“Section 4A of the Act made no distinction about a realization of a foreign exchange gain or loss with reference to its ‘revenue’ or ‘capital’ nature … The method or mode of realization, capital or revenue, appears immaterial in the wording of section 4A of the Act.” – M’Inoti, Mwita & Ongaya, JJA, Commissioner of Domestic Taxes v Delmonte Kenya Limited, Civil Appeal No. E174 of 2022 [2026] KECA 1125 (KLR), Court of Appeal at Nairobi, 12 June 2026.
Facts of the case
From 2001, Delmonte Kenya Limited drew unsecured, interest-free USD- and GBP-denominated loans from related Panamanian entity Delmonte International Incorporation (DII) to fund ordinary working capital supplier payments, raw materials, and salaries. Annual translation of the outstanding balances generated unrealised forex losses or gains, correctly excluded from Delmonte’s tax computations for 2001–2008 since the loans remained unpaid.
By 31 December 2008, balances stood at USD 28,251,615.62 and GBP 1,464,272.89. In 2009, DII assigned the loans to Delmonte Kenya Holdings (DKH), and Delmonte settled the debt partly by offset against intercompany receivables and partly by issuing 41,625 ordinary shares to DKH. This crystallised a previously unrealised loss of Kshs 401,261,996, which Delmonte deducted under section 4A of the Income Tax Act for the 2009 year.
KRA disallowed the portion of the loss attributable to the share-conversion element, treating it as capital expenditure excluded under section 16(1)(b), and assessed additional tax of Kshs 60,828,537 and Kshs 161,481,213 for 2010 and 2011 respectively.
Procedural History
The Tax Appeals Tribunal split the loss allowing deduction of the receivable-offset portion but disallowing the share-conversion portion as capital in nature. On appeal, Tuiyott J (as he then was) reversed the Tribunal on this point, holding the entire loss revenue in nature and deductible under section 4A. The Commissioner’s appeal to the Court of Appeal, advanced on seven grounds, reduced in substance to two questions: was the conversion loss capital or revenue, and, if revenue, was it nonetheless deductible.
The Competing Positions
The Commissioner’s Position
The Commissioner argued that debt extinguished through a share issue is, by definition, a capital transaction, invoking the House of Lords’ Beauchamp v F.W. Woolworth plc (1989) STC 510 (temporary accommodation versus addition to capital structure) and the Indian Supreme Court’s Sutlej Cotton Mills Ltd v Commissioner of Income Tax (exchange fluctuations connected to capital assets are capital account items). The Commissioner further contended that section 4A cannot be read in isolation from sections 3(2)(a)(i), 15 and 16, such that a loss capital in nature under section 16(1)(b) cannot become deductible simply because section 4A governs its realisation.
Delmonte’s Position
Delmonte countered that the character of a loss is fixed by what the underlying loan financed, not by the mechanics of its eventual settlement, and that section 4A’s plain language referring simply to a “foreign exchange gain or loss realized” contains no capital/revenue qualifier. Delmonte relied on Rowlatt J’s classic strict-construction principle in Cape Brandy Syndicate v IRC [1921] 1 KB 64: nothing is implied into a taxing statute, and tax cannot be imposed by analogy or unstated legislative intention.
The Court’s Holdings
First, the Court reaffirmed, via the Supreme Court’s Barclays Bank of Kenya Limited v Commissioner for Domestic Taxes [2025] KESC 70 (KLR), that Article 210(1) of the Constitution permits taxation only as expressly legislated, that ambiguity favours the taxpayer, and that strict construction (tracing through Cape Brandy Syndicate and Adamson v Attorney General [1933] AC 257) bars enlarging a tax provision by inference or purpose.
Second, the Court held that realisation under section 4A is not confined to cash repayment, it extends to payment in kind, exchange of goods or services, amortisation against receivables, or debt-to-equity conversion, the trigger is legal and economic extinguishment of the obligation, not the chosen settlement mechanism.
Third, on the central question, the Court agreed the loss was revenue, not capital. The share issue, being denominated in shillings and executed on a fixed date, could not itself generate a forex loss; the loss had already accumulated over years through translation of loans used for operating expenditure. Treating the receivable-offset portion as revenue while treating the share-issue portion of the same debt as capital was, the Court held, untenable and artificial a single debt of one character cannot bifurcate based solely on settlement method.
Fourth, and significantly, the Court rejected the Commissioner’s fallback that section 4A must yield to section 16(1)(b). The “save as otherwise expressly provided” language opening section 16 means that where another provision expressly governs deductibility, it prevails and section 4A’s mandate that realised forex gains or losses “shall be taken into account” draws no capital/revenue distinction whatsoever. Any such distinction would require legislative amendment, not judicial interpolation.
The appeal was dismissed in its entirety; Delmonte’s full Kshs 401,261,996 deduction stood.
Practical Implications
- Debt-to-equity conversions can trigger a deductible forex loss. Where a Kenyan subsidiary settles a foreign currency intercompany loan via share issue, the resulting realisation of accumulated translation losses is deductible in the year of conversion, provided the underlying loan financed revenue, not capital, expenditure.
- The character of the underlying loan, not the settlement mechanism, governs deductibility. Loans used for working capital or operating expenses support a revenue characterisation of forex losses realised on settlement, regardless of whether settlement occurs by cash, receivable offset, or share issue.
- Section 4A operates as a complete code. It is immune from a section 15/16 capital/revenue overlay; tax advisers should resist any KRA assessment seeking to impose such a gateway test on a section 4A claim.
- Strict construction continues to favour taxpayers. Assessments grounded in implication, analogy, or a purposive reading of the Income Tax Act face a strong constitutional and jurisprudential hurdle, as confirmed by the Court’s reliance on the Barclays Bank decision.
- Loan-purpose documentation is now critical. Groups should maintain clear records showing that intercompany loans were applied to operating expenditure, to support deductibility if the loan is eventually settled through conversion or another non-cash mechanism.
- Open assessments and pending objections warrant scrutiny. Taxpayers who have had similar forex loss deductions disallowed on debt-to-equity or similar restructuring grounds now have strong appellate authority to challenge that position.
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About the author
Preston Ndombi Wawire is an experienced litigator of over 10 years standing and has perfected his art in civil and commercial litigation. He has vast experience in banking and recoveries litigation, insurance and malpractice law, and securities enforcement. Prestone has been involved in some of the most ground breaking litigation in injunctive matters and medical malpractice. Prestone is an active member of the Law Society of Kenya, Environment and Land Court Bar Bench Committee.
Denis Mutugi specializes in Commercial Litigation and Alternative Dispute Resolution.
Denis graduated with a Bachelor of Laws, LLB (Hons) from The University of Nairobi in 2021 and was admitted to the Roll of Advocates of the High Court of Kenya in the year 2023.
Denis has amassed a considerable wealth of experience in conducting legal research on various complex legal matters touching on Commercial, Insurance, Employment and Insolvency law and bankruptcy.
Nadio George is a dedicated Advocate of the High Court of Kenya, passionate about legal excellence, societal progress, and environmental stewardship. Admitted to the Roll of Advocates in 2023, he combines deep legal expertise with a strong commitment to making meaningful contributions to both the legal profession and the community.
