I&M Bank VS KRA

#I&MVSKRA

KRA Audited I&m for the period 2011-2013 and issued an additional assessment worth KES 434.2M on 29/05/2015

I&M Objected on 26/6/2015

KRA Acknowledged receipt of the objection on 15/07/2015 and asked for more information to facilitate decision making

The parties exchanged several emails and letters in the months of August and September 2015

I&M wrote to KRA on 25/01/2017 stating that since KRA didn’t issue objection decision in 60 days as per Section 51(ii) of TPA, then it should be deemed that the objection was allowed.

KRA issued an objection decision on 13/03/2017 and reduced the figure to KES 238.8m

I&M instituted a judicial review in the High Court on 03/04/2017 to quash KRA decision on the grounds that it was time barred

The High Court made a ruling on 05/12/2017 and referred the matter to the Tax Appeal Tribunal.

I&M submitted that KRA objection decision was time barred.

KRA responded that I&M objection was not valid since it didn’t provide for grounds of objection. This is in contrary to Section 51(3) of TPA

KRA also averred that I&M letter of objection lacked finality since I&M stated that it was still reviewing 2011 and 2012 with the goal of supplying KRA with further information.

KRA stated that they acted in good faith to allow I&M to provide further documents.

The main case centered on bad debts provision and exchange loss that KRA had disallowed for Income Tax purpose

I&M relied on IAS 39 provision on impairment of accounts receivables. I&M averred that it’s regularly audited by CBK on its compliance to IAS 39

I&M tabled the facts of 16 cases that were in dispute.

I &M averred that no tax would be lost for claiming bad & doubtful debts since upon their recovery, the same would be reversed.

KRA responded that for a debt to be considered bad it must be uncollectable and the commissioner must be satisfied that it is indeed bad .KRA relied on Section 15(2)(a) of Income Tax Act and Legal Notice 37 of 2011

Income Tax: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. (2) Without prejudice to sub-section (1) of this section, in computing for a year of income the gains or profits chargeable to tax under section 3(2)(a) of this Act, the following amounts shall be deducted:

(a) bad debts incurred in the production of such gains or profits which the Commissioner considers to have become bad, and doubtful debts so incurred to the extent that they are estimated to the satisfaction of the Commissioner to have become bad, during such year of income and the Commissioner may prescribe such guidelines as may be appropriate for the purposes of determining bad debts under this subparagraph;

LN 37-2011 1. A debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect it. 2. A debt shall be deemed to have become uncollectable under paragraph (1) where (a) the creditor loses the contractual right that comprises the debt through a court order; (b) no form of security or collateral is realisable whether partially or in full; (c) the securities or collateral have been realized but the proceeds fail to cover the entire debt; (d) the debtor is adjudged insolvent or bankrupt by a court of law; (e) the costs of recovering the debt exceeds the debt itself; or (1) efforts to collect the debt are abandoned for another reasonable cause. 3. A bad debt shall be a deductible expense only if it is wholly and exclusively incurred in the normal course of business. 4. For the purposes of these guidelines, a bad debt which is of a capital nature shall not be an allowable expense

KRA further stated that at the time of making the provisions, I&M had already entered into payment agreements with some of the debtors. In other cases, courts had issued temporary injunction to I&M to stop them from recovering the debts. I&M had also not sued some of the defaulting debtors.

I &M further submitted that KRA erred by presuming that amounts declared as revaluation were unrealized exchange loss

The tribunal issued its ruling on 30/03/2020

The appeal succeeded partially

In its ruling, the tribunal

-was of the view that since KRA and I&M were still in communication and I&M Objection had no finality,KRA didn’t act in bad faith by delaying objection decision.

- observed that I&Ms Objection notice was valid since it stated the grounds of the objection.

- allowed 5 cases that met the provisions of Income Section 15(2)(a) and Legal Notice 37 of 2011, while 11 cases were disallowed

- ruled that foreign exchange losses were allowable for tax purposes as per Section 4A of Income Tax Act