The Kenya Revenue Authority (KRA) has lost its bid to deny Consolidated Bank of Kenya a Sh264.9 million bad debt tax deduction tied to unpaid loans by borrowers, marking a significant victory for the industry.
The Tax Appeals Tribunal ruled that the money a bank loses after customers fail to repay loans is a normal cost of running a lending business and can be deducted before tax is calculated.
The tribunal set aside KRA’s objection decision of September 18, 2025, finding that the tax authority wrongly treated the written-off loan principal as capital expenditure instead of stock-in-trade. It allowed the bank’s appeal.
The dispute originated from a KRA compliance audit covering Consolidated Bank’s tax affairs between 2019 and 2023. The audit initially resulted in tax assessments of Sh3.67 billion across withholding tax, corporate income tax, value-added tax, pay-as-you-earn, excise duty and other tax heads.
One contested item was KRA’s rejection of Sh264.9 million in bad debt deductions claimed for the 2019 financial year.
KRA had adjusted the bank’s tax losses after disallowing the deduction, arguing that the written-off amounts represented loan principal and were therefore capital in nature.
The authority maintained that only interest earned on loans constitutes taxable income and that principal amounts could not qualify as deductible expenses when written off.
Consolidated Bank challenged that position before the tribunal, saying lending money was its core business and that unrecovered loans were genuine trading losses incurred in generating taxable income.
It said it had supplied extensive evidence showing reasonable efforts to recover the debts before writing them off.
The bank produced bank statements, customer-by-customer analyses, letters of offer, auctioneers’ correspondence, auction notices, memoranda of sale, credit reports and court decisions to demonstrate that it had exhausted recovery efforts before claiming the deductions.
It also argued that customer deposits used to finance lending remained liabilities that had to be honoured whether borrowers repaid their loans or not, making defaults a direct trading loss rather than a capital investment loss.
The tribunal agreed that the central dispute was whether the principal component of bad loans should be treated as capital or revenue expenditure for tax purposes.
In banking, bad debts are loans that borrowers have failed to repay after the lender has exhausted reasonable recovery efforts, leading the bank to write them off in its accounts.
The tribunal observed that both sides accepted the loans had become bad and that the disagreement concerned only their tax treatment.
After reviewing the Income Tax Act and previous tribunal decisions, the panel concluded that KRA had wrongly classified the written-off loan principal as capital expenditure.
“It is the finding of the tribunal that the respondent erred in disallowing the appellant’s bad debts,” the tribunal stated.
It added that the bank “was entitled to the tax losses as the principal amount was stock-in-trade and the same was not capital expenditure.”
The tribunal further held that because KRA had improperly rejected the deduction, the corresponding reduction of the bank’s 2019 tax losses could not stand.
“The principal amount advanced was stock for trading, and the same was not capital expenditure. On this premise, the tribunal finds and holds that the respondent erred in disallowing loan write-off,” the panel said, quashing KRA’s objection decision.
