KRA Beat the Five-Year Clock by a Single Day. It Then Lost KShs. 713 Million on a Note It Read in Only One Column. Lessons from IM Bank Limited v Kenya Revenue Authority (Tax Appeal No. E1325 of 2025) [2026] KETAT 484 (KLR)
Introduction
Every tax audit is fought on two fronts: the calendar and the ledger. In this appeal the bank’s time-bar defence missed by twenty-four hours. Its ledger then defeated the entire KShs. 713 million left in dispute, because the KShs. 1.3 billion the Commissioner said could not be traced had been disclosed all along in the very note from which he drew his own figure.
On 9th October 2026 the Tax Appeals Tribunal held that an iTax assessment issued one day before the five-year limit expired was valid, and that a later letter giving its reasons did not restart the clock. It then set aside the disallowance of KShs. 1,313,248,000.00 as “bad debts written off”, finding the sum to be a write-back of provision arising from the IFRS 9 transition that never touched the profit and loss account. The bank lost the argument on time and won the appeal on substance.
What Happened
The bank filed its 2019 self-assessment return on 17th June 2020. Section 31(4)(b)(i) of the Tax Procedures Act (“TPA”) gave the Commissioner five years, to 17th June 2025, to amend it. A compliance review produced preliminary findings on 14th March 2025 and then, as the window closed, three documents arrived in quick succession, each carrying a different total:
| Date | What landed |
| 17th June 2020 | The 2019 return is filed. The five-year clock starts. |
| 14th March 2025 | Preliminary findings are shared; reconciliations and meetings follow. |
| 16th June 2025 | iTax Assessment Order: KShs. 2,277,142,071.99 in tax and interest. One day left on the clock. |
| 17th June 2025 | Excel “Preliminary Findings 2019” emailed, at KShs. 1,963,329,959.00. The five-year window closes. |
| 1st July 2025 | A manual letter outside iTax, styled “Notice of Assessment for the Period 2019”: KShs. 2,342,955,426.00, with reasons under six heads. |
| 19th September 2025 | Objection Decision: the objection is largely allowed, but KShs. 1,313,248,000.00 of bad debts said to be untraceable survives, carrying tax of KShs. 713,093,664.00. |
The bank attacked on two fronts.
On the clock, it said the iTax Order was too bare to be an assessment and the excel workings were a mere draft, so the true assessment was the letter of 1st July 2025: the first document to give reasons, and one that expressly called itself the formal notice. That letter came fourteen days after the window had closed. On the ledger, it said the KShs. 1,313,248,000.00 was never a bad debt written off at all, but a write-back of provision.
The Commissioner’s reply was that the assessment was made on 16th June 2025 and everything that followed merely explained it, and that the bank had not proved, by primary documents, that the disputed sum met the conditions for deducting a bad debt under Section 15(2)(a) of the Income Tax Act and Legal Notice No. 37 of 2011.
What the Tribunal Decided and Why
ROUND ONE: THE CLOCK decided for the Commissioner
On this the Tribunal decided in favor of the Kenya Revenue Authority (KRA), ruling that an iTax Assessment Order issued just one day before the five-year deadline expired was legally valid. It established that statutory windows cannot be shortened by judicial interpretation and that under Section 31(8) of the Tax Procedures Act (TPA), an assessment does not require a statement of reasons to be valid. Furthermore, the Tribunal clarified that subsequent manual explanatory letters or variance in excel figures do not constitute a new assessment, and it declined jurisdiction over the bank’s constitutional complaints regarding fair administrative action, noting they belong in the High Court.
ROUND TWO: THE LEDGER decided for the Bank
In Round Two (The Ledger), the Tribunal decided in favor of IM Bank Limited, completely setting aside the KShs. 713 million tax liability. The Tribunal found that the allegedly “missing” KShs. 1.3 billion was plainly visible within KRA’s own source documents; the Commissioner had mistakenly read a net figure in the allowance column as a gross figure instead of reconciling it with the gross exposure column. Substantively, the Tribunal ruled that the disputed entry was a balance sheet reclassification arising from the IFRS 9 transition that never touched the profit and loss account, meaning no tax deduction was ever claimed and no tax event occurred. Ultimately, the Tribunal noted that the bank had provided all necessary documents, meaning KRA’s audit suffered from a failure to read the provided material rather than a lack of documentation, and KRA’s own prior concessions against double taxation sealed the bank’s total victory.
Key Take-Homes for Stakeholders
To you Banks, microfinance institutions and IFRS 9 reporters
Your IFRS 9 transition entries remain a live audit exposure. Movements between the loan book and the expected credit loss allowance are routinely netted into a single “write off” line in the notes, and to a reviewer reading one column, a netted write-back looks exactly like an untraced write-off. Keep a standing bridge, year by year, from the gross exposure column to the allowance column, and from both to the tax computation, so that the reconciliation the Tribunal had to perform in this appeal is already on your file when the Commissioner asks.
To you CFOs and boards of corporates under compliance review
Do not bank on the calendar. The five-year clock in Section 31(4)(b)(i) of the TPA is answered by the iTax assessment, not by the letter that later explains it. An assessment issued on the eve of the deadline is as valid as one issued in the first year, and correspondence styled a “Notice of Assessment” will not restart the clock if it raises no new liability. Diarise the fifth anniversary of every return filed, and bear in mind that the limit does not apply at all where gross or wilful neglect, evasion or fraud is in issue.
To you Tax managers handling reviews and objections
Everything you file during a review will later be read as proof of what you understood. The preliminary findings, the reconciliations, the meetings and, above all, a twenty-four-page objection traversing every head satisfied the Tribunal that the bank had not been taken by surprise. Engage fully, as the law requires; but if an assessment genuinely leaves you unable to identify its basis, say so in writing at once and within the objection period, rather than leaving the point to be argued after a detailed objection has already shown otherwise.
To you Advocates and tax agents
Choose the forum before the argument. A complaint that an assessment gives no reasons, grounded in Article 47 and the Fair Administrative Action Act, belongs in the High Court, and the Tribunal will decline it. Within the tax laws, Section 31(8) is a closed list that does not include reasons. And test every authority from both ends before citing it: Zhao was the bank’s own case, and it settled the time-bar point against the bank.
To you Finance teams facing a “cannot be traced” adjustment
“Untraceable” is an assertion, not a finding. Once credible material is on the record, the presumption of correctness vanishes and the evidential burden moves to the Commissioner. Answer an untraced adjustment with arithmetic, not narrative: the audited note, the provision schedule and the returns for the years on either side. Then read the Objection Decision for its concessions. Here, the Commissioner’s own double taxation reasoning on one head decided another in the bank’s favour.
The Bottom Line
The Commissioner may lawfully assess you on the last day the law allows. The only dependable defence is a set of accounts that can explain themselves on that day, column by column, without waiting for a Tribunal to do the reconciliation.
Disclaimer: This post is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in this article should be assumed without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact our Tax Law and Consulting Department; TaxLaw@wamaeallen.com .
About the author
Caxstone specializes in civil, employment and labour disputes, constitutional law, family law and succession, and environment and land matters. He has amassed a wealth of knowledge and experience in litigation which is evident in the successes obtained for clients. He is an active member of the Employment and Labour Relations Court Bar-Bench committee.
His main areas of practice include: Employment and Labour Law, Human Rights Law, Banking and Finance Law Conveyancing and Alternative Dispute Resolution Commercial Law
Academic Qualifications
ATP (Postgraduate Diploma), Kenya School of Law, 2019
LLB (Hons), Moi University, School of Law, 2018
Professional Qualifications
Member, Law Society of Kenya
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.
