the erroneous application of Section 19A(2), the Tribunal concluded that the objection decision dated 7th October 2025 was not justified (paras 76, 77, 82).
Outcome
The Tribunal found the appeal meritorious and upheld it.
The objection decision dated 7th October 2025 was set aside.
The Respondent was granted liberty to re-compute corporation tax only in respect of non-individual members, according to the composition of the Appellant's membership.
Each party was ordered to bear its own costs (para 83).
Major issues / areas of contention
- Whether the Appellant should be classified as a 'primary society' or a 'designated co-operative society' under Section 19A(7) of the Income Tax Act.
- Whether income of a SACCO with mixed individual and non-individual membership should be taxed separately for each category of member under Sections 19A(2) and 19A(4) of the Income Tax Act.
- Whether the doctrine of mutuality applied to interest income earned from members.
- Whether the Respondent properly considered deductible expenses under Section 15 of the Income Tax Act, including capital allowances and donations to charitable organisations.
- Whether the PAYE additional assessment had already been settled by the Appellant.
- Whether the Respondent's objection decision dated 7th October 2025 was justified.