Lecture 1 · I&M defeated a KSh713 million tax claim by tracing the entry.

A tax authority asks your finance team to justify a KSh1.31 billion bad-debt deduction. Your team replies that it never claimed one.

Put yourself in the CFO’s chair. Before approving the response, what would you ask them to produce?

I&M Bank faced that disagreement over its 2019 accounts. The Kenya Revenue Authority treated KSh1,313,248,000 as an unsupported bad-debt write-off. The adjustment generated a demand for KSh713,093,664, including penalties and interest.

The bank said the disputed amount was a balance-sheet reclassification. It had neither reduced taxable profit nor created income. On 9 October 2026, the Tax Appeals Tribunal accepted that explanation and allowed the bank’s appeal.

The tribunal found the amount could be traced through the same financial statement note from which KRA had drawn its disputed figure. I&M supported the explanation with a provision schedule and tax returns for three years. Tribunal judgment

Start with what the entry did.

A bank lends money but expects that some borrowers will not repay everything they owe. It records a loss allowance against its loans to reflect expected credit losses. That allowance is an accounting adjustment, not a separate pot of cash.

A write-off reduces the recorded loan asset. Where a loss allowance already covers the amount, the write-off can reduce both the gross loan balance and the allowance. The tax treatment requires a separate examination of the applicable rules and what the bank has actually claimed.

I&M reported total write-offs of KSh2.918 billion for 2019. Of that amount, KSh906.274 million went directly through its profit and loss account. The bank added that amount back in its tax computation, reversing its effect as an accounting expense when calculating taxable profit.

The remaining KSh2.012 billion was written off against the provision already held for bad and doubtful debts.

KRA, however, read a line in the allowance column showing a reduction of KSh698.298 million. It treated that as the full amount written off against the provision. Compared with KSh2.012 billion, that left KSh1.313 billion which the authority said it could not trace.

Before deciding whether that difference should be taxed, ask yourself a question. Did the KSh698.298 million represent one transaction, or the combined effect of movements in opposite directions?

Separate the movements before judging the total.

The financial statement note presented movements in the gross loans alongside movements in the loss allowance. The allowance’s write-off line contained a net amount.

The reconciliation accepted by the tribunal was as follows. Figures are in KSh million.

KRA had treated the last line as though it were the first. The KSh1.313 billion difference was the credit netted against the write-offs, rather than another unsupported write-off.

The bank traced that credit to adjustments associated with its adoption of IFRS 9, the accounting standard governing financial instruments. According to the explanation accepted by the tribunal, a 2018 entry had debited the provision and credited loans and advances. In 2019, the bank reversed that entry, debiting loans and advances and crediting the provision.

The reversal restored the loans to their gross amount and carried the impairment separately against them. Neither entry passed through the profit and loss account.

The disputed write-back increased the provision. It was not a release of an unnecessary allowance into profit. An ordinary reversal of expected credit losses can affect profit or loss, so the name of an entry cannot determine its accounting or tax consequences. IFRS Interpretations Committee

For this particular entry, the tribunal found no deduction had been claimed and no income had arisen. KRA’s demand that the bank establish an allowable bad-debt deduction rested on a claim the bank had never made.

Prove the path through the accounts.

Imagine a simplified, hypothetical version. An allowance falls by KSh7 million on one line of a reconciliation. That line could contain KSh20 million of write-offs partly offset by a KSh13 million credit. Looking only at the KSh7 million movement would conceal both components.

The arithmetic identifies the difference. Supporting records must establish what created it and how each component was treated for tax.

In I&M’s case, the bank produced its audited financial statements, the note showing the provision movement, a schedule reconciling that movement and filed returns for 2018, 2019 and 2020. The tribunal found those documents had been before KRA before it issued its objection decision.

The taxpayer bears the statutory burden of proving a tax decision incorrect. The tribunal held that I&M had discharged that burden with competent evidence. KRA then offered no competing computation reconciling the gross write-offs with the net allowance movement.

The tribunal’s criticism was direct. “What was wanting was not the production of documents but a reading of what had been produced.”

I&M had supplied the evidence. The authority was required to engage with it. A demand for primary documents could not substitute for addressing the reconciliation already provided. Tribunal judgment

Defend the deadline and the substance.

I&M also challenged the assessment’s validity and timing. It lost that part of its case.

The bank filed its return for 2019 on 17 June 2020. KRA issued an amended assessment through iTax on 16 June 2025, one day before the five-year period applicable to the dispute expired. It followed with spreadsheet workings on 17 June and an explanatory letter on 1 July.

The bank argued that the iTax assessment lacked sufficient particulars and reasons, and that the July letter was the operative assessment. On that reading, the assessment would have arrived outside the statutory period.

The tribunal held that the June assessment met the statutory requirements. It treated the July letter as an explanation of an existing assessment rather than a new one. It also declined jurisdiction over the bank’s constitutional fair-administration argument, directing that limb to the High Court.

The ruling therefore does not give tax authorities a general licence to withhold reasons. It upheld the assessment under the statutory provisions examined in this dispute.

I&M’s accounting defence remained available after its procedural grounds failed. Management should preserve the records needed to contest the substance while advisers examine jurisdiction, service and deadlines. Neither task should wait for the other to succeed.

Count the cost beyond the principal.

The KSh713.094 million demand attached to the disputed adjustment comprised KSh393.974 million in principal tax, KSh19.699 million in penalties and KSh299.421 million in interest.

Interest and penalties together added approximately KSh319.119 million, equivalent to 81% of the principal. Those figures describe the demand set aside by the tribunal, not money established as paid or refunded.

The tribunal ordered each party to bear its own costs. I&M won the disputed adjustment, but the order did not reimburse its litigation costs. The judgment does not quantify them.

For a finance committee assessing a disputed position, the principal amount alone understates the demand being contested. The decision paper should separate principal, penalties and interest, identify the grounds of challenge and set out the evidence supporting each ground.

Build a reconciliation another person can follow.

Three management practices follow from the case. They are preventive controls, not findings that I&M lacked them.

First, retain the gross components behind material net movements. The financial controller should preserve a schedule connecting the opening balance, additions, write-offs, reversals, reclassifications and closing balance to identifiable ledger entries. A summary line should remain traceable after the person who prepared it has left.

Second, record the tax treatment alongside the accounting treatment. The tax lead should explain whether each material movement affected accounting profit, whether it was adjusted in the tax computation and how earlier years were treated. For a balance-sheet reclassification, the file should identify both accounts and explain the basis for its treatment. “No cash moved” is not, by itself, a tax conclusion.

Third, make an objection navigable. The response should identify each contested adjustment, give the calculation and point to the supporting documents already supplied. Legal advisers should manage the procedural timetable while finance staff maintain the numerical reconciliation. Significant unanswered points should be escalated expressly rather than buried in another bundle of attachments.

At the next audit committee meeting, select one material net movement in the accounts. Ask a reviewer who did not prepare it to trace its components into the ledgers and tax computation.

Could that reviewer explain what happened without calling the original accountant?

I&M could substantiate its disputed entry. Its KSh713 million defence depended on making that explanation provable to someone outside the bank.

This edition examines the Tax Appeals Tribunal’s judgment of 9 October 2026. The management guidance is general and does not replace advice on a particular transaction or dispute.